Taxing System in United States of America

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Distinguish between proportional and progressive taxes

The taxing system involves the proportional and progressive taxes. Proportional taxes are also called flat taxes. Proportional taxes are taxes imposed on low, middle, as well as high income earners almost equally. On the other hand, progressive taxes have less impact on low-income earners and high financial impact on high-income people and businesses.

Proportional Taxes

Also known as flat taxes, proportional taxes assess the same tax rate to everyone that pays taxes, without considering the taxpayer’s income or wealth. Proportional taxes are meant to bring a sense of equality between average tax rate paid and marginal tax rate. This means every taxpayer pays a certain percentage of tax without considering the amount of income earned. For example, a 10% rate is fixed so that it neither increases nor decreases although the income is subject to rise or falls. This means a person with a salary of $20,000 annually shall end up paying $2,000 using a proportional tax while another one with annual salary of $200,000 ends up paying $20,000 in taxes. Classical examples of proportional taxes include gross receipts taxes, per capita taxes, and occupational taxes.

Progressive Taxes

An example of a progressive tax system is the current federal income tax. In this system, the proportion of tax liability is set in a special way so that the tax rises as the income rises. Progressive taxes are set in a way that facilitates the wealthy and high-income earners to offer more taxes than the low and middle class earners. Example of this tax system is the estate taxes that clearly show that the wealthy taxpayers pay greater tax rates than low income and middle class groups.

What is the difference between the Federal income tax on individuals and that imposed on corporations?

Federal Individual Income Tax

This tax is imposed on the income of U.S. citizens as well as resident aliens. The citizens and residents of U.S. are taxed based on worldwide income. On the other hand, nonresidents are taxed based on their income within the jurisdiction. For federal individual income tax, the taxable income is calculated by subtracting allowable deductions minus total income (Thomas and Emmanuel, 2007). Individuals can deduct personal allowance as well as certain personal expenses like state taxes, home mortgage interest, and contribution to charity among others. However, some deductions are limited. Taxpayers assess their income tax by the use of filing tax returns. The set deadline for people to file tax returns is April 15th. The taxing jurisdiction can adjust the tax as determined by taxpayers.

Federal Corporation’s Income Tax

This is tax levied on corporations or analogous legal entities. Most nations impose the federal corporation’s tax at the national level although it is possible to impose it at state as well as local levels. Most countries tax local corporations operating in the country based on income from that country. The company taxable income is calculated just like the calculations of taxable income for individuals. However, some jurisdictions demand that calculations for company’s tax be different from the calculations used to calculate individual tax. Corporate tax is imposed on net profits of the companies. There are exceptions that cannot be taxed such as corporate acts like reorganizations.

List an advantage and a disadvantage of using the U.S. Tax Court as the trial court for Federal tax litigation.

The U.S. Tax Court mainly deals with settling disputes over federal income tax. The U.S. tax Court is not answerable to any branch of government like the executive because it is an independent body (Section 441, 2016). In a district court, the trial is by jury. The U.S. tax court operates differently such that one must not pay the tax before litigating the controversy although this means that interest is due on an unpaid deficiency. The U.S. Tax Court is a very popular forum as most people believe the judges here are experts when it comes to tax matters. The Tax Court has an advantage in that a client need not pay the tax before litigating the controversy. The disadvantage is that there is a chance for delay before the case is decided. In addition, the case is never heard before a jury.

 Where can you locate a published decision of the U.S. Court of Federal Claims?

The federal reporter reports cases laws in U.S. and is published by West Publishing. The federal reporter is part of the National Reporter System and is also the medium where decisions of U.S. Court of Federal Claims are published (Martin, 1999). In addition, the federal reporter also publishes the decisions of U.S. Court of Appeals.

Heather, age 12, lives in the same household with her mother, grandmother, and uncle.  

Who can qualify for the dependency exemption? Who takes preference?

When a child qualifies for exceptions for many persons, only a single individual can have the kid as the qualifying child to take the subsequent benefits such as the child tax credit, exception for the child, and earned income credit. The benefits cannot be shared between people unless there are two different qualifying children. There are tiebreaker rules that determine who has the child as a qualifying child. First, the child’s parent is the first priority and the child acts as the qualifying child to him or her before other parties are considered. Special circumstances that can change the status of the parent as the first priority includes when a parent lives with two people who both apply for the same benefits citing the same child as the qualifying child. In this case, some factors are considered like who has the higher income.

What is the purpose of the constructive receipt doctrine?

The constructive receipt plays a major role when assessing taxpayers. In fact, the constructive receipt mandates a taxpayer with liability for income, even if the income has not been received physically (Samuel, 2007). The receipt ensures taxpayers do not defer tax on income not yet spent. Therefore, the principle of taxing income before the taxpayer receives it is termed as the Doctrine of Constructive Receipt.

Under what circumstances may a taxpayer deduct a rental loss associated with a vacation home?

Taxpayers can claim deductions basing the argument on a primary residence as well as a vacation or a second home. More deductions are available when a person owns a second home although the process requires more effort. For instance, when a person devotes some personal use time, the vacation residence produces major tax savings. The second home’s property tax payments and mortgage interests are tax deductible (J.K. Lasser, 2015).

Edna incurs various legal fees in obtaining a divorce.  What type of expenses associated with the divorce are deductible by Edna and which are not?

One cannot deduct legal fees involved in divorces, alimony, or related expenses (Julian, 2014). The operating rules states that deductions for the cost incurred through obtaining personal advice or counseling are prohibited. Although these expenses are incurred in the process of arriving at a financial settlement, they are nondeductible, a restriction that only the U.S. Supreme Court upholds. This is because the claims by spouses attempting divorce come from the individual’s personal marital relationships as opposed to coming from anyone’s income generating actions.

Hubert, a self-employed taxpayer, is married and has two children. He has asked you to explain the tax and nontax advantages of creating a Health Savings Account (HSA) for him and his family.

The Medicare Modernization Act was signed to law in 2003 by President George W Bush. The Act provided for the formation of tax-free savings vehicle that helps people fund their healthcare expenses. What the administration was shooting for was providing better access to healthcare. The savings were intended to replace MSA’s in providing health coverage via the use of tax-free savings. However, for eligibility, a person had to be covered under HDHP.

What impact does a home equity loan have on taxable income?

Home equity loans provide homeowners with the chance to borrow money by using equity in their homes as leverage. Home- equity loans come with certain interests to be paid. This interest is deductible, which is an advantage to the consumer. Therefore, consumers can get a single payment, tax benefits as well as lower interest rates.

References

J.K. Lasser, (2015). Tax News: Vacation Homes from a Tax Perspective. Retrieved April 31, 2016 from http://www.jklasser.com/news/vacation-homes-from-a-tax-perspective/

Julian, B. (2014). What’s Deductible for Legal Fees When Couples Divorce. HuffpostDivorce. Retrieved April 30, 2016 from http://www.huffingtonpost.com/julian-block/whats-deductible-for-lega_b_4714616.html

Martin, B. (1999). In Defense of Unpublished Opinions 60, Ohio St. L.J., p. 177

Samuel, A, D. (2007). Federal Income Taxation of Individuals: Cases, problems and Material, 353. 2nd ed.

Section 441 of the Protecting Americans from Tax Hikes Act of 2015, Division Q of the Consolidated Appropriations Act. (2016). Signed into Law by President Barrack Obama on December 18, 2015.

Thomas, P., & Emmanuel, S. (2007). How Progressive is the U.S. Federal Tax System? A Historical and International Perceptive. Journal of Economic Perspective 21 (1): 23-24