■ T ax doesnt include adjusted gross income (AGI) & doesnt provide for the
standard deduction or the deduction for qualified business income.
■ taxable income is the difference between gross income and deductions
State Income Taxes
●
○ all states require some form of withholding procedures
○ Piggyback Approach:
■ states use as the tax base the income determination made for Federal
income tax purposes
○ Some states “decouple” from selected Federal tax changes
■ to retain state revenue that would otherwise be lost
● ex/ ban of bonus depreciation
○ Most states allow a deduction for personal and dependency exemptions. Some
states substitute a tax credit for a deduction
○ Many state income tax returns provide checkoff boxes for donations to various
causes
○ Most states allow their residents some form of tax credit for income taxes paid to
other states.
○ Amnesty Programs: to pay back taxes on unreported income w/ little or no
penalty
○ Some cities impose a local income tax on residents but it isn't limited to them
Employment Tax:type of income tax imposed on employersand employees
● FICA & FUTA into play for employees (not self-employed individuals) if the particular
work is covered under FICA or FUTA or both
● FICA (Federal Insurance Contributions Act / Social Security tax):(payroll tax)
○ offers some measure of retirement security
○ ONLY APPLICABLE TO WAGES
○ Has two components:
■ Social Security tax (old age, survivors, and disability insurance)
● Tax rate of 6.2% & ceiling amt of 167 k
● Only up to a certain amount (any amt higher is not subjected to tax)
● Regressive/Proportional
■ Medicare tax (hospital insurance)
● Tax rate of 1.45% w/ no dollar limitation
● Affordable Care Act (ObamaCare) imposes an additional 0.9 percent
tax on earned income (including self-employment income) above
$200,000 (single filers) or $250,000 (married filing jointly)
○ employer does not have to match the employees’ 0.9% tax
● Progressive
○ Minors working under parent’s unincorporated trade or business are exempted
○ Self-employed individuals are subject to tax at the combined employer and
employee FICA rate of 15.3%
■ Self-Employment Tax:for non employee taxpayers
● rates are 12.4 percent for Social Security (base of 168k) and 2.9
percent for Medicare, or twice that applicable to an employee
● additional 0.9 % Medicare tax also covers situations involving high
net income from self-employment
■ Net Investment Income Tax (NIIT):
● investment income referred as unearned income
● t ax of 3.8 percent is imposed on net investment income when a
taxpayer’s modified adjusted gross income (MAGI) exceeds certain
threshold amounts of 250k for joint & 200k for single
● Includes passive type income (rent, taxable interest, dividends &
capital gains)
FUTA (Federal Unemployment Tax Act):
●
○ provides a modest source of income in the event of loss of employment
○ provide funds the states can use to administer unemployment benefits
■ Leads to the tax being handled by both Federal and state governments
■ joint administration means that the employer must observe two sets of
rules
○ Rate of 6% on the first $7,000 of covered wages paid during the year to each
employee
○ Credit up to 5.4% of covered wage; means amt paid can be as low as 0.6%
○ If employer has employee base w/ little turnover, unemployment tax rate may
decrease to 0.1% or 0%
○ Paid entirely by employer but some states have special tax for employees for
disability benefits or supplemental unemployment compensation or both
Federal Customs Duties: (Tariffs)
● tariffs have served both as an instrument for carrying out protectionist policies and for
generating revenue
● Allows for foreign goods to be sold at lower prices
Miscellaneous State and Local Taxes:
● Franchise Tax:tax on corporations for the right todo business in the state
○ tax base used varies from state to state but most often is based on the
capitalization of the corporation (either with or without certain long-term
indebtedness)
● Occupational fees:
apply to various
trades or
businesses
○ ex/ a liquor
store
license; a
taxicab
permit; or a
fee to
practice a
profession
such as law,
medicine, or
accounting
verview of Taxes in the
O
US