Chapter 1

Question 1

Marginal Tax Rate

Answer 1

Rate of tax that will be paid or saved on the next dollar of income.
Used in tax planning.

Question 2

Average Tax Rate

Answer 2

(total federal income tax / taxable income)

Question 3

Effective Tax Rate

Answer 3

(total federal income tax / economic income)

Question 4

Tax Rate Type used in Tax Planning

Answer 4

Marginal Tax Rate

Question 5

3 Tax Rate Structures

Answer 5

Proportional
Regressive
Progressive

Question 6

Proportional Tax

Answer 6

Flat tax (average tax rate remains same as tax base increases). 
Example: sales tax, corporate tax rate at 21%

Question 7

Regressive Tax

Answer 7

Average tax rate decreases as tax base increases.

Example: Social Security Tax ceiling

Question 8

Progressive Tax

Answer 8

Average tax rate increases as tax base increases. Consistent with “ability to pay” component of tax.

Question 9

Example of Proportional Tax

Answer 9

Sales Tax, corporate tax rate at 21%

Question 10

Example of Regressive Tax

Answer 10

Social Security Tax ceiling

Question 11

Example of Progressive Rate Structure

Answer 11

federal income tax

Oregon income tax

Question 12

2 numbers needed to compute a tax

Answer 12

Tax Base x Tax Rate

Question 13

4 Criteria of a Tax

Answer 13

1. Paid to government, required by law
2. Pursuant to legislative power
3. Used for general public purposes
4. No special benefit received

Question 14

Income

Answer 14

Includes taxable & nontaxable income

Question 15

Gross Income

Answer 15

Income - items excluded from income

Question 16

Exclusions

Answer 16

Increases in wealth that Congress has decided not to tax

Question 17

Gain

Answer 17

Difference between selling price of an asset and its original cost

Question 18

4 Criteria to Evaluate a Tax

Answer 18

1. Equity
2. Certainty
3. Convenience
4. Economy

Question 19

Horizontal Equity

Answer 19

Similar taxpayers in similar situations pay similar levels of tax

Question 20

Vertical Equity

Answer 20

Taxpayers in different situations pay different levels of tax, but equitable in ability to pay

Question 21

Transaction Loss

Answer 21

Asset is sold for less than its cost

Question 22

Annual Loss

Answer 22

Excess of deductions over income (business)

Question 23

What is another name for the Tax Base?

Answer 23

Taxable Income

Question 24

Why does the IRS publish a new tax rate schedule every year?

Answer 24

For cost of living/inflation increases

Question 25

Which is better, a tax credit or deduction? Why?

Answer 25

Credit, because it is a dollar-for-dollar reduction in tax. Deductions decrease taxable income.

Question 26

What is the normal statute of limitations for a tax return?

Answer 26

3 years from due date of the return

Question 27

In what situation is the statute of limitations on a tax return 6 years?

Answer 27

Omitting gross income in excess of 25%

Question 28

What is the normal statute of limitations for a tax return?

Answer 28

3 years from due date of the return or date it was filed, whichever is later

Question 29

Why are you likely to be audited if you have very low/no AGI?

Answer 29

refundable Earned Income Credit

Question 30

Information Matching

Answer 30

Method the IRS uses to review/check tax returns. Example: W2 and 1099 reporting.

Question 31

Document Perfection Program

Answer 31

IRS checking for mathematical errors on tax returns

Question 32

Discriminant Function System (DIF)

Answer 32

Profiles IRS uses to compare likely deductions against certain incomes

Question 33

What is the goal of tax planning?

Answer 33

To maximize after-tax wealth

Question 34

How does tax planning use time value of money?

Answer 34

1. Defer income, or

2. Accelerate expenses

Question 35

How does tax planning use the marginal tax rate?

Answer 35

Recognizes income in year of lower MTR, recognizes deductions in year of higher MTR, shifts income to taxpayer with lower MTR

Question 36

Tax Avoidance

Answer 36

Using legal methods to minimize tax liability

Question 37

Tax Evasion

Answer 37

Illegal or fraudulent behavior to hide actual tax liability

Question 38

3 elements of Tax Evasion

Answer 38

1. Willfulness/intent
2. Underpayment
3. Action/concrete steps