ACCTCY 4353 Intro to Taxation Chapter 1 Introduction to Tax Learning Objectives 1 Students will understand how taxes affect decision making 2 Students will explain what constitutes a tax and the purpose of taxation 3 Students will describe tax rate structures and calculate how to measure tax rates 4 Students will identify several types of federal and state taxes I Why Care about Taxes Taxation impacts many personal financial planning decisions such as Investment decisions Homeownership Easte planning LO1 Students will understand how taxes affect decision making The current tax law also impacts business decisions such as Business organization type How to raise capital fund business operations dept or through equity stock Compensation packages how businesses pay employees and executives pay with salary or with stocks II What Qualifies as a Tax To be considered a tax the payment must be Required non voluntary Not be tied to any DIRECT benefit received by the taxpayer Imposed by a government agency federal state or local and LO2 Students will explain what constitutes a tax and the purpose 1 of taxation Purpose of taxes ACCTCY 4353 Intro to Taxation 1 Raise revenue for the government everyone benefits from public good that are not excludable so everyone need to pay a little 2 encourage discourage certain behaviors tax reduction or credit ex Charitable contributions Example 1 1 Are the following Taxes 1 Payment for driver s license NO only pay if you want it fee 2 Surcharge on groceries to pay for road construction yes sales tax 3 Postage paid to mail a package no fee for service provided 4 Payment to the county for owning a home yes property tax 5 Speeding ticket no it is a fine 6 1 surcharge for liquor purchases yes sin tax 7 Payment to vendor for credit card processing no fee not from a government acency III How to Calculate Tax A property Tax Base the dollar amount subject to tax based on the selling price value of Tax base for federal income tax Taxable income net income base Taxpayers use their income minus certain deductions to end up with taxable income Sometimes deductions are aimed at specific groups e g self employment tax deductions other times they are aimed at everyone e g standard deduction B Tax Rate the percentage level of taxes imposed on the tax base i Flat tax rate constant for the entire tax base LO3 Students will describe tax rate structures and calculate how to measure tax rates 2 ACCTCY 4353 Intro to Taxation ii Graduated tax rate changes for different tax bases tax brackets C Tax the liability owed Tax base x tax rate Example 1 2 Calculating Tax with Tax Brackets Assume Tom and Siobhan are married with total taxable income of 195 000 Use the tax rate schedule to calculate their tax liability for the current year Married Filing Jointly Not over 22 000 Over 22 000 but not over 89 450 Over 89 450 but not over 190 750 10 of taxable income 2 200 plus 12 of the excess over 22 000 10 294 plus 22 of the excess over 89 450 Over 190 750 but not over 364 200 32 580 plus 24 of the excess over 190 750 Over 364 200 but not over 462 500 74 208 plus 32 of the excess over 364 200 Over 462 500 but not over 693 750 Over 693 750 105 664 plus 35 of the excess over 462 500 186 601 50 plus 37 of the excess over 693 750 Tax base 195 000 Tax 32 580 24 0 24 195 000 190 750 32 580 0 24 4 250 33 600 24 Marginal Tax Rates MTR bracket 3 ACCTCY 4353 Intro to Taxation Different Ways to Measure Tax Rates A Marginal Tax Rate MTR tax rate on next dollar of taxable income or deductions MTR change in tax change in taxable income New total tax Old total tax New taxable income Old taxable income MTR is useful for tax planning B Average Tax Rate ATR average tax rate on taxable income ATR total tax total taxable income ATR is useful for budegeting C Effective Tax Rate ETR tax rate on each dollar of economic taxable and nontaxable income ETR total tax total income include non taxable income ETR is useful for comparing total tax burden of taxpayers because tax law excludes certain income from taxation Example 1 3 Calculating Tax 1 Roman a single taxpayer has 35 000 of taxable income and 25 000 of non taxable income What is his income tax liability Look at tax rate schedule for single tax payer Tax base only taxable income 35 000 Tax 11 000 0 12 35 000 11 000 3 980 income tax liability What is his ATR 3980 35000 11 37 4 ACCTCY 4353 Intro to Taxation What is his ETR 3 980 60 000 6 63 35 000 25 000 total icome taxable and not taxable What is his MTR if he earns an additional 1 of income 12 he is still in the 12 tax bracket 2 Assume Roman earns an additional 25 000 in income 20 000 of which is taxable What is his MTR MTR new tax old tax new tax income old tax income New tax base 55 000 not 60 000 bc only 20 000 in taxable New tax 5 147 0 22 55 000 44 725 7 408 Mtr 7408 new tax 3 980 old tax 55 000 35000 20 000 17 1 3 Using the original facts 1 now suppose that Roman has a deduction that reduces his taxable income by 10 000 What is his new MTR MTR 12 new tax old tax new taxable income old taxable income New tax base 25000 New tax 1 100 0 12 25 000 11000 2780 27800 2980 25000 35000 12000 10000 12 5 A B C A ACCTCY 4353 Intro to Taxation Tax Rate Structures Proportional Tax rate constant throughout the tax base i e flat tax Ex Sales tax Progressive Tax rate increases as tax base increases Ex federal income tax Regressive Tax rate decreases as tax base increases Ex Social security tax IV Types of Taxes Federal Taxes i LO4 Students will identify several types of federal and state taxes Income Taxes tax on individual income initially enacted to support the Civil War in 1861 This initial tax expired and a permanent income tax was enacted in 1892 but was ruled unconstitutional Finally Congress ratified the 16th ammedment in 1913 which allowed the federal government to tax income It is the most significant tax assessed by federal government ii Employment and Unemployment Taxes a Old Age Survivors and Disability Insurance OASDI commonly called social security tax makes monthly payments to qualifying individuals Tax base wages capped at 160 200 2023 Tax rate 12 4 b c Medicare Health Insurance MHI commonly called Medicare tax pays for medical care for elderly or disabled Tax base wages no limit Tax rate 2 9 0 9 for high earners For employed individuals above taxes split between employer and employee Self employed individuals must pay all self employment tax …