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CHAPTER FIVE

CHAPTER FIVE. TAXES. TAXES IN THE U.S. CORPORATE TAXES forms of business are taxed differently single proprietor and partnership income is taxed at personal income rates corporate income may be taxed twice once as it is earned using the corporate income rates

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CHAPTER FIVE

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  1. CHAPTER FIVE TAXES

  2. TAXES IN THE U.S. • CORPORATE TAXES • forms of business are taxed differently • single proprietor and partnership income is taxed at personal income rates • corporate income may be taxed twice • once as it is earned using the corporate income rates • again as dividend income using the personal rates

  3. CORPORATE TAX RATES • MARGINAL TAX RATES • are the most important for the corporation and represent the tax on additional income earned

  4. CORPORATE TAX RATES • MARGINAL TAX RATES • are the rates on the next dollar earned

  5. CORPORATE TAX RATES • MARGINAL TAX RATES: An Example Suppose a corporation earns $85,000 It pays .15 on first $50,000 = $7,500 .25 on next $25,000 = $6,250 .34 on next $10,000 = $3,400 Total tax on$85,000 = $17,150

  6. CORPORATE TAX RATES • CALCULATING AVERAGE TAX RATE: TOTAL TAX PAID TOTAL TAXABLE INCOME

  7. CORPORATE TAX RATES • CALCULATING AVERAGE TAX RATE An Example $17,150 / $85,000 = 20.18%

  8. PERSONAL INCOME TAXES • CALCULATING AFTER-TAX INCOME GROSS INCOME - ADJUSTMENTS ADJUSTED GROSS INCOME - DEDUCTIONS TAXABLE INCOME - TAXES AFTER-TAX INCOME

  9. PERSONAL INCOME TAXES • EXAMPLE: A MARRIED COUPLE IS EVALUATING AN INVESTMENT Assume: No Bracket “Creep” Taxable Income = $80,000 Marginal Tax rate = .28 Possible Investment Income: Tax (.28 x $3,000) = $840

  10. PERSONAL INCOME TAXES • EXAMPLE: A MARRIED COUPLE ARE EVALUATING AN INVESTMENT Assume: Bracket “Creep” Possible Investment Income: $20,000 Tax .28 x 16,900 = $4,732 .31 x 3,100 = $ 961 20,000 = $5,693

  11. PERSONAL INCOME TAXES • TAX-EXEMPT BONDS • DEFINITION: securities whose income is not subject to federal income taxes

  12. PERSONAL INCOME TAXES • TAX-EXEMPT BONDS • most income from bonds issued by states, municipalities, and their agencies need not be included in taxable income for federal returns

  13. PERSONAL INCOME TAXES • TAX-EXEMPT BONDS • to calculate fully-taxable-equivalent yield of a tax-exempt bond use the formula yield = where t = the investor’s marginal tax rate i = the tax-exempt yield

  14. TAX TREATMENT FOR CAPITAL GAINS AND LOSSES • CATEGORIES OF GAIN • depend on holding periods and tax treatment HOLDING PERIOD TAX TREATMENT

  15. TAX TREATMENT FOR CAPITAL GAINS AND LOSSES • CATEGORIES OF GAIN • depend on holding periods and tax treatment HOLDING PERIOD TAX TREATMENT • Less than one year ordinary income

  16. TAX TREATMENT FOR CAPITAL GAINS AND LOSSES • CATEGORIES OF GAIN • depend on holding periods and tax treatment HOLDING PERIOD TAX TREATMENT • Less than one year ordinary income • 12 to 18 months max rate = 28%

  17. TAX TREATMENT FOR CAPITAL GAINS AND LOSSES • CATEGORIES OF GAIN • depend on holding periods and tax treatment HOLDING PERIOD TAX TREATMENT • Less than one year ordinary income • 12 to 18 months max rate = 28% • more than 18 months 20%*

  18. TAX TREATMENT FOR CAPITAL GAINS AND LOSSES • CATEGORIES OF GAIN • depend on holding periods and tax treatment HOLDING PERIOD TAX TREATMENT • Less than one year ordinary income • 12 to 18 months max rate = 28% • more than 18 months 20%* * unless taxpayer is in the 15% tax bracket in which case the rate = 10%

  19. TAX TREATMENT FOR CAPITAL GAINS AND LOSSES • CATEGORIES OF GAIN • depend on holding periods and tax treatment HOLDING PERIOD TAX TREATMENT • Less than one year ordinary income • 12 to 18 months max rate = 28% • more than 18 months 20%* • five years or more 18%**

  20. TAX TREATMENT FOR CAPITAL GAINS AND LOSSES • CATEGORIES OF GAIN (more than 5 years) • depend on holding periods and tax treatment HOLDING PERIOD TAX TREATMENT • five years or more 18%** ** Exception: If taxpayer is in 15% tax bracket, the asset must have been sold in the year 2001 or later, then rate = 8%

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