1. Income Taxes Chapter 3

2. Progressive and Marginal Tax Rates Taxes are compulsory government-imposed charges levied on citizens and their property. Progressive income tax is the tax rate which increases as taxable income increase. Marginal tax rate is the tax rate which is applied to income in each tax bracket range at increasing rate.

3. Marginal Tax Rates Segment of taxable incomeMarginal tax rate (%) First $8,35010 $8,351-$33,95015 $33,951-$82,25025 $82,251-$171,55028 $171,551-$372,95033 Above $372,95035

4. Marginal Tax and Average Tax Marginal tax rate affects financial decisions. Effective marginal tax rate is the total marginal tax rate paid. Average tax rate is lower than marginal tax rate.

5. Step 1: Determine Total Income Various types of income includes ▫Wages and salaries ▫Commissions ▫Bonuses ▫Royalty ▫Rent income ▫Capital gains and losses.

6. Step 1: Determine Total Income (ctd) Capital gain occurs when selling price is more than purchase price. Capital loss occurs when selling price is less than purchase price. Long-term gain (loss) is taxed lower than short- term gain (loss).