This course is the first course in a five-course US Federal Tax Specialization. It covers and focuses on the U.S. federal tax system as it relates to individuals, employees, and sole proprietors. Key concepts covered include gross income and items that are statutorily included or excluded in it, personal and business expenses that qualify as tax deductions, and the differing tax treatments for employees versus self-employed taxpayers. Unlike many other introductory courses in tax and as part of this course’s comprehensive wrap-up, learners will be provided with practical and tangible experience reporting both income and expenses on the main individual tax return used in the US, Form 1040. If you have enjoyed this course, consider enrolling in our online graduate Accounting program. The University of Illinois at Urbana-Champaign, consistently ranked as one of the nation's top three accounting programs, now offers a master’s in accounting at a very affordable tuition rate and is completely online. The iMSA is a full Master of Accountancy program and students graduate with an MS that is highly recognized. Try an open course or two, then apply for admission into the credit-bearing version as you may be eligible to take credit-bearing courses during the application process. If you are missing any prerequisites for the full degree, you can complete Coursera courses to demonstrate readiness and strengthen your application for the iMSA. For more information on this exciting iMSA online program, refer to this link: https://www.coursera.org/degrees/imsa
Types of Taxes
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Del curso dictado por University of Illinois at Urbana-Champaign
Federal Taxation I: Individuals, Employees, and Sole Proprietors
72 calificaciones
University of Illinois at Urbana-Champaign
72 calificaciones
Curso 1 de 5 en SpecializationU.S. Federal Taxation
De la lección
MODULE 1: AN INTRODUCTION TO TAXATION
In this module, you will be introduced to the different kinds of taxes faced by U.S. taxpayers and the U.S. federal income tax structure. The origin of tax law and its constitutionality is discussed along with a brief history of the different changes in rates that have occurred since the 16th amendment was passed. Finally, we will discover the three different sources of new tax laws and rules.
Conoce a los instructores
Matthew HutchensLecturer of Accountancy
Department of Accountancy
Petro Lisowsky, PhD, CPAAssociate Professor of Accountancy
College of Business: Department of Accountancy
Welcome back. There are many types of taxes that exist besides income taxes.
In this video, we'll broadly discuss income taxes,
as well as property taxes,
transaction taxes, death taxes,
gift taxes, employment taxes,
and other types of taxes.
The focus of our course is on income taxes.
So let's just talk a little bit more about them here.
Although we'll focus on federal income taxes imposed at the federal level,
we should also know that most states and some localities also impose income taxes.
For example, New York City, Detroit, Philadelphia,
all apply income taxes on top of
the state income taxes applied by New York State, Michigan, and Pennsylvania.
These income taxes are also generally imposed on individuals,
corporations, and some fiduciaries.
The pay-as-you-go procedures ensure tax collection,
where employers withhold a portion of their employees earnings as they're earned and
remit the employee share of income taxes to the government on the employee's behalf.
Employers also withhold for federal income tax purposes.
If an individual is self-employed, then he or she will
periodically remit estimated tax payments to
the government to prepay the year's tax liability as the income is earned.
Because there's no employer per se to withhold a portion of
the self-employed person's paycheck and remit the taxes to the government on their behalf,
the self-employed person must do it him- or herself.
Some states in fact do not impose an individual income tax.
But to fund their operations,
these states may impose corporate income taxes,
or have higher sales taxes,
or higher property taxes.
So, in all, there is a substantial variation in how
cities and states administer their tax systems.
So how is the individual income tax calculated?
This slide shows the individual income tax formula, which we'll be
using during the course and studying in much more detail.
The income tax formula begins with income that's broadly conceived or broadly defined.
In other words, the government defines income very broadly,
whether it's wages, interest, dividends,
rents, or capital gains;
or even income generated from illegal activities like drug dealing.
All of this income must be reported to the IRS,
unless there are provisions in the Internal Revenue Code that
explicitly allow the income to be excluded.
So this brings us to the next step, to exclusions.
Exclusions are income items that, although they're
technically income and money in a taxpayer's pocket,
Congress has decided not to tax that income for whatever reason.
For example, interest earned on municipal bonds,
that is, interest earned on bonds issued by citizen states,
is not part of the federal income tax base, and thus,
the interest is excluded.
The difference between income broadly conceived and exclusions is gross income.
