10 Questions
What is the primary difference between tax credits and tax deductions?
Tax credits directly reduce the amount of tax owed, while tax deductions reduce taxable income.
Which type of tax is levied on the transfer of a person's estate after death?
Estate tax.
What is the purpose of the division of powers in the US tax system?
To allocate taxing authority between the federal government and the states.
Which component of tax system design determines what is excluded from taxation?
Tax exemptions and deductions.
What type of income is typically subject to income tax?
Wages and salaries, interest and dividends, capital gains, and business income.
What is the Earned Income Tax Credit (EITC) an example of?
A tax credit.
What is the primary purpose of tax deductions?
To reduce taxable income.
What is the key difference between federal and state taxing authority?
The federal government has the power to tax income, while states have the power to tax property and sales.
What is the goal of effective tax system design?
To balance fairness, efficiency, and simplicity with the need to raise revenue for government programs and services.
What is the primary purpose of withholding income tax?
To ensure timely payment of income tax owed.
Study Notes
Income Tax
- A type of tax levied on an individual's or business's income or profits
- Typically calculated as a percentage of the taxpayer's taxable income
- Taxable income includes:
- Wages and salaries
- Interest and dividends
- Capital gains
- Business income
- Income tax rates vary depending on the taxpayer's income level and filing status
- Income tax is usually withheld by employers and paid to the government on behalf of the employee
Estate Tax
- A type of tax levied on the transfer of a person's estate after death
- Applies to the value of the deceased person's assets, including:
- Real estate
- Stocks and bonds
- Businesses
- Cash and other assets
- Estate tax rates vary depending on the size of the estate
- Exemptions and deductions are available to reduce the amount of estate tax owed
Tax Credits
- A type of tax incentive that directly reduces the amount of tax owed
- Unlike tax deductions, which reduce taxable income, tax credits reduce the tax liability
- Examples of tax credits include:
- Earned Income Tax Credit (EITC)
- Child Tax Credit
- Education credits
- Renewable energy credits
Tax Deductions
- A type of tax incentive that reduces taxable income
- Examples of tax deductions include:
- Charitable contributions
- Mortgage interest and property taxes
- State and local taxes
- Business expenses
- Tax deductions can be itemized or taken as a standard deduction
Division of Powers
- Refers to the allocation of taxing authority between different levels of government
- In the United States, taxing authority is divided between the federal government and the states
- The federal government has the power to tax income, while states have the power to tax property and sales
- The division of powers can lead to conflicts and complexities in the tax system
Tax System Design
- Refers to the structure and organization of a country's tax system
- Key components of tax system design include:
- Tax base (what is taxed)
- Tax rates (how much is taxed)
- Tax exemptions and deductions (what is excluded from taxation)
- Tax administration (how taxes are collected and enforced)
- Effective tax system design aims to balance fairness, efficiency, and simplicity with the need to raise revenue for government programs and services.
Understanding the basics of taxation, including types of taxes, tax credits and deductions, division of powers, and tax system design. Learn about income tax, estate tax, tax credits, and more.
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