Chapter 1- Federal Tax Modelo Income – from all sourceso – Exclusionso 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 Rateo 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 transactiono 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laws and voluntarily comply- History of Federal Income Taxo 1861 – 1st federal income tax To help pay for the Civil War Repealed after the waro 1894 – revised federal income tax is introduced Found to be unconstitutionalo 1909 – 1st corporate income tax enactedo 1913 – 1st permanent federal income tax 16th amendment to the Constitutiono 1939 – Internal Revenue Code written All tax laws are written here Recodified in 1954 Recodified again in 1986- Tax Reform Act of 1986o Current statutory source of federal income tax lawo 1943 – Pay-As-You-Go Concept introduced Taxes are paid as close to the time the income is earned as is reasonable.- Federal Tax Administrationo The IRS is the branch of the Treasury Department that is responsible for interpreting andadministering the tax law written in the Internal Revenue Code The commissioner of the IRS is appointed by the presidento Field Organization of the IRS Wage and Investment Income Operating Division- Handle basic tax returns – 1040, 1040A, & 1040EZo 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), & partnershipso 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 milliono 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 stateo 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 19o Excise Tax – based on quantity/units Levied on a specific item Levied at the federal level Examples – gas, alcohol, tobacco, guns, tires, playing cardso Severance Tax – tax on a natural resource that’s removed from its natural stateo Employment Taxes Social Security – FICA (Federal Insurance Contribution Act)- 6.2% on the first $113,700 of wages- Matched by employers Medicare- 1.45% on all wages pay for MHI (Medical Health Insurance)- Matched by employers- No cap 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 ½ of their self-employment tax as a businessexpense to equalize the tax treatments of employees and the self-employedo 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 Ad Valorem – based on the value of the property being taxed 2 types- Realty – land and anything attached to ito Schools levy on realty- Personalty – everything elseo 2 uses Business Personal These determine how the property is taxedo 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- The average person will never exceed this thresholdo Health Care Related Taxes Because of the Affordable Care Act- Increased Hospital Insurance tax for higher income workers and self-employed taxpayerso An additional 0.9% on wages received in excess of $250,000 for married/joint, $125,000 for married/separate, and $200,000 forall other taxpayers- Surtax on unearned income of higher income individualso 3.8% Medicare contribution tax on unearned income is imposedon individuals, estates, and trustso Same thresholds as above- Higher threshold for deducting medical expenseso 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 FSAso Contributions limited to $2500, down from overall $5000 limito Will be adjusted annually for inflation- Indoor tanning excise taxo 10% excise tax, beginning June 30,2010- Standards for Evaluating a Taxo 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 payo Certainty – know when the tax is due and how you’ll pay it Also, be able to calculate the amount of tax to be paido 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 taxo Economy – a tax should have minimum compliance and administrative costs Amount should be kept at a minimum- Tax Rateso Marginal Rate – the rate of tax that will be
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