Since taxes are not voluntary, it is important understand what are the impacts of taxation in our lives. So today I am going to talk about tax models.
There are only three types of entities subject to income taxation in the United States: the individual, the C corporation, and the fiduciary. An individual is a male or female person subject to the tax. A C corporation is a business entity formed under state law on which the income tax is imposed directly. A fiduciary is either an estate or a trust; it may be subject to income taxes, but in most cases the income is passed through to the income beneficiaries and is included in the beneficiaries income for taxation. The fiduciary is a modified "flow-through" entity because the tax may be imposed on income retained by either the estate or the trust, or it may be imposed on the recipients to whom the income is distribuided.
Individual and corporate taxpayers pay the bulk of all income taxes collected. A business may be organized as a sole proprietorship, a partnership, a limited liability company (LLC) or an S corporation. The income taxes on these businesses are not imposed or paid by the businesses (except for LLCs electing to be taxed as C corporation); instead, at the end of the tax year their income flows through to the owners and the owners pay the taxes.
The income of C corporations is subject to double taxation: once at the corporate level and again at the owner level when the income is distributed as dividends to the owners. The flow-through entities avoid double taxation because their income is passed through at the end of the owners and taxed once only at the owner level.
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If you pay for college in 2016, you may receive some tax savings on your
federal tax return, even if you’re studying outside of the U.S. Both the American
Opportunity Tax Credit and the Lifetime
Learning Credit may reduce the amount of tax you owe, but only the AOTC is
partially refundable.
Here are a few things you should know about education credits:
- American Opportunity Tax
Credit
‒ The AOTC
is worth up to $2,500 per year for an eligible student. This credit is
available for the first four years of higher education. Forty percent of
the AOTC is refundable. That means, if you’re eligible, you can get up to
$1,000 of the credit as a refund, even if you do not owe any tax.
- Lifetime Learning Credit ‒ The LLC
is worth up to $2,000 per tax return. There is no limit on the number of
years that you can claim the LLC for an eligible student.
- Qualified expenses ‒ You may use only qualified
expenses paid to figure your credit. These expenses include the costs
you pay for tuition, fees and other related expenses for an eligible
student to enroll at, or attend, an eligible educational institution.
- Eligible educational
institutions
‒ Eligible
educational schools are those that offer education beyond high school.
This includes most colleges and universities. Vocational schools or other
post secondary schools may also qualify. If you aren’t sure if your school
is eligible:
- Ask your school if it
is an eligible educational institution, or
- See if your school is
on the U.S. Department of Education’s Accreditation database.
- Form 1098-T ‒ In most cases, you
should receive Form
1098-T, Tuition Statement, from your school by February 1. This form
reports your qualified expenses to the IRS and to you. The amounts shown
on the form may be either: (1) the amount you paid for qualified
tuition and related expenses, or (2) the amount that your school billed
for qualified tuition and related expenses; therefore, the amounts shown
on the form may be different than the amounts you actually paid. Don’t
forget that you can only claim an education credit for the qualified
tuition and related expenses that you paid in the tax year and not
just the amount that your school billed.
- Income limits ‒ The education credits
are subject to income limitations and may be reduced, or eliminated, based
on your income.
- Interactive Tax
Assistant tool
‒ To see if you’re eligible to claim education credits, use the Interactive
Tax Assistant tool on IRS.gov.
Source: Internal Revenue Service
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