Earned Income Tax Credit

Examples of Earned Income Tax Credit in the following topics:

• Clinton's Promise of Change

  • His promise of welfare reform in the 1992 presidential campaign and its subsequent enactment epitomized the New Democrat position, as did his 1992 promise of a middle-class tax cut and his 1993 expansion of the Earned Income Tax Credit for the working poor.
  • This Act raised taxes on the wealthiest 1.2% of taxpayers while cutting taxes on 15 million low-income families.
  • It also made tax cuts available to 90% of small businesses.
  • Overall, the top marginal tax rate was raised from 31% to 40% under the Clinton administration.

• Individual Taxes

  • In U.S. constitutional law, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership.
  • Income tax is levied on the total income of the individual, less deductions, reducing an individual's taxable income, and credits, a dollar-for-dollar reduction of total tax liability.
  • Income tax is often collected on a pay-as-you-earn basis (i.e., witholding taxes from wages).
  • These include income tax witholding, social security and medicare taxes, and unemployment taxes.
  • This graph shows the total effective tax rates for each earning class in 2011.

• Other Current Liabilities: Sales Tax, Income Tax, Payroll, and Customer Advances

  • Sales tax payable can be accrued on a monthly basis by debiting sales tax expense and crediting sales tax payable for the tax amount applicable to monthly sales.
  • Income tax is a tax levied on the income of individuals or businesses (corporations or other legal entities).
  • Corporate tax refers to a direct tax levied on the net earnings made by companies or associations and often includes the capital gains of a company.
  • Net earnings are generally considered gross revenue minus expenses.
  • Income tax payable can be accrued by debiting income tax expense and crediting income tax payable for the tax owed; the payable is disclosed in the current liability section until the tax is paid.

• Special Reporting

  • Other special reporting issues include Earnings per Share, Retained Earnings and Intraperiod Tax Allocation.
  • Line items typically include profits or losses from operations, dividends paid, the issue or redemption of stock, and any other items charged or credited to retained earnings.
  • Intraperiod Tax Allocation: With intraperiod tax allocation, the specific item (or items) that generated the income tax expense are shown on the income statement with the applicable tax amount applied.
  • Income tax is allocated to income from continuing operations before tax, discontinued operations and extraordinary items.
  • Summarize how a company reports extraordinary items, discontinued operations, intraperiod tax allocations, retained earnings and earnings per share.

• Defining the Income Statement

  • Income statement is a company's financial statement that indicates how the revenue is transformed into the net income.
  • Income statement, also referred to as profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations, is a company's financial statement that indicates how the revenue (cash or credit sales of products and services before expenses are taken out) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as Net Profit or "bottom line").
  • When combined with income from operations, this yields income before taxes.
  • The final step is to deduct taxes, which finally produces the net income for the period measured.
  • An income statement under accrual accounting reflects revenues "earned", where an exchange in value among the parties has taken place, regardless of whether cash was received.

• Corporate Taxes

  • Income taxes in the United States are an enormous and complex issue.
  • Earnings are taxed regardless if they are actually distributed.
  • In return, the earnings of a C corporation are taxed both on the entity level and the individual level.
  • The S corporation is a hybrid entity wherein the income, deductions and tax credits of the business are taxed at the shareholder level as opposed to the entity level.
  • In the United States, taxable income for a corporation is defined as all gross income (sales plus other income minus cost of goods sold and tax exempt income) less allowable tax deductions and tax credits.

• Trading off Equity and Efficiency

  • Income taxes are a laddered progressive tax where income tax rates are set in income bands or ranges.
  • The purpose of a progressive tax system is to increase the tax burden to those most able to pay.
  • These individuals and groups support a flat tax or proportional tax instead.
  • Their argument for a tax modification is related to the view that increasing the tax rate in conjunction with income creates a disincentive to individuals to earn more and is, as a result, punitive to those that achieve income related success.
  • Income tax is a progressive tax that assumes a regressive nature at the highest tax rate.

• Basic Earning Power (BEP) Ratio

  • The Basic Earning Power ratio (BEP) is Earnings Before Interest and Taxes (EBIT) divided by Total Assets.
  • EBIT, or earnings before interest and taxes, is a measure of how much money a company makes, but is not necessarily the same as operating income:
  • The distinction between EBIT and Operating Income is non-operating income.
  • However, in most cases, EBIT is relatively close to Operating Income.
  • BEP is calculated as the ratio of Earnings Before Interest and Taxes to Total Assets.

• Times Interest Earned Ratio

  • Times Interest Earned Ratio = Earnings before Interest and Taxes (EBIT) / Interest Expense.
  • Earnings before Interest and Taxes (EBIT) can be calculated by taking net income, as reported on a company's income statement, and adding back interest and taxes.
  • Analysts often use "Operating Income" as a proxy for EBIT when complex accounting situations, such as discontinued operations, changes in accounting principle, extraordinary items, etc., are reported in a company's financial statements.
  • Analysts will sometimes use EBITDA instead of EBIT when calculating the Times Interest Earned Ratio.
  • The Times Interest Earned Ratio is an indication of a company's overall financial health.

• The Federal Tax System

  • Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes.
  • Income subject to tax is determined under tax rules, not accounting principles, and includes almost all income.
  • State taxes are generally treated as a deductible expense for federal tax computation.
  • Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
  • Similar to federal income taxes, federal estate and gift taxes are imposed on worldwide property of citizens and residents and allow a credit for foreign taxes.