1. Income Tax Base and Rates

2. 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

3. 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

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

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

6. 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.

7. 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

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

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

10. 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

11. 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?

12. 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.

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

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

15. 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

16. Filing Status: Single

17. Filing Status: Married Filing Jointly

18. Filing Status: Married Filing Separately

19. Filing Status: Head of Household