BA 128 Agenda 1/25
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Questions from lecture
Review
Assignment I2-5,8,9,33,34
Additional problems I2-4,20,21,30,38
GSI: Celia Poon, cpoon@haas
Office Hours: Wed 11-12:30 F308
Grader: Hoon Lee, hoonlee@haas
Purpose of Taxes
• Government to collect revenues
• Influence personal and business decisions
for social and economic reasons
• Fiscal policy to stimulate investment,
reduce unemployment and inflation
• Help small business and specialized
industries
Tax system and structure in the
US
• Pay as you go system
• Tax law changes - incremental
• Largest source of federal tax revenue
– Individual, Social Security, Corporate income
taxes
• Tax Base = Taxable Income
• Tax Rate = % rate applied to tax base
Tax Rate Structure
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Progressive
Regressive
Proportional
Average tax rate
Effective tax rate
Marginal tax rate
Types of taxes
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State and franchise taxes
Wealth transfer taxes (estate and gift taxes)
Property Taxes
Federal excise taxes/customs duties
Sales Taxes
Employment Taxes (social security taxes,
cap at $68,400)
Individual Tax Formula
Income from whatever source derived
- exclusions
= Gross Income
- deductions for AGI (business related and IRA deduction)
= Adjusted Gross Income (AGI)
- greater of standard deduction or itemized
- personal exemption
= Taxable Income
* applicable tax rate (from tax table or tax rate schedule based on
filing status)
= Gross Tax
- credits and prepayments
= Net taxes payable/refund due
Examples of Exclusions
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Interest on municipal bonds
Gifts and inheritances
Foreign earned income
Employee fringe benefits
Exclusions besides interest on muni bonds
are not reported in tax form
• PI2-3
Deductions for AGI
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IRA contributions
Alimony
Interest on educational loans
Trade and business deductions
PI2-5
Itemized Deductions
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Medical expenses (>7.5% of AGI)
State, local and property taxes
Mortgage interest
Charitable contributions (limited)
Casualty and theft losses (>10% of AGI)
Misc deductions (>2% of AGI) -e.g. tax
preparation fees
Standard deduction
• Depends on filing status - e.g. Single $4250
• Blind - legally blind (not = completely
blind)
• Dependents - S.D. limited to greater of
earned income + $250 or $700
• Loss standard deduction if married file
separately and the other spouse itemizes
Personal Exemption
• 1 exemption per person
• A dependent cannot claim its personal
exemption in his/her tax return
• Dependency exemption
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Gross income test (< exemption or exception)
Support test
Relationship test
Cannot file a joint return
US citizen/resident or Canadian/Mexican
residents
Phase out provisions
• Threshold for personal exemption, lose 2%
for each $2500
• Threshold for itemized deduction, lose 3%
• Threshold for child care credit, reduce $50
for each $1000 (base on MAGI)
Tax credits
• Refundable
– earned income credit
– income withholding - prepayments
• Nonrefundable
– child income credit
– low income housing credit
– foreign tax credit
Corporate Taxation
• Different types of corporations
• C-corp
• S-corp (flow through entity, < 35
shareholders, file information return)
Corporate Tax formula
Income from whatever source derived
- exclusions
= Gross Income
- deductions
= Taxable Income
* applicable tax rate
= Gross Tax
- credits and prepayments
= Net taxes payable/refund due
Capital gains and losses
• Sale and exchange of capital asset
• What is not a capital asset - inventory, trade
receivables, business property
• What is usually? Stocks and bonds
• Capital gain tax - new rule 1998
• Long term and short term
• Short term taxed at ordinary income amounts
• Long term (taxed at 20% max)
• Capital loss ($3000 deduction and the rest can
carryforward)
Tax planning
• Shift income to family members
• For corporations, establish entities to absorb
gains
• Doubling up - defer payment or pay sooner,
cash basis vs. accrual basis
Who must file a tax return
• PI2-30, for single $6950
• Self employment must file if income >$400
• Dependents with unearned income >$700
must file
• Filing date - before the 15th day of the
fourth month after the close of tax year
• Extension
• Tax forms - 1040, 1040EZ, 1040A