Contents

§ 2.16 CAPITAL ASSETS, GAINS, AND LOSSESA corporation with taxable income in excess of $100,000 is required to increaseits tax liability by the lesser of 5 percent of the excess or $11,750. This increase intax phases out the benefits of the 15 percent and 25 percent rates for corporationswith taxable income between $100,000 and $335,000. A corporation withtaxable income in excess of $335,000 and no more than $10 million, in effect,pays tax at a flat 34 percent rate. A corporation with taxable income in excess of$15 million is required to increase its tax liability by the lesser of 3 percent of theexcess or $100,000. 66 This increase in tax recaptures the benefits of the 34 percentrate in a manner analogous to the recapture of the benefits of the 15 percent and25 percent rates.Thus, there are four marginal rates of income taxation for corporations: 15,25, 34, and 35 percent. As with individuals, the marginal tax imposed on corporationsincreases as taxable income increases. With respect to corporations,however, the benefit of progressive rates (lower levels of income taxed at marginallylower rates) is phased out, as described, as taxable corporate incomeincreases.Trusts and estates also are subject to income taxation. 67 For years beginningin 2004, a 15 percent rate applies to taxable income not over $1,950; taxableincome over $1,950 but not over $4,560 is subject to a $292.50 tax, plus tax at therate of 25 percent of the amount over $1,950; taxable income over $4,560 but notover $7,000 is subject to a $955 tax, plus tax at the rate of 28 percent of theamount over $4,600; taxable income over $7,000 but not over $9,550 is subject toa $1,627 tax, plus tax at the rate of 33 percent of the amount over $7,000; and taxableincome over $9,550 is subject to a $2,468.50 tax, plus tax at the rate of 35 percentof the amount over $9,550. 68One of the significant factors for individuals in relation to the marginal taxrates is that tax deductions (including the charitable contribution deduction)and tax credits have greater economic value for the higher marginal rate taxpayers.Because every dollar of taxable income has a corresponding tax, every dollarexcluded from tax has a tax savings. A dollar that escapes tax by reason of a taxdeduction at the 35 percent level saves the taxpayer 35 cents on the dollar, whilea dollar protected from tax at the 10 percent level saves the taxpayer only 10cents on the dollar. This feature of the U.S. income tax law is an unavoidableconsequence of progressive income taxation.Notwithstanding the foregoing, qualified dividend income is taxable at the 5percent and 15 percent rates applicable to capital gain, rather than at the generalordinary income tax rates. 69§ 2.16 CAPITAL ASSETS, GAINS, AND LOSSESA capital asset is an item of investment property held by a person, irrespective ofwhether the property is connected to the person’s trade or business. 7066 Id.67 IRC § 1(e).68 Rev. Proc. 2003-85, 2003-49 I.R.B. 1184, § 3.01.69 JGTRRA § 302. This change is reflected in IRC § 1(h)(3) and (h)(11). See infra note 79.70 IRC § 1221(a). 47