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What are the types of taxes?`
o Income
o Employment
o Sales
o Excise taxes
o Transfer taxes
o Property taxes
o Federal taxes
o State and local taxes
o Implicit taxes
What are some federal taxes?
o Income
o Employment and unemployment
o Excuse
o Transfer
What are some state and local taxes?
Income
Sales and use
Property
Excise
What are income taxes when they are federal taxes?
o Represents approximately 59.5 percent of all tax revenues collected in the United States (individuals 50.2 percent and corporations 9.3 percent).
o Levied on individuals, corporations, estates, and trusts.
What are employment taxes when they are federal taxes?
o Second-largest group of taxes imposed by the U.S. government
o Employment taxes include the OASDI (Social Security tax) and the MHI tax (Medicare tax).
o Unemployment taxes fund temporary unemployment benefits for individuals terminated from their jobs without cause.
What are sales taxes?
o Tax base for a sales tax is the retail sales of goods and some services.
o Tax base for the use tax is the retail price of goods owned, possessed, or consumed within a state that were not purchased within the state.
What are excise taxes when they are federal taxes?
o Third-largest group of taxes imposed by the U.S. government
o Levied on the quantity of products sold
What are estate and gift taxes?
o Levied on the fair market values of wealth transfers upon death or by gift
What are property taxes?
o Property taxes are ad valorem taxes, meaning that the tax base for each is the fair market value of the property.
o Real property taxes consist of taxes on land and structures permanently attached to land.
o Personal property taxes include taxes on all other types of property, both tangible and intangible.
What are income taxes when they are state and local taxes?
o Most state taxable income calculations largely conform to the federal taxable income calculations, with a limited number of modifications.
What are excise taxes when they are state and local taxes?
o States typically impose excise taxes on items subject to federal excise tax.
What are implicit taxes?
o Indirect taxes that result from a tax advantage the government grants to certain transactions.
o Defined as the reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status.
o Difficult to quantify but important to understand in evaluating the relative tax burdens of tax-advantaged investments.
What are the ways to measure tax rates?
o Marginal
o Average
o Effective
What is marginal tax rate?
o The tax rate that applies to the next additional increment of a taxpayer’s taxable income
What is average tax rate?
o The taxpayer’s average level of taxation on each dollar of taxable income
What is effective tax rate?
o The taxpayers average rate of taxation on each dollar of total income (both taxable and nontaxable)
What are the tax rate structures?
o Proportional
o Progressive
o Regressive
What is the proportional tax rate structure?
o Imposes a constant tax rate throughout the tax base
o Flat tax
What is the progressive tax rate structure?
o Imposes an increasing marginal tax rate as the tax base increases
What is the regressive tax rate structure?
o Imposes a decreasing marginal tax rate as the tax base increases
What qualifies as a tax?
o Payment required by a government that us unrelated to any specific benefit or service received from the government
What Are the key components to meet definition of a tax?
o Payment required
o Payment imposes by government agency (federal, state, local)
o Payment not tied directly to benefit received by the taxpayer
What is the tax formula?
o Tax = tax base x tax rate
What are society decisions impacted by taxes?
o Personal finance
o Investment
o Business
o Politics
What are the taxpayer filing requirements for corporations?
o All must file regardless of taxable income
What are the taxpayer filing requirements for estates and trusts?
o Required to file if gross income exceeds $600
What are the taxpayer requirements for individuals?
o Filing is determined by taxpayer’s filing status, age, and gross income
What are the tax return due dates for individuals and C corporations?
o fifteenth day of fourth month following end of tax year.
o Can apply for automatic extensions
What are the tax retune due dated for partnerships and S corporations?
o fifteenth day of third month following end of tax year.
o Can apply for automatic extensions
What is the statute of limitations?
o the time in which the taxpayer can file an amended return or the IRS can assess a tax deficiency.
o Generally ends three years from the later of (1) the date the tax return was actually filed or (2) the tax return’s original due date.
