Copyright © 2013 by M. Ray Gregg. All rights reserved. 2 Introduction to Federal Income Tax.

Copyright © 2013 by M. Ray Gregg. All rights reserved.

2

Introduction to Federal Income Tax


3

Tally your results.


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Consider the Alternative

• How would you like to NOT pay tax?

• What situation would you likely be in if you did not have to pay tax?


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Who Pays Tax?• Individuals

• Corporations

• Estates

• Trusts

Any Surprises?


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Taxpaying Entities

Files a

Tax return?

Entity

PaysTax?

Income

Taxed?

Proprietorship No No Yes!

Partnership Yes No Yes!

Corporation Yes Yes Yes!

1065

1120


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Name as many as you can.


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Types of Taxes• Sales• Excise• Income– Federal– State– Local

• Estate• Gift• Social Security• Unemployment• Personal property• Real property


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Types of Taxes• Sales• Excise• Income

–Federal– State– Local

• Estate• Gift• Social security• Unemployment• Personal property• Real property

This course


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• Proportional

• Progressive

•Regressive


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Tax

Base


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Tax

Base


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Tax

Base


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Marginal Costs• Define from Economics– “Marginal costs are the costs a

company incurs in producing one additional unit of a good.”

Source: http://economics.about.com/cs/economicsglossary/g/marginal_cost.htm

Source: http://en.wikipedia.org/wiki/Marginal_cost

– “In economics and finance, marginal cost is the increase in total cost that arises when the quantity produced (or purchased) increases by one unit.”


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History of Marginal Rates

• For individuals

• For corporations


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U.S. Tax Rates1909 - 1999


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WW I


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Great Depression

Stock Market Crash


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WW II


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Korean War


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Kennedy Tax Cut


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Vietnam War


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Regan Tax Cut


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Marginal Rates 1913 - 2008

http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html


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Regan Tax Cut


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Regan Tax Cut


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Bush Tax Increase


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Bush Tax Cut


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Consider these facts…• For current year

• All Income 140,000

• Exempt Income 25,000

Determine:• Marginal Rate

• Average Rate

• Effective Rate


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All Income 140,000Less: Exempt Income 25,000Sub-total 115,000Exemption 3,900Std Deduction 6,100 10,000Taxable Income 105,000

Tax Calculation:TI 105,000

- Base 87,850 17,150x Mar Rate 0.28

Sub-Total 4,802+ Tax on Base 17,891

Total Tax 22,693

Marginal Rate 28.0%Average Rate 21.6%Effective Rate 16.2%


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- Base 87,850 17,150x Mar Rate 0.28


Total Tax 22,693



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- Base 87,850 17,150x Mar Rate 0.28


Total Tax 22,693


Marginal Rate


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28%


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Tax Taxable Income


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- Base 87,850 17,150x Mar Rate 0.28


Total Tax 22,693



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21.6%


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Tax All Income


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- Base 87,850 17,150x Mar Rate 0.28


Total Tax 22,693



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$22,693 $140,000


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- Base 87,850 17,150x Mar Rate 0.28


Total Tax 22,693



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• Mother-in-law– Turned down raise

• Employees appeal to boss– Boss agrees to raise costing $100,000

• Doctor bills patients near end of yr

• You contribute $1,000 to church

assume 30% tax rate

Copyright © 2013 by M. Ray Gregg. All rights reserved. 2 Introduction to Federal Income Tax.

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Transcript of Copyright © 2013 by M. Ray Gregg. All rights reserved. 2 Introduction to Federal Income Tax.