Tag Archives | income taxes

Tax Brackets

See Also:
Marginal Tax Rate
Prepaid Income Tax
Ad Valorem Tax
Deferred Income Tax
Cash Flow After Tax

Tax Brackets

What are tax brackets? Tax brackets are levels of taxation determined by income. Individuals with income falling within a certain tax bracket pay taxes according to the stated rate for that bracket. Typically, lower income is taxed at a lower rate and higher income is taxed at a higher rate. The idea is that people making more money can afford to pay more taxes and still live comfortably while people making less money have less income available to pay towards taxes. Tax brackets are a component of progressive tax rate systems.

Tax Bracket Example on 2008’s Tax Rates

Here is a tax bracket example based on 2008’s tax rates. Let’s look at three individuals with three different incomes. The first person earns annual taxable income of $20,000 dollars. The second earns annual taxable income of $50,000 dollars. The third person earns annual taxable income of $150,000 dollars.

The tax brackets for this hypothetical example are as follows. Individuals making less than $25,000 dollars of annual taxable income must pay taxes at the rate of 15%. Individuals earning income between $25,001 and $50,000 dollars must pay taxes at a rate of 20%. And individuals making more than $50,001 dollars of annual taxable income must pay 25% taxes.

In this example, the first individual, the person with a salary of $20,000 who pays taxes according to the first tax bracket tax rate, pays taxes of 15%. This amounts to $3,000 dollars of taxes due for that individual. The second individual, the person earning $50,000 dollars who is taxed at 20% ends up paying taxes of $10,000. While the third individual, the one making $150,000 dollars and paying taxes at a rate of 25% ends up paying $37,500 dollars. Of course, these are not the real tax brackets in the U.S. or elsewhere, they are merely hypothetical examples for illustrative purposes.

US Tax Brackets 2008

Tax Rate      Single                    Married Filing Jointly 
10%           $0 - $8,025               $0 - $16,050 
15%           $8,026 - $32,550          $16,051 - $65,100 
25%           $32,551 - $78,850         $65,101 - $131,450 
28%           $78,851 - $164,550        $131,451 - $200,300 
33%           $164,551 - $357,700       $200,301 - $357,700 
35%           Over $357,701             Over $357,701

Tax Bracket Example on 2018’s Tax Rates

Let’s look at another tax bracket example based on 2018’s tax rates. There are three different people that earn different incomes. The first person earns annual taxable income of $50,000 dollars. The second earns annual taxable income of $100,000 dollars. The third person earns annual taxable income of $250,000 dollars. By using the US Tax Brackets 2018 chart below, the first person is in the 22% tax bracket; the second person in the 24% tax bracket; the third person in the 35% tax bracket.

The first individual makes $50,000. Using the 22% bracket, this individual owes $11,000.

The second individual makes $100,000. Using the 24% bracket, this individual owes $24,000.

The third individual makes $250,000. Using the 35% bracket, this individual owes $87,500.

US Tax Brackets 2018

Tax Rate      Single                    Married Filing Jointly 
10%           $0 - $9,524               $0 - $19,049 
12%           $9,525 - $38,699          $19,050 - $77,399 
22%           $38,700 - $82,499         $77,400 - $164,999 
24%           $82,500 - $157,499        $165,000 - $314,999 
32%           $157,500 - $199,999       $315,000 - $399,999 
35%           $200,000 - $499,999       $400,000 - $599,999
37%           $500,000 +                $600,000 +

IRS Tax Bracket Information

For IRS tax bracket information, IRS tax bracket tables, and IRS tax brackets for 2018, go to the following website: irs.gov.

Download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

tax brackets

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

tax brackets

Originally posted by Jim Wilkinson on July 24, 2013. 

0

Prepaid Income Tax

In accounting, Prepaid Income Tax is defined as an asset listed on the balance sheet that represents taxes that have been already paid despite not yet having been incurred. It is also called a deferred income tax asset.

Prepaid Income Tax Explanation

Prepaid income tax is a form of prepaid expense. The most common reason why prepayment on income taxes occurs is due to over-estimation of tax deposits. In this situation, taxes are estimated from the financial records of the previous year. These estimated taxes are paid. Then, when the year-end taxes are found to be less than the taxes paid earlier, prepayment on income taxes has occurred. This prepayment can create one of two results. Either it results in a tax refund or the credit written off towards the tax liability of the next period.

(NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFOs. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)

The difference between prepaid income tax and a deferred tax asset is that prepaid income tax occurs within one year. Conversely, a deferred income tax asset can occur for a period of longer than one year.

Often, prepaid income taxes are the result of poor assumptions. Generally, company controllers overestimate the needed tax deposits. In conclusion, this is one of the most common cases leading to prepaid income taxes.

Prepaid Income Tax Journal Entry

The following is what the prepaid income tax journal entry may look like:

DR                                                    CR
Prepaid Income Tax               $100,000
Cash                                                                                              $100,000

Income Tax Expense              $25,000
Prepaid Income Tax                                                                   $25,000

Result: Prepaid income tax balance = $75,000

Download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.

