MBA 622 Federal Taxation

1
MBA 622 - Federal Taxation

• Chapter 1
• Introduction
• Types of Taxes

2
Chapter 1 - Introduction

• This chapter will introduce a number of important
  terms and concepts
• Pay particular attention to the terms taxable and
  non-taxable income, deductions (2 types), and tax
  credits
• The individual income tax formula is also
  presented in this chapter and will be important
  throughout the course

3
Basic Components of theU.S. Tax System

• Congress-Makes Law
• 4 Step Sequence-
• House Ways Means
• Senate Finance
• Joint Committee
• Signed by President
• Internal Revenue Service - Interpret and Enforce
  Tax Law

4
Basic Components of theU.S. Tax System (cont.)

• Basic Principles of Our Tax System
• Ability to pay principle
• Progressive tax structure - note inside cover of
  text for progressive rates

5
History of Our Tax System

• 1861 - First Federal Income Tax
• 1894 - Second Federal Income Tax
• 1913 - 16th Amendment to the Constitution
• 1954 - IRC Summarized to Date

6
History of Our Tax System

• 1986 - Summarized the code and updated from the
  1954 code
• Our current IRC is the IRC of 1986 as amended to
  date
• Published yearly by all major tax services - CCH,
  Prentice-Hall, etc.

7
History Continued - Adam Smiths Canons of
Taxation

• Smith said in 1776 in The Wealth of Nations
  that a tax system should have the following
  aspects
• Equality
• Convenience
• Certainty
• Economy

8
U.S. Tax Forms Include

• Individuals
• 1040 EZ
• 1040 A
• 1040
• Partnerships
• 1065
• K-1 Forms
• Corporations
• 1120
• 1120S

9
U.S. Tax Forms Include

• Estates and Trusts Income Tax Returns
• Form 1041
• Simple and Complex Trusts
• Estate - Form 706
• Gifts - Form 709
• Note Regular Corporation Problem of Double
  Taxation

10
5 Important Tax Terms

• 1. Tax Base - Define and Examples
• 2. Proportional vs. Progressive Tax Rates
• 3. Exclusions - Define and Examples
• 4. Deductions - 2 Types
• 5. Tax Credits - Define and Examples

11
Major Types of Taxes in U.S. Today

• 1. Property Taxes -
• 2 Types
• Real Property
• Personal Property
• 2. Transaction Taxes -
• 3 Types
• Excise
• Sales
• Severance

12
Major Types of Taxes in U.S. Today (cont.)

• 3. Death Taxes - 2 Types
• Estate Taxes
• Inheritance Taxes
• 4. Gift Taxes -
• Unified with Estate tax
• Falls on donor not donee
• Exclusion 10k/20k
• 5. Income Taxes - Note
• Formulas Next Slides

13
Individual Income Tax Formula

• Income as Broadly Defined
• Less Exclusions
• Equals Gross Income
• Less Deductions For Adjusted Gross Income
• Equals Adjusted Gross Income
• Less Deductions From Adjusted Gross Income
  (Larger of Itemized Deductions or the Standard
  Deduction)

14
Individual Income Tax Formula(continued)

• Less Personal and Dependency Deductions
• Equals Taxable Income
• Note Taxable Income is a very important tax
  base that is used to determine the gross amount
  of tax due. Taxpayers use Taxable Income figure
  when they use either the Tax Tables or the Tax
  Rate Schedule (Example)

15
Individual Income Tax Formula(continued)

• After finding the Taxable Income figure
• Find Tax on Taxable Income (usually table)
• Add Other Taxes (FICA etc)
• Less Tax Credits (Child Care, Educational, etc)
• Less Tax Withheld or Estimated Payments
• Equals Tax Refund or Balance Due

16
Individual Income Tax Formula(conclusion)

• Review the Individual income tax formula
  carefully
• Be sure to know basic definitions of all the
  terms and examples of them
• Example - Review Format of the 1040

17
Major Types of Taxes in U.S. Today (cont.)

• 5. Income Taxes
• 6. Employment Taxes -
• 2 Basic Types
• a. FICA Taxes
• b. FUTA Taxes
• 7. Miscellaneous Taxes
• Examples - Customs and Occupational Taxes

18
Important Details Related to the Internal Revenue
Service

• 1. Audits by the IRS
• Percentages
• Types of Audits
• Revenue Agent Reports
• Appeal Process - only two levels

19
Important Details Related to the Internal Revenue
Service (cont.)

• 2. Statute of Limitations
• Normal Rule is the
• 3 Year Rule
• Exceptions to 3 Yr. Rule
• a. Six Year Rule
• b. No Limit Rule
• Examples!

20
3 Additional Terms

• 1. Tax Avoidance - define and examples
• 2. Tax Evasion - define and examples
• 3. Marginal Tax Rate - define and examples

21
Jones - Chapter 1Key Terms and Concepts

• Preface - page 20 Tax Bite per work day
• Jurisdiction - page 5
• Tax Formula - page 5 Note - Flat vs. Progressive
  rates
• Types of taxes - 8-12
• Sources of the tax law - pages 16-17

22
Jones - Chapter 1Problems to review

• Complete the following problems on pages 18-20
• Nos. 1,2,5,7,10,11, 13, 14
• Application problems - numbers 2,4,6

23
Looking ahead to Chapter 2

• Assume you are the fair-minded tax manager of
  LilLand. Queen Lil demands that you collect
  36,000 from the following four taxpayers
• A earns 100,000 B earns 50,000
• C earns 25,000 D earns 10,000.
• Write on a piece of paper how much you will
  collect from each taxpayer. The sum must be
  36,000. Turn this in on your way out, and well
  discuss next time.