Taxable and Non-Taxable Income - Assignment Example

Name Student Id Lecturer’s Name Date Taxation refers to an assessment by the government of property value, estates and transactions of a deceased person, licenses granting income or a right, as well as import duties from all foreign countries. Taxation covers and includes all what a government imposes upon an individual, and this is aimed at serving or for service of the state. Taxes are divided into two classes: indirect taxes and direct taxes. Laws and policies that direct the process of tax, together with rules, are covered by the tax law1. These factors of the tax process involve charges on transactions, estates, income, property, licenses and more, by the government. The tax law and taxation includes also duties on imports from all foreign countries, as well as all levies which are compulsory and imposed by the government on individuals, and this is done for the advantage of the state. The complex tax law body covers tax payment to a minimum of four government ranks, and this can be either indirectly or even directly. Direct taxes are the ones paid to the government directly. These taxes are imposed on things like personal property, income and real property. Indirect taxes are those taxes assessed against services and products meant for consumption, but instead, they are paid to an intermediary. For instance, when a customer buys goods like milk at a local store, the seller or retailer charges a person tax on the milk, and this tax is subsequently paid to the government by the retailer2. There is an endless list of things that are involved in creating and enforcing tax laws, also collecting tax revenues. These entities vary from the level of the local government like cities, municipalities, districts, townships, counties, regional as well as state to federal levels. These include transit districts, agencies, schools and utility companies. The field of tax law is extremely complex, and it is in persistent flux, largely as a result of two reasons. One reason is that the tax code has increasingly been used for the objectives instead of being used to raise revenue like meeting social, economic and political agendas. The other reason for constant flux is the mode in which amending the tax code is done3. The internal revenue service is in charge of administering the federal tax law. The tax law for local government and state is contained in administrative codes, code sections, regulations; procedures as well as statements issued by state court decisions, as well as the respective government authorities. The attorneys of tax play many essential roles in the complicated arena of tax law. They represent people in the various stages that are involved in tax disputes like the ones from the revenue department, tax court, administrative appeals, and they also represent their clients in the Supreme Court. The tax lawyers are also invaluable while helping clients navigate the complex and bewildering laws in the area of tax law practice. Taxable and non- taxable income Income can be received in form of property, services or money. It is not all income that is taxed; therefore, there is taxable and non – taxable income. In most cases, any amount included in a person’s income is taxed, unless the law states otherwise and specifically exempts it. Taxed income is reported on a person’s returns, and is subjected to taxation. Non- taxable income is not shown on a person’s returns, or may be shown, but it is not taxed. Taxation is normally done on an income that is available to a person irrespective of whether it is in a person’s possession. For example, a valid check made available to a person, or received before a tax year ends, is seen as income received constructively in that year, irrespective of whether the person will cash or deposit it during the following tax year4. Income received by an agent on behalf of a client is considered constructively as income received on the year the agent received it. Prepaid income like compensating for future services is normally include in a person’s income in the yea a person received it. However, in case an accrual method of accounting is used by a person, there is a possibility of deferring the prepaid income that a person receives for services yet to be performed, before the following tax year ends. In such a case, a person includes the income in his or her income as it is earned by performing services. Other types of income include; employee compensation. Child care providers, baby-sitting, fridge benefits, business and investment income, rents from property that is personal property, partnership income, partner’s distributive shares, personal returns, S corporation income, S corporation returns, royalties, as well as bartering. The amount of income a person earns determines how much one owes the federal and state revenue taxes. Tax return preparation helps one to comprehend how tax law evaluates a person’s income. First and foremost one is supposed to determine their filing status. If a person is married the best alternative is always to file jointly. If a person files their taxes jointly with their spouse, one is obliged to sum up all of their taxes jointly. Even if one is married, though, one can decide to file their taxes separately. When a person files their taxes separately, it therefore means that each one sums up their income and one pay their taxes separately. One has to divide up their deductions, and understand that in order for both of them to calculate amount of their separate deductions they can’t use same amount of expenses. In some states they have property laws that necessitate married couples who separately files returns to pool all their income and expenses and later split both the revenues and expenditures equally when it comes to returns. The states that practice such property laws are referred to as the community property states. If a person is not married one is required to file the taxes as single. Single people in some cases may file the taxes as head of household for taxes purposes as well as those who are considered unmarried. The law of the state requires a person to report entirely all of their revenues. This comprises all of one’s interest, side income and other revenue including what one may have received from salaries and tips. A person’s income is largely classified as either: Earned income: This is the income that one receives from day to day ventures such as remuneration, tips, earnings and business income. One is also supposed to report foreign income that one earns, however if one is able to meet certain requirements, one may be able to omit the foreign income from taxable income. However alimony is most cases is not considered earned income. Unearned income: This is the income that one receives even though one hasn’t done any active involvement in order to earn it. This largely includes income that one receives from dividends, gambling, interest, social security benefits, debt forgiveness, unemployment benefits, selling investments and retirement account distributions. Real estate’s income as well as the revenue that one receives from business ownership even though one is not involved actively in running a business is also considered unearned income5. Persons total gross revenue is determined by summing up all kinds of revenues that one have received in course of the tax year. If a person instead files taxes separately, one shall therefore need to be extra careful about sharing up the revenue between the person and their spouse. One requires to substantiate whose name is to appear on which assets, and divide up the revenue accordingly. If a person