What are the two types of tax law sources?
o Primary authorities
o Secondary authorities
What are primary authorities?
o Official sources of tax law
o Statutory sources (e.g., Internal Revenue Code)
o Judicial sources (the courts)
o Administrative sources (IRS pronouncements
What are secondary authorities?
o Unofficial tax authorities
o Tax services
o Tax articles
What is the IRS audit selection?
o In general a taxpayer’s return is selected for audit because the IRS believes the tax return has a high probability of being incorrect.
What are the consequences for misreporting income on tax returns?
o Fraud and tax evasion
What is the individual income tax formula?
Gross income- deduction for adjusted gross income= adjusted gross income (AGI)
AGI – standard deduction or itemized deductions = taxable income
Taxable income x tax rate = income tax lability
Income tax liability + other taxes= total tax
Total tax – credits – prepayments = tax due or refund
What is gross income?
o All realized income from whatever source derived
o Income generated in a transaction with a second party in which there is a measurable change in property rights between parties
What is deduction of adjusted gross income?
o Above the line deductions
o Items that lower the gross income in total
What is adjusted gross income?
o Gross income less deductions for AGI
What is taxable income?
o The tax base for the income tax
What is a tax rate?
o The level of taxes imposed on the tax base, usually expresses as a percentage
What is income tax liability?
o The amount of tax you owe to federal government on your annual earning income
What are prepayments?
o Payments already made toward tax liability, including:
§ Income taxes withheld from wages by employer
§ Estimated tax payments made during the year
§ Taxes overpaid in prior year and applied toward current year’s liability
If prepayments exceed tax liability after credits, the taxpayer receives a refund
What is tax due?
o Amount the individual pays
What is tax refund?
o Amount the individual receives back
What is total tax?
o All the taxes you owe over a year
What are other taxes?
o Taxes imposed on tax bases other than the individuals taxable income
What is standard deduction?
o A fixed deduction offered in lieu of itemized deductions
o Depends on taxpayer’s filing status
What is itemized deduction?
o Certain types of expenditures that congress allows taxpayers to deduct as from AGI deductions
What are the characteristics of income/loss?
o Ordinary
Capital gain
What is ordinary rate income?
o Income or loss that is taxes at the ordinary rates provided in the tax rate schedules or that offsets income taxed at these rates and is not capital in character
What is capital gain (preferential) rates for capital assets?
o Gains or losses on the disposition or sale of capital assets
What are deductions?
o Amounts that are subtracted from gross income in calculating taxable le income
What are credits?
o Reduce tax liability dollar for dollar
How do deductions reduce income/tax due?
o Reduce taxable income
Can not be refundable
How do credits reduce income/tax due?
o Reduce taxable income
Can be refundable
What is the criteria for a qualifying child?
o Relationship test
o Age test
o Residence test
o Support test
What is the relationship test for a qualifying child?
o Taxpayer’s son, daughter, stepchild, an eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of these relatives
What is the age test for a qualifying child?
o child must be younger than the individual claiming the child as a qualifying child and either
§ Under age 19 at the end of the year,
§ Under age 24 at the end of the year and a full-time student, or
Permanently and totally disabled
What is the residence test for a qualifying child?
o Same residence as taxpayer for more than half the year
What is the support test for a qualifying child?
o Child must not provide more than half of his or her own support.
What is the criteria for a qualifying relative?
o Relationship test
o Support test
o Gross income test
What is the relationship test for a qualifying relative?
o A descendant or ancestor of the taxpayer (e.g., child, grandchild, parent, or grandparent),
o A sibling of the taxpayer, including a stepbrother or stepsister
o A son or daughter of the taxpayer’s brother or sister (not cousins)
o A sibling of the taxpayer’s mother or father
o An in-law (mother-in-law, father-in-law, sister-in-law, or brother-in-law) of the taxpayer
o Other person, with no qualifying family relationship(above), who lives in taxpayer’s home entireyear
What is the support test for a qualifying relative?
o Taxpayer must pay more than half of living expenses (support)
o Scholarships of actual child excluded
What is the gross income test for a qualifying relative?
o Gross income < $4,400 in 2022
What are the different filing status?
o Married filing jointly
o Qualifying widow(er)
o Married filing separate
o Single
o Head of household
What are the requirements for married filing jointly?
o Must be married on the last day of the year
§ If one spouse dies, the surviving spouse is considered to be married to decedent spouse at year-end.
