Exam 1 Flashcards
Who is affected by taxes?
Individuals
Politicians
Investors
Businesses
What is a tax?
Fund government agencies.
Required
To a Government Agency
No direct benefit to the tax payer
To calculate a tax
Tax base * Tax rate
Measurement of taxes
Marginal
Average
Effective
Marginal Tax
Tax on next dollar of income
Average Tax
Taxable income
Effective Tax
Total Income
Proportional Tax
Flat tax
Progressive Tax
Graduated tax higher earnings = higher taxes
Regressive
Taxes decrease with earnings
Federal taxes (4)
Income
Employment
Excise
Transfer Tax (death/gift tax)
State Taxes
Sales
Property
Income
Inheritance
Evaluation: Sufficiency
Involves assessing the aggregate (combined) size of the tax revenues that must be generated and making sure that the tax system provides these revenues
Evaluation: Equity
Tax burden should be distributed across taxpayers
Horizontal- similar situations
Vertical- greater ability to pay
Evaluation: certainty
Taxpayers should be able to determine when to pay the tax and how to determine the tax
Evaluation: Convenience
Tax system should be designed to be collected without undue hardship on the taxpayer
Evaluation: economy
Should minimize the compliance and administration costs associated with the tax system
Gross income
Received economic benefit
(Burrowed)
Realized income
And tax law does not provide for exclusion or deferral.
Income tax formula full
Gross income -deductions for agi =adjusted gross income -deductions from agi -exemptions =taxable income *tax rate =tax -credits \+other taxes =total tax -prepayments =refund/credit
Excluded income
Municipal bond interest
Gifts
Inheritance
Workers comp
Inheritance
Life insurance proceeds
Disability if premium paid
Retirement
Health insurance premiums
Disability insurance premiums
(Whole life insurance premiums)
(Awards/prizes)
(Clothing)
Deferred income
Installment sales
Like kind exchanges
Involuntary conversions
Contributions to qualifying retirement plans
Adjustments FOR agi
Business deductions
Moving expenses (limited)
SE health insurance
Alimony
Student loan interest
Adjustments FROM agi
Standard or itemized deduction
- personal
- dependency
Qualifying child requirements
Relationship
Age 19 or 24 (or disabled)
Residence
Support
Qualifying relative
Relationship - living in home >1 year
Support >50% living expenses
Gross income
Special rates
Qualifying dividends-15% or 0%
Long term capital gains
Assets >1 year
Losses limited to current long term gain or $3000
Dependency tie breaker
Parents
Days in home
Higher AGI
Filing statuses
Single
Married joint
Married separate
Qualifying widow(2 years& dependent child)
Qualifying person
Head of household
Head of household for filing status
Unmarried
Pay more than 50% costs of home
Qualifying persons
Return of capital
Cost of asset is called TAX BASIS
Return of capital means the tax basis is excluded when realizing income
Gain of sale or disposition of asset
Tax benefit rule
Refunds for expenses deducted prior to the extent that the refund reduced taxes in the year of deduction.
Income can’t be assigned
Can income be assigned?
Types of income
Earned
Unearned
- rent
- interest
- gain
- dividend
Alimony
Taxable to recipient
Deductible by payer
Discharge of indebtedness
Taxpayers debt is forgiven the amount is taxable unless insolvent
