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| A tax should be based on the taxpayer's ability to pay. The payment of a tax in proportion to the taxpayer's level of income results in an equitable distribution of the cost of supporting the government. |
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| When two similarly situated taxpayers are taxed the same. |
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| When taxpayers with different situations are taxed differently but fairly in relation to each taxpayer's ability to pay the tax. |
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| A taxpayer should know when and how a tax is to be paid. In addition, the taxpayer should be able to determine the amount of the tax to be paid. |
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| 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 for taxpayers to make the payment is as they receive income and have the money to pay the tax. |
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| Taxes are paid as close to the time the income is earned as is reasonable. |
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| A tax should have minimum compliance and administrative costs. The costs of compliance and administration should be kept at a minimum so that the amount that goes to the U.S. Treasury is as large as possible. |
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The value that is subject to tax. The tax base for the federal income tax is called taxable income.
Ex: Dollar amount of a purchase subject to sales tax, wages subject to payroll tax, value of property subject to property tax. |
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The rate of tax that will be paid on the next dollar of income or the rate of tax that will be saved by the next dollar of deduction.
Used in tax planning to determine the effect of reporting additional income or deductions during a tax year.
Rates for individual taxpayers are 10%, 15%, 25%, 28%, 33%, & 35%. |
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The total federal income tax divided by taxable income.
The average rate of tax on each dollar of income that is taxable. |
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| Taxable income plus nontaxable income |
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The total federal income tax divided by the taxpayer's economic income.
Is the average rate of tax on income from all taxable and nontaxable sources. |
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| Proportional Rate Structure |
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Definition
A tax for which the average tax rate remains the same as the tax base increases.
Also called a flat tax.
The marginal tax rate and the average tax rate are the same at all levels of the tax base.
As the tax base increases, the total tax paid will increase at a constant rate.
Ex: Sales taxes, real estate and personal property taxes. |
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| Regressive Rate Structure |
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Definition
A tax in which the average tax rate decrease as the tax base increases.
Marginal tax rate will be LESS than the average tax rate as the tax base increases.
Although the avg tax rate and marginal rate both decrease as the base increases, the total tax paid will increase
Person w/ low tax base will pay a higher avg and marginal rate, but person with high tax base will still pay more total tax. Doesn't Exist in US |
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| Progressive Rate Structure |
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Definition
A tax in which the average tax rate increases as the tax base increases.
The marginal tax rate will be higher than the avg tax rate as the tax base increases.
Avg, marginal, and total tax all increase w/ the tax base.
Promotes equality. |
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| Social Security Taxes (Employment Taxes) |
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Definition
All employees and their employers pay taxes on the wages earned by employees.
Employees pay S.S. Taxes that are matched by employers.
Designed to provide retirement benefits and has been expanded to include medical insurance, disability benefits, and survivor's benefits. Current S.S. tax payments are used to pay current benefits and excess is funded. Govn't borrows from fund for expenses. |
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| Paid by self employed individuals for the amount equivalent of both halves of the S.S. tax. The amount paid by employers and employees. Self-employed taxpayers and those with other sources of income that are not subject to withholding, dividend & interest income, must make quarterly estimated payments. |
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| Employers pay state and federal unemployment taxes on wages paid to employees. The FUTA is 6.2% of the first $7,000 in wages to each employee. Don't have to be paid for employees who earn less than 1,500 per calender quarter. |
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| Land & any structures that are permanently attached to it, such as buildings. |
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| All other types of property besides land and buildings. |
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| Taxes based on the value of the property being taxed. Most property taxes are not based on the true fair market value of the property. Rather the assessed value is used to determine the tax. |
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| varies widely but is typically 50 to 75 percent of the estimated market value of the property. |
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| Imposed on various products and services. Differs from sales tax b/c it is typically imposed on a quantity, such as a gallon of gas or pack of cigs. Ex: alcohol, coal, guns, tires, tobacco, shells, gas, fishing equipment. |
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| Paid by the donor of property, the person making the gift. The person who receives the gift, the donee, is not subject to either the gift tax or income tax on that gift. Based on the fair market value of the property transferred. 12,000 exclusion per donee, 24,000 for married couples. |
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| Paid by the administrator, executor, of a deceased taxpayer's estate from the assets of the estate. Based on the fair market value of the property transferred. Many exclusions mostly on large gifts or estates. |
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| Unified Donative-Transfers Credit |
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Definition
| Allows a lifetime credit against gift and estate taxes. Used when a gift is made that is not totally excludable. Common gifts are birthdays, graduations, and weddings which are not subject to gift tax. |
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| Income minus income items that are excluded from taxation. |
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| Increases in a taxpayer's wealth and recoveries of the taxpayer's capital investments that are not subject to income tax. |
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| An item that does not affect the current period's taxable income but will affect taxable income in a future tax year. |
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| Determined by subtracting deductions and exemptions from gross income. |
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| Recurring income earned by a taxpayer for a tax year. |
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| The difference between the selling price of an asset and its tax cost and is the result of disposing of the asset. |
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| amounts that the tax law allows as subtractions from gross income. characterized as expenses, losses, and exemptions. |
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| a current period expenditure that is incurred to earn income. Trade or business expenses and income-producing expenses must be ordinary, necessary, and reasonable in amount to be deductible. |
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| occurs when an asset is disposed of for a selling price that is less than its tax cost. are limits on the amount of loss that can be deducted. characterized as personal, business, or capital. the limits deny most deductions for personal losses, place a cap on capital loss deductions, and allow business losses to be fully deducted. |
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| predetermined amounts subtracted by individuals, trusts, and estates to determine their taxable income. The exemption deduction for individuals is congress's recognition that people need a minimum amount of income to provide for basic living expenses. The minimum amount of income is deducted as an exemption and is not subject to tax. |
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| Subtracted from the income tax liability to determine whether the taxpayer has underpaid or is entitled to a refund. |
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| A direct reduction in the income tax liability. treated like tax prepayments. A tax credit is more valuable than a deduction of an equal amount. |
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| Deductions of the qualified expenses they incur. NOT subject to reduction based on the income of the taxpayer. Once the allowable amount of an expenditure in this category has been determined, it is not subject to further reduction based on income. |
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| Referred to as Itemized Deductions. Individuals deduct the greater of their allowable itemized deductions or the standard deduction. Ex: medical expenses, taxes, interest, charitable contributions, casualty and theft losses. |
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| Amount allowed for all taxpayers to deduct regardless of their actual qualifying itemized deduction expenditures. 5,350 for singles, 10,700 for married couples. |
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| Personal & Dependency Exemptions |
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Definition
Personal- taxpayer and spouse
Dependency- individuals dependent on taxpayer for support. 3,400 deduction for each person. |
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