MGMT 127A (Chapter 1)

Tax rate Progressive

if a higher rate of tax applies as the tax base increases. Examples are federal income tax, Federal gift, and estate taxes, and most state income tax rate structures

General rules related to Ad valorem (property) on personal property

1) Generally vehicles (cars and boats, for example) are the only non-realty personal use assets subject to property tax. The value of a vehicle is typically established by a schedule based on its age and make/model (a high priced car versus a low-priced car) Usually, any vehicle property tax is assessed and collected along with vehicle license or registration fees 2) Which jurisdiction has the authority to tax goods on rail cars (called railroad rolling stock) or on semitrailers continues to be a difficult issue 3) A few states levy an ad valorem tax on on tangibles such as stocks and bonds

Examples of Federal Excise taxes

1) Manufacturers' excise taxes on trucks, trailers tires, firearms, sporting equipment, medical devices 2) Alcohol 3) Miscellaneous taxes (e.g. the tax on wagering)

Some characteristics of ad valorem (property) taxes on real property

1) Property owned by the Federal government is exempt from tax. In general, the same is true fr property owned by state and local gov and by charitable organizations 2) Some states provide for lower valuations on property used for agriculture or other special uses (wildlife sanctuaries) 3) States may have a homestead exemption, which makes some portion of the value or a personal residence exempt from tax 4) Lower taxes may apply to a residence owned by a taxpayer aged 65 or older 5) When non-income producing property (e.g. personal residence) is converted to income producing property (e.g rental house, the appraised value may be increased

Major types of Tax

1) Property taxes 2) Transaction 3) Death taxes 4) Gift taxes 5) Income taxes 6) Employment taxes 7) Other U.S. taxes

State Income tax decouple

1) Some states "decouple" from select tax legislation enacted by Congress -State may not be able to afford the loss revenue resulting from such legislation 2) Because of tie-ins to the Federal return, states may be notified of changes made by the IRS upon audit of a Federal return - In recent years, the exchange of information between the IRS and state taxing authorities has increased

Two categories of property taxes (REAL & PERSONAL PROPERTY)

1) Those imposed on real property (land and buildings) 2)those imposed on personal property (assets other than land and buildings) Both usually generate a deduciton fpr Federal income tax purposes

Ad valorem (Property) Tax on Real Property

1) Used exclusively by states and their local subdivisions (such as cities, counties, and school districts). 2) Represent a major source of revenue for local governments

Two popular local taxes (excise)

1) the hotel occupancy tax 2) rental car "surchange"

Income taxes

1)Imposed at the federal, most state, and some local levels of government - Income taxes generally are imposed on individuals, corporations, and certain fiduciaries (Estates and trusts) 2) Federal income tax base is taxable income (income less allowable exclusions and deductions) 3) Most jurisdictions attempt to assure tax collection by requiring pay-as-you go procedures including -Withholding requirements for employees - Estimated tax prepayments for all taxpayers

Use tax

A complement to the sales tax and is assessed at the same rate as the sales tax. A use tax is owed on property purchased outside the state but used in the state

Tax Base

A tax base is the amount to which the tax rate is applied.

The federal Gift tax

A taxable gift is measured by the fair market value of the property on the date of transfer less the annual exclusion per donee and in some cases, less the martial deduction, which allows tax-free transfers between spouses In 2016-2017 each donor is allowed an annual exclusion of 14,000. Cumulative in effect, this means that the tax base for current taxable gifts includes past taxable gifts to current taxable gifts could force the donor into a higher tax bracket.

State Income Tax

All but the following states impose an income tax on individuals: -Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming - New Hampshire and Tennessee impose an individual income tax only on interest and dividends

Tax Administration

Internal Revenue Service (IRS) - Responsible for enforcing the Federal tax laws - Audits small percentage of returns filed using mathematical formulas and statistical sampling --- To update selection criteria, the IRS selects a cross section or returns, which are subject to various degrees of inspection - Results highlight areas of taxpayer noncompliance and enable the IRS to use its auditors more productively

Gift Taxes (excise tax)

Levied on property transfers made during the owner's life and not at death. If the recipient pays the donor for the property (but at an amount less than its fair market value) the difference is a gift.

Estate tax (excise tax)

Levied on the estate of the decedent (it is a tax on the right to pass property at death.

