Chapters 1-3 Flashcards
what employment taxes are employees and employers subject to
social security and medicare (FICA) for both; employer may also have to pay unemployment
What basic tax rates apply to the ordinary income, dividend income, and interest income of an individual? What are they for a corporation?
individual: 10,12,22,24,32,35,37% for ordinary and interest income; 0,15,20% for dividends
corporations: flat 21%
What tax rates apply to an individual’s capital gains?
long term: 0,15,20% (same as dividends)
short-term: 10,12,22,24,32,35,37% (same as ordinary)
describe the basic elements of the tax model
gross income-deductions=taxable income(applicable tax rates)=gross tax liability-tax credits and prepayments=tax liability owed or refund due
Differentiate the tax treatment of an individual’s capital losses from the tax treatment of corporate capital losses
individuals: can deduct capital losses in excess of capital gains up to $3000 and carry forward indefinitely
corporations: can only deduct capital losses against capital gains; first carry losses back 3 years then forward 5 and are otherwise lost
What are the basic tax rates for an individual and a corporation?
Individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37% applied to their ordinary income.
Corporation: flat tax rate of 21%.
What is the purpose of the DIF formula? What happens if someone has a high DIF score?
DIF (discriminant inventory function) identifies when an audit will be cost effective- the audit will yield additional taxes sufficient to warrant the expenditure of resources necessary to conduct it. ; high DIF score = high chance that examination will result in a change of income tax liability
What is a statute of limitations? What is its significance to taxpayers?
SOL is the time limit to take action in examining a tax return; 3 (error <25% of gross inc.) or 6 (>25%) years after the later of either the date of filing or the due date of return
What is the difference between tax avoidance and tax evasion?
Tax avoidance is the minimization of taxes by using legal alternatives to determine the tax owed. Tax evasion is the avoidance of taxes through illegal means.
explain the business purpose doctrine
it says that transaction will be recognized for tax purposes only if it is made for some business or economic purpose other than a tax avoidance motive.
In the citation Reg. §1.247-3, what do the 1 and the 247 indicate?
The 1 is a prefix that refers to an income tax regulation; the 247 is a root number that designates the Code section to which the regulation is related.
What are two major categories of differences between financial accounting income and taxable income?
The two major categories are temporary (or timing) differences and permanent differences. For temporary differences, income is taxed in a different period than it is accrued for accounting purposes. Income that is not taxed but is included in financial accounting income would be a permanent difference.
Virginia gave her 14-year-old grandson, Tommy, $10,000 in common stock. One month later, Tommy receives a $100 dividend on the stock. How much income is taxed to Tommy and how much to Virginia?
$100 div income to tommy, none to virginia
Why is interest income on state and local bonds tax exempt?
The interest exclusion for most state and local bond issues permits state and local governments to finance their governmental activities at much lower interest rates than they would be required to pay if they were competing with corporate bonds.
Are the recipients of gifts and inheritances subject to double taxation?
no. the giver may be subject to a transfer tax that could be considered double taxation, though
