Question

– Travis and Amy Carter are married and have 2 children • April (age 17), and • Martin (age 18) – Travis is a mining engineer; Amy is a registered nurse – The Carters live only a few blocks from Ernest and Mary Walker, Amy Carter’s parents • The Walkers are retired and live on interest, dividends, and Social Security benefits

– 1. The ad valorem property taxes increased on the Carters’ residence, while those on the Walkers’ residence decreased

– 2. When Travis registers an automobile purchased last year in another state, he is forced to pay a sales tax to his home state

– 3. Gifting a high value item: As an anniversary present, the Carters (the kids) gave the Walkers (the parents) a recreational vehicle (RV)

–4. When Travis made a consulting trip out of state to Chicago, IL the client withheld Illinois state income tax from the payment made to Travis for his services

– 5. Travis employs his children to draft blueprints and prepare scale models for use in his work • Both April and Martin have had training in drafting and topography

– 6. The Carters are audited by the state on an income tax return filed several years ago • Later in the year, they are audited by the IRS on a Form 1040 they filed for the same year • In each case, a tax deficiency and interest were assessed

–7. The Walkers are audited by the IRS • Unlike the Carters, they did not have to deal with an agent but settled the matter by mail

Explain these developments and resolve the issues raised

Answer 1

History of taxation:-

prior to 1900 s income tax financed war

1861 : first federal individual income tax was enacted

repealed after civil war

1984: new federal individual income tax was enacted tax found be unconstitutional

other important events

1909: first federal corporate income tax was enacted

1913: 16th amendment ratified

sanction both federal individual and corporate income tax

individual income tax rate 51%

corporate income taxes 10

social insurance taxes and contributions 35

excise rate 2

other 1

tax base : amount to which tax rate is applied

e. g. for the federal income tax the base is taxable income

tax rate: applied to the tax base to determine tax liability

may be proportional or progressive

incidence of tax : degree to which the tax burden is shared by the tax payers

major type of taxes property tax transaction tax death tax

gift tax

income tax

employment tax

other U. S. Taxes

property ad valorem taxes

based on the value of assets, essentially tax on wealth or capital, generally imposed on realty or personalty

exclusive jurisdiction of states and their local political subdivisions, deductible for federal income tax purposes

why did the walker's taxes decrease while those of carter's increased?

a likely explanation is that one ( or both) of the walkers achieved senior citizen status.

in the case of carter the assessed value of the property probably increased perhaps they made significant home improvements.

when Travis purchased an automobile why did he force to pay sales tax?

general sales taxes currently jurisdiction of state and localities

state that impose sales taxes also charge a use tax on items purchased in other state and used them in their jurisdiction.

states without sales taxes or used taxes alaska, Delaware, Montana, New Hampshire and Oregon

the payment Travis made when he registered the car is probably a used tax

when the car was purchased in another state, likely no sales tax was levied, the current payment makes up for the amount of sales tax he would have paid had the car been purchased in his home state.

gifting a high value item

Tax on the right to transfer assets during a person’s lifetime , applies only to transfers that are not supported by full and adequate consideration.

Taxable gift = FMV of gift less annual exclusion less marital deduction (if applicable)

The value of the RV is not stated, but probably exceeds the annual exclusion allowed (the Walkers) from two donors (the Carters).Thus, a taxable gift results, and a Form 709 (Gift Tax Return) must be filed.Whether any gift tax is due depends on Past taxable gifts the Carters have made, and Amount of their unified transfer tax credit still available.

Made a consulting trip out of state to Chicago

Because the income earned by Travis on his Chicago trip is subject to tax in his home state, he probably will be able to claim an offsetting credit. Whether this negates the double taxation of the same income depends on the amount of credit allowed.

Employment of his childern.

Presuming April and Martin perform meaningful services for Travis, they are legitimate employees. April is not subject to Social Security tax because she is < age 18. However, Martin is age 18 and needs to be covered. Furthermore, Amy Carter is now working and will also be subject to Social Security tax. Travis, as an independent contractor, is subject to self-employment tax

Although the facts do not mention the matter, both Travis and Amy might owe occupation or license fees—Travis for engineering and Amy for nursing.

Carters are audited by the state

The audit of the Walkers by the IRS obviously was a correspondence type. The reason for the audit was probably a minor oversight, such as the omission of some interest or dividend income. The audit of the Carters, however, was more serious—probably a field or office type. Since the Federal audit followed a state audit that was productive (i.e., led to the assessment of a deficiency), there may have been an exchange of information between the two taxing authorities.

Imposition of the use tax when Travis registered the new car is one way a state can preclude the avoidance of its sales tax When gifts between family members are material (e.g., an RV) and exceed the annual exclusion, a gift tax return needs to be filed. Even though no gift tax is due because of the unified transfer tax credit, filing a return starts the running of the statute of limitations.

The Carters must recognize that some of their income is subject to income taxes in two states and take advantage of whatever relief is available to mitigate the result. Employment within and by the family group (e.g., children, other relatives, domestics) has become a priority item in the enforcement of Social Security tax and income tax with holdings. The Carters should be aware of the need to cover their son, Martin Because of the double audit (i.e., both state and Federal) and the deficiency assessed, the Carters need to make sure that future returns do not contain similar errors.Taxpayers with prior deficiencies are among those whose returns may be selected for audit.