Income Tax Base and Rates

Principles of Sound Tax Policy Adequacy Neutrality Fair or equitable Horizontal Vertical Ease of Administration and Compliance Accountability Administration and enforcement should be efficient and fair Government must enforce the laws Open, transparent tax policy

Tax Base and Rates Tax rates Computation Statutory Effective Computation Average Effective Average Marginal Tax classifications based on average tax rates relative to gross income Regressive Proportional or flat Progressive

Overview of Tax Calculations on 1040 Form Income Adjusted Gross Income Tax and Credits Other Taxes Payments Refunds Amount You Owe

Income Wages, salaries, tips, etc. Taxable interest Ordinary dividends Alimony Business income Capital gains Unemployment compensation Social security benefits

Excluded Forms of Money Income Interest earnings on municipal bonds. Employer contributions to benefit plans, e.g. medical/dental/vision insurance. Contributions to retirement savings plans, e.g. pension contributions, IRA contributions, KEOGH contributions.

Adjusted Gross Income Educator expenses Health savings account Moving expenses Penalty on early withdrawal of savings Alimony paid IRA deduction Student loan interest Tuition and fees

Taxable Income and Tax From AGI Subtract itemized or standard deductions Subtract exemptions Apply tax rates

Credits Foreign tax credit Child and dependent care Education credit Retirement savings contributions credit Child tax credit Residential energy credits

Deductions are permitted for: Medical and dental care--expenditures in excess of 7.5% of AGI may be deducted Taxes paid, including state and local income taxes, real estate taxes, and personal property taxes (sales tax ?) Interest paid, including home mortgage interest and investment interest Gifts to charity, including cash gifts and other than cash gifts Casualty or theft loss Job expenses, including un-reimbursed employee expenses, job travel, union dues, and job educational expenses Other miscellaneous expenses (including tax preparation fees

Appropriate Deductions? A rabbi claimed as a business expense the $4,031 he spent on 700 guests who attended his son’s bar mitzvah. Tax court found the Rabbi “was not required to invite the entire…congregation…as a condition of his employment.” Appropriate Deductions?

Appropriate Deductions? The entertainer Dinah Shore claimed several dresses as business expenses, prompting an investigation by the IRS. “Dinah Shore ruling”: A dress may be deducted as a business expense only if it is too tight to sit in.

Appropriate Deductions? A man tried to deduct $30,000 in expenses on illegal drugs. Allowed to claim deductions, he was sentenced for criminal charges.

Appropriate Deductions? Many OECD countries have traditionally allowed/ treated foreign bribes as business expenses.

Income Tax Rate Structures The U.S. income tax has a progressive rate structure. Current tax rates range from 10% to 39.6%. Table of personal income tax brackets

Filing Status: Single

Filing Status: Married Filing Jointly

Filing Status: Married Filing Separately

Filing Status: Head of Household