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Demonstrate how taxes influence basic business, investment, personal, and political decisions
Discuss what constitutes a tax and the general objectives of taxes
Describe the different tax rate structures and calculate a tax
Identify the various federal, state and local taxes Apply appropriate criteria to evaluate alternate tax
systems
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Who cares about taxes?
Businesses: What organizational form should a business use? Where should the business locate? How should business acquisitions be structured? How should the business compensate employees? What is the appropriate mix of debt and equity for the
business? Should the business rent or own its equipment and
property? How should the business distribute profits to its owners?
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Who cares about taxes?
Politicians: Politicians often distinguish themselves from their
opponents based on their tax rhetoric. Voters must have basic knowledge of taxes to
evaluate the merits of alternative tax proposals.
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Who cares about taxes?
Individuals: Would you like to own a home?
Tax deductions for home mortgage interest and real estate taxes can reduce the after-tax costs of owning a home.
Would you like to retire? Understanding the tax-advantaged methods of saving
for retirement can increase the after-tax value of your retirement nest egg.
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What qualifies as a Tax?
A Tax is a payment required by a government agency that is unrelated to any specific benefit or service received from the government agency.
Key components of a tax: Payment required Payment imposed by government agency (federal, state,
local) Payment not tied directly to benefit received by the
taxpayer.
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Tax Question? Which of the following constitute a tax?
Payment for drivers license? (Not a tax)
Payment for required (by government) house appraisal? (Not a tax)
Payment for hotel use of 1% of bill to pay for city projects. (A tax)
Payment for rental car use of 3% of bill to pay for the roads. (A tax)
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How to calculate a Tax?
To calculate a tax, a taxpayer must know: Tax Rate: level of taxes imposed on the tax base
and is usually expressed as a percentage Tax Base: defines what is actually taxed and is
usually expressed in monetary terms
Tax = Tax Base * Tax Rate
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Different ways to measure tax rates
Marginal Tax Rate: the tax rate that applies to the next additional increment of a taxpayer’s taxable income.
Average Tax Rate: the taxpayer’s average level of taxation on each dollar of taxable income.
Effective Tax Rate: the taxpayer’s average rate of taxation on each dollar of total income (both taxable and non-taxable)
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Tax Rates Example
Bill and Mercedes have $160,000 of taxable income and additional $10,000 of nontaxable income. Using the 2013 married-joint tax rates, what is their tax due, average tax rate, and effective tax rate? If they receive an additional $80,000 of taxable income, what is their marginal tax rate on this income?
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Tax Rates Solution
Tax Due = $32,265.50, computed as:
$32,265.50 = $28,457.50 + 28% x ($160,000 - $146,400)