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ACCOUNTING 5135

OVERHEADS PART ONE

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COMPUTATION OF TAX LIABILITY
Income
- Deductions
= taxable income (tax base)
x rate
= tentative tax
- credits
= tax liability
-

From 1040 set out to reflect formula

TYPES OF TAXES
Property Taxes (Ad Valorem)
-

Based on value
Most commonly places on realty (home)

Question: Where does most of the money raised from property taxes go?
Answer: schools
-

Not a federal tax


Must distinguish from personalty (realty: that which cannot be removed

without causing irreparable damage)


Disputes as to valuation arise

Question: Why would there be enforcement problems with taxing personalty


Answer: Impossible to keep track of & easy to hide & to value
Transaction Taxes
a. Excise Taxes sin taxes
- Sales tax on particular items (tobacco, gas, alcohol)
Question: Why do you suppose the government elects to tax items such as alcohol,
tobacco, and gasoline?
Answer: Discourage from using them and easy to pass these taxes
(Influence behavior)
Question: What happens to revenues if the tax succeeds in its objectives?
Answer: Revenues also fall because ppl will stop buying them

Question: Do you think tax law should be used in such a manner?


Answer: Just want to raise revenue should just have a flat tax BUT
usually not only objective LIKE sin tax to influence behavior to not to do
something
always two-fold for tax laws revenue and influence behaviors
-

Discuss Ethical Consideration in Text


More Excise Taxes from Federal Government Good or Bad?
Tobacco taxes positives and negatives
b. General Sales Tax
- Primarily used by state governments
- Varying exceptions
Question: What are some of the key exceptions in Minnesota? Why?
Answer: Food and clothing theyre needs NOT wants
c. Severance Taxes
- On extraction of natural resources (coal, iron, oil, etc.)

d.
e.
f.
-

Estate Tax
Imposed on TRANSFER of wealth
Imposed on decedent (one who died)
Federal (could be state too)
Inheritance Taxes
Same as estate tax, but imposed on recipient of property
Only imposed by some state governments (no Federal)
Gift Taxes
Imposed on donor (giver)
Estate, inheritance and gift taxes all based on FMV of property being
transferred

Income Taxes
-

U.S. has self-assessing system list out revenue, deductions, etc. We are

doing it all by ourselves BUT:


Has moved toward a pay- as-you-go system wages estimate what youll
pay and keep it, thats why get tax return back because overestimate

Question: What is the argument for lower progressivity of income tax?


Answer: Biggest argument: people with higher income, are people with
excess money, SO invest in tax exempt investments so wont push into next tax
bracket
-

State taxes usually piggyback off of federal computation of taxable income


most states have own income tax but able to start with Federal Income Tax
(so dont have to start over)

Employment Taxes
1. FICA (Federal Insurance Contributions Act Social Security Tax)
- Social security: disability, survivors, retirement / Medicare: medical hospital
insurance
- Employer matches what employee pays
- Self-employment tax which covers both portions (double)
- Social Security portion (6.20%) has a cap
- Medicare portion (1.45%) does not have a cap
- DIAGRAM IN NOTEBOOK
2. FUTA (Federal Unemployment Tax Act)
- Funds unemployment compensation (employer paid only)
Consider: If earn $1, only receive .9235 because social security taken off top. But
$1 taxed. Whats the rationale? Does it hold up?
Answer: Rationale: Social security is still your money for retirement Hold
up: Social Security can become taxable meaning taxing twice
Proposed Changes
1. The Flat Tax: Flat rate across board with tiers (making progressive with tiers)
2. VAT Tax (Value Added Tax): paying tax on what adding to product and then
reflected in price point
3. National Sales Tax: get rid of all other taxes (savers get money back) state tax
too
Questions:

1. Why do the proponents argue these systems of tax are better?


Current system too complicated and eliminating IRS
2. Do you see any potential problems?
- special interest (credit/deductions)
-VAT+national sales tax creation of Black Markets
-All 3: Regressive issue
people who making less spending everything earn=more taxed
people make more saving more = not taxed on that

UNDERSTANDING THE FEDERAL TAX LAW


Provisions Enacted For Social Reasons
Question: Whats the rationale for the home mortgage interest deduction? (costs
US $85 billion/year to give deduction)
Answer: promote home ownership (when suburbs first starting) social
consideration
Question: Is this a good way for society to spend its money?
Pros: (-Biggest tax deduction people love it)
-Stimulates real estate industry
-Promotes care and pride in peoples home
-Stable neighborhoodstable society
Cons:
-Penalize mobile community (people who dont want a house)
-Regressive (bigger housebigger deduction)
-Poor cant afford it (house/loan)
-Cant afford it anymore
Other social policy provisions:
a. Retirement savings deductions incentives to save for retirement
b. Nontaxable health benefits to employeesincentives employers give
health benefits
c. Deduction for charitable contributionsgood for country
d. Credit for child caregood for country
e. Disallowance of expenditures contrary to public policy
i. Examples: pay a bribe=nondeductible | pay penalty =
nondeductible

Provisions Enacted For Economic Reasons


Question: If technological progress was deemed important to encourage, what may
the government give a tax break for?
Answer: Research and development
-

Other economic provisions:


a. Quicker write-off of business equipment (Depreciation accelerated
write off now)
b. Favorable provisions regarding alternative energy
c. Breaks for US citizens working overseas

Provisions Which Give Special Treatment For Certain Industries


Question: Can you think of any areas/industries for which Congress may want to
give special tax breaks?
Answer: Clean energy, farming, small business
Provisions Enacted For Equity Reasons
-

Mitigation of multiple taxation deduction for state, local, and foreign taxes
Deferral of tax until wherewithal to pay
a. Installment sales
b. Like-kind exchanges

Provisions Enacted For Political Reasons


Everything!!!
WORKING WITH THE TAX LAW (CHAPTER 2)
Legislative Branch
-

Creates law

Question 1: In which House must all revenue bills begin? Which committee has
jurisdiction over tax matters?
Answers: House: House of Representatives
Committee: House Ways and Means Committee (Paul Roman from WI
head) starts law sends to House of Representatives
-

Then to Senate

Question 2: Which Senate Committee has jurisdiction over tax matters?


Answer: Finance Committee draft a bill Senate
-

Then to joint conference committee: talk about why differences and then write

new one together


Then back to House/Senate
Then to President
Legislative history important to determine congressional intent (bluebook by
joint committee)

Executive Branch
-

Administers/Enforces the law


Task assigned to Treasury Department (IRS part of Treasury)
Tasks are twofold:
1. Tax Administration
a. Return processing
i. Huge increase in electronic returns
ii. Concept of a self-assessing system write all the forms
(new provisions rewrite)
b. Interpretation of tax laws:
i. Treasury regulations highest of the administrative

authorities
Three possible status of regulations
a. Proposed regulationscomments by outside firms
i. No legal effect
ii. But probable retroactive effect to when first proposed (what think
going to do)
b. Temporary regulations only in effect for 3 years

i. Same force/effect as final regulations =LAW


c. Final regulations
Two major types of regulations
a. Administrative (interpretive) regulations (explanations to taxpayers)
i. Authority granted under IRC Sec. 7805
ii. Can only be challenged if shown inconsistent with statute
(interpreted wrong)
b. Legislative regulations
i. Delegation by Congress to create law
ii. Would have to be unconstitutional to be challenged
c.

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