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and voluntarily comply- History of Federal Income Taxo 1861 – 1st federal income tax To help pay for the Civil War Repealed after the waro 1894 – revised federal income tax is introduced Found to be unconstitutionalo 1909 – 1st corporate income tax enactedo 1913 – 1st permanent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