Earmarked tax-assessed for specific purpose, because the mat made by the taxpayer doesn’t directly relate to specific benefit received by taxpayer Ex. Marge travels to AL where she rents a hotel room and dines at several restaurants. The price she pays for her hotel room and meals includes an additional 2% city surcharge to fund dad construction in AL.
This is a tax b/c the mat is required by local covet and doesn’t directly relate to specific benefit that Marge receives Tax= Tax Base x Tax Rate Tax Base- defines what is actually taxed. Tax Rate- level of taxes imposed Flat Tax- single tax applied to entire base Graduated tax- divided into series of brackets Marginal tax rate (New Total Tax- Old Total Tax) (New Taxable Income- Old) Marginal is the next additional increment of taxable income Average tax rate- taxpayer’s bag level of tax on each dollar of taxable income Total Tax / Taxable Income
Effective tax rate- taxpayers bag rate of taxation on each dollar of total income (taxable and nontaxable) Provides better depiction of taxpayer’s burden b/c it depicts the total tax paid as a ratio of the sum of both taxable and nontaxable income Total tax / Total Income Proportional tax structure (flat tax)- imposes constant tax rate throughout base. Proportional tax = tax base x tax rate Marginal tax rate remains constant, always = average tax rate Progressive tax structure- imposes marginal tax rate as the tax base increases, marginal tax rate and taxes paid increases. Regressive tax structure- decreasing marginal tax rate.
Ex. AS and unemployment taxes As tax base increases, marginal tax rate decreases while total taxes paid increases Federal Taxes Income tax- most significant tax, represents 60% of US tax revenue Levied on individuals, corps, estates, trusts Employment/electioneers taxes Second largest group. Consists of old age, survivors, and disability insurance (SAID) tax, AKA Social Security tax and Medical Health Insurance tax (Medicare) Unemployment taxes fund temp unemployment benefits Excise tax Levied on quantity Of products sold Transfer tax Levied on fair market values of wealth transfers upon death or by gift
State and Local Taxes Sales and use tax Tax base for sales tax is retail sales of goods and some services Tax base for use tax is retail price of goods owned, possessed, or consumed w/m state that were not purchased w/n state Property tax Are ad valor taxes (tax base for each is fair market value of property) Real property taxes consist of taxes on land, structures, improvements permanently attached to land Personal property taxes include taxes on all other types of property, intangible and tangible Income tax Most state taxable income calls largely conform to the federal taxable income alas Excise tax- states typically impose excise taxes on items subject to federal excise tax Implicit tax- (above taxes are all explicit). Implicit are not directly paid to gobo. The reduced before tax return that a tax-favored asset produces b/c of its tax advantaged status. Tax-favored: when the income the asset produces is either excluded from tax base or subject to lower rate.
Tax benefits associated with tax-favored asset increase demand for asset Evaluating Taxes- Sufficiency Involves assessing the aggregate size of the tax revs that must be generated and ensuring that the tax system provides these revenues Static forecasting Norse how taxpayers may alter their activities in response to a proposed tax law change and bases projected tax revenues on existing state of transactions Dynamic forecasting attempts to account for possible taxpayer responses to a proposed tax law change Income effect- predicts that when taxpayers are taxed more, they will work harder to generate the same after-tax dollars Substitution effect- predicts that when taxpayers are taxed more, rather than work more, they will substitute nontaxable activities like leisure pursuits for taxable ones b/c the marginal value of taxable activities has decrease Equity- ax system is considered fair or equitable if the tax is based on the taxpayer’s ability to pay. Taxpayers with a greater ability to pay tax, pay more tax Horizontal Equity- two taxpayers in similar situations pay the same tax. In broad terms, each of the federal, state, and local taxes discussed satisfy this definition.
Two individual taxpayers with the same taxable income, same purchases, same value of property, and same estate value pay the same federal income tax, sales tax, property tax, and estate tax Vertical Equity- Vertical equity is achieved when taxpayers with greater ability to pay tax, pay ore tax relative to taxpayers with a lesser ability to pay tax. Certainty- taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax Convenience- suggests that a tax system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government. Economy- requires that a good tax system should minimize the compliance and administration costs associated with the tax system Ex. Ferrier has the choice between investing in a State of New York bond at 8. 0 percent and a Curetting bond at 16. 0 recent.
Assuming that both bonds have the same Montana characteristics and that Ferrier has a 30 percent marginal tax rate, in which bond should she invest? Ferrier’s after tax rate of return on the tax exempt State of New York bond is 8. 0 percent. The Curetting bond pays taxable interest of 16. 0 percent. Ferrier’s after tax rate of return on the Curetting bond is 1 1. 20 percent (i. E. , 16. 0% interest income – (16. 0% x 30%) tax = 11. 20%). Ferrier should invest in the Curetting bond Congress would like to increase tax revenues by 10 percent. Assume that the average taxpayer in the United States earns $45,000 and pays an average tax rate of 25 percent. This analysis is an example of dynamic forecasting.
