Federal Tax Test 1

tax defined

a payment required by government agency that is unrelated to any specific benefit or service received from the government agency

basic tax calculation tax =

tax base x tax rate

tax base

the item that is taxed

tax rate

the level of the tax

marginal tax rate

most important measurement because it is the tax that applies to the next follar of income earned or next dollar expenses deducted

marginal tax rate formula

change in tax / change in taxable income

or

(new total tax - old total tax) / (new taxable income - old taxable income)

proportional tax (flat tax)

constant rate regardless of income

progressive tax

rate increases as income increases (rate increase not just tax)

regressive tax

rate decreases as income increases (social security, unemployment taxes)

flat tax proponents

lower-income people support a rate which everyone will pay 15% of their income in tax

behavior with high rates

tax avoidance

expatriate

cut back on work

non-compliance

substitution effect

income effect

substitution effect

when rates rise, high income taxpayers don’t see a benefit to do more work and will spend more time on leisure or volunteer work

income effect

when rates rise, low income will work longer/harder to pay for necessities

moderately progressive / fairly low

rates are the same but reached at different income levels depending on filing status

apply to taxable income which is after a standard deduction

individual income tax raises

51% of US revenues

employment taxes raise

33% of US revenues

corporate income tax raises

9% of US revenues

excise taxes raise

2% of US revenues

sales taxes

based on retail price and collected point of sale

wayfair decision

out of state sellers must collect sales tax if they have “economic presence in the state”

more than 200 transactions or $100,000

excise taxes

often assessed to tax behavior, based on a unit of measure, not value

IRS ruled that fantasy sports

have to pay excise tax on entry fees they receive

income taxes types of taxpayers in internal revenue code

individuals

corporations

estates & trusts

employment taxes

2nd largest tax amount collected

employment tax types

OSADI

MHI

OSADI

old age, survivors, and disability

(retirement & disability)

MHI

medical health insurance
(medical care for elderly, disabled)

employment taxes funde

important safety-net programs (medical health and retirement)

for many businesses employment taxes are

a bigger expense than income taxes because they are on gross payrolls while income tax is based on net profits

excise

levied on quantity of products sold

estate and gift taxes

levied on fair market value of transfers at death or by gift

deduction

reduces tax by lowering taxable income

tax benefit = reduction x marginal tax rate

credit

dollar for dollar reduction in the amount of tax that has to be paid

static forecasting

assumes that as rates change taxpayer behavior won’t change

dynamic forecasting

assumes change brings more change

democrats like credits because

not based on income level

republicans like deductions because

higher income taxpayers get more benefit at higher progressive rate

sufficiency

involves assessing the aggregate size of tax revenues that must be generated and making sure that the tax system provides these revenues

equity

how the tax burden should be distributed across taxpayers

certainty

taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax

convenience

tax system should be designed to be collected without undue hardship to the taxpayer

economy

should minimize the compliance and admin costs associated with the tax system

horizontal equity

similar taxpayers taxed similarly

vertical equity

those with greater ability to pay have higher taxes

wherewithal to pay concept

we don’t make taxpayer pay tax until the income is in hand so that there is wherewithal to pay
(no tax on appreciation of assets until sold, installment sales)

administrative convenience concept

we don’t tax when administratively difficult
(annual tax on home’s appreciation)

arms-length transaction

FMV used

pay as you go

withholding, estimated taxes

assignment of income doctrine

income from a service belongs to the provider; income from property belongs to the owner of the property (can’t shift it away)

substance over form

IRS looks at the substance, rather than the way a transaction is portrayed by taxpayer

tax benefit rule

a refund that results from a deduction in a prior year must be included in income when received to the extent of prior deduction

income from corporation salary, interest, and rent

taxed as ordinary income

qualified fringe benefits

deductible for the corporation in arriving at corporate taxable income but are not included in taxable income for recipient

income from a sole proprietorship

taxed as ordinary income to the recipient, subject to that individual’s marginal tax rate

partnerships and S corps

are not taxed as an entity but their income passes through to the owners who are taxed on their individual income tax return

S corps and partnerships are

pass-throughs with no tax at the entity level but taxes paid on the individual owner’s tax return

corporations

required to file regardless of taxable income

estates & trusts

required to file if gross income exceeds $600

individuals

more complex

determined by taxpayer’s gross income, age, and filing status

general rule for individual filing

must file is gross income exceeds the standard deduction

must file net self-employment if

earnings of $400 or more

file kiddie tax

if you are a dependent with unearned income

required to file if you have

foreign financial accounts or virtual currency holdings or trades

may want to file even if not required if

have a refundable earned income credit or child tax credit

use low income proof to get state social benefits; needs based scholarships

want to have a record of earnings for social security

form 4868

extension to file until 10/15 but not extension to pay

partnerships and s corporations return due dates

15th date of the 3rd month following year end

sole proprietorships return due dates

filed on a schedule of the owner’s individual return

regular (c corporations)

15th day of the 4th month after year end

automatic extension

up to 6 months

period of assessments

aka statute of limitations

period of assessments

period in which a taxpayer can amend a return to collect overpaid taxes or in which the IRS can assess additional taxes

normal limit for period of assessments

3 years from the later of (a) the original date or (b) the date the return was filed

omitted income limit

7 years from the later of due date or date return was filed

fraud or failure to file

statute doesn’t run

statute of limitations can be extended

by negotiated agreement