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Our Federal Tax System

The Federal Tax System-

     The federal tax system in the United States has been marked by significant changes
     over the years in response to the ever changing role of the government. While the law
     itself is complex, the concept is relatively simple. Income from all sources is taxed,
     unless specifically exempted by the law.

     The types and amounts of tax collected are completely different than they were 200
     years ago. Some of these changes are traceable to specific events, such as a war, or
     the passage of the 16th Amendment which gave Congress the power to levy a tax on
     personal income. Other changes were more gradual, responding to changes in society,
     the economy, and in the role of the federal government. For most of our country's
     history, individuals rarely had any contact with the federal government as most of the
     government's tax revenues were derived from excise taxes, tariffs, and customs duties.

     In 1765, the English Parliament passed the Stamp Act, the first tax imposed directly on
     the American colonies. Colonists lacked representation in the English Parliament. This
     led to the rallying cry of the American Revolution "taxation without representation is
     tyranny" and established a persistent wariness regarding taxation.

     Before the Revolutionary War, the federal government had only a limited need for
     revenue, while each of the colonies had greater responsibilities and revenue needs,
     which were met with different types of taxes. The south taxed primarily imports and
     exports, the middle colonies imposed a property tax and a "head" or poll tax levied on
     each adult male, and the northern colonies taxed real estate, had excise taxes, and
     taxes based on occupation.

The Revolutionary War Period-

     To pay the debts of the Revolutionary War, Congress levied excise taxes on distilled
     spirits, tobacco and snuff, refined sugar, carriages, property sold at auctions, and
     various legal documents.

     The Articles of Confederation of 1781 reflected the American fear of a strong federal
     government. The federal government had few responsibilities and no tax. It relied solely
     on donations from the States. When the Constitution was passed in 1789, it was

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Our Federal Tax System
The Revolutionary War Period - continued

      recognized that no government could function if it relied entirely on other governments
      for its resources. Therefore, the federal government was granted the authority to raise

      Article I, Section 8, Clause 1 of the U.S. Constitution states Congress shall have the
      power to impose "Taxes, Duties, Imposts and Excises,". However Article I, Section 9
      requires that, "No Capitation, or other direct, tax shall be laid, unless in Proportion to the
      Census or enumeration herein before directed to be taken." Therefore, any taxes
      imposed had to be uniform throughout the United States. The Constitution limited
      Congress' ability to impose direct taxes, by requiring it to distribute taxes in proportion to
      each state's population.

The Post-Revolutionary War Period

      After the Revolutionary War the citizens had representation, but many still opposed
      taxes. From 1791 to 1802, the federal government was supported by taxes on distilled
      spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate
      bonds, and slaves. In 1794, farmers in Pennsylvania opposed the tax on whiskey,
      forcing President Washington to send federal troops to suppress the Whiskey Rebellion,
      and establishing the important precedent that the federal government was determined to
      enforce its revenue laws. On the other hand, The Whiskey Rebellion also established
      that the resistance to taxes that led to the Declaration of Independence and the
      Revolutionary War did not evaporate with the new federal government.
      To raise money for the War of 1812, Congress imposed additional excise taxes, sales
      taxes on gold, silverware, jewelry, and watches, and raised certain customs duties.
      Congress also raised money by issuing Treasury notes. In 1817 Congress did away with
      those taxes, relying solely on tariffs on imported goods, and for the next 44 years the
      federal government collected no taxes.

The Civil War Period

      The Revenue Act of 1861, the first U.S. personal income tax, was imposed on August 5,
      1861. This tax on personal income was a new direction for a federal tax system. It was
      amended on July 1, 1862. It taxed 3% of all incomes from $600 to $10,000 per year. The
      standard deduction was $600. Individuals with an annual income of more than $10,000
      paid a 5% tax rate. This tax was the forerunner of our modern personal income tax as it

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Our Federal Tax System
The Civil War Period -continued

      was based on the concepts of graduated taxation and "withholding at the source" by
      employers. An "inheritance" tax also made its debut.

      The Act of 1862 established the office of Commissioner of Internal Revenue. The
      Commissioner was given the power to assess, levy, and collect taxes, and the right to
      enforce the tax laws through seizure of property and through prosecution.

      By 1866, tax collections had reached their highest point in history. The federal
      government collected more than $310 million. In 1867, heeding public opposition to the
      income tax, Congress cut the tax rate. The need for federal revenue declined sharply
      after the war and the personal income tax was abolished in 1872.

