Term
| What is the Definition of a Tax? |
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Definition
-An enforced, involuntary contribution
-Required and determined by law
-Providing revenue for public and governmental purposes
For which no specific benefits or services are received |
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Term
| What is the Purpose of a Tax? |
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Definition
Revenue
Social changes
Economic changes
Equity
Not a Penalty |
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Term
| Standards of a Good Tax System Adam Smith’s Four Criteria |
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Definition
Equality
Certainty
Convenience
Economy |
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Term
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Definition
Tax should be based on the taxpayer’s ability to pay
Horizontal Equity: Two similarly situated taxpayers are taxed the same
Vertical Equity: Differently situated taxpayers are taxed differently but fairly |
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Term
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Definition
When and how a tax is to be paid should be known to the taxpayer
The taxpayer should be able to determine the amount of the tax |
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Term
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Definition
| Tax should be levied when the taxpayer has funds available to pay |
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Term
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Definition
| The costs of complying with the tax system should be minimal |
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Term
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Definition
| Tax = Tax Base × Tax Rate |
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Term
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Definition
Marginal Tax Rate: The rate of tax on the next dollar of taxable income
Average Tax Rate: The rate equal to the total tax divided by the tax base
Effective Tax Rate: The rate equal to the total tax divided by economic income |
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Term
| Tax Structures: Proportional (slide 1 of 3) |
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Definition
Average tax rate
remains the same
as tax base increases |
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Term
| Tax Structures: Regressive (slide 2 of 3) |
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Definition
Average tax rate
decreases as
tax base increases |
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Term
| Tax Structures: Progressive (slide 3 of 3) |
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Definition
Average tax rate
increases as
tax base increases |
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Term
| Major Types of U.S. Taxes |
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Definition
Income Tax
Employment Tax
Sales Tax
Property Tax
Excise Tax
Wealth Transfer Tax
Health Care Related |
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Term
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Definition
Taxes are paid by individuals, corporations, estates, and trusts
Tax base is total income less allowed deductions |
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Term
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Definition
Taxes are paid by employees, employers, and self-employed taxpayer
Tax base is wages and salaries earned
Two major types
Social Security Taxes
Unemployment Taxes |
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Term
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Definition
Taxes are paid by purchasers of goods and services
Tax base is the selling price of a product or a service |
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Term
Taxes are paid by purchasers of goods and services
Tax base is the selling price of a product or a service |
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Definition
Taxes are paid by owners of property
Real property is land and any structures that are permanently attached to it (buildings)
All other types of property are personal property
Tax base is the assessed value of real or personal property (ad valorem) |
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Term
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Definition
Taxes are paid by purchasers
Tax base is the quantity purchased and not the value of the purchase |
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Term
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Definition
Taxes are paid by entity transferring property
Tax base is the value of the property transferred
Transfers to spouses and charities are excluded
For 2013, Unified Credit excludes up to $5.25M in property from gift and/or estate tax otherwise excluded
Donors may exclude annual gifts of $14,000 per donee |
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Term
| Health Care Related Taxes |
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Definition
For Higher Income Workers
0.9% Hospital Insurance applied to
Wages in excess of threshold amounts
Net self-employment income in excess of threshold amounts
Surtax on Unearned Income
3.8% Medicare contribution tax on unearned income of individual, estates and trusts
For individuals imposed on lesser of
net investment income or
Modified AGI in excess of threshold amount |
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Term
| Sources of Federal Income Tax Law |
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Definition
Legislative
Law (Internal Revenue Code)
Administrative
Treasury Regulations
IRS Pronouncements
Judicial
Supreme Court
Other courts |
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Term
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Definition
Broadly defined income- exclusions= gross income
Gross income- deductions= taxable income |
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Term
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Definition
Expenses (Chapters 5 & 6)
Current period expenditures incurred in order to earn income
Losses (Chapter 7)
Transaction losses result when an asset is disposed of at a price less than its tax cost
Annual losses result when allowed deductions exceed income
Exemptions (Chapter 8)
A minimum amount of income needed for basic living
Personal and dependency ($3,800 each) |
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Term
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Definition
Gross Income
minus: For Deductions
Not restricted based on taxpayer’s income
Generally trade, business, rent or royalty expenses
minus: From Deductions
Restricted based on Adjusted Gross Income
Generally personal expenses
Itemized, or
Standard amount (changes with filing status) |
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Term
| Tax Formula: Adjusted Gross Income |
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Definition
Gross Income
minus: For Deductions
equals: Adjusted Gross Income [AGI] |
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Term
| Tax Formula: Taxable Income |
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Definition
Gross Income
minus: For Deductions
equals: Adjusted Gross Income [AGI]
minus: From Deductions and Exemptions
Taxable Income |
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Term
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Definition
Return must be filed annually
Calendar-year individuals file and pay on or before the 15th day of April
May receive an extension of time to file but not time to pay |
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Term
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Definition
Goal is to maximize after-tax wealth
Considers the Time Value of money
Defer income
Accelerate deductions
Considers Marginal tax rates
Recognize income in year of lower marginal rate
Recognize deductions in year of higher marginal rate
Shift income to taxpayer with lower marginal rate |
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Term
| Tax Avoidance v. Tax Evasion |
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Definition
Tax Avoidance: Taxpayers have no obligation to pay more tax than the law requires
Tax Evasion: Taxpayers may not use fraudulent or deceptive behavior to hide tax liability |
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