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BA 128 Agenda 1/25

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. Purpose of Taxes. Government to collect revenues

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BA 128 Agenda 1/25

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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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