Week 1 Homework
Please provide your answer to each question in the space provided below.
When finished, submit to the DropBox.
Chapter 1 (5 pts)
1. Briefly discuss the purpose of the Sixteenth Amendment.
The sixteenth amendment, which was passed by Congress in 1909, grants the power to collect federal income taxes (Smith et al. 2015). Congress is given the authority to collect tax on any source of income, whether directly or indirectly. All individuals, and businesses, are required to pay federal taxes. Prior to the sixteenth amendment, Congress was only able to levy tariffs on imported goods. Congress tried to tax individuals on their property for additional revenue, but this tax was considered unconstitutional in the Pollock Case (Hart 2002). The reason for this being unconstitutional, was because it was deemed as an unapportioned tax, which was not allowed by the Constitution at the time. There was a large disparity between the rich and poor class, and income tax was intended to “level the plainfield”. The original purpose of the sixteenth amendment was to provide a tax relief to wage earners (Hart 2002). Now that all wages are taxed, whether apportioned or not, taxing the rich was supposed to assist the lower classes while generating revenue for the government.
Hart, Phil. "Phil Hart -- Constitutional Income: The Purpose of the 16th Amendment. Part1."Phil Hart -- Constitutional Income: The Purpose of the 16th Amendment. Part1. NewsWithViews.Com, 28 July 2002. Web. 01 Nov. 2014. <http://www.newswithviews.com/money/money4.htm>.
Smith, Ephraim P., Philip J. Harmelink, James R. Hasselback, and Ted D. Englebrecht. CCH Federal Taxation: Comprehensive Topics, 2015. Chicago, IL: Wolters Kluwer, 2014. VitalSource Shelf.
Chapter 2 (5 pts)
2. Explain the two "safe harbors" available to an Individual taxpayer to avoid a penalty for underpayment of estimated tax.
The two safe harbors available to individual taxpayers to avoid a penalty for underpayment of taxes include:
1. The taxpayer must pay 90 percent of their current tax liability to avoid a penalty (Robertson). For example, if my current tax liability is $5,000, I must have paid at least $4,500 to avoid a potential penalty. To determine a penalty, taxpayers must compute their tax liability for the current year, multiply if by 0.90% and look at their tax liability paid to date to determine if they are liable for a penalty.
2. The second safe harbor states if 100% of your previous year tax liability (110% for individuals with adjusted gross income greater than $150,000) was paid, the penalty can be avoided (Robertson). As an added example, if my tax liability last year was $5,000 and I paid $6,000, I can avoid a tax penalty.
It is critical for high income taxpayers to ensure their tax payments are adequate to avoid potential tax penalties in the near future. This is especially important when there is large income earned from investments, lottery winnings, or even when bonuses are paid. Congress gives taxpayers the ability to withhold taxes through payroll withholdings throughout the year to prevent any underpayments in taxes.
"Avoiding Underpayment Penalties." Avoiding Underpayment Penalties. George Robertson, n.d. Web. 02 Nov. 2014. <http://www.gwrfinancial.com/articles/article1319_avoid_underpayment.html>.
Chapter 3 (5 pts)
3. Explain the distinction between an "above the line" deduction (i.e. FOR AGI) and a below the line deduction (i.e. FROM AGI). Which one is more valuable?
For AGI deductions are referenced as deductions above the line, while deductions from AGI are referenced as deductions below the line. The actual “line” refers