Based on the information above, the average taxpayer pays $11,250 of tax (i. E. , $45,000 x 25%), leaving $33,750 of income after tax. A 10 percent increase in revenues would mean that the average taxpayer pays 312,375 in tax ($1 1 , 250 x 1. 10). With this new tax amount, we can solve for the tax rate that would generate this tax amount. After-tax income = Pretax income x (1 – tax rate) After-tax income = pretax income -? (Pretax income x tax rate) After-tax income = Pretax income -? Tax Substituting information from the problem results in: $33,750 pretax income – $12,375 Pretax income = $46,125 We can use the above formula to solve for the new tax rate. $33,750 = $46,125 x (1 – tax rate) Tax rate – – 26. 83% Chi. Taxable income- tax base for individual income tax GAG- GIG less deductions for GAG. GIG increases taxable income dollar for dollar GIG US uses all inclusive income concept- GIG-? all income from whatever source derived Realized income is generated in a transaction with a second party in which there is a measurable change in property rights between parties appreciation in a stock investment would not represent realized income unless the taxpayer sold the stock). Measured change in property rights; a physical transaction that may or may not have tax effect Recognized Income is reported on tax return Ex. Of realization event but not recognized event.
Selling house for $700,000 but not recognized b/c of exemption for married joint filing status Exclusions- realized income that is exempt from income tax Interest income from mini bonds, gifts and inheritances, gain on sale Of personal residence, life insurance proceeds Deferrals- realized income that ill be taxed in subsequent year Installment sale, like kind exchange Common income items- compensation for fringe benefits, buss news income, gains from selling property, interest and dividends, rents and royalties, alimony and annuities, retirement income Character of Income Tax exempt- realized during year but excluded from GIG and never taxed Tax deferred Ordinary- included in GIG in ICY and taxed at ordinary rates Qualified dividend- taxed at a rate of 15 percent (20 percent for high income taxpayers and O percent for low income taxpayers).
If the dividend does not meet these requirements, it is taxed as ordinary income. Because qualified dividends are subject to a lower rate than ordinary income (a preferential tax rate), qualified dividends can be referred to as preferentially taxed income Capital- These are gains or losses on the disposition or sale of capital assets. In general, capital assets are all assets other than: AR from sale of goods/ services, inventory and other assets held for sale in ordinary business, assets used in trade or business including supplies Loss on the sale off capital asset (no matter how long the taxpayer held it before selling) is a for GAG deduction in the year of sale.
However, the deduction for a capital loss in a particular year is limited to $3,000 (losses In excess of the limit are carried forward indefinitely) Deductions reduce taxpayer’s taxable income, a legislative grace For GAG- above the line deductions, generally more favorable Alimony paid, moving expenses, business expenses, loss on dispositions of assets, capital losses (limited to 3000), contributions to retirement, rental and royalty expenses From GAG- below the line deduction Itemized deductions- med and dental, taxes, interest expo, charitable contributions standard deductions- personal and dependency exemptions re $3950 for both types Exemptions- a fixed income tax deduction a taxpayer may claim for each person who qualifies as dependent Other taxes- alternative minimum tax (AM T) aka self-employment tax taxpayers with relatively high GAG are subject to a 3. 8% net investment income tax (also called the Medicare Contribution tax) and a . 9% additional Medicare tax on earned income Tax credits- Unlike deductions, which reduce taxable income, tax credits directly reduce taxes payable Tax prepayments- withholdings and estimated tax payments Dependency requirements Must be citizen of IIS or resident of US, Canada, MAX
Must not file a joint return with the individual’s spouse unless there is no tax liability on the couple’s joint return and there would not have been any tax liability on either spouse’s tax return if they had filed separately Must be considered either a qualifying child of the taxpayer or a qualifying relative of the taxpayer Qualifying Child- relationship, age, residence, support Relationship- child or descendant of a child (taxpayers child, stepchild, and eligible foster child) Age- A qualifying child must be younger than the taxpayer and either (1) under age 19 at the end of the year or (2) under age 4 at the end of the year and a full-time student A person is a full-time student if she was in school full-time during any part of each of five calendar months during the calendar year. An individual who is permanently and totally disabled is deemed to have met the age test Residence- A qualifying child must have the same principal residence as the taxpayer for more than half the year.
