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Federal Income Tax
University of Dayton School of Law
Wohl, Laurence B.


· 30-40 question Multiple Choice

· 5 hour exam (3.5 hours to complete on average)

· Open Book (anything you want, notes, computer, books)

Tax Introduction

· General Introduction

o Tax is political science course of who will bear the burden of financing the gov’t and who will get the benefits

o Fundamental Policy Issues

§ Who bears the cost (said it many times in class)

o Tax Base: Key Term

§ What are we taxing

§ Must know what to tax before we decide how much to tax

· Theory and Policy

o Why Income Tax

§ Income Defined

· Tax system in United States is based on “Income”

o Income defined by tax code, statutory definition

· More “income” you have, more tax you pay

§ Many different ways to impose a tax

· Head Tax

o Equal amount of tax on each person à not fair to the poor

· Ability to Pay

o Tax based on your “ability” to pay, not necessarily your “income”

o Possibilities

§ Narrow View

· Tax based on liquid assets, like cash

· Encourages holding illiquid assets, like house and property

§ Broader View

· Tax based on material well-being, without regard to liquidity

§ Broadest View

· Tax based on ones ability or opportunity to earn wealth (education considered)

· Taxing opportunity doesn’t seem fair

o How to implement tax on “ability to pay”

§ Income, consumption and wealth as tax bases

o Tax Incidence

§ Party that bears the ultimate burden of the tax bears the tax incidence

· Tax corporation à corporation passes taxes onto consumers à consumers bear tax incidence

§ Individuals can rarely pass tax incidence onto someone else

o Inflation

§ Tax system does not make adjustments for the effects of inflation

· Therefore, inflation impacts ones taxes over time

§ Bracket Creep

· Increase in tax rates that occurs solely as a result of inflation

· $25K taxed at 20%, $50K taxed at 30%

· 10 years later, $50K has spending power of $25K, yet now taxed at 30%

§ Investment in Productive Property

· Property that depreciates over time must be considered for tax purpose

· Buy property for $100K

· Sell property for $100K 20 year later

· Seems like you came out even, but $100K worth less in 20 years (actually have loss

o Income Tax vs. Consumption Tax

§ Possibly base tax on consumption rather than income

· Taxed on what they took out of the pot rather than what they put in it

· Taxed on wealth they consume not on the wealth they created

§ Example: Basic IRA

· Amount saved is tax deductible

· IRA grows over time (income), but not taxed

· Amount consumed or used from IRA is taxed (consumption)

· Rate Structures

o Progressive Income Tax

§ Tax rises as income rises

§ Not just greater amount of money taxed ($100K vs $25K)

§ But also greater percentage of the income ($100K at 28%, $25K at 15%)

o Marginal Rates

§ Increases in tax rates apply to the increment in income

§ Example

· 15% on first $20K

· 25% on income over $20K

· Person making $30K would pay 15% on $20K ($3K), and 25% on $10K ($2500)

§ Important for tax planning

· General Process (Ordinary Income)

o 1) Identify Gross Income

§ All income from any source

o 2) Subtract Exclusions/Deductions (“Above the Line”)

§ Items that are, by definition in Tax Code, not included in gross income

§ Generally non-personal expenditures

§ Expenses related to Trade or Business

§ Alimony payments

§ Moving expenses

o 3) Result is Adjusted Gross Income

o 4) Subtract Personal Allowances (“Below

unt, for each person in the house

o Itemized Deduction

§ For persons who qualify by having deductions that add up to amount more than the standard deduction

§ Taxable Income

· Amount of income subject to tax

o Gross Income – Deductions à Adjusted Gross Income

o Adjusted Gross Income – Allowances à Taxable Income

§ Allowances = Personal Exemptions + Personal Deductions (standard/itemized)

· Adjusted Gross Income – Personal Exemption(s) – Personal Deductions (standard or itemized)

· Income subject to tax at two rates

o Ordinary Income: Marginal Rate

o Capital Gains: Lower Rate

§ Tax Due

· Determined by applying the taxable income amount to the marginal tax rate table

§ Tax Credits

· Credits are used to offset the taxes due

o Subtracted from Taxes Due

o Direct dollar for dollar reduction of tax owed

· Examples

o Money already paid to gov’t through employer withholdings

· If credit is less than tax due

o Owe money

· If credit is more than tax due

o Refund

o Capital Gain

§ Defined

· Essentially corporate earnings or other profits dispersed to individual

§ How to get it

· Capital gain or loss is gain or loss from sale or exchange of capital asset

§ Capital Asset

· Broad definition of “property” but subject to exceptions (few)

§ Capital Gain or Loss

· Buying capital asset then selling later for higher (gain) or lower (loss) amount