Resultant Value of the Taxable Assets, Property, and Income - Essay Example

TOPIC TAX ACCOUNTING What is the definition of tax base and how it affects the amount of tax levied? The resultant value of the taxable assets, property, and income within a definite geographic area. It determines what is being taxed, or the activity that tolerates the burden of the tax. An assessment of the tax base is of particular importance in certain municipal bond issues secured by tax revenues. Explain what is meant by regressive tax. Why the social security tax is considered a regressive tax? Regressive tax is a tax levied in such a way that as the amount subject to taxation increases the tax rate decreases. In other words, a regressive tax asserts a greater burden on the poor than on the wealthy people — there is an inverse relationship between the tax rate and the ability of tax payer to pay as measured by consumption, assets, or income. The Social Security tax is relative until the taxpayer reaches the maximum level of income. However, when the taxpayers income arrives at the maximum limit, all income earned over the limit is not taxed. That is why social security tax is considered as a regressive tax because lower-income individual has to pay higher taxes than the person earning in excess of the maximum income level. Define and compare the marginal tax rate and the average tax rate? A marginal tax rate is the tax that applies to the taxpayer’s last dollar of taxable income. As the income increases, taxes paid by the taxpayer also increases and each additional dollar of income is taxed at the highest rate applicable to the total income. A taxpayer’s average tax rate is the ratio of the amount of taxes paid to taxable income. It is calculated by dividing the total income taxes paid by your total income. The average tax rate includes taxes paid at all levels of income so it will be less than the marginal rate. The difference between marginal and average tax rates is that the marginal tax rate is the highest rate at which persons are taxed, but average tax rate represents the percentage of the income that goes toward paying taxes. As gross income increases, the increasing marginal tax decreases after-tax net income and resulting, the effective average tax rate increases with the rising income. What qualifications are necessary to file as head of household? A person can qualify to file as head of household if he meets all the following requirements: 1. If the person is unmarried or “considered unmarried” on the last day of the year. 2. Person paid more than half the cost of keeping up a home for the year. 3. A “qualifying person” lived with the person who is filing as a head of household, in the home for more than half the year. What are three general tests that a qualifying person must meet to be a dependent of a taxpayer? 1. Dependent Taxpayer Test 2. Joint Return Test 3. Citizen or Resident Test What are the four specific tests necessary to be a qualifying relative of the taxpayer? The four specific tests which are required to be a qualifying relative of the taxpayer: 1. Qualifying Child Test 2. Relationship Test 3. Gross-Income Test 4. Support Test What is multiple support agreement, and what is its purpose? Sometimes no one offers more than half of the support of an individual. Instead more than one person, who is able to take the exception but for the support test who together provide for more than half of the individual’s support. This being the case any single person who currently provides for more than 10% of the individual’s support but only that person singularly, can claim an exemption for that individual. In order to process this exemption, the individual in question must agree and therefore sign an agreement of exemption for that year. Signed statements and records must be kept with the claimants. A multiple support declaration of other related individuals identified as not in compliance to the exemption claim must be fastened to the return of the claimant. Explain how income is recognized under the cash method of accounting? Under the cash method of accounting, income is recognized when the taxpayer receives or beneficially receives cash, services or property. Are there circumstances when income is recognized even when a cash basis taxpayer does not receive cash? Explain. A taxpayer can indirectly receive cash. If a cash basis taxpayer take loan from a bank and on behalf of the taxpayer someone else pays the debt, the taxpayer must record income for the amount of debt repaid by the third party. Another example is interest on certain U.S. Savings Bonds. Even though no cash is received, a taxpayer can vote for to report the interest on the bonds annually. What is meant by the concept of constructive receipt? The income which is available to or in the control of the taxpayer despite of whether the taxpayer prefers to consume the income. For example, income credited to a savings account at year-end is profitably received even if the taxpayer does not