Chapter 1- Introduction to Tax
Who cares about Taxes and Why?
● Business, Individuals & Politicians
What Qualifies as Tax?
Tax- payment required by a government that is unrelated to any specific benefit or service received
from the government.
Sin Taxes- imposed relatively high surcharges on alcohol and tobacco products
Earmarked Tax-budgeting practice of dedicating tax or other revenues to a specific program or
purpose.
Graduated Tax
● Divided into a series of monetary amounts or brackets
Flat Tax
● A single tax applied to an entire base.
Example of a Tax
● Margaret travels to Birmingham, Alabama, where she rents a hotel room and dines at several
restaurants. The price she pays for her hotel room and meals includes an additional 2 percent city
surcharge to fund roadway construction in Birmingham. Is this a tax?
○ This is a tax. The Payment is required by a local government and it does not directly
relate to a specific benefit that Margerit Receives.
Example of a Not Tax
● Margaret’s parents, Bill and Mercedes, recently built a house and were assessed $1,000 by their
county government to connect to the county sewer system. Is this a tax?
How to Calculate a Tax
Tax= Tax Base x Tax Rate
Tax Base- what is actually taxed ( Monetary Terms)
Tax Rate- level of taxes imposed on the tax base and is usually expressed as a percentage.
Purchase of $30 has a tax of 6%
How much is the Tax?
$30 x 0.06= $1.80
Common Tax Bases
● Taxable Income ( Federal & State Income Taxes)
● Purchases ( Sales Tax)
● Real Estate Values ( Real estate Tax)
● Personal Property Values ( Personal Property Tax)
,Taxable Income: Gross Income- Deductions
Marginal Tax Rate
● the incremental tax paid on an incremental amount of additional income or deductions.
Example:
160,000$ is between 81,150 and 172,750. They pay
9,328$ + 22% of taxable income in excess of 81,050
9,328$+ 22% of 91,700
$9,328+17,369= $26,697
,Example 1.4
Marginal tax rate= ( New Total Tax- Old Total Tax) / (New Taxable Income- Old Taxable Income)
New Total Tax calculation= 160,000+80,000= 240,000
240,000 is between the tax bracket of $172,750 and 329,850.
29,502 +24% of taxable in excess of 172,750
24% of 240,000-172,750= 67,250
24% of 67,250=16,140
29,502+ 16,140=
New Total Tax- 45,642
Old total tax- 26,697
New Taxable income- 240,000
Old Taxable income- 160,000
(45,642-26,697) / (240,000-160,000)= 0.2368= 23,68%
, Marginal tax rate= ( New Total Tax- Old Total Tax) / (New Taxable Income- Old Taxable Income)
New total tax calculation:
160,000-90,0000= 70,000
In the bracket between 19,900 and 81,050.
$1,990 +12% taxable income in excess of 19,900
$1,990+ 12%(50,100)
$1,990+6,012= 8,002
New Total Tax- 8002
Old total tax- 26,697
New Taxable income- 70,000
Old Taxable income- 160,000
(8,002-26,697) / (70,000-160,000)= 0.2077= 20.77%
The marginal tax rate is particularly useful in tax planning because it represents the rate of
taxation or savings that would apply to additional income (or deductions).
Who cares about Taxes and Why?
● Business, Individuals & Politicians
What Qualifies as Tax?
Tax- payment required by a government that is unrelated to any specific benefit or service received
from the government.
Sin Taxes- imposed relatively high surcharges on alcohol and tobacco products
Earmarked Tax-budgeting practice of dedicating tax or other revenues to a specific program or
purpose.
Graduated Tax
● Divided into a series of monetary amounts or brackets
Flat Tax
● A single tax applied to an entire base.
Example of a Tax
● Margaret travels to Birmingham, Alabama, where she rents a hotel room and dines at several
restaurants. The price she pays for her hotel room and meals includes an additional 2 percent city
surcharge to fund roadway construction in Birmingham. Is this a tax?
○ This is a tax. The Payment is required by a local government and it does not directly
relate to a specific benefit that Margerit Receives.
Example of a Not Tax
● Margaret’s parents, Bill and Mercedes, recently built a house and were assessed $1,000 by their
county government to connect to the county sewer system. Is this a tax?
How to Calculate a Tax
Tax= Tax Base x Tax Rate
Tax Base- what is actually taxed ( Monetary Terms)
Tax Rate- level of taxes imposed on the tax base and is usually expressed as a percentage.
Purchase of $30 has a tax of 6%
How much is the Tax?
$30 x 0.06= $1.80
Common Tax Bases
● Taxable Income ( Federal & State Income Taxes)
● Purchases ( Sales Tax)
● Real Estate Values ( Real estate Tax)
● Personal Property Values ( Personal Property Tax)
,Taxable Income: Gross Income- Deductions
Marginal Tax Rate
● the incremental tax paid on an incremental amount of additional income or deductions.
Example:
160,000$ is between 81,150 and 172,750. They pay
9,328$ + 22% of taxable income in excess of 81,050
9,328$+ 22% of 91,700
$9,328+17,369= $26,697
,Example 1.4
Marginal tax rate= ( New Total Tax- Old Total Tax) / (New Taxable Income- Old Taxable Income)
New Total Tax calculation= 160,000+80,000= 240,000
240,000 is between the tax bracket of $172,750 and 329,850.
29,502 +24% of taxable in excess of 172,750
24% of 240,000-172,750= 67,250
24% of 67,250=16,140
29,502+ 16,140=
New Total Tax- 45,642
Old total tax- 26,697
New Taxable income- 240,000
Old Taxable income- 160,000
(45,642-26,697) / (240,000-160,000)= 0.2368= 23,68%
, Marginal tax rate= ( New Total Tax- Old Total Tax) / (New Taxable Income- Old Taxable Income)
New total tax calculation:
160,000-90,0000= 70,000
In the bracket between 19,900 and 81,050.
$1,990 +12% taxable income in excess of 19,900
$1,990+ 12%(50,100)
$1,990+6,012= 8,002
New Total Tax- 8002
Old total tax- 26,697
New Taxable income- 70,000
Old Taxable income- 160,000
(8,002-26,697) / (70,000-160,000)= 0.2077= 20.77%
The marginal tax rate is particularly useful in tax planning because it represents the rate of
taxation or savings that would apply to additional income (or deductions).
