Exclusions- items specifically removed from the tax base by law Deductions- subtracted from the tax base rather than fully excluded. Flat tax- one single rate applied to the entire tax base.
Progressive tax- rates increase as tax base increases. (Federal income tax) Tax credit- authorized deduction in gross tax liability
Real and personal property taxes- Real (real estate) Personal (difficult to enforce because property is easily concealed or moved, with the exception of vehicles which must be registered) Excise tax- imposed on sale of specific items (cigarettes, luxury goods, etc.) Use tax- Purpose is to prevent avoidance of sales tax (i.e. buying goods in Oregon). Imposed on use of personal property Transfer tax- tax imposed on the right to transfer property, either by gift or inheritance. Tax imposed on the donor. Includes a once-in-a-lifetime exclusion and per donee exclusion. Two categories- Gift and Estate taxes Gift tax- Allowed a $13,000 per year per donee exclusion (26,000 if given jointly with spouse). Unlimited marital deductions and charitable contribution. Taxable gifts allowed an once-in-a-lifetime credit of $1,730,000 and for the taxable estate, an exemption equivalent of credit of 1,730,000 for 2012 to the extent the credit was not used for the gift tax. Estate tax- Combined with taxable gifts. Can deduct contributions to spouse and charity. Once-in-a-lifetime exemption equiv. of $5,000,000 to the extent it was not used for gift tax purposes. FICA tax-Social security and medicare. Employee:S.S- 4.2% $110,000 base medicare-1.45%. Employer:S.S-6.2% medicare- 1.45% Self-employment tax- same as FICA 13.3% $110,000 base 2.9% in excess of base FUTA tax- Employer tax. 6.2% on first $7000 of covered wages
= Gross income
- Above-the-line deductions from gross income
= AGI adjusted gross income
- Below-the-line deductions from AGI
1. Itemized deductions or standard deduction (greater of two) 2. Exemption deductions
= Taxable income
* Applicable tax rate(s)
= Gross tax liability
- Tax credits and prepayments
= Net tax or refund payable
Exclusions are like income items that do not show up on a return. Deductions are like expenses and do show up on a return. Types of exclusions- municipal bonds interest, gifts, inheritances, child support payments, and loans Standard deduction- Married filing jointly (surviving spouse) $11,900, Head of household $8,700 Additional standard deductions- Not married: $1,450 if over 65, $1,450 if legally blind Married: $1,150 if 65 or over, $1,150 if legally blind (each married taxpayer) Dependency exemption- $3,800 each dependent (including self and spouse if married). If death occurs during year entitled to exemption for the year for deceased spouse. If divorces or legally separates during year, not entitled to exemption for spouse. Qualifying child tests-1) must be taxpayers child, stepchild. Also included grandchildren, siblings, niece, or nephew. 2) Child must live with taxpayer for more than half the year. 3) Child must be under 19 or 24 if child is full-time student. Classified as full-time student if attends college any 5 months during year. 4) Child can’t provide more than ½ of their own support. Support includes food, clothing, med. care, housing, or education. If dependent does not spend funds received, they don’t count towards support. Scholarship is excluded from support test. Qualifying relative- 1) relationship test is met if dependent is relative or household member. Relative includes all relationships for qualifying child category and parents, uncles, aunts, and certain in-laws. Test can be met even if dependent is not related to the taxpayer, but lives with them. 2) taxpayers must provide over ½ of dependent’s support for the year. Possible to meet support test even if no single person provides more than ½ the support. Under multiple support agreement person who wants to claim dependent must contribute more than 10% of support and all...
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