Exam (elaborations)
TAX4001 - Woodward - Exam 1 (1)
TAX4001 - Woodward - Exam 1 (1)
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TAX4001 - Woodward - Exam 1A property tax is assessed based on the value of the property at a point in time. How
does this compare to how income taxes are assessed? - ANS-Income taxes are
assessed based on income *over a period of time* rather than at a point in time. Think
income statement verses balance sheet.
What period of time will we use when determining federal individual income tax in this
class? - ANS-One calendar year
What method of accounting is used for individual income taxes and why? -
ANS-Individuals use cash basis accounting because its easy for the average individual
to understand and its how most peoples income records are kept.
Who creates the tax laws in the U.S.? - ANS-Congress (signed or vetoed by the
president)
*Note - Think no taxation without representation, congress is our representation in
government.
Who interprets the U.S. tax laws? - ANS-The U.S. Treasury department through the
Internal Revenue Service (IRS)
What is the underlying conflict between individuals and the government when it comes
to income taxes? - ANS-Individuals want to pay as little as possible while the
government wants taxpayers to pay as much as possible without affecting the amount
of work the person is willing to do or the amount of risk they are willing to take on.
What is the primary purpose of having an income tax from the governments point of
view? - ANS-To raise revenue
Income from which sources is subject to federal individual income tax? - ANS-All
income from whatever source derived unless it is excluded
What two components are necessary to have a tax? - ANS-A base and a rate
Generally, how do you calculate a tax? - ANS-Base * Rate = Tax
, Why is U.S. federal individual income tax so complex? - ANS-Federal income tax for an
individual is complex for a couple of reasons. First, the base is complex to determine. It
has to take into account everything that happens during the year that affects income
including things like marriage, death, having children, donations, buying a house,
retirement, inheritance, etc... Also because when dealing with income tax you are
looking at what happened the previous year but also have to keep in mind what is
happening in the current year and things coming down the line in future years.
Why it it important to have a basic understanding of other types of taxes when looking at
federal individual income tax? - ANS-It is important to have a basic understanding of
other types of taxes besides federal individual income tax because some other types of
taxes factor into the calculation of federal individual income tax.
Ex: Property tax is on your home is deductible when itemizing.
What does it mean when we say that our income tax rate structure is progressive? -
ANS-The higher your income, the higher your tax rate
What are income shifting strategies? - ANS-Shifting income from higher rate tax payers
to lower rate tax payers.
Ex: Showing income to 10 year old old son so its taxed at a lower rate
What are timing strategies? - ANS-Deferring income to a later period for tax purposes
so that you wait to pay taxes on it at a later time and accelerating deductions to reduce
tax paid for the current period.
*Note - The taxpayer is always trying to reduce taxes for the current period!
What are conversion strategies? - ANS-Trying to convert non excluded income to
excluded income for tax purposes and therefore reduce the amount of income tax
What is the difference between tax avoidance versus tax evasion? - ANS-Tax avoidance
is the legal use of tax laws to reduce your tax burden whereas tax evasion is the illegal
practice of not paying taxes by either not reporting income, reporting expenses that
shouldn't be reported, or not paying taxes owed.
Where do you find the tax "rules"? - ANS-The Internal Revenue Code of 1986 as
amended
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