HB 311 1st Edition Lecture 5 Taxes Three Taxing Levels Federal State Local Tax Base item that is taxed examples follow Income Tax Individual pays of income Wealth Tax Based on value of certain types of assets Consumption Tax Amount of goods we use such as sales tax Income Taxes Total Effective Tax Rate Total effective tax rate TETR combined rate to which taxpayer is subject State tax is deductible from income in calculation of federal tax Calculated as TETR T federal tax rate T state tax rate 1 T federal tax rate Progressive Tax Systems Marginal and Average Rates Progressive tax system characterized by higher tax rates on higher income Tax bracket is range of income where tax rate is constant Marginal Tax Rate rate that will be paid on the next dollar of income a taxpayer earns Average Tax Rate of total income a person pays in taxes Capital Gains and Losses Ordinary income includes wages business profits dividends and interest Capital gain or loss income arises when an asset that s help for investment is sold for more or less than was paid for it Capital Gains taxed at lower rates than ordinary income Generally taxed at 15 Personal Taxes Some income items are exempt from taxation including interest on municipal bonds Taxable Income is total non exempt income less exemptions and deductions These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o Deductions are personal expenditures that the tax code allows to be subtracted o Exemptions are fixed amounts that can be deducted to arrive at taxable income o Tax Rates and Investment Decisions When comparing investments in municipal bonds vs corporate bonds an adjustment must be made due to the fact that interest on municipal bonds are not taxed
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