CH1 Brief - CHAPTER 1 1. Sources of revenue/types of taxes,...

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Unformatted text preview: CHAPTER 1 1. Sources of revenue/types of taxes, Table 2 (% of 2009 Collections): A. Income: 51.60% (Individuals 44.77% of the collections; Corporations 6.83% of the collections) B. Employment: 44.77% C. Estate and gift: 1.23% D. Excise: 2.37% 2. Flat v. graduated (which can be progressive OR regressive) taxes. See inside our text cover for the 2011 U.S. tax rate schedules for individuals (6 “brackets”). EXAMPLE: All individuals of Country X use the following tax schedule to determine their income tax liabilities: If Taxable Income is: Over But not over Pay + % on Excess 01 the amount over $ 0 $10,000 $0 10% $0 $10,000 $20,000 $1,000 5% $10,000 $20,000 ..... .. $1,500 3% $20,000 Country X’s income tax system: Is a progressive income tax system Is much like the U.S. income tax system Uses a flat tax Is a regressive, graduated income tax system 9‘.“ 9‘?” EXAMPLE 2: Using the information above, and What you know about the U.S. income tax system (from your readings thus far), which of the following is TRUE? a. Under both the Country X and U.S. income tax systems, a taxpayer pays a higher rate of taxes as his/her income rises. b. Under the Country X income tax system, a taxpayer pays less in taxes as his/her income rises. 0. Under both the Country X and U.S. income tax systems, a taxpayer pays more in taxes as his/her income rises. d. Both “a” and “c” are correct. Why may a sales tax be considered a regressive income tax? 3. Who has first rights to income? 0 Presumption 1: “It’s all my money . . . because I earned it!” 0 Presumption 2: “The government has first rights . . . because they provided the system that allowed me to earn it!” 0 Reality: Individuals need to get compensated and the system/ government needs money to function — the trick is determining the “best” way to split income between taxpayers and the government. 4. Tax avoidance v. tax evasion 5. Brief history of the federal income tax: A. Sixteenth Amendment to the Constitution (passed by Congress in 1909) gave Congress the power to tax “incomes, from whatever source derived, without apportionment among the several States...” (but, it took until 1913 until final vote for ratification, by the states, was received). B. Revenue Act of 1913 (enacted on October 3, 1913) imposed a tax on the net income of individuals and corporations and tax was “retroactive” to March 1, 1913 (understand what retroactive means). C. Internal Revenue Code of 1939 was the first separate codification of the internal revenue laws (replaced piecemeal annual revenue acts). . Internal Revenue Code of 1954 successor to the Internal Revenue Code of 1939. Tax Reform Act of 1986 (changes were so extensive the law was renamed the Internal Revenue Code of 1986). a: 6. Brief summary of federal tax legislation procedure (Exhibit 1, page 1-19). A. Tax Bill screened by House of Representatives’ Ways and Means Committee (the “House Committee”) Consideration by House of Representatives Referred to Senate Finance Committee (the “Senate Committee”) . Consideration b Senate I If Senate and House versions of tax bill differ, the tax bill is sent to a Joint Conference Committee (composed of members of the House Committee and Senate Committee) for resolution of differences. I Uniform tax bill sent back to the House and the Senate for consideration and approval in final form Tax bill assed b House and Senate goes to President (“P”) cow Signed tax bill becomes law I If P vetoes the tax bill expressly or via pocket veto (i. e., he doesn’t sign it or veto it), a 2/3 vote in the House AND Senate is needed to override the P’s veto F. Incorporated into the Code G. Valuable Papers (sometimes the reports generated by this process are looked at during tax research to determine the “legislative intent” behind certain items) 7. Objectives: Raise $ - but also social, political and economic factors to consider: 0 Economic factors: Can changes in tax laws stimulate the economy? If so, what are the most effective tax changes? 0 Social factors: Parental decisions (e. g. , encourage folks to obtain group-term life insurance and health plans and to save for retirement). Also, some deductions (fines) not allowed. 0 Political factors: Special interests groups. Also, should we have a big government that helps or a small government that lets us retain our money? Many tax discussions involve more than one of these factors. 8. Basic tax concepts/terms. A. Accrual basis (of accounting). Income accounted for as earned (even if not collected). Expenses deducted in year in which incurred (even if not paid). . Assignment of income doctrine. Taxes should be imposed on the person who (a) owns the property that earns income or (b) furnishes the service that generates the income (e. g., Sara can’t reduce her family’s taxes by having her boss pay her 4 kids for Sara’s agreement work) (see above for Sara’s incentive to attempt this). . (Tax) Basis. Amount paid for the property and FMV of other property provided in the transaction. Computing tax depreciation and determining tax gains/losses. Tax Basis V. Accounting Basis. Business purpose. Transactions must be grounded in a business purpose other than tax avoidance (tax avoidance is not a proper motive for being in business). Capital asset. Investment and personal use property. Gains and losses from capital assets are subject to special rules. More later. Cash basis. Income reported when received (in cash or property) and expenses deductible when paid. . Claim of Right. When individual may have to return property he/she currently receives. Generally, property is income upon receipt — not only when he/she has full right to it. Conduits. Do not pay taxes (e.g., partnerships and S-Corps). Income/loss flows directly to the partners/stockholders. Partnerships and S-Corps do, however, compute and report the business’ income as part of an informational return (i. e. , 1065 or 11208). Constructive receipt doctrine. When an individual has an absolute right to the income (e. g. , interest on a bank account), it must be recognized. This limits cash basis taxpayers. Also, you may not defer your taxable income (until 2011) just because you decide not cash your December 2010 paycheck until January of 2011. Entity. Generally, four types of entities for tax paying purposes: individuals, corporations, trusts, and estates. Each entity determines its own tax and files its own tax return. Double taxes if (non-S) corporation pays dividends to its shareholders. Gross Income. Chapter 4. Holding period. Length of time property held by TP (or treated as holding for income tax purposes). . Income. Gain from capital, labor, or both. Term is usually used as part of “gross income” or “adjusted gross income” (i.e., “AGI”) or “taxable income.” . Income-shifting. Goal is often to transfer income to a family member with a lower marginal tax rate. . Other taxes: Critique the statement: “Our highest marginal tax rate is 35% (hint: other taxes — e. g. , employment taxes, local government taxes). See how “double” tax arguments could be made for individuals who spend or invest their “already taxed” income (which is a different type of “double tax” than most people discuss). . Pay-as-you—go tax system. TPs pay throughout the year, not just at year-end. Withholdings and estimated taxes. . Realized V. recognized gain or loss. Realization when transaction is completed. Not all realized gains/losses are recognized. . Self-assessment system. TPs report their own pain. But there is still an IRS. Could there be a “Pro-Taxpayer” argument for making it less of a self-assessment system? . Substance V. form. Substance is the true nature of the transaction. Form is what the transaction is dressed up as. Form should (and often does) mirror substance; however, sometimes folks try to formalize transactions in a ways that do not mirror the substance (in an effort to reduce taxes). Example: rental v. purchase . . . name itself does not matter. . Tax Benefit Rule. Recovery is includable in income only to the extent the deduction reduced a tax in a prior year. . Taxable Income. Income subject to tax after considering the applicable deductions. Chapter 3 (and beyond). . Wherewithal to pay. TPs should be taxed on a transaction when he/she has means to pay the taxes (i.e., instead of as his/her asset merely appreciates in value). ...
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This note was uploaded on 12/02/2011 for the course ACCOUNTING 4001 taught by Professor Nathanielbell during the Spring '11 term at FIU.

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CH1 Brief - CHAPTER 1 1. Sources of revenue/types of taxes,...

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