Chapter 1. Introduction to Taxation, the Income Tax Formula, and Form 1040EZ “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.” -- Franklin D. Roosevelt. LO #1 Understand progressive, proportional, and regressive tax structures.
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Introduction to Taxation, the Income Tax Formula, and Form 1040EZ
“Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”
-- Franklin D. Roosevelt
1. The three types of tax rate structures are ________, _________, and _________.
Progressive, proportional, and regressive
2. The tax rate structure for which the tax rate remains the same for all levels of the tax base is the __________ rate structure.
3. The federal income tax system is an example of a ________ tax structure.
Total tax / taxable income = average tax rate
− Permitted Deductions from Income
= Taxable Income
× Appropriate Tax Rates
= Tax Liability
− Tax Payments and Tax Credits
= Tax Refund or Tax Due with Return
1. The marginal tax rate is the rate of tax imposed on the next dollar of taxable income.
2. What is the marginal tax rate for a married couple with taxable income of $64,510?
3. Average tax rate and marginal tax rate mean the same thing.
4. Complex tax returns do not follow the basic (or simplified) income tax formula.
1. Almost all taxpayers can file a Form 1040EZ.
2. Max, who is 74 years old and single, is eligible to file Form 1040EZ if his taxable income is under $100,000.
3. Erma, a 28-year-old single taxpayer with no dependents, has wage income of $40,000. She is eligible to file a Form 1040EZ.
1. There are only three types of income that can be reported on a Form 1040EZ.
Wages, unemployment comp., interest
2. Unemployment compensation is reported to the taxpayer on a Form ______.
3. To be able to use a Form 1040EZ, a taxpayer must either be filing status _______ or filing status __________.
Married filing jointly or single
1. Taxpayers eligible to use Form 1040EZ must calculate their tax liability using the tax tables.
2. Refer to the tax tables. What is the tax liability of a married couple with taxable income of $89,262?
3. Using the tax rate schedules in Table 1-2, determine the tax liability (to the nearest penny) for a married couple with taxable income of $89,262.
1. Taxpayers pay all of their tax liability when they file their tax returns.
2. Bret’s tax liability is $15,759. His employer withheld $16,367 from his wages. When Bret files his tax return, will he be required to pay or will he get a refund? What will be the amount?
3. An Earned Income Credit will increase the amount of tax liability.
1. The committee charged considering tax legislation in the House of Representatives is called the ________________ Committee.
Ways and Means
2. The most commonly relied-on statutory authority is _________________.
The Internal Revenue Code
3. All tax legislation must pass both the House of Representatives and the Senate and be signed by the president of the United States in order to become law.
1. Administrative tax authority takes precedence over statutory tax authority.
2. IRS Revenue Procedures are applicable only to the taxpayer to whom it is issued.
3. The administrative tax authority with the most strength of authority is_______.
IRS Treasury Regulations
1. The U.S. Supreme Court does not accept appeals of tax cases.
2. A taxpayer who does not agree with an assessment of tax by the IRS has no recourse.
3. A taxpayer who does not want to pay the tax assessed by the IRS prior to filing a legal proceeding must use the ___________ Court.