Welcome to Income Tax I  Professor Aprill  Office in Dean’s Suite  Phone:   Availability: most days if not in meetings

Policies (Handouts p. 10)  You will be put “on call.”

Policies  You will have 5 “opt outs”

Texts, etc. (Handouts p. 1)

You will get the most out of class if you prepare AND review. ( Handouts p. 12)

Lottery example

Issues raised by lottery example (Handouts p. 16)  Who  What about losers  How much  Ways to reduce  When  Variations

Einstein thought tax was too hard.

Holmes said taxes are what we pay for a civilized society.

Criteria – Horizontal Equity (Handouts p. 15)  Treat those similarly situated in the same way

Criteria – Vertical Equity  Those who are not similarly situated should not be treated in the same way.

Criteria - Efficiency  Tax should interfere as little as possible with people’s economic behavior.

Criteria - Administrability  The simpler and more objective the system, the better.

Progressivity says those who are better off should pay at a higher rate 10% on income from $1 to $10,00 20% on income from $10,001 to $50,000 30% on taxable income from $50,001 to $100,000 35% on all taxable income above $100,000

Marginal rate is used to make decisions and understand impact of taxes. (Handouts p. 17) 10% on income from $1 to $10,00 20% on income from $10,001 to $50,000 30% on taxable income from $50,001 to $100,000 35% on all taxable income above $100,000

Credit vs. Deduction Energy Conservation Example (Handouts p. 18)

Credits reduce taxes.

Deductions reduce taxable income.

Think in terms of after- tax income (Handouts p. 17)

Tax expenditure budget lists tax laws that encourage or discourage behavior.

Deductibility of mortgage interest is one of the largest at $87.7 billion for 2007.

Employer provided medical insurance and medical care comes in at $100.2 billion in 2007.

Employer-provided pensions are listed at $ billion.

To raise revenue for government, we rely on an income tax.

As a society, we have decided that an income tax best measures ability to pay.

Some argue for a sales tax or other form of consumption tax.

Imputed income complicates an income tax.

Fringe benefits complicate income tax.

Realization complicates income tax.

Deductions complicate income tax.

Capital gains complicate income tax.

Gross Up: Divide after-tax amount by 1 minus the tax rate to learn what amount is needed pre-tax. (Handouts p. 19)

Basic Computation (Handouts p. 13)  Gross income  Minus certain deductions  Equals Adjusted Gross Income (AGI)  AGI minus standard or itemized deduction  Equals taxable income

Basic computation con’t  Taxable income multiplied by tax rates  Equals tax before credits  Minus credits  Equals tax due

The IRC has titles, subtitles, chapters, and subchapters as well as sections, subsections, paragraphs, subparagraphs, and clauses.