Prepaid Income Tax

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Prepaid Income Tax

See Also:

Marginal Tax Rate
Tax Brackets
Flat Tax Rates
Cash Flow After Tax
Unclaimed Property

3

Whole New Meaning For “Tax Return”

I was helping my daughter prepare her tax return last night. She graduated in May of 2009 and started a job in August 2009. As she was entering information into Turbo Tax, she asked me how much money she would get back. I informed her that she may or may not get any money back. In fact, some years she might have to write a check!

Whole New Meaning For “Tax Return”

She was shocked! She said, “I thought tax returns meant that they return your taxes!”

Once I stopped laughing, I spent the next 30 minutes explaining the difference between getting a refund and how much taxes you pay. Needless to say it was an awakening for her.

tax return

2

History of Income Tax Rates: Refresher

After the President’s recent State of the Union speech it might be a good time to refresh our knowledge of the history of income tax rates. Given the massive deficit that the government is creating it is inevitable that income tax rates will go up. But by how much? History should provide a clue as to how high they can go.

History of Income Tax Rates

Question: How long ago was the marginal income tax rate double today’s rate of 35%? Answer: 29 years ago or 1981!

Question: What is the highest marginal tax rate in history? Answer: 94% in 1945!

Question: What was the beginning marginal tax rate in what year? Answer: 7% in 1913 for incomes over $500k!

Income taxes have been in existence for almost 100 years in the United States. They are presently the lowest they have been during that time period. So, what are the chances of them staying this low in the future?

During this 100 year period the taxable income threshold has dropped after being adjusted for inflation. Furthermore, income taxes have increased or taxable income thresholds have dropped after every major war time period. In other words, the government has had to pay for WWI, WWII, Korean and Vietnam Wars with higher taxes. We now have two wars to pay for; Afghanistan & Iraq!

The question faces us in not whether income taxes will increase but how high will they go? It is entirely possible that the marginal tax rates could go back up to a 70% bracket in the next 5 years.

For the past 25 years we have tended to ignore the tax effect of Federal income taxes on our investments. Going forward taxes will have a bigger impact on the economics of our deals. In the future business is going to be buffeted by strong headwinds: higher taxes and higher interest rates!

Download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

History of Income Tax Rates

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs


History of Income Tax Rates

0

When will it end?

Thanks to an incredible increase in the leverage used by various commercial banks, investment banks, and investment firms over the last 6 years, the US capital markets and perhaps the world’s teeter on the verge of collapse. For a good overview and one that puts it in the proper perspective, see this from the WSJ.

This has led the US government to make a $85 billion direct equity investment in AIG, receiving 80% of AIG’s equity. For a critical reaction, see here.

The Fed is also continuing to print money to increase liquidity available to banking institutions.

In recent days, we’ve seen the federal government take the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) into conservatorship, confirming the GSE status that many in the nation’s capital seemed to misunderstand or not understand at all. There was also the loan guarantee the Fed provided to JPMorgan Chase to acquire a faltering Bear Stearns. Amazingly, at least one significant financial market player (Lehman Brothers) was actually allowed to fail.

Lest we forget that Detroit is likely to be heading to DC with hat in hand sometime soon.

These are interesting times, to say the least. And to top it off, we have a presidential campaign nearing its conclusion in less than 50 days, with both campaigns offering some version of increased federal government involvement in the economy, and in particular in the capital markets.

How this plays out is far from certain, but it seems a near certainty that the taxpayers across the fruited plain will be left holding the bag.

When will it end

0

Don’t Let Tax Strategies Drive Financial Performance

With most young companies cash is king. As a company grows managing the cash available to finance that grow is crucial to sustaining the growth rate. Minimizing the cash expenses of the company is an entrepreneurs and CFO’s primary job. One of the main cash expenses is federal income taxes.

Don’t Let Tax Strategies Drive Financial Performance

During this start up and growth phase (which can last 10 years or more) the entrepreneur is focused on minimizing the cash payments for federal income taxes. He will work closely with his tax CPA to aggressively take financial positions that minimize taxes.

Somewhere along the line this strategy begins to lose its effectiveness. It generally happens when outside bank financing is obtained to fuel the growth of the company. As larger and larger amounts of outside debt is obtained the financial reporting needs of the company changes. The financial statements must now be presented to new users (i.e. the bank). The banks are seeking a clearing picture of the financial position of the company on an accrual basis. Often they want to know the true equity available from the company so they can establish the leverage of the company.

But maximizing the equity value of the company often is at odds with minimizing federal income taxes. To minimize taxes you typically end up either taking deductions sooner, deferring the recognition of income or valuing assets more conservatively. Taking these positions is fine until you want to borrow money.

Most entrepreneurs want to borrow as much as they can to fuel growth. However, by presenting there financial statements on a tax basis they minimize the amount that lenders will advance.

Conclusion on Tax Strategies Driving Financial Performance

The answer is that just as no strategy works in every situation, neither does one strategy work forever. The goal of the CFO should be to educate the owner to the needs of the other users of the financial statements. Often the benefits of paying higher income taxes is offset by the increased growth rate of the company.

Tax Strategies

0