The Post-Civil War Period

      With the passage of The Wilson Tariff Act in 1894 Congress revived the flat rate federal
      income tax. The Bureau of Internal Revenue was created with an income tax division.
      However, the Supreme Court ruled the law unconstitutional in Pollock v. Farmers' Loan
      & Trust Co. the following year. The Supreme Court ruled that taxes on rents from real
      estate, interest income, dividend income, and from personal property were direct taxes
      on property, and therefore had to be apportioned according to the population of each
      state. Under the Constitution, Congress could impose direct taxes only if they were
      levied in proportion to each State's population. Thus, a federal income tax was
      impractical from the time of the Pollock decision until ratification of the Sixteenth
      Amendment. What seemed to be a straightforward limitation in the Constitution on the
      power of the Congress proved inexact and unclear when applied to an income tax. The
      Bureau of Internal Revenue’s income tax division was closed.

      From 1896 until 1910 the Federal government relied heavily on high tariffs for its
      revenues. The War Revenue Act of 1899 raised funds for the Spanish-American War
      through the sale of bonds, taxes on recreational facilities, and it doubled the tax on beer
      and tobacco. The War Revenue Act expired in 1902. From 1868 to 1913, 90% of all
      revenue was collected from excise taxes on liquor, beer, wine and tobacco.

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Our Federal Tax System
The 16th Amendment

     In 1909 President Taft recommended that Congress propose a constitutional
     amendment that would give the government the power to tax incomes without
     apportioning the burden among the states populations.

     The 16th amendment was ratified by Wyoming on February 3, 1913, providing the three-
     quarter majority of states necessary to amend the Constitution. It allowed the Federal
     government to tax the income of individuals without regard to the population of each
     State. The 16th Amendment states "The Congress shall have power to lay and collect
     taxes on incomes, from whatever source derived, without apportionment among the
     several States, and without regard to any census or enumeration.". It made the income
     tax a permanent fixture in the U.S. tax system and resulted in a revenue law that taxed
     incomes of both individuals and corporations.

     On October 3, 1913 President Woodrow Wilson signed into law the Revenue Act of
     1913, also known as the Tariff Act of 1913. Congress levied a 1% tax on net personal
     incomes above $3,000 and rising to 7% on incomes of more than $500,000. Less than
     1% of the population was subject to income tax in 1913. It also lowered basic tariff rates
     from 40% to 25%, the lowest rates since the Walker Tariff of 1857. In 1913 the first Form
     1040 appeared as the standard tax reporting form, and March 1st was the date specified
     as the filing deadline.

     Before the income tax most citizens were able to pursue their financial affairs without
     any knowledge by the federal government. Individuals earned their money and wealth
     was accumulated and dispensed with little or no interaction with the federal government.

     The United States entry into World War I greatly increased the need for revenue. One
     problem with the income tax law was how to define "lawful" income. Congress
     responded by passing the 1916 Revenue Act. It deleted the word "lawful" from the
     definition of income. Consequently, all income, regardless of how it was obtained,
     became subject to tax. The Supreme Court would subsequently rule the Fifth
     Amendment could not be used by bootleggers and others who earned income through
     illegal activities to avoid paying income taxes. As a result, many who broke various laws
     and were able to escape prosecution for those crimes were convicted on tax evasion

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Our Federal Tax System
The 16th Amendment - continued

     The 1916 Act raised the lowest tax rate from 1% to 2% and raised the top rate to 15% on
     taxpayers with incomes in excess of $1.5 million. The 1916 Act also imposed taxes on
     estates and excess business profits.

     The income tax fundamentally changed the relationship between the citizens and the
     federal government by giving the federal government the right and the need to know all
     about an individual’s or business's financial life. Consequently, in 1916 Congress
     required that information from income tax returns be kept confidential.

     Needing still more tax revenue, the War Revenue Act of 1917 lowered exemptions and
     greatly increased income tax rates.

     The Revenue Act of 1918, passed to raise even greater sums for the World War I effort,
     increased income tax rates once again, this time raising the lowest rate to 6%. The top
     rate of income tax rose to 77%. The Revenue Act of 1918 codified all existing tax laws
     and pushed the filing deadline forward to March 15th where it remained until 1954 when
     it was moved ahead to April 15th. In 1918, 5% of the U.S. population paid income taxes,
     as compared to just 1% five years earlier.

