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Definition of a tax?
Payment to gov. required by law. Used for public or gov. purposes. No benefits and not a penalty.
What is the largest tax collected by the U.S. Gov and who pays this tax?
Federal Income Tax. Individuals, corps, estates, and trusts.
What is a tax base?
The item, event, or value that a tax is levied upon, "income"
Proportional tax rate
The ate is constant over all levels of the base
Progressive tax rate
As the base increases the rate increases
As the base increases the rate decreases
To be a good tax, it should raise enough revenue to supply the necassary public goods. "match revenue from tax with tax expenses."
Taxpayer enages in more income producing activities to generate the same amount of after tax income.
Taxpayer engages in fewer income producing activites because the after tax value of working is less than the value of leisure
Good tax should be fair, based on ability to pay
those with equal ability to pay should pay the same percentage of tax
Those with a greater ability to pay should pay a greater percentage of income in tax
Average tax rate
(Total Tax)/(Taxable Income)
Effective tax rate
(total tax)/(total income)
Marginal tax rate
(rate at which the next $ will be taxed)
(%change in tax)/(%change in taxable income)
Taxpayer filing requirements?
- Coprs-all must file regardless of taxable income
- Estates and Trusts-file if gross income is above 600
- Individuals-determined by taxpayers filing status, age, and
- gross income
Tax Return Due Date
- Indviduals-April 15th, 15th day of 4th month following end of tax year
- Corps-March 15th, 15th day of 3rd month following end of tax year
How long is an extension for? And when are taxes due if you file an extension?
Extension is 6 months from due date.
Taxes are still due the usual date, you can just have an extension to file your tax return
Failure to file-5% per month of total tax due
Failure to pay-1/2% per month ot total tax owed
Not to exceed 25%
Statue of Limitations
Time in which the taxpayer can file an amended return or the IRS can assess a tax deficiency
3 years from the later of 1) the date the tax return was actually filed 2) the tax return's original due date
Statue is extended to 6 years if gross income is substantially understated (omitted amount is more than 25% of GI)
Discriminant Function system (DIF)
based on most misused deductions, error's, $ amounts
Document Perfection System
checks for math errors etc
Info Matching Programs
compares tax return data with other IRS info
conducted by mail and are generally limited to 1 or 2 items on the return (most common)
Conducted in the local IRS office and tends to bigger matters
Held at taxpayers place of business and can last months to years (least common)
Types of Audits
- Correspondence examination
- Office examination
- Field examination
What portion of tax returns are audited?
- 1.1% of individuals
- 1.5% of corporations
Most common income level to audit?
$1 to $75,000
IRS Appeals/Litigation Process
30 day lettter(preliminary notice of deficiency), 90 day letter (statutory notice of deficiency), then 1)pay and file a refund check, get denied and sue in U.S. District Court or U.S. Court of Federal claims 2) Do not pay and go to Tax Court
What is the difference between Primary authorities and Secondary authorities?
Primary authorities are official sources of the tax law generated by the legislative branch and Secondary authorities are unofficial tax authorities that explain and interpret the primary authorities.
Primary sources of tax law
- Statutory Authority-Congress
- Administrative Authority-US Treasury
- Judicial Authority-Courts
What is the most authoritative source of tax law?
Internal Revenue Code (IRS)
Represent the IRS position on a specifit factual situaion
Issued to explain internal IRS procedures and routing matters (standard mileage rate, depreciation tables)
Tax research Steps
- 1. Understand the Facts
- 2. Identify issues
- 3. Locate relevant authorites
- 4. Analyze tax authorites
- 5. Communicate the results
Difference between Tax Avoidance and Tax Evasion?
Tax Avoidance is using legal methods to reduce taxes and tax evasion is using illegal methods to reduce taxes
Goal of tax planning?
Maximize wealth, takes into consideration tax and notax costs and goals
When tax rates are constant across years you can defer income and accelerate deductions.
When tax rates change across years you can shift income to low tax years and shift deductions to high tax years
Results from a transaction between the taxpayer and another party
- Report the income on the tax return
- Also called Gross Income
Long Term capital gains are taxed at what %
0% or 15%
Short Term capital gains are taxed at what %?
Net Capital losses are taxed how?
- $3,000 deductible against ordinary income for year
- losses in excess of $3,000 are carried forward
FOR AGI(adjusted gross income)
How does it reduce income?
Above or below line?
- all taxpayers receive benefit from this type of deduction
- Reduce income dollar for dollar
- Above the line
What is more beneficial FOR or FROM AGI? Why?
FOR AGI, reduces taxable income dollar for dollar
Above or below the line?
- Below the line.
- Greater of standard deduction or itemized deduction
Married filing jointly deduction amount?
Qualifying widow or widower deduction amount?
Married filing seperately deduction amount?
Head of Household Deduction amount?
Single deduction amount?
If a taxpayer qualifies as another taxpayer's dependent what is the taxpayer's standard deduction?
Larger of earned income plus $300 or $950
Tax Credits reduce what?
Tax liability dollar for dollar
What is more beneficial a tax deduction or a tax credit? Why?
Tax credit, reduces the tax liability dollar for dollar instead of the taxable income.
Personal Exemption amount?
To be a qualifying child, four tests must be met....
- 1. Relationship test
- 2. Age Test
- 3. Residence (abode) test
- 4. Support Test
Relationship test requirments
Has to be the taxpayers children or the taxpayers siblings and any descendants
- Under 19 at end of year
- Under 24 at end of year if full time student
- Permanently and totally disabled
Qualifying child must have the same principal residence as the taxpayer for more than half of the year
Support test Requirments
Qualifying child may not provide more than one-half of his or her own suport during the year
Tie breaker rules for qualifying child?
- 1. Parents first
- 2. Days living with each parent if parents live apart
- 3. Higher AGI
How long can you file as a widow?
2 years following the year of spouse's death, must remain unmarried for 2 years
Gross Income is defined for tax purposes how?
All income from whatever source derived, realized in any form
Claim of right Doctine
Income recognized when there are no restrictions on use of income
Assignment of Income Doctrine
- Income from services is taxed to the service provider
- Income from property is taxed to the owner of the property
Community Property Systems
- Half of the income earned from services of one spouse is included in GI of the other spouse
- Half of the income from property held as community property by the married couple is includedin the GI of each spouse
Doctrine of Constructive Receipt
Income is received when it is available to you
Assignment of Income Doctrine
Taxpayer who earns the income must pay taxes on the income
- 1. Cash Payment
- 2. Payments are pusuant to a written divorce or separation
- 3. Payor and payee must live apart
- 4. Payments must cease upon death of payee
Alimony is income to the and deductible AGI by the
payee, FOR, payer
Alimony Recapture occurs in what year
Prize and award income is reported in GI unless what (2 things)
- Qualified purpose and donate to qualified charity
- Employee achievement awards