copyright © 2013 by m. ray gregg. all rights reserved. 2 introduction to federal income tax
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Introduction to Federal Income Tax
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Tally your results.
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Consider the Alternative
• How would you like to NOT pay tax?
• What situation would you likely be in if you did not have to pay tax?
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Who Pays Tax?• Individuals
• Corporations
• Estates
• Trusts
Any Surprises?
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Taxpaying Entities
Files a
Tax return?
Entity
PaysTax?
Income
Taxed?
Proprietorship No No Yes!
Partnership Yes No Yes!
Corporation Yes Yes Yes!
1065
1120
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Name as many as you can.
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Types of Taxes• Sales• Excise• Income– Federal– State– Local
• Estate• Gift• Social Security• Unemployment• Personal property• Real property
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Types of Taxes• Sales• Excise• Income
–Federal– State– Local
• Estate• Gift• Social security• Unemployment• Personal property• Real property
This course
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• Proportional
• Progressive
•Regressive
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Tax
Base
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Tax
Base
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Tax
Base
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Marginal Costs• Define from Economics– “Marginal costs are the costs a
company incurs in producing one additional unit of a good.”
Source: http://economics.about.com/cs/economicsglossary/g/marginal_cost.htm
Source: http://en.wikipedia.org/wiki/Marginal_cost
– “In economics and finance, marginal cost is the increase in total cost that arises when the quantity produced (or purchased) increases by one unit.”
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History of Marginal Rates
• For individuals
• For corporations
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U.S. Tax Rates1909 - 1999
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U.S. Tax Rates1909 - 1999
WW I
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U.S. Tax Rates1909 - 1999
Great Depression
Stock Market Crash
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U.S. Tax Rates1909 - 1999
WW II
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U.S. Tax Rates1909 - 1999
Korean War
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U.S. Tax Rates1909 - 1999
Kennedy Tax Cut
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U.S. Tax Rates1909 - 1999
Vietnam War
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U.S. Tax Rates1909 - 1999
Regan Tax Cut
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Marginal Rates 1913 - 2008
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
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Marginal Rates 1913 - 2008
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
Regan Tax Cut
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Marginal Rates 1913 - 2008
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
Regan Tax Cut
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Marginal Rates 1913 - 2008
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
Bush Tax Increase
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Marginal Rates 1913 - 2008
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
Bush Tax Cut
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Consider these facts…• For current year
• All Income 140,000
• Exempt Income 25,000
Determine:• Marginal Rate
• Average Rate
• Effective Rate
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All Income 140,000Less: Exempt Income 25,000Sub-total 115,000Exemption 3,900Std Deduction 6,100 10,000Taxable Income 105,000
Tax Calculation:TI 105,000
- Base 87,850 17,150x Mar Rate 0.28
Sub-Total 4,802+ Tax on Base 17,891
Total Tax 22,693
Marginal Rate 28.0%Average Rate 21.6%Effective Rate 16.2%
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All Income 140,000Less: Exempt Income 25,000Sub-total 115,000Exemption 3,900Std Deduction 6,100 10,000Taxable Income 105,000
Tax Calculation:TI 105,000
- Base 87,850 17,150x Mar Rate 0.28
Sub-Total 4,802+ Tax on Base 17,891
Total Tax 22,693
Marginal Rate 28.0%Average Rate 21.6%Effective Rate 16.2%
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All Income 140,000Less: Exempt Income 25,000Sub-total 115,000Exemption 3,900Std Deduction 6,100 10,000Taxable Income 105,000
Tax Calculation:TI 105,000
- Base 87,850 17,150x Mar Rate 0.28
Sub-Total 4,802+ Tax on Base 17,891
Total Tax 22,693
Marginal Rate 28.0%Average Rate 21.6%Effective Rate 16.2%
Marginal Rate
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28%
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Tax Taxable Income
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All Income 140,000Less: Exempt Income 25,000Sub-total 115,000Exemption 3,900Std Deduction 6,100 10,000Taxable Income 105,000
Tax Calculation:TI 105,000
- Base 87,850 17,150x Mar Rate 0.28
Sub-Total 4,802+ Tax on Base 17,891
Total Tax 22,693
Marginal Rate 28.0%Average Rate 21.6%Effective Rate 16.2%
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21.6%
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Tax All Income
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All Income 140,000Less: Exempt Income 25,000Sub-total 115,000Exemption 3,900Std Deduction 6,100 10,000Taxable Income 105,000
Tax Calculation:TI 105,000
- Base 87,850 17,150x Mar Rate 0.28
Sub-Total 4,802+ Tax on Base 17,891
Total Tax 22,693
Marginal Rate 28.0%Average Rate 21.6%Effective Rate 16.2%
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$22,693 $140,000
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All Income 140,000Less: Exempt Income 25,000Sub-total 115,000Exemption 3,900Std Deduction 6,100 10,000Taxable Income 105,000
Tax Calculation:TI 105,000
- Base 87,850 17,150x Mar Rate 0.28
Sub-Total 4,802+ Tax on Base 17,891
Total Tax 22,693
Marginal Rate 28.0%Average Rate 21.6%Effective Rate 16.2%
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• Mother-in-law– Turned down raise
• Employees appeal to boss– Boss agrees to raise costing $100,000
• Doctor bills patients near end of yr
• You contribute $1,000 to church
assume 30% tax rate