Accy 312 Midterm #1

Chapter 1

Measuring Tax Rates

• Marginal (MTR): tax rate that applies to next add. increment of taxable income

• Ex: 9075⇒9076 = 10 to 15% for add. $1

• Average (ATR): taxpayer’s avg. level of taxation on each $1 of taxable income (TOTAL BASE/TAX INC)

• Municipal Bonds: tax exempt b/c interest return is low

• Ex: Tim earns $75K in taxable income & $10K interest from investment in City of Waterloo bonds

• Federal tax owed: 5081.25+.25(75000-36900)=14606.25

• ATR= 14606.25/75000=19.46%

• ETR=14606.25/85000=17.18%

• MTR= 25%

Chapter 3

• Gross Income

o Unless otherwise stated, gross income is ALL income from whatever source

• Compensation, gains from prop., interest, rents, dividends, alimony

o US tax laws use all-inclusive income concept

• Realized Income-measureable change in prop right; included in GI unless excl. or deferred

• Ex: receiving firm offer, $60K not realized (so not recog.)

• Recognized Income-reported on tax return

• Excluded Income- never included in taxable income

• Ex: municipal bonds

• Deferred income- included in next tax year

• Ex: Unrealized gain on stock GI only if you sell stock

• Deductions for Individuals Taxpayers

o FOR AGI (“Above the Line”) - 1040

• Deducted in determining AGI

• Reduced taxable income $1 for $1

• Ex: moving, educator expenses

o FROM AGI (“Below the Line”) – Schedule A

• Deducted from AGI to determine taxable income

• Greater of standard ded. or itemized ded.

• Itemized: medical, taxes, interest, charity contrib.

• Personal & Dependency exemptions

• AGI

o Basis for computing % limitations on certain itemized ded.

• Standard Deduction (sum of two components)

o Basic: amount based on taxpayer’s filing status

o Additional: Age 65 or older and/or blind (2 for both)

• Amount depend on filing status

o Limitations (“gift from Congress”)

• Can’t use std. ded.

• MFS, when either spouse itemizes deductions

• Nonresident aliens

• Individual filing return of tax year or ½ year/temp absc....