Intro 2 Fed Tax: Sys. & Eq. 4 Paying Tax
Fed Tax Sys.
- Vertical equity based on ability 2 pay
- Hz'al equity based on similar tax 4 similar sit.'ed people
- Internal eff. 4 tax sys. 2 min. enforcing & complying
- External eff. so people not distort behav. by tax
- Noncyclical Tax Sys.
- Reliance Int. Protected
- Tax 2 Raise $
- Income Tax
- Def'ed as consumption + / - change in net worth over given
per. of X
- Arg. not save enough w/income tax b/c tax int. but
- Result oriented savers save regardless of int.
- Focus on last $ & may need high int. rate 2 cause save
- Tax only 1 factor in rate of return
- Can't know ideal mix of consume v. saving
- Wealthy not care
- Consumption Tax
- Taxed on spent / consumed $
- Value added tax
- Indiv. consumption where consumption = income - savings, incl'ing
consumption other than visible income
- Arg. save more but
- May need higher tax rate 2 get same tax amt
- Part Income & Consumption Tax Sys. Now
- Rate Structure
- Prog. Tax
- Arg. shouldn't redist. mkt dist. but
- Mkt not reward merit consistently so govt should
- Arg. discourage people from working but
- People work 4 other values than $
- Low income earners try 2 earn as much $
- Shouldn't B 2 high b/c interfere w/indiv. dec. & incr.
- Arg. 2 have prog. tax
- Tax based on ability 2 pay
- Marginal utility of $ higher 4 low income earner
- Lots of reg. tax in sys.
- Flat Rate
- Three Sources of Tax Making
- Orig. from House of Rep. then 2 Sen.
- After committees, debates, & vote then Pres. can sign
- Official interp. of stt. so lots of wt.
- Priv. letter ruling 4 indiv. quest's
- Gen. counsel memo 4 commonly asked quest.'s
- Technical advice memo binding IRS only 4 that case
- Revenue proced's
- Revenue ruling
- What IRS thinks means so given wt.
- Leg. reg. where Sec. of Treas. promulgate reg. 2 interp. rule
so more wt.
- T (taxpayer) can appeal 2 IRS then 2 ct
- T has b/p in civil cases, not IRS
- IRS has b/p beyond rsbl doubt in crim. cases
- US Tax Ct
- Not pay tax & litig.
- No jury trial & IRS rep. itself
- Can appeal 2 ct of appeals
- IRS loses
- Can not appeal & prod. acquiesce in dec. doc.
- Can appeal & prod. nonacquiesce
- Dist. Ct
- Pay tax & litig.
- Jury trial
- Appeal 2 ct of appeals
- Ct of Claims in Wash.
- Pay tax & litig.
- No jury trial
- Appeal 2 spec. Ct of Appeals in Fed. Cir.
- Expert judges
- X Value of Tax
- Adv. 2 Defer Tax 4 Pension Plan
- Er contrib's 2 pension plan & nobody pays tax on in. until
- Tax deferral is int. free loan from govt
- Acct'ing Method
- When get $, income
- Constructive receipt is exception so if could've gotten $
last yr., taxed by last yr.
- When do something, not when get paid report
- Ethical Duty 2 Act Fairly 2 IRS by Tax Atty
- Duty not 2 take wrong position even if good faith
- Range of stand.'s
- ABA orig'ly wanted rsbl 4 good faith belief then no need 2
- IRC 6694 penalty where rsbl possibility so advise client &
- Circular 230 where need rsbl possibility but if not, discl.
- Unethical 2 advise 2 break law
- Dispute Rsln
- As long as rsbl& plausible arg.
- Writing Opinions & Asking 4 IRS Rulings
- Spec. rules when atty write opinion 4 tax shelter
- Gross Income (GI) - Deductions = Adj'ed Gross Income (AGI)
- Itemized / Stand. Deduction - Pers'al Exemption = Taxable Income
- Not in the equation 4 calc. income
- Could B stt'ry / C/L
- Listed In § 61
- Incl's wages, int., alimony, busi. income, etc.
- Incl's annuity K
- Above the Line Deduction 4 AGI
- Listed in § 62
- Busi. expense gen'ly 2 calc. GI
- Incl's IRA deductions, moving, self empl., etc.
- Itemized Deduction v. Stand. Deduction
- Take Higher of Itemized / Stand. Deduction by § 63
- Stand. Deduction § 63)c
- Married then $5k ($5,000)
- Head of household $4,400
- Single $3k
- Married & sep. $2,500
- Blind, take $600 by § 63)f
- Can get $750 4 unmarried
- Higher if more than 65 yrs. old
- Indiv. misc. itemized deduction of § 67 only if more
than 2% of AGI
- Busi. ee expense is imp. if large
- Med. if more than 7.5% of AGI
- State tax, etc., mortgage int., charity, & casualty losses
- Reduced if more than $100k by § 68 by lesser of
- Three % of excess AGI /
- Eighty % of amt of itemized deduction otherwise allowable
- Pers'al Exemption 4 TI
- Def'ed in § 151
- Pers'al deduction 4 self & dep. of $2k
- Dep's incl. ch., steps, sibling, parents, etc. & indiv.
w/princ. place of abode @ T's home & is member of household
by § 152
- If being member of household viol. local law, not member by
- Earn less than exemption amt /
- Is 19 yrs. old / in school & is less than 24 yrs. old
- Multiple Support Agmt § 152)c
- If people contrib. less than 1/2 2 support, then dec. among
who gets exemption
- Pers'al Deduction 4 Married
- If file jt'ly, then T is both spouse & self so both get
it by § 151)b
- Phaseout by § 151)d)3
- Reduces exemption by 2% 4 each $2,500 that T's AGI exceeds
threshold amt but not exceed 100%
- Tax Rate
- Marginal Tax Rate
- Shown in § 1
- Effective Tax Rate
- Gen'ly look @ AGI
- Marriage Tax
- All married couple w/ = amt should pay same tax
- Change in marital status shouldn't make dif.
- Single persons should pay same as married
- Marriage Penalty
- Married couple pay more than unmarried couple
- Single person w/same amt pay more than married / unmarried
- Prog. tax sys. creates marriage penalty
- Det'ing When Married by § 7703)a
- Last day of taxable yr.
- Ch's Earning & Income Shifting
- Parent Not Taxed
- Stand. Deduction 4 Dep. § 63)c)5
- Larger of $500 /
- Dep's earned income
- By § 151)d)2, pers'al exemption disallowed 4 dep. if
dep. can claim exemption
- If Ch. Less Than 14 Yrs. Old
- By § 1)g, tax is greater of tax imposed w/o regard 2
this sub§ /
- Sum of TI of ch. reduced by ch's net unearned income + ch's
share of allocable parental tax
- Too complex so not have 2 report
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Law School Notes
December 8, 1997
Ms. Haeji Hong