Individual Income Tax Rate

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Individual Income Tax Rate

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Lecture Note
University of Texas at Austin
Fin 320f - Foundations of Finance

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Lecture 10 Outline of Current Lecture -Individual Income tax rates -Progressive vs. regressive taxation -Ordinary income vs. capital gains -Deductions and exemptions -Marginal vs. avg tax rate -Tax deduction vs tax credit Current Lecture  Notice that the rates progress (get larger) as taxable income gets larger  In other words, the US has a progressive tax system  Regressive taxation applies higher rates to lower incomes  The tax tables apply to ordinary income:  Wages, salaries and tips  Interest income  Non-qualified dividend income (holding period ≤ 60 days)  Short-term capital gains (holding period ≤ one year)  A maximum of 20% is charged on:  Qualified dividend income (holding period ≥ 60 days)  Long-term capital gains (holding period ≥ one year)  All taxpayers deduct certain expenses from gross income  Companies deduct business-related expenses  Individuals deduct a personal exemption for each person on the tax return, plus:  An itemized list of living expenses, or  The “standard deduction” determined by Congress  The marginal rate is applied to the last (highest) dollar of taxable income  The average tax rate is applied to every dollar of taxable income  Average tax rate = Tax expense ÷ Taxable Income  Tuula’s average tax rate:  = $15,818.75 ÷ $79,850.00= 19.8%  A tax deduction reduces taxable income  The personal exemptions, plus the itemized or standard deductions for individuals, plus any other special deductions  All business-related expenses for corporations  As taxable income declines, the total tax liability declines as well  FIN 320F

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