pull out it for use. Under what circumstances is a dividend nontaxable to a share holder recipient? When a dividend is made from a business to its shareholders, the dividend is a taxable dividend to the extent of current or accrued profits and earnings of the firm. If it goes beyond E&P, it is non-taxable return of capital to the level of the shareholder’s basis in the stock. The excess amount by which the dividends exceed basis is considered as a capital profit. If there is in excess of the E&P or the firm and the excess is less than the basis of share holders in the stock then the dividend is non-taxable Under what circumstances is a state or local income tax refund in the taxable income of a taxpayer? If a state or local income tax refund is received during the tax year, the refund must generally be included in income if the taxpayer deducted the tax in an earlier year. However, under the tax benefit rule, the taxpayer must only include the refund up to the amount by which the deduction taken for the refunded amount, reduced tax in the earlier year. Due to this rule, a state or local income tax refund may not be entirely taxable if the taxpayer claimed unused tax credits, or was subject to the alternative minimum tax in the earlier year. Congress has chosen to exempt certain income from taxation such as scholarship, gifts, life insurance proceeds, municipal bonds, and employee fringe benefits. Given that one of primary purposes of the IRC is to raise benefits for government, why do you think congress would provide these and other exemptions? One significant reason is to promote or not discourage certain actions by taxpayers. Scholarships often enable individuals to attend school. Taxing the scholarship would, at the margin, discourage individuals from seeking more education. Another reason for an exemption is to not burden taxpayers with undue recordkeeping requirements. An example would be certain employee fringe benefits. List the five types of filing status and briefly explain the requirements for the use of each one? 1. Single 2. Married Filing Jointly 3. Married Filing Separately 4. Head of Household 5. Qualifying Widow(er) With Dependent Child If filing status is single then the return is required if the gross income is more than $5,500. And the age of person is 65 or over, a return is required if the gross income is more than $6,250. If person’s filing status is married and filing joint return then a return is required if the gross income is more than $11,000. If person is married and the age of one spouse is 65 or over and filing joint return then a return is required if their gross income is more than $11,600 and if age of both spouses is 65 or over. A return is required if their gross income is more than $12,200 If you are married filing separate return then a return is required if your gross income is more than $2,500. If the person is a head of household then a return is required if his/her gross income is more than $2,500.If filing head of household and (age 65 or over) then a return is required if the gross income is more than $7,650. If person’s status is qualifying Widow (or widower) with dependent child then a Return is required if your gross income is more than $8,500. If the age of qualifying widow (or widower) is 65 or over then a return is required if the gross income is more than $9,100. In which of the following cases may the taxpayer claim head of household filing status? a) Taxpayer is single and maintains a household that is the principal place of abode of her infant child. Yes b) Taxpayer is single and maintains a household for her and maintains a separate household that is the principal place of abode of her dependent widowed mother. No c) Taxpayer is married from January to October and lived with its spouse from January to May. From June 1 to December 31, taxpayer maintained the household that was the principal place of abode of his married son and daughter in law whom the taxpayer can claim as dependents. Yes d) Same as © except taxpayer lived with his ex-spouse until August and maintained the household from September 1 to the end of the year. Yes Julio and Martina are engaged and are planning to travel to Las Vegas during 2008 Christmas season and get married around the end of the year. In 2008, Julio expects to earn $45,000 and Martina expects to earn $15,000. Their employers have deducted the appropriate amount of withholding from their paychecks throughout the year. Neither Julio nor Martina has any itemized deductions. They are trying to decide whether they should get married on December 31, 2008, or on January 1, 2009. What do you recommend? Explain your answer. They should get married on December 31, 2008 because if they do not get married on the advised date they will fall in to single filing status and thus being entitled to a higher tax brackets than by getting married and filing jointly. Filing jointly offers them excessive tax benefits when compared to single filing status. Determine the amount of