Gross income is the income subject to tax.
Next, we subtract particular deductions or expenses.
These are referred to as deductions for adjusted gross income
because they're subtracted from gross income
to produce this adjusted gross income subtotal,
better known as AGI.
Next, the taxpayer can subtract additional classes of deductions.
In fact, they can select to deduct the greater of either itemized deductions,
also known as from AGI deductions, or the standard deduction,
which is a standard amount that's allotted to
each taxpayer based on his or her filing status.
After subtracting either itemized deductions or the standard deduction,
we next, beginning with tax year 2018,
have an up to 20 percent deduction for qualified business income.
This is certain qualifying income subject to
some limitations generated from flow through entities,
such as partnerships or S corporations,
or from sole proprietorships.
Finally, we get to taxable income as the difference between
the AGI and the various additional deductions and exemptions.
Taxable income is the tax base in the US income tax system.
Finally, to calculate the actual tax liability,
we use our tax tables and tax rate schedules.
From the tax liability,
we can subtract any income taxes that were withheld or
prepaid during the year as well as various tax credits,
which are dollar-for-dollar offsets in the tax liability.
The difference between the tax liability and the amount of
prepayments and credits claimed during the year will
tell us whether or not the taxpayer needs to pay more to cover the entire tax liability,
because the prepayments and withholdings maybe weren't enough.
Or, if the taxpayer prepaid more than the tax liability during the year,
then he or she will receive a refund.
So besides income taxes,
property taxes are widely used in the US,
notably at the city, county, and state levels.
Property taxes are also known as ad valorem taxes because
the tax base is property rather than income.
Specifically, the tax base is
the fair market value, or some portion of it, of specified property.
Because it's based on value,
it means that, as the value of the property increases,
the property taxes also increase.
But when the value of the property decreases,
the tax also decreases.
Real property taxes include taxes on land and structures affixed to the land.
For example, real estate taxes on one's home
may increase year to year if housing prices rise,
but they should decrease when housing prices fall.
Personal property taxes include taxes on all other types of property besides realty.
For example, Massachusetts has
a motor vehicle tax that's based on the value of one's car.
Because the car values typically decrease over time,
this tax also decreases as the taxpayer holds on to the car.
Of course, when a new car is purchased by a taxpayer,
this means the motor vehicle tax rate is quite significant.
So next, we have transaction taxes.
Some examples here are excise taxes in sales or use taxes.
Excise taxes are imposed at the federal, state, and local levels.
Excise taxes are applied on units rather
than on income or value of the underlying products.
For example, the federal gas tax is charged per gallon of gas sold.
Tobacco taxes are applied per pack of cigarettes.
Generally, local governments impose excise taxes on
visitors or other non-citizens who cannot vote in that jurisdiction,
and thus they try to fund special projects with their tax revenues.
For example, hotel occupancy taxes and
rental car surcharges are based on
rooms rented or where you rent an automobile, respectively.
The tax collections benefit local citizens without
actually having the local citizens pay for these projects.
But unlike excise taxes,
sales and use taxes are based on
a product's underlying value during the time of purchase.
They're not based per unit.
For example, if you buy a $1,000 television and the sales tax is 5 percent,
then you'll pay $50 in sales taxes.
Meanwhile, a $500 television will generate $25 in sales taxes for the state,
again a 5 percent rate.
There is considerable variation in states and other localities.
In fact, some states don't even impose a sales tax.
Use taxes are similar to sales taxes in concept, but
the use tax is applied on items purchased outside the taxpayer's home state,
but is used in the taxpayer's home state.
Use taxes tried to prevent residents of
high sales tax states from going to low sales tax states to purchase products,
then bring them home to use them, causing
revenue losses for the high sales tax jurisdiction.
Unlike sales taxes, use taxes are
self-reported by taxpayers on their tax returns and, quite frankly,
very difficult to track by high-tax states.
As a result, compliance rates are actually very low.
Next, we'll look at death taxes.
Death taxes are taxes on the right to transfer
or receive property upon the death of an owner.
If it's a tax on the right to pass or bequeath property from a decedent to the heirs,
then this is an estate tax.
It is, in effect, imposed on the person that died,
as if dying wasn't bad enough.
But if it's a tax on the right to receive or inherit
property--that is, by the heirs of the decedent's assets--
then this is known as an inheritance tax.
