TAX 4001: Exam 1 2019 Questions and Answers Graded A

What is the most difficult part about calculating taxes? - determining the tax BASE, not the tax rate. Average tax rate - total tax / taxable income Effective Tax Rate - total tax/total income marginal tax rate - change in tax/change in taxable income or... (New total tax-Old total tax)/(New taxable income-Old taxable income) After Tax rate of return on a bond (regular and municipal) - Example 1-12 Price*before tax return rate=int. inc.*income tax rate=income tax interest income-income tax=after tax income after tax income/price=after tax rate of return When a taxpayer is filing an extension, what is the last day that they can pay without paying a penalty. - Individual taxpayers can request an extension of 6 months to file their tax return. This DOES NOT extend the time that a taxpayer must pay their taxes. If extension is filed, a taxpayer must estimate the taxes they will owe and must pay them by 4/15/xx. If taxes are underpaid, the taxpayer will be charged interest on the taxes owed. C Corp's return filing day, extension length - the 15th of the fourth month following the company's year-end can request an automatic 6 or 7 months of extension What is the automatic length of an extension for a partnership or S-corp? - 6 months Statute of Limitations - If there is a mistake on a tx return, the taxpayer must file an amended return to correct the error (requesting refund or pay amount) if the period of limitation has not passed. What is the period of the statute of limitations? - It is within 3 years of the LATER of (1)when the return was actually filed or (2) the return's original due date. Are there exceptions to the statute of limitations? - Yes, the period can be extended depending on the circumstances. If the taxpayer omits items of gross income that exceed 25% of the gross income reported -- extends to 6 years For fraudulent returns or failure to file can cause the case to be open indefinitely. Taxpayers can also request to the IRS extension so that both sides have sufficient time to resolve issues. Do corporations have to file a tax return? - YES! Regardless of their taxable income Do estates & trusts have to file a tax return? - Yes if their gross income exceeds $600. Are individual taxpayers required to file a tax return? - It all depends on their filing status and gross income (see exhibit 2-1). Gross income thresholds are indexed each year for inflation. What determines whether a tax return is required? - GROSS INCOME, not if a refund is due or not Primary authorities - official sources of the tax law generated by the legislative branch, judicial branch, and executive/administrative branch. See Exhibit 2-5 What is the primary goal of tax planning? - maximize the taxpayer's after-tax wealth while achieving the taxpayer's non-tax goals What are the 3 tax planning strategies? - Timing (deferring or accelerating taxable income