The 1920’s

     The Prohibition Unit was established to enforce the National Prohibition Act of 1919,
     commonly known as the Volstead Act, which, under the 18th Amendment to the
     Constitution prohibited the manufacture, sale, and transportation of alcoholic beverages.
     When it was first established in 1920, the Prohibition Unit was a division of the Bureau of
     Internal Revenue. On April 1, 1927 it became an independent entity within the
     Department of the Treasury, changing its name from the Prohibition Unit to the Bureau
     of Prohibition.

     The tax rates dropped sharply after World War I. During the 1920s, with a booming
     economy, Congress cut taxes five times returning the lowest tax rate to 1% and lowering
     the highest rate to 25%. As tax rates and tax collections declined, the economy got even

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Our Federal Tax System
The 1920’s - continued

      On a cold wintry morning in February, 1929 two cars; a Cadillac sedan and a Peerless,
      both outfitted to look like Chicago Police detective sedans, pulled up to the SMC Cartage
      Company garage at 2122 North Clark Street in the Lincoln Park neighborhood on
      Chicago's North Side that served as the headquarters of Bugs Moran’s North Side Gang.
      Four gunmen, two disguised as police officers and toting Thompson submachine guns,
      killed seven men in a storm of seventy machine-gun bullets and two shotgun shells. To
      show by-standers that everything was under control, the two men in street clothes were
      "arrested" and came out with their hands up, led by the two phony uniformed cops. Al
      Capone, the Chicago gangster, had orchestrated the most notorious gangland killing of
      the 20th century - the St. Valentine's Day Massacre. The massacre was Capone's effort
      to dispose of Bugs Moran, who, as it turned out, wasn’t in the garage at the time. Moran,
      spotting the police cars outside, had decided to keep walking. No one was ever arrested
      for the crime.

      The economy grew steadily during most of the 1920’s. It was a golden age as
      innovations such as radio, automobiles, aviation, and the telephone became popular. On
      August 24, 1921, the Dow Jones Industrial Average stood at 63.9. By September 3,
      1929 it had risen more than six fold to 381.2. During the summer of 1929 it became clear
      that the economy was contracting, and the stock market would soon go through a series
      of unsettling price declines in early October.

      On October 29, 1929 the stock market crashed and the Great Depression began. As the
      economy shrank, government tax receipts also fell. In 1932, the federal government
      collected only $1.9 billion, compared to $6.6 billion in 1920. In the face of rising budget
      deficits which reached $2.7 billion in 1931, Congress followed the prevailing economic
      wisdom of the time and passed the Tax Act of 1932 which dramatically increased tax
      rates. This further improved the government's finances while further weakening the
      economy. By 1936 the lowest personal income tax rate had reached 4% and the highest
      tax rate was 79%.

The 1930’s

      During a routine warehouse raid in Chicago in 1931 by the Treasury Department’s
      Bureau of Prohibition, agents Eliot Ness and The Untouchables discovered what was
      clearly a crudely coded set of accounts in a desk drawer. They, and Frank Wilson, an
      undercover agent in the Bureau of Internal Revenue’s Intelligence Unit, then

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Our Federal Tax System
The 1930’s - continued

      concentrated on gathering evidence and pursuing Public Enemy No. 1, Al Capone, for
      his failure to pay income tax on this substantial illegal income. Capone had always done
      his business through front men and it was previously believed he had no books or
      accounting records in his own name. Even his mansion was in his wife's name. Capone
      was tried in federal court in 1931. Capone was found guilty on five of 22 counts of tax
      evasion for the years 1925, 1926, and 1927, and willful failure to file tax returns for 1928
      and 1929. Capone's legal team offered to pay all outstanding income taxes plus interest
      and told their client to expect a severe fine. On October 17, 1931 the judge sentenced
      Capone to eleven years in a federal prison and one year in the county jail, as well as an
      earlier six-month contempt of court sentence. He ultimately served only six and a half
      years because of time off for good behavior. He also had to pay fines and court costs
      totaling $80,000. Capone’s isolation from his associates and the repeal of Prohibition
      ended his criminal career.

