Chapter 1: Intro to Taxation Flashcards
Two components of taxes?
Tax rate and a tax base
Tax liability = tax rate X tax base
Tax base can be income, wages, value, or sales price.
Progressive tax rate?
The tax rate increases as the tax base increases. Increase with increase in taxable income
Proportional tax rate?
Tax rate is constant, regardless of the size of the base. (flat tax)
State retail sales tax is proportional
Regressive tax rate
The tax rate decreases as the tax base increases.
What are the three types of tax rates?
Progressive, proportional, and regressive.
Under all three tax rate structures, the amount if taxes due increases as the tax base increases. The structure of the tax rate on affects the rate of increase.
What are the four kinds of tax bases?
- Transactions (slaes or purchases of goods and services, and transfers of wealth, by death or gift)
- Property or wealth (including ownership of specific kinds of property)
- Privileges and rights (including the ability to do business as a corporation, the right to work in a certain profession, and the ability to move goods between countries)
- Income on a gross or net of expense basis.
What are the three kinds of transaction taxes?
Sales and certain excise taxes, employment taxes, and taxes on the transfer of wealth (gifts and inheritance)
What is the difference between a general sales tax and an excise tax?
These taxes differ by the breadth of their bases. An excise tax base is limited to a specific kind of good or service, while a general sales tax os brand based (it might be levied on all retail sale items). All levels of government impose excise taxes, while state and local governments make heavy use of general sales tax.
Federal excise tax?
The federal government relies upon income and employment taxes as its principal source of funds. They extend beyond sales transactions. They are also levied on privileges and rights. The bases used for federal excise taxes are extremely diverse.
State excise tax?
Many states levy excise taxes on the same items taxed by the federal government and can vary greatly from state to state. Many items are taxed.
Local excise tax?
Two recently popular local taxes are hotel occupancy tax and rental car “surcharge” Because these tax the visitor who cannot vote, they are political windfall and serve as a means of financing special projects that generate civic pride (convention centers/sports arenas)
General Sales tax?
The broad based sales tax is a major source of revenue for most state and local governments. Used in all states besides Alaska, Delaware, Montana, New Hampshire, and Oregon. While specific rules very from state to state, the sales tax typically employs a proportional tax rate and includes retail sales of tangible personal property in the base. Sales tax is collected by the retailed and paid to the government. Local general sales taxes, over and above those levied by the state are common, not uncommon to see taxpayers living in the same state who pay different general sales taxes.
Use taxes
This tax is a value based tax, usually imposed at the same rate as sales tax, on the use, consumption, or storage of tangible property. Every state that imposes a general sales tax levied on the consumer also applies a use tax.
The use tax exists to prevent people from only purchasing products from states that have lower or no sales tax.
Difficult to enforce for many purchases so the purchases often does not pay. so most states are taking steps to prevent loss by collecting use tax that relates to sales online.
Value added tax?
The value added tax is a variation of a sales tax; it is levied at each stage of production on the value added by the producer. VAT is in widespread use in many countries around the world and typically serves as a major source of revenue for the countries that use it.
Employment tax
Tax on the salaries and wages paid to employees, from both state and federal governments. On the federal side, employment taxes are a major source of funds. The FICA tax accounts for one third of revenues in the federal budget, second only to the income tax.
What are the two types of employment taxes imposed by the federal government?
- The federal insurance contributions act (FICA)
2. The federal unemployment tax act
Fica Taxes
Two Components: old age, survivors, and disability payments (social security) and medicare health insurance payments. There is no ceiling on the base amount for the medicare tax. The employer withholds the FICA tax from an employees wages. Payment are usually made through weekly or monthly electronic payments or depository. Employers must also file form 941. Employer’s quarterly federal tax return, by the end of the first month following each quarter of the calendar year and any pay any remaining amount of employment taxes due for the previous quarter. Failure to pay can result in large and sameness ruinous penalties.
an additional .9% medicare tax is imposed on earned income above 200,000 or 250000. unlike the social security tax of 6.2% and the regular medicare portion if 1.45 percent, an employer does not match the employees .9% additional medicare act.
Self-Employment tax?
Self-Employed individuals are required to pay both the employer and employee portion of the FICA tax. Self employed individuals deduct half of the SE tax - the amount normally deductible by an employer as a business expense.
Unemployment taxes
FUTA: provides funds to state unemployment benefit programs and applies at a rate of 6% on the first 7,000 of covered wages paid during the year to each employee. as with Fica, this represents a regressive rate structure. Federal government allows a credit for unemployment taxes paid.
estate tax
Tax imposed on the transferor at death
Inheritance tax
tax on the recipient of property from the death of an individual. The value of the property transferred is the base for determining the amount of the tax.
Federal estate tax
Determination of the estate tax begins with the gross estate, which includes property the dependent owned at the time of death, property interests, such as life insurance proceeds paid to the estate or a beneficiary other than the estate if the deceased-insured had any ownership rights in the policy.
Marital deduction for amounts passing to a serving spouse.
State taxes at death
States usually levy an inheritance tax, an estate tax, or both. The two forms of tax differ according to whether the liability is imposed on the heirs of the estate. Typically an inheritance divides the heirs into classes based on their relation to the dependent. the more closely related the heir, the lower the rates imposed and the greater the exemption allowed.
Gift tax
Gift tax: excise tax levied on the right to transfer property (during owner’s life, not death). Applies only to transferred amounts that are not supported by full and adequate consideration.
Intended to compliment the estate tax. Gift tax base is the sum of all taxable gifts made during one’s lifetime. Gifts are valued at fair market value of the property on the date of the gift. To compute the tax due in a year, the tax rate schedule is applied to the sum of all lifetime taxable gifts. the resulting tax is then reduced by gift taxes paid in prior years.
Annual Taxable gifts
Determined by reducing the fair market value of gifts given by an annual exclusion of $14,000 per donee. A married couple can elect gift splitting which enables them to transfer twice the annual exclusion per donee per year. Taxable gifts are reduced by deductions for gifts to charity and to one’s spouse. Goofed for educational and medical purposed may be exempt from the gift tax as well.
