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Understanding U.S. Taxation: Structure, Types, and Filing Requirements

This guide provides a comprehensive overview of the U.S. tax system, covering the purpose of taxes, types of taxes, and the structure of tax rates. Learn about fiscal policy's role in economic stability, the components of individual and corporate tax calculations, as well as deductions, exemptions, and credits available to taxpayers. Explore the intricacies of capital gains and losses, along with essential information on filing requirements and deadlines. This resource is ideal for students and professionals seeking clarity on taxation fundamentals.

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Understanding U.S. Taxation: Structure, Types, and Filing Requirements

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  1. BA 128 Agenda 1/25 • 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

  2. 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

  3. 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

  4. Tax Rate Structure • Progressive • Regressive • Proportional • Average tax rate • Effective tax rate • Marginal tax rate

  5. Types of taxes • 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)

  6. 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

  7. Examples of Exclusions • 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

  8. Deductions for AGI • IRA contributions • Alimony • Interest on educational loans • Trade and business deductions • PI2-5

  9. Itemized Deductions • 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

  10. 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

  11. Personal Exemption • 1 exemption per person • A dependent cannot claim its personal exemption in his/her tax return • Dependency exemption • Gross income test (< exemption or exception) • Support test • Relationship test • Cannot file a joint return • US citizen/resident or Canadian/Mexican residents

  12. 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)

  13. Tax credits • Refundable • earned income credit • income withholding - prepayments • Nonrefundable • child income credit • low income housing credit • foreign tax credit

  14. Corporate Taxation • Different types of corporations • C-corp • S-corp (flow through entity, < 35 shareholders, file information return)

  15. 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

  16. 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)

  17. 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

  18. 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

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