      Other notable tax evaders:

         On October 10, 1973, Spiro T. Agnew, the 39th Vice President of the United States,
          resigned and then pleaded nolo contendere (no contest) to criminal charges of tax
          evasion and money laundering;
         Soviet spy Aldrich Ames earned more than $2 million for his espionage and was also
          charged with tax evasion as none of the money was reported on his income tax
          returns. Ames attempted to have the tax evasion charge dismissed on the grounds
          his espionage profits were illegal, but the charges stood. The $2 million remains to
          this day in an undisclosed bank account. Russian intelligence has refused to disclose
          this bank account information in order for the United States to seize it, arguing that
          that money was rightfully earned by Ames;
         Leona Helmsley the billionaire New York City hotel operator and real estate investor
          nicknamed "The Queen of Mean." She was convicted of federal income tax evasion
          in 1989 and served 19 months in prison, after receiving an initial sentence of 16

      Irwin A. Schiff a prominent member of the group which refers to itself as the tax honesty
      movement, and which has been referred to by the Internal Revenue Service and other
      government agencies as the tax protester movement. Schiff is known for writing and
      promoting literature that claims the United States income tax is applied incorrectly. He
      has lost several civil cases against the federal government and has a record of multiple
      convictions for various federal tax crimes. Schiff is serving a 13-plus year sentence for

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Our Federal Tax System
The 1930’s -continued

      tax crimes as Inmate #08537-014 at the Federal Correction Institution at Fort Dix, New

The Social Security Act

      In 1935 Congress passed the Social Security Act. This law provides payments to the
      aged, the needy, the handicapped, and to certain minors. These programs were initially
      financed by a 2% tax, one half of which was subtracted directly from an employee's
      paycheck and one half was collected from employers. The tax was levied on the first
      $3,000 of the employee's salary or wage.
      In 1939, Congress again codified the tax laws and all subsequent tax legislation until
      1954 amended the 1939 code.

The World War II Period

      The Revenue Act of 1942 was hailed by President Roosevelt as "the greatest tax bill in
      American history,". It increased taxes and the number of Americans subject to the
      income tax, created deductions for medical expenses and investment expenses, and
      reduced the personal exemption amount from $1,500 to $1,200 for married couples. The
      exemption amount for each dependent was reduced from $400 to $350 and a 5%
      Victory tax on all individuals with incomes over $624 was created, with postwar credit.
      The top tax rate reached 94% during the World War II and remained at 91% until 1964.

      In 1943 Congress re-introduced payroll withholding, as had been done during the Civil
      War, with the Current Tax Payment Act. This greatly eased the collection of the tax for
      the Bureau of Internal Revenue. It also greatly reduced the taxpayer's awareness of the
      income tax by increasing it’s transparency, which made it easier to raise taxes in the
      future. Tax withholding was also introduced in the Tariff Act of 1913, but repealed by the
      Income Tax Act of 1916. The Current Tax Payment Act required employers to withhold
      taxes from employees' wages and pay them directly to the government on the workers'
      behalf quarterly.

      In 1944 Congress passed the Individual Income Tax Act, which created the standard
      deductions on Form 1040, raised individual income tax rates, and repealed the Victory
      Tax. It standardized the value of personal exemptions at $500 per person. There were
      about 60 million taxpayers.

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Our Federal Tax System

The Post-World War II Period

       President Eisenhower reorganized the Bureau of Internal Revenue in 1953 and
      replaced its patronage system with career, professional employees. The IRS
      commissioner and chief counsel are selected by the president and confirmed by the
      Senate. The Bureau’s name was changed to the Internal Revenue Service to stress the
      "service" aspect of its work.

      On August 16, 1954 the Internal Revenue Code of 1954 was enacted by Congress,
      succeeding the Internal Revenue Code of 1939. The Code temporarily extended the
      Revenue Act of 1951's

      5% increase in corporate tax rates through March 31, 1955, increased depreciation
      deductions by providing additional depreciation schedules, and created a 4% dividend
      tax credit for individuals. References to the Internal Revenue Code subsequent to 1954
      generally mean Title 26 of the United States Code, as amended. The basic structure of
      Title 26 remained the same until the enactment of the comprehensive revisions
      contained in Tax Reform Act of 1986, although individual provisions of the law were
      changed regularly.

      The Social Security system remained basically unchanged until 1956. In 1956 Social
      Security began an evolution and more and more benefits were added, beginning with
      Disability Insurance benefits. In 1958, benefits were extended to dependents of disabled
      workers. In 1967, disability benefits were extended to widows and widowers.

      By 1959, the IRS had become the world's largest accounting, collection, and forms-
      processing organization. Computers were introduced to automate and streamline its
      work and to improve service to taxpayers. In 1961, Congress passed a law requiring
      individual taxpayers to use their Social Security numbers on tax forms.

The 1960’s

      The Revenue Act of 1964 was signed by President Lyndon Johnson on February 26th,
      1964. It reduced individual income tax rates from 91% to 70%, and reduced the top
      corporate rate from 52% to 48%. A minimum standard deduction of $300 plus $100 per
      exemption was created.

