Chapter 1: Introduction Flashcards
Marginal tax rate
Rate applied to an incremental amount of taxable income that is added to the tax base.
Can be used to measure the tax effect of a given transaction
Average tax rate
Total tax liability / taxable income
Average tax rate for each $ of income
Effective tax rate
Total tax liability / by total economic income (not just taxable)
A broad measure of a taxpayer’s ability to paybtaxes
Taxable income
Total income Minus exclusions = Gross income Minus deductions = Taxable income (AGI)
Calculation of tax due
Taxable income x applicable tax rate = Income tax before credits Minus tax credits = Total tax liability Minus prepayments = Balance due or refund
Total tax liability
Taxable income x rate
Less tax credits
Gross income
Total income less exclusions (non taxable items)
Franchise tax
Another name for state corporate income tax. Generally based on weighted average formula of: net worth, income and sales (x modified federal taxable income)
Gift tax
Excise tax imposed on the donor for transfer of property considered to be a taxable gift.
Annual exclusion allowed per donee
Unlimited marital deductions between spouses
Cumulative over the taxpayer’s lifetime
Gift tax calculaton
FMV all gifts in current year
Minus: annual exclusions, marital deductions, charitable contribution deduction
= Taxable gifts for current year
Plus: taxable gifts for all prior years
= Cumulative taxable gifts (tax base)
Times: unified transfer tax rates
= Tentative tax on gift tax base
Minus: unified transfer taxes pd in prior years and unified credit
= Unified transfer tax (gift tax) due for current year
Donee liability for gift tax
Contingent liability in event of nonpayment by donor
Gift tax: charitable contributiona
Unlimited deduction allowed (essentially exempt from gift tax)
Federal estate tax
Part of the unified transfer tax system
Based on the total property transfers an individual makes during their lifetime and at death
Aka unified transfer tax
Federal estate tax structure
Tax base is estate (less death expenses/ charitable contributions/ transfers to spouse) plus taxable gifts prior to death
Tax base x tax rate less tax credits and gift taxes already paid = estate tax
Unified tax credit
As of 2021: $4,625,800
From $345,800 + .40 ($11,700,000 - $1,000,000)
Alternative valuation date for decedent’s property value
Six months after date of death
May be elected if the aggregate value of the gross estate decreases in that six months and election results in lower liability
Ad valorem tax
Taxes according to value (property tax)
Value added tax
Essentially a sales tax levied at each state of production on the value added
Sales tax
Varies by state
Not deductable on personal federal income tax, but may be deductable if incurred for trade or business
Also taxpayer may elect to deduct state and local sales tax INSTEAD of state and local income tax
OASDI
Old-age survivors and disability insurance
Part of FICA
6.2% on the first $142,800 of wages
HI
Hospital insurance (medicare)
Part of FICA
1.45% on wages up to $200,000
Additional 0.9% on wages over $200,000 ($250,000 for married filing jointly)
No ceiling
Self employed OASDI and HI
OASDI 12.4% (income up to $142,800)
HI 2.9% income up to $200,000 and 3.8% anything over that
Unemployment tax
Paid to federal and state
Federal rate 6% on first $7000 of wages, with 5.4% credit for taxes paid to state government
May be adjusted by employer circumstance
Adam Smith’s four canons of taxation
Equity
Certainty
Convenience
Economy
(Additional 5th: simplicity)
Horizontal equity
Similarly situation taxpayers treated equally
Vertical equity
Taxpayers who are not similarly situated should be treated differently
Basis of a progressive rate structure
Certainty in taxation
1) ensures a stable source of government operating revenues
2) provides taxpayers with some certainty concerning amount of annual tax liability
IRS advanced rulings
May be requested by a taxpayer for a proposed transaction. Taxpayers then may rely on ruling if transaction is completed in affordable with the proposal