resides in a community property state, different laws apply and each one may have to report 50% of the revenue. A person will also require good records sharing up deductions, since both of them shall not be in a position to use similar expenditures when one is calculating deductions. Once a person reports all of their revenue, they will then have a chance to adjust it. A person can reduce their revenue with the assistance of contributions to skilled health savings, self-employments deductions, student’s loans and other expenses. After adding up all these one is able to get total adjustments. The Adjusted Gross Income (AGI) of a person income is therefore calculated by deducting the adjustments from the person’s total income6. A person’s AGI is mainly the starting point in obtaining taxable income. Taxable income is obtained by deducting certain deductions from the persons AGI. The taxable income is therefore the amount that is used to determine how much a person owes the federal or state in taxes. Usually the biggest deductions taken are the standard deduction, personal exemptions, or itemized deductions. After figuring out the person tax, one may therefore be entitled to certain credits that bring down tax liability such as education credits. It is therefore possible to go through the calculations more than one occasion in order to conclude on what would be the lowest domestic tax liability. Check the numbers for married filling also for separate filing and get the one that will lead to lesser money paid in total taxes. To calculate taxable income there is need to less all deductions and allowances that will be exempted from the gross adjusted income. Taxable income is the gross income that one has less deductions, exemptions and money owed to others. It is classified as earned and unearned income. These include salaries, commissions, fees, tips and all other fringe benefits one receives for services. There is also inclusion of other income items such as dividends, interests, capital gains, and other incomes earned from investments. This means that any amount that an individual earns as income should be included in determining taxable income. The first point in determining the taxable income is the calculation of the gross profit which is the summation of all the money earned by an individual. The gross income comprises of the earned income which is the money directly received for services or trading this means that the individual is actively involved in realizing the income. The earned income is earned in a dormant way where the individual is not necessarily involved in realization of the income. Gross Income = Earned income + unearned income Amount in Dollars Payment for the show 28, 000 Payment for column ( 46 weeks *2* 1500) 138,000 Business earnings 280, 000 Total earned income 446, 000 Unearned Income Interest Australian bank 4,000 Interest US bank 1,800 Dividends from BHP 150 Dividends from Telstra 100 Profit from sale of block 5,000 Total unearned income 11,050 Total Gross Income 457,050 Adjustable gross income=Gross income less (deductions + exemptions) exemptions Health Scheme Payment 2,400 Loan payment interest 865 Total exemptions 3,265 Deductions electricity 250 Telephone 400 Newspapers 1,550 Stationary 150 Vehicle expenses 450 Travel expenses 2,500 Mothers medical expenses 2,000 Total deductions 7,300 Exemptions + deductions 10,565 Taxable income 446,485 The government works to ensure there is no double taxation on any citizen because the tax system is fair and just. The taxable income amount that can be subjected to a tax by the government and it is determined from the adjusted gross income because gross income cannot reflect the actual earnings of an individual because there are expenses involved. This means that gross income will lead to double taxation and even lead individuals to negative incomes because of high taxations. Therefore, to avoid this any expenses and other outward payments are deducted so as to lower the taxable income. The taxable income, therefore, can be said to be adjusted gross revenue less exemptions and revenues. This means that every item that is included in the income statement is either income earned by actively participation in its realization or unearned that is the rewards from other sources such as interest on savings and dividends. The income is the reduced by applying exemptions and deductions. The tax system also does not include any items that have credit attached to it because it is not fully owned by the individual incurring the tax7. 2. Determining the net amount of income tax payable by Jess in the financial year 2012/2013 Income tax payable can be defined as an account of liabilities owned by an individual or corporations in their financial statements and balance sheets. The accounts comprises the amount the individuals must pay to the government as taxes to enable the government to have the finances to operates its day to day running of their business. The taxable income is determined by applying a standard rate that is given by the government for a financial year so as to help individuals pay their taxes at any given time during the financial year. The standard rate is referred as the prevailing tax rate and applies to all individuals and corporations. Individuals calculate their net taxable income by multiplying their taxable income with the tax rate given by the country’s revenue bodies. The amount to be taxed is the tax base and in this case it is the adjustable gross income (AGI). The net taxable income in Australia is given by range of incomes that determine what amount an individual will pay as tax. This is to cater for all ranges of income from all the citizens’ so as to widen the government’s tax base. In Australia any income that is $ 180, 001 is taxed $ 54, 547 and any amount above $ 180,001 is taxed 45 cents for every dollar. Therefore, Jess’s net amount of taxable income will be as follows; Net Amount of taxable income = $ 54, 547 + (45 cents * any dollar above 180, 001). The amount above $ 180, 001 = 448485- $ 180, 001 = $ 268, 484. Therefore, 45/100*268484 = $ 120, 817 The net amount of taxable income = $ 54, 547 + $ 120, 817 = $ 175, 364. Therefore, Jess will have to pay a tax of $ 175, 364 to the revenue body. In conclusion, tax system is very complicated and, therefore, citizens should seek guidance from tax specialist so as to avoid doing the wrong things in the making decisions related to taxation. The citizens should also understand the tax systems and respect the tax law and pay the required taxes to the government to enable the government provide the necessary services with the revenue earned from taxes. The government should also strengthen its tax system to ensure there are no individuals avoiding paying tax and yet they do not qualify to be exempted from paying taxes. The principles of exemption and deduction should also be applied where necessary so as to ensure that no one is taxed unfairly. There should be also strong values that should guard against misuse of these principles to an extent that people avoid paying taxes. In relation to this case Jess has presented some of the items that are to exempted while calculating taxable income, but there those also she has presented that do not qualify to be deducted or exempted from the calculations. The gross income is the starting point of the taxable calculation and continues to subtracting exemptions and deductions. Bibliography Lehman, Coleman, Taxation Law In Australia. (Thomson Reuters, 2001). Parsons, Richard, Income Taxation in Australia: Principles of Income, Deductility and Tax Counting. (Thomson Reuters, 2011). Read More