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Our Federal Tax System
The 1960’s - continued

      In 1965 Congress enacted the Medicare program which provides for the medical needs
      of persons aged 65 or older. Social Security Amendments created the Medicaid program
      which provides medical assistance for people with low incomes and resources. The
      expansions of Social Security and the creation of Medicare and Medicaid required
      additional tax revenues. In1972 benefits were indexed for the cost of living. In 1949 the
      FICA payroll tax rate was 2%. The expansions in 1965 led to further rate increases, with
      the combined payroll tax rate climbing to 15.3 % by 1990. The maximum Social Security
      tax burden rose from $60 in 1949 to $7,849 by 1990.

The Economic Recovery Tax Act of 1981

      In the late 1960s and through the 1970s there was persistent and rising inflation,
      ultimately reaching 13.3% in 1979. During this time, the income tax was not indexed for
      inflation. Despite repeated tax cuts, the tax burden of the citizens rose. The Economic
      Recovery Tax Act of 1981, which enjoyed strong bi-partisan support in Congress, was
      passed on August 4, 1981 and was signed into law by President Ronald Regan on
      August 13, 1981. It was the largest tax cut in U.S. history. It amended the Internal
      Revenue Code of 1954 to encourage economic growth through reductions in individual
      income tax rates, first year expensing of depreciable property, incentives for small
      businesses, and incentives for savings. The Accelerated Cost Recovery System was
      implemented for depreciation. The Act reduced the income tax rates by approximately
      25% over three years with the top rate falling from 70% to 50% and the bottom rate
      falling to 11%. The rates were indexed for inflation, although indexing was delayed until
      1985, and a 10% Investment Tax Credit was implemented to spur capital formation. The
      tax cuts resulted in deficits in the federal budget in the 1980s and early 1990s, but also
      created an economic expansion.

The Tax Reform Act of 1986

      The Congress passed the Tax Reform Act of 1986 on October 22, 1986. President
      Reagan signed the most significant piece of tax legislation in 30 years. It contained 300
      provisions and took three years to implement. The Act codified the federal tax laws for
      the third time since the Revenue Act of 1918. It simplified the income tax code,
      broadened the tax base and eliminated many tax shelters and other preferences. The
      top tax rate was lowered from 50% to 28%, the lowest it had been since 1916, while the
      bottom rate was raised from 11% to 15% - the only time in history that the top rate was
      reduced and the bottom rate increased concurrently. 15% and 28% became the only two
      income tax brackets. The capital gains tax rate was the same as for ordinary income.
      Interest on consumer loans and state and local sales tax were no longer deductible.

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Our Federal Tax System
The Tax Reform Act of 1986 - continued

      Income averaging, which reduced taxes for those only recently making a much higher
      income than before, was eliminated. The Act increased the personal exemption and the
      standard deduction. Deductions for passive activities were limited to remove the tax
      benefits of many tax shelters, especially for real estate investments. Also in 1986, limited
      electronic filing began.

The Internal Revenue Service Restructuring and Reform Act of 1998

      The Internal Revenue Service Restructuring and Reform Act of 1998 resulted from
      hearings held by the Congress in 1996 and 1997. It prompted the most comprehensive
      reorganization and modernization of IRS in nearly half a century. The Act, which
      expanded taxpayer rights and called for reorganizing the agency into four operating
      divisions aligned according to taxpayer needs, included numerous amendments to the
      Internal Revenue Code of 1986. It provides that individuals who fail to provide their
      taxpayer identification numbers are not allowed to take the earned income credit for the
      year in which the failure occurs and that individuals are allowed to deduct interest
      expense paid on certain student loans. The Taxpayer Bill of Rights III was enacted on
      July 22, 1998 as title III of the Act. It established a Taxpayer Advocate Service as an
      independent voice inside the IRS.

      During the 1990s the top income tax rate rose again, standing at 39.6% by the end of
      the decade. In 2000 the IRS ended its geographic based structure and implemented the
      four major operating divisions required by the Restructuring and Reform Act of 1998:
      Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business,
      and Tax Exempt and Government Entities.

The Economic Growth and Tax Relief Reconciliation Act of 2001

      The top income tax rate was cut to 35% and the bottom rate was cut to 10% by the
      Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA made
      significant changes in several areas of the Internal Revenue Code, including income tax
      rates, estate and gift tax exclusions, and qualified and retirement plan rules for Individual
      retirement accounts, 401(k) plans, 403(b), and pension plans. Many of the tax reductions
      in EGTRRA were designed to be phased in over a period of up to 9 years.

