Ato1 Study Session Essay

6945 Words Jul 30th, 2013 28 Pages
ATO1 Study Session
What you need to know to pass ATO1

Competency 302.2.1: Current Tax System. The student understands the nature, purpose, and scope of the current U.S. tax system.
Differentiate between U.S. federal income tax system and other tax models.
The United States of America is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, payroll, property, sales, imports, estates and gifts, as well as various fees. Taxes are imposed on net income of individuals and corporations by the federal, most state, and some local governments. Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes.
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A trust or estate may earn tax−exempt income and may deduct certain expenses. Each is allowed a small exemption. However, neither is allowed a standard deduction. The tax brackets for income taxable to a trust or estate are much more compressed and can result in higher taxes than for individuals.
Define how tax regulations impact business decisions.
Tax regulations impact business decisions on investments, going abroad, stocks, bonds, growth etc.
The student determines the tax treatment for partnerships, estates, and trusts.
Partnerships have flow-through taxation which means that the entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their "distributive share" of the entity's taxable income, even if no funds are distributed by the partnership to the owners.
Identify the tax treatment for an estate.
Estates and nongrantor trusts must file income tax returns just as individuals do, but with some important differences. For one, their income is taxed at either the entity or beneficiary level depending on whether it is allocated to principal or allocated to distributable income, and whether it is distributed to the beneficiaries. And because their exemption amounts, tax brackets and related thresholds haven’t been indexed for inflation or modified for tax relief to the extent those for individuals have, they can be subject to higher tax rates at much lower levels of income. General tax principles

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