Topics from class
Chapter One 1. General tax theory - Efficiency Equity (horizontal, vertical) Simplicity model. What it means, how to apply in order to assess a tax.
An equitable tax is one that is perceived as being fair to all who are affected by the tax.
Make it efficient: minimizes compliance costs and easy to compute
Level playing field NO unintended behavioral changes
Ability to pay Horizontal- Same level; same tax
Easy to comply Easy to administer
2. Major types of taxes, and which level of government (local, state, federal) uses these taxes
Federal: Income taxes and payroll taxes
State: Sales taxes and income taxes
Local: Property taxes
Property taxes, excise taxes, Sales and use taxes, user fees, wealth transfer taxes, employment taxes, federal income taxes, state and local income taxes
3. Calculation of, and difference between, marginal, average and effective tax rates
Marginal: tax rate on the next dollar earned
Average: tax liability divided by taxable income
Effective: tax liability divided by economic income
4. Calculation and examples of progressive, proportional and regressive tax rates
Progressive (stair-step): rate increases as base increases
Proportional (flat): rate doesn’t change with the base
Regressive: rate decreases as base increases
5. Difference between a credit and a deduction
Credit is unaffected by MTR while a deduction is only as helpful as the bracket that the taxpayer falls into for their MTR.
6. Difference between a refundable and nonrefundable tax credit
Refundable: A credit that can reduce a taxpayer’s tax liability to zero and produce a refund for any amount of the credit in excess of the taxpayer’s liability. Nonrefundable: A tax credit that can only reduce a taxpayer’s income tax liability.
7. Types of basic business entities
C-corp: separate entity: taxed twice
LLC: conduit entity
S-corp: conduit a. Tax and non-tax advantages and disadvantages of each b. Identification as a taxpaying entity or a flow-through entity
8. Components of tax system (tax base and tax rate)
Compulsory payment to government
Not a fine or penalty
No direct relationship between tax paid and benefits received
Rate * base = tax liability 9. Application of the basic model to calculate taxable income and tax liability
Less deduction FOR AGI
Less deduction FROM AGI STD V items Exemptions
Taxable Income (Base)
TAX LIABILITY – any credits or prepayments.
1. Main sources of primary authority, and examples of each a. Legislative: tax laws that result from the legislative process. i. Internal Revenue Code, Committee Reports, Blue books, treaties, b. Executive: (Administrative) Internal Revenue Service, Secretary of the Treasury ii. Treasury Regulations, IRS pronouncements, Revenue rulings, Private letter Ruling c. Judicial: decisions made by the federal courts provide additional guidance regarding federal tax law iii. Trial courts, appellate courts
2. Differences between Tax Court and District Court
Tax court hears only federal tax cases
District courts hear a wide variety of cases; they are not limited to disputes involving federal tax law.
3. How to use Code/Regs, and relationship between each
Code dictates compliance to tax law while regulations help to expand on what the code is trying to explain. Section 182 of the code is 1.182 in the regulation
4. Tax compliance versus tax planning
Compliance: Involves researching a “closed fact” situation, where the transaction already has taken place and the tax consequences need to be reported properly.
Planning: Involves researching an “open fact” situation, where the transaction has yet to occur and can be modified to achieve optimal tax savings.