      One of the most notable characteristics of EGTRRA is that its provisions are designed to
      sunset, or revert to the provisions that were in effect before it was passed. EGTRRA will

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Our Federal Tax System
The Economic Growth and Tax Relief Reconciliation Act of 2001 - continued

      sunset on January 1, 2011 unless further legislation is enacted to make its changes

      EGTRRA brought to prominence a lesser known provision of the Internal Revenue
      Code, the Alternative Minimum Tax (AMT). It is an alternate system of calculating a
      taxpayer's liability that removes many so called "tax preference items". The applicable
      AMT rates were not adjusted in step with the lowered rates of EGTRRA and the 2003
      act, causing many more people to face higher taxes because of the AMT than had
      originally been planned. The AMT was originally designed as a way of making sure that
      wealthy taxpayers could not take advantage of "too many" tax incentives and reduce
      their tax obligation by too much. When it was introduced in 1969 it was intended to target
      155 high-income households that had been eligible for so many tax benefits that they
      owed little or no income tax. In 1970, 20,000 taxpayers owed AMT. In 2006, 3.5 million
      taxpayers owed AMT, because of a temporarily higher exemption, which expires at the
      end of the year. In 2007, unless Congress acts, 23.4 million taxpayers will owe AMT. If
      the 2001-2006 tax cuts expire as scheduled at the end of 2010, 39 million taxpayers,
      more than one-third of all taxpayers, will be hit with the AMT in 2017. If the tax cuts are
      extended, that number jumps to 53 million taxpayers, about half of all taxpayers.

      EGTRRA changed the rate of tax on dividend income starting in 2003 to 5% for those in
      the 0% or 15% brackets, falling to 0% in 2008. It was lowered to 15% for all other
      brackets. The capital gains tax on qualified gains of property or stock held for five years
      was reduced from 10% to 8%.

The Jobs and Growth Tax Relief Reconciliation Act of 2003

      The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), was passed by
      Congress on May 23, 2003 and signed by President Bush on May 28, 2003. The act
      increased the exemption amount for the individual Alternative Minimum Tax, lowered
      taxes on dividends and capital gains, accelerated the tax rate cuts that had been
      enacted in 2001, and temporarily reduced the tax rate on capital gains and dividends to
      15%. Many of the slow phase-ins enacted in 2001 were accelerated by the Act of 2003,
      which removed the waiting periods for many of EGTRRA's changes.

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Our Federal Tax System
The Jobs and Growth Tax Relief Reconciliation Act of 2003 - continued

      Two tax bills signed in 2005 and 2006 extended through 2010 the favorable rates on
      capital gains and dividends, raised the exemption levels for the Alternative Minimum
      Tax, and enacted new tax incentives designed to persuade individuals to save more for

The Modern Income Tax

      The United States imposes an income tax on individuals, corporations, trusts, and
      certain estates. This tax is imposed on income, such as wages, and realization of gains
      on the disposition of property. An individual's tax bracket depends upon their income and
      their filing status. There are five (5) filing status: single, married filing jointly, married
      filing separately, head of household, and qualifying widow or widower.

      Tax rates can be progressive, regressive, or flat. With a progressive tax the rate of tax
      increases as the amount of taxable income increases. The U.S. income tax is a
      progressive tax. There are six tax brackets for ordinary income ranging from 10% to

      An individual pays tax at a given bracket only for each dollar within that bracket's range.
      The individual's marginal tax rate, the percentage of tax on the last dollar earned, has no
      effect on any underlying income taxed at a lower bracket. This ensures that every rise in
      a person's pre-tax salary results in an increase of their after-tax salary.

      Income tax systems often have deductions available that lessen the income tax liability
      by reducing taxable income. Claiming deductions may reduce an individual's tax liability
      by a rate equal to the marginal tax rate of their particular tax bracket. If an individual is
      able to increase the amount of their tax deductions by $1,000 and the individual's
      marginal tax rate is 25%, the tax deductions will reduce the individual’s tax liability by
      $250 ($1,000 x 25%). Please note that if part of the individual’s $1,000 of income that
      was offset by $1,000 of tax deductions was taxed in a lower tax bracket then the
      reduction in tax liability would be less than $250.

      Short-term capital gains are taxed at the ordinary income tax rates. Long-term capital
      gains have lower tax rates, with special tax rates in some circumstances.


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