Chapter 1 Federal Tax Model o Income from all sources o Exclusions o Gross Income starting point for 1040 o Deductions FOR A G I o A G I o Deductions FROM A G I o Taxable Income Tax Base o x Tax Rate o Income Tax Liability total amount owed o Credits o Tax Prepayments o Tax Refund due with Return What is a tax o A tax is a required contribution of some group of a certain amount levied by a governing body with revenues being used for public use Imposed by legislation Non exchange transaction o Tax Tax Base Tax Rate Tax Base the value that is subject to tax taxable income The U S Federal Taxing System is voluntary compliance system o This means that everyone is expected to know the tax laws and voluntarily comply History of Federal Income Tax o 1861 1st federal income tax To help pay for the Civil War Repealed after the war o 1894 revised federal income tax is introduced Found to be unconstitutional o 1909 1st corporate income tax enacted o 1913 1st permanent federal income tax 16th amendment to the Constitution o 1939 Internal Revenue Code written All tax laws are written here Recodified in 1954 Recodified again in 1986 Tax Reform Act of 1986 o 1943 Pay As You Go Concept introduced o Current statutory source of federal income tax law Federal Tax Administration Taxes are paid as close to the time the income is earned as is reasonable o The IRS is the branch of the Treasury Department that is responsible for interpreting and administering the tax law written in the Internal Revenue Code The commissioner of the IRS is appointed by the president o Field Organization of the IRS Wage and Investment Income Operating Division Handle basic tax returns 1040 1040A 1040EZ o Small Business and Self Employed Operating Division S Corporations and corporations with assets under 5 million Sch C E F 2106 employee business expense deductions partnerships o Large and Mid Size Business Operating Division Mid size corps S corps and partnerships with assets between 5 and 250 million and large businesses with assets 250 million o Tax Exempt Operating Division Exempt organizations employee plans and state and local govts o Was 7 regions 10 service centers and 63 districts What taxes are NOT Federal Income Taxes o Sales Tax based on amount of the sale General Most are levied by state o Use Tax paying the equivalent of sales tax for online or out of state tax free purchases Levied by the state Claimed on the OH IT 1040 pg 2 line 19 o Excise Tax based on quantity units Levied on a specific item Levied at the federal level Examples gas alcohol tobacco guns tires playing cards o Severance Tax tax on a natural resource that s removed from its natural state o Employment Taxes Social Security FICA Federal Insurance Contribution Act 6 2 on the first 113 700 of wages Matched by employers Medicare Matched by employers No cap 1 45 on all wages pay for MHI Medical Health Insurance Self Employment Tax self employed individuals must pay the equivalent of both halves of the social security and Medicare taxes They are allowed to deduct of their self employment tax as a business expense to equalize the tax treatments of employees and the self employed o Unemployment Tax FUTA Employer pays 6 2 of the first 7000 in wages paid to each employee Employer gets a credit for state unemployment of up to 5 4 leaving the minimum FUTA rate at 0 8 o Property Taxes 2 types Ad Valorem based on the value of the property being taxed Realty land and anything attached to it o Schools levy on realty Personalty everything else o 2 uses Business Personal These determine how the property is taxed o Wealth Transfer Taxes asset given as a gift or left behind upon death Estate Tax paid from the assets of a deceased taxpayer s estate Federal Tax Levied on the fair market value of the assets a taxpayer owned at death Gift Tax paid by the person making the gift The person receiving the gift in not subject to any tax on the gift Transacted when still alive The first 14 000 year per person receiving the gift is excluded from federal gift tax Taxpayers are also allowed to make unlimited gifts to their spouses and to charities without paying federal gift tax Federal Tax Inheritance Tax levied by state and local governments Unified Donative Transfer Credit allows a lifetime credit against gift and estate taxes The credit is equivalent to 5 25 million in property from the gift and or the estate tax in 2013 o Health Care Related Taxes The average person will never exceed this threshold Because of the Affordable Care Act Increased Hospital Insurance tax for higher income workers and self employed taxpayers o An additional 0 9 on wages received in excess of 250 000 for married joint 125 000 for married separate and 200 000 for all other taxpayers Surtax on unearned income of higher income individuals o 3 8 Medicare contribution tax on unearned income is imposed on individuals estates and trusts o Same thresholds as above Higher threshold for deducting medical expenses o Unreimbursed medical expenses of taxpayers under age 65 are deductible to the extent that they exceed 10 of A G I previously 7 5 o Over 65 7 5 until 2016 then 10 Limitation on contributions to health FSAs o Contributions limited to 2500 down from overall 5000 limit o Will be adjusted annually for inflation Indoor tanning excise tax o 10 excise tax beginning June 30 2010 Standards for Evaluating a Tax o Equality based on ability to pay fairness Horizontal Equity 2 similarly situated taxpayers are taxed the same Vertical Equity taxpayers with different situations are taxed differently but fairly in relation to ability to pay o Certainty know when the tax is due and how you ll pay it Also be able to calculate the amount of tax to be paid o Convenience a tax should be levied at the time it is most likely to be convenient for the taxpayer to make the payment The most convenient time is as they receive income and have the money available to pay the tax o Economy a tax should have minimum compliance and administrative costs Amount should be kept at a minimum Tax Rates o Marginal Rate the rate of tax that will be paid on the next dollar of income or the rate of tax that will be saved by the next dollar of deduction Used to determine the effect of reporting additional income or deductions during a tax year o Average Rate Tax Liability Tax Base taxable income o Effective Rate Tax Liability Economic Income all income Tax Rate Structures o Progressive the average tax rate increases as income increases o