Federal Taxation Exam With Verified
Solutions
incremental basis
federal income tax is changed on an incremental basis rather than a complete revision basis. Under
so-called incrementalism, when a change in the tax law is deemed necessary by Congress, the entire
law is not changed, but specific provisions of the tax law are added, changed, or deleted on an
incremental basis. The complexity of the federal income tax today is from the incremental nature of
tax legislation.
largest sources of federal revenues
*individual income taxes--largest
*Social Security (FICA) taxes and corporate income taxes are two other major revenue sources.
tax base
amount to which the tax rate is applied to determine tax due. i.e. (taxable income)
tax rate
percentage rate applied to the tax base.
progressive tax rate
where the rate of tax increases as the tax base increases.
i.e. federal income tax.
proportional tax rate (flat rate)
the rate of tax is the same for all taxpayers, regardless of the level of their tax base. This is generally
used for real estate taxes, state and local sales tax, personal property taxes, customs duties, and
excise taxes.
regressive tax rate
tax rate decreases with an increase in the tax base (e.g., income). The Social Security (FICA) tax is
regressive because a fixed rate of tax for both the employer and employee is levied up to a ceiling of
$110,000 for 2012.
**sales tax, which is levied by many states, is also regressive when measured against the income
base.
corporations
federal corporate income tax reflects a stair-step pattern of progression that tends to benefit small
corporations.
marginal tax rate
the tax rate applied to an incremental amount of taxable income that is added to the tax base. (tax
rate based on applicable tax base.... e.g., taxable income of $100,000.....marginal tax rate is 28%)
average tax rate
computed by dividing the total tax liability by the amount of taxable income.
, effective tax rate
total tax liability divided by total economic income.
total economic income
includes all types of economic income that a taxpayer has for the year.
corporate income tax (franchise tax)
franchise taxes usually are based on a weighted-average formula consisting of net worth, income, and
sales.
wealth transfer taxes
imposes a single tax on transfers of property taking place during an individual's lifetime (gifts) and at
death (estates).
gift tax
is an excise tax that is imposed on the donor for transfers of property that are considered to be a
taxable gift. $13,000 annual exclusion is allowed per donee. In addition, an unlimited marital
deduction is allowed for transfers between spouses.
*** charitable contributions are effectively exempted from the gift tax because an unlimited
deduction is allowed.
federal estate tax
part of the unified transfer tax system that is based on the total property transfers an individual
makes both during his or her lifetime and at death.
property taxes
based on the value of a taxpayer's property, which may include both real estate and personal
property. Real estate taxes are a major source of revenue for local governments.
federal excise taxes and customs duties
federal excise taxes are imposed on alcohol, tobacco, gasoline, telephone usage, production of oil and
gas.
sales tax
imposed on retail sales of tangible personal property.
employment taxes
social security (FICA) and federal and state unemployment compensation taxes.
individual taxes
federal income tax---progressive--
state income tax---progressive
federal gift tax---progressive
federal estate tax--- progressive
corporation taxes
Solutions
incremental basis
federal income tax is changed on an incremental basis rather than a complete revision basis. Under
so-called incrementalism, when a change in the tax law is deemed necessary by Congress, the entire
law is not changed, but specific provisions of the tax law are added, changed, or deleted on an
incremental basis. The complexity of the federal income tax today is from the incremental nature of
tax legislation.
largest sources of federal revenues
*individual income taxes--largest
*Social Security (FICA) taxes and corporate income taxes are two other major revenue sources.
tax base
amount to which the tax rate is applied to determine tax due. i.e. (taxable income)
tax rate
percentage rate applied to the tax base.
progressive tax rate
where the rate of tax increases as the tax base increases.
i.e. federal income tax.
proportional tax rate (flat rate)
the rate of tax is the same for all taxpayers, regardless of the level of their tax base. This is generally
used for real estate taxes, state and local sales tax, personal property taxes, customs duties, and
excise taxes.
regressive tax rate
tax rate decreases with an increase in the tax base (e.g., income). The Social Security (FICA) tax is
regressive because a fixed rate of tax for both the employer and employee is levied up to a ceiling of
$110,000 for 2012.
**sales tax, which is levied by many states, is also regressive when measured against the income
base.
corporations
federal corporate income tax reflects a stair-step pattern of progression that tends to benefit small
corporations.
marginal tax rate
the tax rate applied to an incremental amount of taxable income that is added to the tax base. (tax
rate based on applicable tax base.... e.g., taxable income of $100,000.....marginal tax rate is 28%)
average tax rate
computed by dividing the total tax liability by the amount of taxable income.
, effective tax rate
total tax liability divided by total economic income.
total economic income
includes all types of economic income that a taxpayer has for the year.
corporate income tax (franchise tax)
franchise taxes usually are based on a weighted-average formula consisting of net worth, income, and
sales.
wealth transfer taxes
imposes a single tax on transfers of property taking place during an individual's lifetime (gifts) and at
death (estates).
gift tax
is an excise tax that is imposed on the donor for transfers of property that are considered to be a
taxable gift. $13,000 annual exclusion is allowed per donee. In addition, an unlimited marital
deduction is allowed for transfers between spouses.
*** charitable contributions are effectively exempted from the gift tax because an unlimited
deduction is allowed.
federal estate tax
part of the unified transfer tax system that is based on the total property transfers an individual
makes both during his or her lifetime and at death.
property taxes
based on the value of a taxpayer's property, which may include both real estate and personal
property. Real estate taxes are a major source of revenue for local governments.
federal excise taxes and customs duties
federal excise taxes are imposed on alcohol, tobacco, gasoline, telephone usage, production of oil and
gas.
sales tax
imposed on retail sales of tangible personal property.
employment taxes
social security (FICA) and federal and state unemployment compensation taxes.
individual taxes
federal income tax---progressive--
state income tax---progressive
federal gift tax---progressive
federal estate tax--- progressive
corporation taxes
