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CHAPTER 1: AN OVERVIEW OF FEDERAL TAXATIONWhat is a Tax? Exaction of the support from the government, imposed not exchange revenueThe Characteristics of a Tax:1)no relationship between how much you pay and how much you benefit from government.2)predetermined material 3) Taxed levied on a recurring or predictable basis. 4)Distinguished from regulation or penalties. B. History of U.S. Taxation1. Constitutional Problem 2. Sixteenth Amendment (1913)3. Taxes as a Source of Revenue – Individual43% Social insurance receipt 32%>Corperate income tax 13% Other 5% Excise Tax3.2%Estate and gift taxes0.06% C. Key Tax Terms --Rate Structures: Proportional, Progressive, or Regressive0-93250-10% TaxEg. Tax income 100,000Total income 150,0009325-919005226.25+25%Tax=118713.75+2268=20981.75Deducible is 1000, save 28191900-19165018713.75+28%Effective rate= 20981.75/100000=21%Average rate=20981.75/150000=14%Average Tax Rate=Tax/taxable income b. Effective Tax Rate=/total economic incomeD. Major Types of Taxes1. Income Taxes a. Federal b.State( 7 state without state income tax: Texas, Washington, Nevada, Alaska, South Dakota, Wyowing)2. Estate and Gift Taxes (annual exclusion$14000,file gift tax return)3. Employment Taxesa. FICA Taxes: Social Security and Medicare Tax i. Employee and Employer --- Equal Contributions SS Tax = 6.2% x 1st$127,200 of Earned Income/Year (2017)Medicare Tax = 1.45% x ALL Earned Income per Year ii. Self-employed --- 12.4% & 2.9% x Self-Employment IncomeSelf-Employment Income = Net Profit x 92.35%iii. AdditionalMedicare Tax Rate on Earned Income Amount in Excess of $200,000 ($250,000 MFJ)is 0.9% for Employees and Self-Employed. Applies Only to Employee Share, Not Employer Share.Example:W2=$70,000 Net Income from Self-Employment: $80,000Self-Employment Tax:Social Security Medicare1st127200-----127,200-70,000=57200Self-Employment Income = Net Profit x 92.35%57200X0.124=709373880=80,000 X 92.35% then 73800X0.029=2142.52Total =7093+2142.52=9236b. FUTA and SUTA Taxes --- Employer Contributions Only4. Excise Taxes(Cigarettes,Gasoline,Liquor)5. Other Taxes: Sales & Use Taxes (Eg. Buy car from other state ), Property Taxes, Franchise TaxesE. Goals of Taxation--Economic、Social、Equity、Administrative、PoliticalCHAPTER 2 TAX PRACTICE AND RESEARCHPart 1: Tax PracticeA. Terminology Tax Compliance1.Tax Return Preparer --- Only Requirement: Must Obtain PTIN from IRS (free – no fee to obtain preparer tax identification number)2.Tax Litigation-when you want to sue IRS Tax Professionals: CPAs, Tax Attorneys, EAs (Enrolled Agents)1
Taxpayer PenaltiesAccuracy related or negligence 20% X understatement of tax due to negligence 1)Regular negligence Defense: reasonable basis2)Substantia negligence --Understated Larger of $5000 or10% correct taxDefense: Substantiated Authority if Undisclosed Reasonable Basis if Disclosed Tax Preparer PenaltyNegligenceSubstantial: greater of $1000 or50% tax prep feeDefense: Substantiated Authority if Undisclosed Reasonable Basis if DisclosedPart 2: Tax ResearchA. Authoritative Sources of Tax Law1. Legislative: Statutory Law (Internal Revenue Code or IRC, Tax Treaties, ...)2. Official Interpretations of Tax Lawa.Executive: IRS/Treasury Dept. Interpretations b. Judicial: Court CasesB. The making of Tax Law