The tax base in both cases is the value of the property.
For example, the fair market value of the decedent's estate will
be the tax base when calculating the US Federal State Tax.
The U.S. only imposes an estate tax;
it does not impose an inheritance tax.
However, some states levy one or both.
At the federal level, the unified transfer tax credit reduces
or eliminates enough value of decedent's estates,
that they are then not subject to the federal estate tax.
Another type of tax is the gift tax.
Whereas the right to transfer property upon or after death is referred to as death taxes,
gift taxes are tax on the right to transfer assets from
one taxpayer to another while the taxpayer is still alive.
However, for it to be considered a gift,
the giving taxpayer, or the donor,
must not expect anything in return from the recipient, or donee, for that gift.
Such an arrangement is different from other types of income transfers such as wages.
Receiving wages implies that a person did something for somebody else,
and thus gets paid for their services.
If a person receives wages,
they are subject to the income tax.
Receiving a gift, however, is not included in the tax space,
that is, it is not subject to income tax.
Gift and estate taxes in the US are unified under a single tax rate schedule.
This arrangement effectively caps
the total value of property that can be passed from one person to another,
either while the donor is alive or upon the donor's death.
Next, are employment taxes, also known as payroll taxes.
The first major employment tax is known as
FICA, shorthand for Federal Insurance Contributions Act.
FICA taxes are designed to fund Social Security and Medicare.
Currently, the Social Security portion of FICA is 6.2 percent of some level of wages,
after which, however, the 6.2 percent does not apply.
The Medicare portion is 1.45 percent of all earned income;
that is, wages or business income but not interests or dividends.
The Social Security and Medicare portions are paid by both the employer and the employee.
Therefore, a total of 7.65 percent of the FICA tax is paid by
the employee, and another 7.65 percent is paid by the employer,
for a total of 15.3 percent.
Note that these are additional taxes, on top of the regular income tax.
If a person is self-employed,
he or she will need to pay both the employee and employer share of FICA--
that is, the full 15.3 percent.
This is known as the self-employment tax.
However, self-employed individuals get a deduction for one-half of self-employment taxes
paid to help level the playing field between being an employee or being self-employed.
Separate from FICA, there are also what are known as
Obamacare taxes, tied to the patient protection and Affordable Care Act of 2010.
If your AGI is greater than some threshold amount based on your filing status,
then your self-employment income, or your earned income (i.e.,
your wages), are subject to an additional 0.9 percent tax,
on top of the regular income and other FICA taxes owed.
The employer here does not match the 0.9 percent tax.
If AGI is greater than some threshold,
any unearned income, like interest dividends or
capital gains, may be subject to an additional 3.8 percent tax--
again, on top of the applicable income taxes owed on that income.
The last type of employment tax is FUTA,
shorthand for Federal Unemployment Tax Act.
This tax funds state unemployment benefits. Unlike FICA,
FUTA is paid only by the employer, not by
the employees. And, in fact, self-employed individuals do not pay the FUTA tax.
The idea behind the FUTA tax
is, if an employer hires and lays off employees very
frequently, and these employees then draw on state unemployment benefits,
these employers' FUTA tax rates will be higher than
other employers', who have a higher employee retention rate.
Therefore, FUTA does not have the same tax rate for every employer, but
rather reflects employee retention rates and encourages higher retention rates.
Finally, a variety of other taxes exist.
Federal customs duties are tariffs on certain imported goods.
Franchise taxes are taxes levied on the right to do business in the state.
Occupational taxes are applicable to various trades or businesses--for example,
buying a liquor license or getting
a taxi permit or paying fees to practice a profession within a state.
Finally, a very important tax in non-US jurisdictions is the value-added tax.
This tax is present in most developed economies, which basically
taxes the value-added at various stages of production of products.
In effect, this is a consumption tax, because
the tax becomes embedded in the price of the product, despite
the fact that various parties along the supply chain
technically remit the VAT payments to their respective governments.
The VAT is a good example of how tax incidence may fall on a party that's not
the same party that sends cash taxes to
the government. In all, we can see that, besides income taxes,
there's quite a variety of other types of taxes.
Although our course will focus on the US Federal Individual Income Tax,
there are many, many other taxes that exist and that you should be aware of.
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