HB 311 1st Edition Lecture 5TaxesThree 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 taxesCapital Gains and LossesOrdinary 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 itCapital 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 subtractedo Exemptions are fixed amounts that can be deducted to arrive at taxable incomeo 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
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