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Question 2-44 in fundamentals of taxation

Question 2-44 in fundamentals of taxation

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FUNDAMENIAL OF TAXATION A proper analysis of the United States tax system begins with an examination of the tax structue and types of taxes employed in the United States. Knowledge ot historical principles that uided the development ot the system, and investigating the various motivations that uderlie existing provisions of the tax law, will help in understanding the US tax system. This chapter also introduces the various taxable and nontaxaNe Ibusiness enities and provides an overview of tax planning. The Structure of Taxes (Tax Terminology A.Txes have two components tax rate and tax base B. Tax Rates Tax rates can be structured to yicld 1. Proportional tax: Te rate of tax remains constant over the tax base (sales tax) 2. Piogressive tax:Tax rates increase as the tax base grows larger (Federal income, gilt & estate tax) 3. Regressive tax: Tax ates decrease as the tax ase grows larger (Federal employment taxes such as FUTA and HCA) C. Tax Base-Most taxes are levied on one of the following tax bases: Tansactions (including sales and transters ol wealth 2. Property or wealth including real estate taxes and ownership ot propertyj 3. Privileges and rights (including the ability to use the corporate form or to be in certain professions, excise taxes and custom duties) 4. Income (can be on gross or net income). IL. Types of Taxes A. Alter income taxes, transaction taxes usually allt more US taxpayers than any other type of tax. In many countries, transaction taxes are even more important than income taxes. B. services. Examples of transaction taxes inclufe 1. Excise Taxes a. Levied by Federal and state govemments on exchanges of specified commodiies (oil, alcohol, phone service and tobacco) or services b. Excise taxes may be levied on producers, resellers or consumers. c. May have signiticant impact on specitic industries. d. Although excise tax ates are generally proportional, they may vary greally from state to state. 2. Sales and Use Taxes a. Major soues of income for most state and local governments, and cover a broad base of transactions. b. Items subject to tax vary by state, and rat may vary by locality C. The ate is proportional and collected by retailers. 3. Value Added Tax (VAI: a. In many countries around the world, the VAT has gained acceptance as a major soce of revenue b. A VAT is a sales tax levied on t value added at each stage of production. Levied on the sale, consumption, or production of commodities or C. Employment Taxes: As imposed by Federal and state governments, thesetaxes include 1. FICA taxes (Federal Insurance Contributions Act) a. Tax imposed on self-employed individuals, employers, and their employees. Accounts for about 113 of the Federal reventues; only the income tax provides more Federal revenue b. Pioceeds iance retirement Social Security) and medical costs (Medicare) (1) Employee rate is 6.2% tor Social Security (SS) up to S106.800 tor 2009 and 1.45% for Medicare (no ceiling). Total of 7.65% it income is $106.300 or less. Employer matches the contributions. (2) Sell-employed pay the employee and the employer portions. This is 12.4% (2x 6.2%) for SS and 2.9% (2 x 1.45%) lor Medicare. Income limits are the same as lor employees. Thus, a total ol 15.3% il income is $106.800 or less. D. Death Taxes E. Gilt Taxes F. Property Taxes And Others..12:44 AM 令.1.ull 4G 66% Edit 回ㄨ D. Death Taxes E. Gilt Taxes F. Property Taxes And Others Tax Planning Fundamentals: Iegitimate arranging of financial activities that reduces or delers tax costs. within the object and spirit ol the la Iax Evasion: a) Very clear-an act with the intent to deceive b) includes knowingly lailing to repot evenue, or claiming the deduction of a lalse expense, or both. Tax avoidance: a) Circumvents the law to avoid tax, bITransactions that do not rellect the real acts, c) May be regarded as abuse d)Often, dificu to distingish between legitimate tax planning and abusive tax avoidance e)When CRA perceives tax avoidance transactions to be abusive, it will attempt to deny the resuling benelils Types of Tax Planning B The objective of tax planning is to reduce or deler the tax cost. AAI tax planning opportunities into one of three categories: 1. Shitting income trom one time period to another 2. Transfering income to another entity or altenative taxpayer 3. Converting the nature of income trom one type to anothe Restrictions to Tax Planning: 1) Tax planning is divifed between acceptable and unacceptable activities 2) The Act specitically prohibits a number ot activities. Anti Avoidance le: GAAR stipulates: When a person is involved in an avoidance transaction, the tax will adjusted to deny the benelit. Mobile View Tools

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