Federal Income Tax I: Chapter 1

Who must pay federal Income taxes?

Individuals, corporations, estates, and trusts are subject to federal, state, county, and municipal (city) taxes.

The first enactment of federal income taxation on individuals

It was in 1861 to finance the American Civil War and was repealed after the war.

Reinstatement of the federal income taxation on individuals

It was reinstated in 1894 and later was challenged in the U.S. courts, and it was declared unconstitutional by the U.S. Supreme Court in 1895 because the U.S. Constitution required that income tax be apportioned among the states in proportion to their population.

Other taxes imposed by U.S. government.

Most U.S. states, counties, and cities imposes income taxes.

U.S. Government means to finance its operation before 1913

Relied mainly on customs duties and excise taxes

Define Progressive Tax Rate and Give Example.

A progressive tax rate structure is a tax rate structure that increases in tax rate as the tax base increases. Example the federal income tax for individuals, corporations, estates, and trusts.

Define Proportional Tax Rate, Give Example, and Other name it is called.

A proportional tax rate structure is a tax rate structure that is the same tax rate for all taxpayers regardless of the amount of the tax base. Example state and local sales taxes. It is sometimes referred to as a flat tax.

Define Regressive Tax Rate and Give Example.

A regressive tax rate structure is a tax rate structure that where the tax rate decreases as the tax base increases. Examples are Unemployment taxes, FICA (Medicare & Social Security Taxes), and Self-Employment taxes.

Modern-Day Federal Income Tax

Because the U.S. Constitution required that the federal income tax be apportioned among the U.S. states in proportion to their population, which would make the tax system both unfeasible and burdensome to administer, it became necessary for the U.S. Constitution to be amended to permit the passing of a federal income tax law. As a result, the Sixteenth Amendment to the U.S. Constitution was ratified in 1913. It simply stated that, "The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

Discuss the Tax Law Sources.

Tax Law Sources comes from all three branches of the federal government. Legislative branch tax law source is the Internal Revenue Code (IRC); Executive branch of tax law source is Income Tax Regulations, Revenue Rulings, Revenue Procedures, and Letter Rulings; Judicial branch of tax law is the Court Decisions.

Define Average Tax Rate.

The average tax rate is the rate of tax for each dollar of taxable income. It is calculated by dividing the tax liability, which is the tax due or owed, by the taxable income, which is the tax base.

Explain the Economic Objective of the federal income tax law.

The economic objective of the federal income tax system is to use fiscal policy to encourage private investments, reduce unemployment, alleviate the effects of inflation on the economy. Example, motivating people to invest in securities by enacting special tax rates for Net Long-Term Capital Gains (NLTCG).

Define Effective Tax Rate.

The effective tax rate is a broad measure of taxpayers' ability to pay taxes. It is mainly used by tax policymakers. It calculated by dividing the total tax liability by total economic income, which includes all the economic income the taxpayer has for the year.

What is the dominant form of taxation in the U.S.?

The federal income tax

What are the objectives of the Federal Income Tax Law?

The federal income tax law has two objectives, which are economic and social objectives.

Name the Flow-through Entities and Explain their tax obligation.

The flow-through entities are Sole Proprietorship, Partnerships, S Corporations, LLC (Limited Liability Corporation), LLP (Limited Liability Partnerships), and Trusts. The flow-through entities do not pay taxes on their business income directly but rather include their business income on each owner individual income tax return. Their business income can increase or decrease their gross income.

Define Marginal Tax Rate.

The marginal tax rate is the tax rate applied to an incremental or portion of an amount of taxable income that is added to the tax base to determine the tax effect of a proposed transaction. It measures the tax rate applicable to the last dollar of income. For example, New Company Wells paid an shareholder $4,000 in dividends and the shareholder wants to determine how much the dividend payment will increase or decrease his tax due.

Explain the Social Objective of the federal income tax law.

The social objective of the federal income tax system is to encourage or discourage certain socially desirable or undesirable activities. Example offering charitable deductions to motivate people to donate to charities.

The two basic components of all tax structures

The tax base and the rate are the two basic parts of all tax structures.

What is the tax base?

The tax base is the income or the income subject to tax, which is called the taxable income, in which the tax rate is applied to for tax determination.

What is the tax rate?

The tax rate is the percentage of rate that is multiplied by the taxable income, which is the tax base, to determine the tax due; it is also called the marginal tax rate.

Name the Taxpaying Entities and Explain their tax obligation.

The taxpaying entities are Individuals and Corporations. Individuals and corporations pay income taxes on their taxable income.

What are the names of the three courts where federal tax litigation can initial?

The three courts where federal tax litigation can begin are U.S. Tax Court where disputed tax balance does not have to be paid first to file motion for hearing, Federal District Court to request a Jury trial (disputed tax balance must be paid first), and U.S. Court of Federal Claims can be initiated here if disputed tax balance is paid first and claimant is requesting for refund of tax paid. The most common trial court that litigation can start is the U.S. Tax Court because a person can file for suit without the requirement to pay the disputed IRS (Internal Revenue Service) tax debt.

What are the three types of tax rates?

The three type of tax rates are progressive, proportional, or regressive. A tax rate can be either progressive, proportional, or regressive.

What are the two types of entities in the federal income tax system?

The two types of entities in the federal income tax system are Taxpaying Entities and Flow-Through Entities.