Tax rate increases as the tax base increases

Example: Federal Income Tax

Tax rate is the same for all taxpayers, regardless of the level of their tax base

Ex: Real Estate Tax, state and local tax

Tax rate decreases when tax base increases

Ex: Social Security/FICA

-- C Corp is subject to double taxation; taxed both 1) on the corp's net income, and 2) on the shareholders when the profits are distributed

--S Corp only has one level of taxation; all income is allocated to the shareholders

--Specifically defined terms, such as tax-exempt bond interest

--Subtracted from total income to get gross income

-- Can be itemized or standard

--Subtracted from Gross Income

1) Made in cash (not property)

2) Made pursuant to a divorce, separation, or written agreement between the spouses

3) Terminate at the death of the payee

4) Not be designated as being other than alimony (e.g., child support)

5) Be made between people who are living in separate households

--Tax free

--Neither the recipient spouse, nor the child owes tax on it

--Federal Insurance Contributions Act

--This is social security tax

1) Old-age survivors

2) Disability insurance (OASDI)

What is the self-employment tax rate?

What is the ceiling on the OASDI portion?

-- imposed at a 15.3% rate on the individual's self-employment income

--$97,500

--Employers are required to pay federal and state unemployment taxes to fund the payment of unemployment benefits to former employees.

--Federal rate = 6.0% on first $7,000 of wages

--Based on the value of a taxpayer's property

--May include both real estate and personal property

--Prizes are earned, gifts are unearned

--Prizes are taxable

--Gifts are nontaxable

Horizontal -- similarly situated taxpayers should be treated equally (If 2 people have same amount of income, they should pay the same amount of tax)

Vertical -- taxpayers who are not similarly situated should be treated differently (If 2 people have different amounts of income, they should pay different amounts of tax)

1) Ensures a stable source of government operating revenues

2) provides taxpayers wiht some degree of certainty concerning the amount of their annual tax liability

--Up to 85% of Social Security benefits may be taxable

--Taxable portion depends on the taxpayer's provisional income and filing status.

1) Accident and health insurance benefits

2) The face amount of life insurance

1) Internal Revenue Code (IRC)

2) Congressional Committee Reports

1) Income Tax Regulations

2) Revenue Rulings

3) Revenue Procedures

4) Letter Rulings

--Taxing procedure that allows the gov't to still receive the same amount of money despite changes in tax laws

--i.e. lowering taxes for group A, raising taxes for group B

--Located around the country

--These centers perform tax return processing work

The limited time period in which the IRS and taxpayers can make corrections to a tax return

--Generally 3 years

Fringe benefit in Sec. 132 (e)

e.g., free coffee, holiday turkey, use of company eating facilities

1) Determine the facts

2) Identify the issue(s)

3) Identify and analyze the tax law sources

4) Evaluate nontax implications

5) Solve the problem

6) Communicate the findings to the client

Cafeteria (125) Plans

(a.k.a. Flexible Spending Accounts)

-- Offer employees the option of choosing cash or statutory nontaxable fringe benefits

--Cash is taxable

--statutory nontaxable fringe benefit is excluded from gross income

Amount to which the tax rate is applied to determine the tax due

(ex: Taxable income, fair market value, etc.)

--forgiveness of debt is taxable

--person who owed money must report the amount forgiven as income

-- discharge occurs in bankruptcy

-- discharge occurs when the taxpayer is insolvent (unable to pay debts)

--Measure of income that falls between gross income and taxable income

AGI = Income - Exclusions - Deductions

Taxpayers are allowed to itemize expenses related to:

1) The production or collection of income

2) The management of property held for the production of income

3) The determination, collection, or refund of any tax

--Individual Retirement Account

--Contributions to IRA can be deducted from Adjusted Gross Income

--Both can reduce taxpayer's liability to zero

--If there is leftover credit after liability is zero, Refundable credits are paid by the gov't to the taxpayer, Nonrefundable cannot be paid to the taxpayer.

Allowed for:

--each taxpayer

--his/her spouse

--any additional dependents

All dependents must:

1) Have a qualifying identification number

2) Meet a citizenship test

3) Meet a separate return test

4) Not themselves claim another person as a dependent

Relationship Test -- taxpayer's children, siblings, or any descendent of the previous

Age Test -- Must be under age 19, or a full-time student under 24

Abode Test -- Must have same home as the taxpayer for more than half of the year

Support Test -- May not provide more than one-half of his/her own support during the year

Relationship Test -- Must be directly related to taxpayer (no cousins), or reside in taxpayer's home for the whole year

Gross Income Test -- Dependent's Gross Inocme must be less than the exemption amount for that year ($3,950 for 2014, $3,900 for 2013)

Support Test -- The taxpayer must normally provide more than one-half of a dependent's financial support during the year

Multiple Support Declaration

Enables a taxpayer to claim a dependency exemption in situations where the taxpayer does not provide over one-half of the dependent's support

1) Single

2) Married Filing Separately

3) Married Filing Jointly

4) Head of Household

5) Qualifying Widow(er) with dependent child

--Divided into long term and short term

--Only long-term is taxable

--Individuals in 10%-15% bracket do not pay tax on long-term gains

--Individuals in 25%-35% bracket are taxed at 15%

--Individuals in 39.6% bracket are taxed at 20%

Results upon the occurrence of two events:

1) A change in the form or substance of a taxpayer's property

2) A transaction with a second party

--A change in value is not recognized until property is sold

--Value is difficult to be objective upon unless a sale occurs

A taxpayer who recovers an amount deducted in a previous year must report the amount recovered as gross income.

***A tax benefit occurs if the deduction reduced the tax for the year***

--Income can be either separate or community

**Community income is considered to belong equally to the spouses**