Federal Taxation 2011

2011 Federal Taxation (with H&R BLOCK At Home(TM) Tax Preparation Software CD-ROM)

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* C HAPTER O NE * AN OVERVIEW OF FEDERAL TAXATION SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 1-1 A tax base is the amount upon which a tax is levied. The tax base for the Federal income tax is called “taxable income” and is the taxpayer’s total income less exclusions, deductions, and exemptions that might be available to the taxpayer. (See Exhibits 1-3, 1-4, and 1-5 and pp. 1-11 through 1-17.) The tax base for the Federal estate tax is called “total taxable transfers” and is computed as follows: Gross Estate, less the sum of Expenses, indebtedness, and taxes; Losses; Charitable bequests; and Marital deduction Equals: Taxable estate Add: Taxable gifts made after December 31, 1976 Equals: Total taxable transfers. The tax base for the Federal gift tax is called “taxable transfers to date” and is computed as follows: Fair market value of all gifts made in the current year, less the following: Annual exclusions ($13,000 per donee in 2010), Marital deduction, and Charitable deductions Equals: Taxable gifts for the current year Add: All taxable gifts made in prior years Equals: Taxable transfers to date. (See Exhibit 1-5 and pp. 1-16 through 1-17.) 1-2 A proportional tax rate is one that is a constant percentage regardless of the size of the tax base (i.e., as the base changes the rate remains the same). (See Example 6 and p. 1-7.) A progressive tax structure is one in which a higher percentage rate is
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applied to increasing increments of the tax base [i.e., as the base increases (decreases) the rate increases (decreases)]. (See Example 7 and p. 1-7.) A marginal tax rate of any rate structure is that percentage at which the next dollar added to the tax base will be taxed. In a proportional tax rate structure, the marginal tax rate remains the same through all levels of taxation. The tax impact of an additional dollar of income remains the same through all levels of taxation. In a progressive tax structure, the marginal tax rate increases as the level of taxable income increases. The tax impact of an additional dollar of income or deduction varies as the level of taxable income varies and thus the total tax rate is determined by the level of income which is taxed. However, in both cases, the tax impact of an additional dollar of income or an additional deduction can be determined. (See Example 8 and p. 1-8.) 1-3 In the technical sense (i.e., in terms of the definitions of proportional and regressive rate structures), the media have reached an erroneous conclusion. However, when the nature of these taxes is considered relative to the taxpayer’s ability to pay, the media is correct. According to the technical definition, a regressive tax rate structure is one where the rate decreases (increases) as the base increases (decreases). In contrast, in a proportional tax rate structure, the rate is a constant percentage of the base. In the technical sense, both sales taxes and social security taxes are proportional
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Federal Taxation 2011 - * CHAPTER ONE * AN OVERVIEW OF...

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