§ Exception—The surviving spouse remarries before year’s end
o Joint and several liability for tax
What are the requirements for qualifying widow(er)?
o Available for the two years following the year of spouse’s death
o Surviving spouse does not qualify if he or she remarries during the two-year period.
o Surviving spouse must maintain household for dependent child.
What are the requirements for married filing separate?
o Taxpayers are married but file separate returns.
§ Typically, not beneficial from tax perspective
· Tax rates and other tax benefits
§ May be beneficial for nontax reasons
· No joint and several liability
What are the requirements for single?
o Unmarried unless qualifying for head of household
What are the requirements for head of household?
o Unmarried or considered unmarried at end of year
o Not a qualifying widow or widower
o Pay more than half the costs of keeping up a home during the year
o Lived in taxpayer’s home with a “qualifying person” for more than half of the year
What is the status when a spouse passes away with children?
o Qualifying widow(er)
What is the status when a spouses passes away without children?
Single
What is included in gross income?
o Wages
o Dividends
o Capital gain
o Business income
o Retirement distribution
o Other income
What is excluded in gross income?
o Life insurance
o Child support
o Welfare
Municipal bond income
How is AGI calculated?
o Gross income – adjustments to income
What are the deductions FROM AGI?
o Deducted from adjusted gross income to determine taxable income
o “Deductions below the line”
What are the deductions FOR AGI?
o “Deductions above the line”
o Deducted in determining adjusted gross income
o Always reduce taxable income dollar for dollar
What is gross income?
o Taxpayers report realized and recognized income on their tax returns for the year
o gross income means all income from whatever source derived
o includes income realized in any form, whether in money, property, or services
What is excluded income?
o Income never included in taxable income
o Municipal bond interest
o Gain on sale of personal residence
What is deferred income?
o Income included in a subsequent tax year
o Installment sales
o Like-kind exchanges
What is included in excluded income?
o Life insurance
o Child support
o Welfare
o Municipal bond income
What is included in deferred income?
o Income that you have not received or not earned yet
For a cash basis taxpayer when is income taxable?
o In the tax year you receive it
What are the types of income?
o Property disposition
o Gambling income
o Municipal bonds
o Workers compensation
What is property disposition?
o Taxpayers usually realize a gain or loss when disposing of an asset.
o Taxpayers are allowed to recover their investment in property (tax basis) before they realize any gain.
What is the formula for property disposition?
o Sale proceeds – selling expenses = amount realized – tax basis (investment) in property sold = gain (loss) on sale
What is gambling income?
o Any money that is generated from games of chance or wager on events with uncertain outcome
What are municipal bonds?
o Bonds issued by state and local governments located in the United States
What is worker’s compensation?
o Unable to work because of a work related injury
What is realized income?
o Measurable change in property rights
o included in gross income unless specifically excluded or deferred
What is unrealized income?
o The profit they can make if they sell the asset but haven’t yet
Is realized or unrealized income included in gross income?
Realized
What are the exclusions from income?
o Municipal bond
o Gain on the sale of personal resident
o Fringe benefits
What is gain on the sale of personal residence?
o Taxpayers may exclude up to $250,000 ($500,000 if married filing jointly) of gain on the sale of their principal residence
o Must satisfy ownership and use tests
o Any excess gain generally qualifies as long-term capital gain
What is homeowners exclusion?
o Taxpayers may exclude up to $250,000 ($500,000 if married filing jointly) of gain on the sale of their principal residence
What are transfer taxes in regard to federal taxes?
Levied on the FMV of wealth transfers upon death or by gift (estate)
What is the marginal tax rate useful for?
tax planning
What is the average tax rate useful for?
Budgeting tax expense
What is formula for average tax rate?
total tax/taxable income
Note
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