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68 Cards in this Set
- Front
- Back
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What organizational form should a business use? Where should the business locate? How should business acquisitions be structured? How should the business compensate employees? What is the appropriate mix of debt and equity for the business? Should the business rent or own its equipment and property? How should the business distribute profits to its owners? |
Business Decisions in which taxes are an influencing factor
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-the decision to buy or rent your home - Would you like to retire someday - choosing investments -evaluating alternative job offers -saving for education expenses - doing gift or estate planning |
Personal Decisions in which taxes are an influencing factor |
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Components necessary to calculate tax |
tax base and tax rate |
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3 Tax rate structures |
- proportional - progressive - regressive |
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Imposes a constant tax rate throughout the tax base. As a taxpayer's tax base increases, the taxpayer's taxes increases. The marginal tax rate remains constant and always equals the average tax rate. known as flat tax ex: sales tax |
Proportional tax rate structure |
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Imposes an increasing marginal tax rate as the tax base increases. As a taxpayer's tax base increases, both the marginal tax rate and the taxes paid increase. ex: federal and most state income tax |
Progressive tax rate structure |
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Imposes a decreasing marginal tax rate as the tax base increases. As a taxpayer's tax base increases, the marginal tax rate decreases while the total taxes paid increases. ex: u.s.. social security tax and federal and state unemployment taxes |
Regressive tax rate structure |
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Taxes that comprise Federal revenue |
Income taxes Employment and unemployment taxes Excise taxes Transfer taxes |
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Taxes that comprise State revenue |
-Sales and use taxes -Property taxes -Income taxes -Excise taxes
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-the issuance of debt instruments such as Treasury bonds -cut governmental spending -for the government to default on its debt obligations |
Governmental actions when taxes aren’t enough |
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two taxpayers in similar situations pay the same tax |
Horizontal equity concept |
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Principle applied by employer withholding |
pay- as-you-go, prepayments |
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Factors that determine filing necessity |
filing status, gross income, and age. |
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Dates to file and pay |
Individual and partnership tax returns are due on April 15 for calendar-year individuals. corporations March 15 |
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when extensions are filed |
individuals and corporations.. 6 mos partenerships.. 5 mos
they do not change payment due date |
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the period in which the taxpayer can file an amended tax return or the IRS can assess a tax deficiency for a specific tax year |
Statute of limitations |
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Types of possible audits |
3 types -correspondence -office -field examinations |
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-most common irs audit -conducted by mail and limited to one or two items on the return -the least complex -charitable contributions |
correspondence examination |
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-second most common audit -conducted at local IRS offices -more comples -usually small businesses and middle to high income |
office examinations |
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-least common audit -conducted at taxpayers place of business or location -the most complex -last months to years -usually business and complex individual returns |
field examinations |
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Types of correspondence letters from the IRS |
-30 day letter -90 day letter
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provides the taxpayer the opportunity to pay the proposed assessment or request an appeals conference |
30 day letter |
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also known as a statutory notice of deficiency. it explains that the taxpayer has to either (1) pay the proposed deficiency or (2) file a petition in the U.S. Tax Court to hear the case |
90 day letter |
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Potential action when settlement cannot be agreed with the IRS |
- the taxpayer may petition the U.S. Tax Court to hear the case.
