Income Tax Concepts chapter (2)

1. Income Tax Conceptschapter (2)

2. Tax prepayments: - Employees prepay taxes on wages through payroll-tax withholding . - The tax prepayments are subtracted from the income tax liability to determine whether the taxpayer has underpaid and owes additional tax with the return (tax due) or is entitled to a refund of overpaid taxes additional tax with the return (refund due).

3. Tax credit: A tax credit is a direct reduction in the income tax liability. Tax credit are treated like tax prepayments, a credit is not deducted to arrive at taxable income but is instead subtracted directly from the income tax liability. Individuals allowed tax credit for certain circumstances and activities, and - Buildings and land tax (article 12) - Withholding (article 31- item 5)

4. Income defined (includes income from all resources) Minus: excluded income (nontaxable income) Equals: gross income Minus: deduction Equals: net income Minus :exemptions Equals: taxable income * tax rate (from tax law) Equals: income tax Minus: - tax prepayments - tax credit Equals: tax (refund) due with return

5. Case (11) : The following are information for a taxpayer taken from his self assessment for the ended year 2008: Revenues: - Salary from job during the year =10,000$ - Sales for his own shop= 48,000$ - Net profit from shares =22,000$ (note: it is not the nature of his trade) - Revenue from farming project= 12,000$ - had a share of the patrimony from relative person =11,000$ Expenses: - Cost of goods sold for his own shop =18,000$ - Purchased a REFRIGERATOR for the shop amounted= 3000$ and the depreciation rate 10% annually. - Rent for the shop= 1200$ - The depreciation for the car =2000$ only 50% accepted by tax officer. - Utilities expenses for business (water, electricity, phone)= 500$ - Rent of his house =5000$ - Medical care expenses for his son (documented) =3000$ - Cost of school premium for his sons. (American school)= 1400$ - Living cost for his family =5000$

6. Personal information: - Married and has two sons. - The owner for his job deduct 100$ monthly paid to tax office. Required: 1- total income 2- non taxable income 3- taxable income 4- deductions 5- exemptions 6- net taxable income 7- Tax prepayment 8- accrued tax 9- tax value to be paid or refund 10- Not accepted deductions or exemptions (if any)

7. Answer: income: Salary from job during the year= 10,000$ Sales for his own shop= 48,000$ Net profit from shares= 22,000$ Revenue from farming project= 12,000$ A share of the patrimony= 11,000$ 1- Total of income = 103,000 $ non taxable income: Net profit from shares =22,000$ Revenue from farming project =12,000$ A share of the patrimony =11,000$ 2- non taxable income= 45,000 taxable income: Salary from job during the year =10,000$ Sales for his own shop =48,000$ 3- taxable income= 58,000$ Deductions: * Cost of goods sold for his own shop =18000$ * REFRIGERATOR depreciation = 300$ * Rent for the shop= 1200$ * The depreciation for the car 50%*2000= 1000$ * Utilities =500$ 4- deductions = 21,000$

8. Exemptions: Resident =3000$ Rent of house= 2000$ Medical care =3000$ Wife 500$ Sons 1000$ 5- exemptions = 9500$ 6- net taxable income = (58000-21,000-9500)= 27500$ 7- Tax prepayment = 100$* 12= 1200$ 8- accrued tax =3360 10000* 8%= 800 6000*12% =720 11500*16% = 1840 9- tax value to be paid or refund = 3360-1200 = 2160$ paid 10- Not accepted deductions or exemptions = 10400$ 3000$+ 1000$+ 1400$+ 5000$

9. Concept: Determine the specific meaning of a particular component by extracting the essential characteristics and its relationship to other elements General Concepts :provide guidelines on the overall operation and implementation of the income tax system. 1-Ability-to-pay concept. This concept states that the tax levied on a taxpayer should be based on the amount that the taxpayer can afford to pay. (net income or profit amount) not gross income

10. 2-Administrative convenience concept. This concept states that items may be omitted from the tax base whenever the cost of implementing concept exceeds the benefit of using it. (Similar expenses related to work are accepted by tax officer but if not, it will not be accepted) And how much the expenses are paid by the tax officer to monitor these operations to accept them or not ? and does the benefit of tax payment cover the expenses or not ?

11. 2-Pay- as-You-Go Concept * Pay- as-You-Go Concept requires taxpayers to pay tax as they generate income. * This concept is implemented through withholding of tax. * The withholding provisions require employers to withhold amounts from each employee's paycheck to pay the tax on the income in that check. * This minimize the probability of a taxpayer facing a huge tax bill at the end the year. * Note that the taxpayer might pay too much tax through this process. In such cases the government simply refunds the excess tax that has been paid.