the taxable income that should be reported by a cash basis taxpayer in 2008 in each of the following independent cases. a) A taxpayer completes $500 of accounting services in December 2008 for a client who pays for the accounting work in January 2009. b) A taxpayer is in the business of renting computers on short term basis. On December 1, 2008, she rents a computer for a $200 rental fee and receives a $500 deposit. The customer returns the computer and is refunded the deposit on December 20, 2008. c) A same fact as (b) except the computer is returned on January 5, 2009. d) On December 18, 2008, a landlord rents an apartment for $700 per month and collects the first and last month’s rent up front. It is customary that tenants apply the deposit to their last month’s rent upon moving out. e) An accountant agrees to perform $500 of tax services for an auto mechanic who has agreed to perform repairs on the car of the wife of the accountant. The mechanic repairs the car in December 2008 and the accountant starts and completes the tax work in March 2009 a) No taxable income in 2008. It is taxable in 2009 when received. b) Taxable income is $200 in 2008. c) Taxable income is $200 in 2008. d) Taxable income is $1,400 in 2008. Here, the deposit is actually the equivalent of the last month’s rent and is normally applied to rent otherwise due. The landlord is, effectively, collecting two month’s rent at the time of move in and must record income in that amount. e) The mechanic would have $500 of taxable income in 2008 and accountant would have taxable income of $500 in 2008 A taxpayer who purchases a Series EE U.S. Savings Bond must report the interest income (i.e., increase in value) on the bond on the date the bond is redeemed or the taxpayer can elect to report the interest currently in income. Under what circumstances should a taxpayer report income at maturity? Under what circumstances is it more advantageous to report income currently? If the marginal tax rate of the taxpayer will be higher when the bonds mature, it is more advantageous to report the income currently (at the lower rates) rather than at maturity (at the higher rates). Care should be taken, however. If the taxpayer will be receiving Social Security income when the bonds mature, the taxable interest might cause Social Security benefits to become taxable, thus eliminating the benefits of the lower future tax rates. From a record keeping perspective, it is easier to report the income all at once rather than a little bit each year. Alternatively, by paying the tax in small increments, the entire bond proceeds will not be taxed on maturity. Sean, who is single, received Social Security benefits of $8,000, dividend income of $13,000, and interest income of $2,000. Except as noted, those income items are reasonably consistent from year to year. At the end of 2008, Sean is considering selling stock which would result in an immediate gain of $10,000, a reduction in future dividends of $1,000 and an increase in future interest income of $1,500. He has asked you for advice. What course of action do you recommend? If Sean does not sell the stock, his adjusted gross income will be $15,000. Note that none of his Social Security benefits are taxed. If Sean sells the stock, a portion of his Social Security benefits would be taxed in 2008. His provisional income would be: Dividend income…………………………. $ 13,000 Interest income…………………………… 2,000 Gain on sale of stock……………………... 10,000 One-half Social Security benefits………... 4,000 ----------- Provisional income………………. $ 29,000 ======= Because his provisional income exceeds the lower limit, his Social Security benefits will be taxed to the extent of the lesser of (a) 50% of the benefits or (b) 50% of the excess of provisional income over $25,000. In this case, the taxable amount would be $2,000. Thus, because the stock sale would push Sean over the provisional income limitation, a portion of his Social Security benefits would be taxed. If the sale were not made, none of the Social Security benefits would be taxed. Since this sale opportunity is at the end of the year, Sean should consider selling half the stock in 2008 and the other half on the first available trade date in 2009. By doing this, Sean would record a $5,000 gain in 2008, which would not cause any Social Security benefits to be taxed because his provisional income would be exactly $25,000. In 2009, if his Social Security benefits remained at $8,000, his dividend income was exactly $12,000 ($13,000 - $1,000), and his interest income was exactly $3,500 ($2,000 + $1,500), then the taxable Social Security benefits would be $250 (you may find it instructive to perform this calculation yourself). By taking this approach, Sean’s taxable income would be $1,750 lower over the two years compared to taking the entire gain in 2008. Reference: Discussion Forum Index. TaxAlmanac, A free Online Resource for Tax Professionals. 9 Mar. 2009 < http://www.taxalmanac.org/index.php/Discussion_Forum_Index> Read More