the taxpayer may pay the tax, then request a refund of the tax and sue the IRS for refund |
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Where tax legislation is initiated |
the House of Representatives |
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defines what is actually taxed and is usually expressed in monetary terms |
tax base |
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for AGI deductions are? |
-deducted from gross income in order to come up with the AGI. |
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from AGI deductions are? |
are deducted from the AGI in order to come up with the taxable income
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Deductions directly related to business activities. Deductions indirectly related to business activities. Deductions subsidizing specific activities. |
deductions FOR AGI |
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itemized deductions -medical exps -charitable contribs -casulty and theft losses |
deductions FROM AGI |
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Hierarchy of standard deduction amounts |
MFJ QWW HOH SINGLE MFS |
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Personal and dependency exemptions |
3,950 per person |
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Calculate tax due or refund |
gross income - for AGI deductions = AGI - from AGI deductions: - (1) greater of stand or item ded - (2) personal/dep exps = taxable income x tax rates = income tax liability + other taxes = total tax - credits - prepayments = taxes due or refund
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Tests for qualifying children |
(1) relationship, (2) age, (3) residence, (4) support |
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Income limits for qualifying relatives to be claimed as dependents |
gross income for the year be less than the personal exemption amount of 3950 |
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General rules applied when children of divorced parents are supported by both parents to determine who claims the child |
-the parent who the child livied with the longets has priority -or if the same time than parent with highest AGI |
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according to their marital status at year-end and whether they have any dependents |
Filing status |
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5 filing statuses |
Married filing jointly Married filing separately Qualifying widow or widower (surviving spouse) Single Head of household |
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Taxpayers are legally married as of the last day of the year. When one spouse dies during the year the surviving spouse is still considered to be married for tax purposes during the year of the spouse's death. Both spouses are ultimately responsible for paying the joint tax. |
married filing jointly |
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Taxpayers are legally married as of the last day of the year. Generally no tax advantage (usually a disadvantage). Each spouse is ultimately responsible for paying own tax. Couples may choose to file this (generally for nontax reasons). |
married filing sepeartely |
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When a taxpayer's spouse dies, the surviving spouse can file for two years after the year of the spouse's death if the surviving spouse remains unmarried and maintains a household for a dependent child. |
Qualifying widow or widower |
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Unmarried taxpayers at year-end who do not qualify for head of household. |
single |
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Unmarried taxpayers or taxpayers considered to be unmarried at year end. Must pay more than half of the costs of maintaining a household in which a qualifying person lives for more than half of the tax year or must pay more than half of the costs for maintaining a separate household for a parent who qualifies as taxpayer's dependent. |
head of household |
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Liability for tax when divorce occurs |
married filing sepeartely or abandoned spouse |
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Multiple support agreements: who may claim the qualifying relative |
No one taxpayer paid over one-half of the individual's support. The taxpayer and at least one other person provided more than half the support of the individual The taxpayer contributed over 10 percent of the individual's support for the year. |
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income that taxpayers realize, recognize, and report on their tax returns for the year |
What is gross income? |
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If and when income should be included in gross income |
when (1) they receive an economic benefit, (2) they realize the income, and (3) no tax provision allows them to exclude or defer the income from gross income for that year |
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If and when losses may be claimed |
losses from the sale of: -property -dividends -interest -rents -royalties -annuities
also: -gambling losses to the extent of the winnings -capital losses
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the refund is included in gross income to the extent that the prior deduction produced a tax benefit |
Tax benefit rule |
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doctrine that states that a taxpayer realizes and recognizes income when it is actually received |
Constructive receipt |
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the portion of proceeds from a sale (or distribution) representing a return of the original cost of the underlying property. |
Return of capital |
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the judicial doctrine holding that earned income is taxed to the taxpayer providing the service, and that income from property is taxed to the individual who owns the property when the income accrues |
assignment of income doctrine |
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Types of property or other financial benefits received that might qualify as income |
-salary -wages -fees -unemployment -dividends -interest -rental -annutities -flow thru entites -alimony -soc sec -awards -discharge of debt |
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Including a portion of an annuity payment in income |
original invstmnt / expected value of annuity + Return of capital % |
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Calculating a gain or loss on the sale of an asset |
sale proceeds - selling exps = amt realized - investment = gain or loss |
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a support payment of cash made to a former spouse. The payment must be made under a written separation agreement or divorce decree that does not designate the payment as something other than alimony, the payment must be made when the spouses do not live together, and the payments must cease no later than when the recipient dies. |
Alimony payments |
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Prizes included in gross income |
Prizes, awards, and gambling winnings, raffle or sweepstake prizes or lottery winnings
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Prizes that might be excluded from gross income
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-awards for scientific, literary, or charitable achievement such as the Nobel Prize -employee awards for length of service or safety achievement limited to $400. |
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imputed income from an economic benefit the taxpayer receives indirectly rather than directly. The amount of the income is based on comparable alternatives. |
Employee discounts |
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Types of interest includable in gross income
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interest from property or assets |
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Types of interest excluded from gross income
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interest from muinicpal bonds |
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Employee benefits to be included in income
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-automobile to use for personal purposes -health club -home security |
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Employee benefits to not be included in income
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fringe: -medical & dental ins -ee discounts not over 20% -cafeteria plans -flex accts |
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Components of scholarships excluded from income |
tuition, fees, books, and supplies. |
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exclusion of amounts from series EE bonds |
interest earned on Series EE savings bonds when used to pay higher education expenses. |
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Foreign earned income exclusion amounts and limits |
-max $99,200 - live in the foreign country for 330 days in a consecutive 12-month period -must a resident of the foreign country |
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Court awards for illness and injury included in gross income |
-punitive damages |
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Court awards for illness and injury excluded in gross income |
-workers' comp -compensation for a physical injury -Reimbursements by health and accident insurance policies for medical expenses paid by the taxpayer -Disability payments received from an employee-purchased policy |
