Capital 4

Question 1

What are personal allowances and why are they recognized?

Answer 1

Certain expenses not directly related to a particular source of income

– Recognised because these expenses reduce taxpayer’s ability to pay taxes

Question 2

What are examples of personal allowances?

Answer 2

• Basic allowances (necessary for subsistence)
• Spousal and child support, child care expenses
• Allowances for the elderly, disabled or sick persons

Deductions
- * Charity donations
- * Insurance contributions (in particular social security and life insurance)
- Interest payments for loans, housing or moving expenses

Question 3

Form of personal allowances:

What is taxation impact of deductions?

Answer 3

The higher the personal tax rate the higher the benefit of a deduction

–> Effective tax relief = deduction x personal tax rate

Question 4

Form of personal allowances:

What is taxation impact of Tax credit?

Answer 4

Reduces the tax due equally irrespective of the taxpayer’s income level

–> Effective tax relief = tax credit

Question 5

What are the prevailing concepts of personal allowances?

Answer 5

• Personal allowance: deduction
• Additional allowance for couples: deduction
• Children: tax credit

Question 6

Whatzt is the treatment of losses in steps?

Answer 6

1. Step: Loss offset (within one year) ->horizontal or vertical
2. Step: Loss deduction (carry-back or carry-forward)

Question 7

What is meant with a loss offset and the two types?

Answer 7

= within one tax year - Losses are set off against other income in the year they accrued

a) Horizontal: Deduction of losses from income of the same category

b) Vertical: Deduction of losses from
income of other categories

Question 8

What is the loss treatment in a global income tax?

Answer 8

• No restrictions regarding time and amount of loss offset and loss deduction

Question 9

What is the loss offset in the global income tax?

Answer 9

• horizontal and vertical loss offset possible
• Horizontal prior to vertical loss offset

Question 10

Explain what happens in the loss deduction in the global income tax? For both types

Answer 10

Loss carry-back:
- Refund of taxes paid in previous years
- Limitation: taxable income of previous years

Loss carry-forward:
- Loss reduces tax base in subsequent years
- Loss carry-back prior to loss carry-forward

Question 11

What is the loss treatment in a Schedular income tax regarind a loss offset?

Answer 11

• Typically restricted to horizontal loss offset for certain categories of income
• Typically no possibility for vertical loss offset within certain categories of income

Question 12

Why are capital losses only be set off against capital gains And why does that make sense?

Answer 12

Capital losses can typically only be set off against capital gains

• By restricting the deductibility of capital losses, the incentive to postpone the realization of capital gains is reduced
• Without this limitation, taxpayers would be able to deduct their losses while, at the same time, deferring their gains

Question 13

What is the loss deduction treatment of capital losses in a Schedular income tax?

Answer 13

• Typically restricted to certain categories of income

Question 14

What is the summary of loss rationale in a Schedular income tax treatment?

Answer 14

• Loss offset and loss deduction only within single categories of income
• Potential increase of tax burden compared to global income tax

Question 15

What is the treatment of Loss Carry forward?

Answer 15

• Loss deduction is limited in amount, but not limited in time
• Up to a certain basic amount all losses are deductible (the basic amount can be zero as well)
• Losses above the basic amount can only be deducted in the limits of a certain percentage of taxable profits,
• e.g., Germany, a certain percentage of the loss, e.g., Poland, or up to a specified amount, e.g., USA

Question 16

What is the advantage of loss carry-back`??

Answer 16

• Refund of taxes paid in previous years
• Interest and liquidity advantage
• Compulsory prior to loss carry-forward or available on option, e.g. Germany, Netherlands, United Kingdom

Question 17

When loss carry-back is an option should is be exercised or not?

Answer 17

Advantages:

• Instant improvement of liquidity and interest advantage
• Cann offset income from previous year that was taxed at higher progressive rates, –>resulting in a higher tax saving

Disadvantages:

• Potential loss of tax breaks, if it reduces taxable income inprevious year to a level where deductions, credits etc. Cannot be fully utilized
• Missing to carry-forward of losses, leads to higher tax rates (progressive taxation), if future income is higher

Question 18

What are typical elements of progressive tax rates?

Answer 18

• Income brackets
• Tax rates
• 1st income bracket with a zero-tax rate equivalent to a basic allowance

Question 19

How do you compute the progressive tax rates in France? given 15.000 and 40.000e of income?

• 0%: up to 11.294
• 11%: 11.295 to 28.797
• 30%: 28.798 to 82.341

Answer 19

Income 15.000:
- Tax due = 0 + (15.000 - 11.294) * 0.11 = 407.66

Income 40.000:
- Tax due = 0 + (28.798 - 11.294)x 0.11 + (40.000-28.798)x 0.3 = 5.286.04

Tax due = 0+(3rd (beg) - 1st (end) )x 0.1+( income- 2 (end) ) x0.3

Band: Immer das Anfang des Bandes über x und das Ende des Bandes unter x
Man nimmt immer das ende eines Bandes/income minus das höchste des bandes davor

Question 20

Describe the two types of family taxation?

Answer 20

Seperate taxation:
- Each individual is liable to tax on his/her own taxable income, the tax table applied separately for each family member/spouse
- Income not directly linked to one family member is attributed equally to all family members/both spouses

Joint taxation:
- taxable income of all family members summed up, and either subject to a special tax table or subject to income splitting

Question 21

In joint taxation, what is income splitting and special tax table ?

Answer 21

• Income splitting: total income is divided by a “family coefficient” and applied to the general tax table; resulting tax due is multiplied with the family share in order to get the final tax due.
• Special tax table has a comparable tax reducing effect as the income splitting —> here a table with reduced tax rates is applied and no coefficient or similar

Question 22

What are the different forms of personal allowances?

Answer 22

• Deductions

-Tax Credit