An Inheritance tax

Levied on the person receiving the property (the heir). The value of the property transferred provides the base for determining the amount of the tax.

State and Local excise taxes

Parallel the federal version of gasoline, liquor, and tobacco products but rates vary greatly among states Also includes admission to amusement facilities, on the sale of playing cards and on prepared foods some counties impose a translation tax on the transfer of property that requires the recording of docu

Ad Valorem (Property taxes) on Personal Property

Personal Property or personalty, can be defined as all property that is not realty or as tangible property or intangible property. Intangible personalty includes stocks, bonds, and various other securities

How real property is defined

Real Property or realty, generally includes real estate and any fixtures. A fixture is something so permanently attached to the real estate that its removal will cause irreparable damage. Examples a built in bookcase, electrical wiring and plumbing

State Income Tax characteristics

Some characteristics of state income taxes include - With few exceptions, all state require some form of withholding procedures - Most states use as the tax base the income determination made for Federal income tax purposes ----some states apply a fiat rate to Federal AGI ---- Some state apply a rate to the Federal income tax liability - Referred to as the 'piggyback' approach to state income taxation

Tax rates

Tax rates are applied to the tax base to determine a taxpayer's liability. Two types 1) Proportional 2) Progressive

Self-Employment tax (Social Security taxes)

Taxpayers who are not employees subject to Social Security taxes. 12.4 % for Social Security and 2.9% for Medicare or twice that applicable to an employee.

Property Taxes

Correctly referred to as ad valorem taxes because they are based on value, property taxes are a tax on wealth, or capital. As a result, they have much in common with estate taxes and gift taxes. Although property taxes do not tax income, the income actually derived (or the potential for any income) may be relevant if it affects the value of the property being taxed.

General Sales tax

Covers a multitude of transactions. Rates can vary many states, for example, allow lower rates

Federal Excise tax (transaction tax)

Covers fewer items than int he past. Focused excise taxes on items such as tobacco products, fuel and gasoline sales and air travel. Realize that these taxes may be trying to influence social behavior

Employment taxes

FICA taxes - Paid by both an employee and employer - The Social Security rate is 6.2% in 2017 on a maximum of $127,200 of wages ---the medicare rate is 1.45% on all wages - A spouse employed by another spouse is subject to FICA - Children under the age of 18 who are employed in parent's unincorporated trade or business are exempt from FICA

Transactions taxes

Imposed on at the manufacturer's, wholecar's, or retailer's level, cover a wide range of transfers. Transaction taxes can be assessed by any taxing authority (Federal, state, or local government). Cover transfers of property and normally determined by multiplying the value by a percentage rate.

Employment Taxes

-Self employment tax ---Sole proprietors and independent contractors may also be subject to Social Security taxes - Known as the self employment tax - Rates are twice that applicable to an employee ----Generally 12.4% for Social Security and 2.9% for Medicare - The tax imposed on net self-employment income up to a base amount of $127,200 for 2017 - The 0.9% tax addition to Medicare also covers situations involving high net income form self-employment

FICA Taxes

Has two components: 1) Social Security tax 6.2% and for 2017 base amount is $127,200 (old age, survivors, and disability insurance) 2) Medicare tax applied at a rate of 1.45 % subject on dollar limitation. (hospital insurance) The affordable care act an additional .9% tax on earned income above $200,000 (single filers) or $250,000 (married filing jointly) Employer matches social security tax of 6.2% and the Medicare portion of 1.45% but does not have to match the employees' .9% A spouse employed by another spouse is subject to FICA. However, children under the age of 18 who are employed in a parent's unicorporated trade or business are exempted.

Tax rate proportional

If the rate of tax remains constant for any given income level. Examples are most excise taxes, general sales taxes, and employment taxes ( FICA and FUTA)

FUTA Taxes

To provide funds the states can use to administer unemployment benefits. Must file State and Federal returns and payments to both governmental units In 2017, FUTA is 6% on the first $7,000 of covered wages paid during the year to each employee. Federal allows a credit for FUTA paid but cannot exceed 5.4% of the covered wages. Thus the amount required to be paid to the federal government could be as low was .6% State reduced the unemployment tax on employers who experience stable employment since the state pays less unemployment benefits. might drop as low as .1%