Flashcards Chapter 1 Federal Tax

What are examples of taxes not imposed by the federal government?

State and local taxes, such as state income tax, property tax, and sales tax.

What is the 2025 annual gift tax exclusion?

$19,000 per donor, per recipient.

Can spouses split gifts?

Yes. Spouses can split gifts, allowing the annual exclusion to apply to gifts from both spouses.

Why might someone make gifts instead of transferring property at death?

Gifts can reduce the size of the taxable estate and potentially reduce estate taxes at death.

Why does the tax law allow certain tax credits?

Credits are generally used to encourage certain behaviors or provide relief to taxpayers.

Why is the installment method allowed?

It allows income from a sale to be recognized over time as payments are received, rather than recognizing the entire gain immediately.

Who is required to have a PTIN?

Anyone who prepares or assists in preparing federal tax returns for compensation generally needs a PTIN.

What are taxes?

Compulsory payments imposed by a government to raise revenue and/or accomplish public policy objectives.

How is the severity of a tax issue handled through an audit?

The IRS uses different levels of examination depending on the nature and complexity of the issue.

When was the first individual federal income tax enacted?

1861, during the Civil War. It was later repealed.

What happened to the 1894 federal individual income tax?

The Supreme Court ruled it unconstitutional.

What is a regressive tax?

A tax that represents a larger percentage of income for lower-income taxpayers than for higher-income taxpayers.

What is a progressive tax?

A tax where the tax rate increases as income increases.

What can happen when a local tax holiday expires?

Taxing jurisdiction can increase because the temporary tax exemption ends.

Who issues ethical accounting guidelines mentioned in the chapter?

The AICPA (American Institute of Certified Public Accountants).

What happens to tenant improvements at the end of a lease?

The tax treatment depends on the circumstances, including who owns the improvements and the terms of the lease.

What does VAT stand for?

Value Added Tax.

What is a VAT?

A tax imposed on the value added to goods or services at different stages of production/distribution.

What is bracket creep?

When inflation increases a taxpayer's nominal income, potentially pushing them into a higher tax bracket even though their real purchasing power has not increased proportionally.

Why are tax brackets sometimes adjusted for inflation?

To help prevent inflation alone from pushing taxpayers into higher tax brackets.