Time that a child (or the taxpayer) is temporarily away from the taxpayer’s home because the child (or taxpayer) is ill, is pursuing an education, or has other special circumstances is counted as though the child or taxpayer) were living in the taxpayer’s home Support- A qualifying child must not have provided more than half his or her own support (living expenses) for the year. When determining who provided the support for a child of the taxpayer who is a full-time student, scholarships are excluded from the computation. Otherwise, support generally includes food, clothing med and dental care, recreation, allowances and gift, wedding costs, lodging, child care expenses, education Tiebreakers rules- whoever the kid lives with for the longest has priority. Lastly, whoever has the highest GAG has priority.
Qualifying relative Relationship- descendant or ancestor of taxpayer (includes adopted/step child, foster, stepmother/father), sibling of taxpayer (steps), son or daughter of brother or sister (cousins do not qualify), In-law (mother, father, sister, brother, son, daughter), or member of household Support- taxpayer pays more than half of relatives expenses or: no one taxpayer paid over half of individual’s support; taxpayer and at least one other person provided more than half the support of the individual, and the taxpayer and the other person(s) would have been allowed to claim the individual as a dependent except for the fact that they did not provide over half of the support of the individual; taxpayer contributed over 10% of individual’s support, Gross Income- gross income test requires that a qualifying relatives gross income for the year be less than the personal exemption amount. As we noted above, the personal exemption amount for 2014 is $3,950.
Differences- The relationship requirement is more broadly defined for qualifying relatives than qualifying children, Qualifying children are subject to age restrictions while qualifying relatives are not, Qualifying relatives are subject to a gross income extraction while qualifying children are not, Taxpayers need not provide more than half a qualifying child’s support (though the child cannot provide more than half of her own support). Filing Status Married filing jointly- legally married as of last day of year. When one spouse dies during the year the surviving spouse is still considered to be married for tax purposes during the year of the spouse’s death.
Married filing separately- legally married as of last day of year, for Montana reasons usually Qualifying widow/widower- When a taxpayer’s spouse dies, the surviving spouse can file s qualifying widow or widower for two years after the year of the spouse’s death if the surviving spouse remains unmarried and maintains a household for a dependent child. Single- unmarried or legally separated. Doesn’t qualify as HO Head of Household- be unmarried at EYE, not a qualifying widow/err, pay more than half costs of keeping up home, qualifying person Married treated as unmarried (abandoned spouse)- married at EYE, does not file joint return with other spouse, pays half+ costs of maintaining home, taxpayer lived apart for last 6 months. Temporary absences due to illness, education, equines, vacation, or military service count as though the spouse still lived in the taxpayer’s home).
Note that the qualified dividend is taxed at a maximum rate of What if: Assume Rodney and Anita divorced last year. During the current year, Brannon lives with Anita for the entire year, and Anita pays all the costs of maintaining the household for herself and Brannon. Assume that Anita released the dependency exemption to Rodney under the divorce decree. Under these circumstances, what is Anta’s filing status for the year? Answer: Head of household. Brannon is a qualifying person for Anita (the custodial parent) even though Anita is not claiming the dependency exemption for Brannon. Brannon is not a qualifying person for Rodney (the instructional parent).
What if: Assume that Rodney and Anita divorced last year, Brannon is Anta’s cousin, and Brannon lived with Anita in he home from June 15 through December 31. What is Anta’s filing status for the year? Answer: Single. Anita does not qualify for head of household filing status because Brannon is not Anta’s qualifying child (fails relationship test) or qualifying relative (fails relationship test because he did not live in Anta’s mom for the entire year, and he does not have a qualifying family relationship with Anita because he is Anta’s cousin). What if: Assume that Rodney and Anita divorced last year, Brannon is Anta’s cousin, and Brannon lived with Anita in her home for the entire year. What is Anta’s filing status for the year? Answer: Single.
Even though Brannon is Anta’s qualifying relative, Brannon meets the qualifying relative relationship test only because he lived with Anita for the entire year (not because he had a qualifying family relationship with Anita). Therefore, while Anita may claim a dependency exemption for Brannon, she does not qualify for the head of household filing status. What if: Assume Shawn (Redness’s brother) lived with the Halls, but Shawn paid more than half the costs of maintaining a separate apartment that is the principal residence of his mother, Sharon, whose gross income is $1 ,500. Because Shawn provided more than half of Sharon ‘s support during the year, and because Sharon gross income was only $1 ,500, she qualifies as Swan’s dependent (as a qualifying relative). In these circumstances, what is Swan’s filing status? Answer: Head of household.
Shawn paid more than Alfa the costs of maintaining a separate household where his mother resides, and his mother qualifies as his dependent. If Sharon gross income exceeded the exemption amount she would fail the dependency gross income test and would not qualify as Swan’s dependent. If she did not qualify as his dependent she would not be a qualifying person, and Shawn would not qualify for the head of household filing status.