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Chapter 1 and 8 11-12

Chapter 1 and 8 11-12 - ACCT 403 CHAPTER 1(pages 1.17-22...

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ACCT 403 CHAPTER 1 (pages 1.17-22) and CHAPTER 8 TAXATION OF INDIVIDUALS Fall 2011 I. Brief History, Importance, and Types of Tax Authority of the Federal Income Tax A. Brief History 1. 1861-1872 - an income tax was levied to finance the Civil War. 2. 1894 - income tax was reinstated but held to be unconstitutional in 1895. 3. 1913 - 16TH Amendment gave Congress the power to levy income tax on individual income. 4. 1939 - 6% of tax-paying population paid tax. 5. 1943 - withholding of taxes began. 6. 1946 - About 74% of eligible taxpayers paid tax. 7. Since 1975, there have been over 25 major tax bills enacted 2. Both individuals and corporations pay income tax on their taxable income. B. Importance 1. Affects most business and many common personal decisions. 2. Important to understand marginal tax rate (MTR) when choosing between two decision alternatives. a. MTR = the rate of tax (tax savings) on the next dollar of income (deduction). b. Is more relevant that average tax rate (Total income tax/Total Income) when making a decision affected by the federal income tax law. 1. The after-tax benefit (ATB) of an inflow = cash inflow x (100% - MTR). A. If the inflow is not taxable, the ATB equals the before tax benefit. 2. The after-tax cost (ATC) of an outflow = cash outflow x (100% - MTR). A. If the outflow is not taxable, the ATC equals the before tax cost. 3. Some of the more common decisions affected by current tax laws include the following: a. Buy or rent a home. b. Finance auto or obtain a home equity loan. c. Start your own business. d. Make gifts or include in will. e. Repair or buy new business machine. f. Invest in stocks or bonds. g. Invest in tax free or taxable income. h. Getting married.
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i. Overtime work versus leisure time. j. Timing of income or deduction recognition. k. Accounting elections. C. Sources of Federal Law 1. Congressional Branch (Legislative) and the Internal Revenue Code (Code). a. The Code is a codification (organization) of tax laws a logical manner. b. Major steps of legislation are as follows: 1. House, Ways, Means committee writes tax legislation. 2. House passes bill. 3. Senate finance committee crafts parallel bill. 4. Senate passes bill. 5. Joint conference committee makes compromises and passes bill at conference level. 6. House and Senate vote again. 7. President signs bill or vetoes the bill. 2. Administrative Branch/Treasury/Internal Revenue Service a. Treasury Regulations. b. Revenue Rulings and Letter Rulings. c. Revenue Procedures. d. Technical Advice Memorandum. 3. Judicial Branch a. Original Court. 1. Tax Court (including a Small Claims Court). 2. U.S. District Court. 3. U.S. Court of Federal Claims. b. Appellate Courts. 1.
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Chapter 1 and 8 11-12 - ACCT 403 CHAPTER 1(pages 1.17-22...

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