Tag Archives | income

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.

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tax brackets

Originally posted by Jim Wilkinson on July 24, 2013. 

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Revocable Trust

See Also:
Pension Plans
Keogh Plan
Credit Life Insurance
401k
Individual Retirement Account (IRA)

Revocable Trust Definition

A revocable trust is an agreement between a grantor and trustee where it transfers profit generating assets to the trustee. However, the grantor is still able to generate income from the assets. The grantor is also able to change the terms of the agreement at any point during his/her lifetime. This last point is the difference between a revocable trust and an irrevocable trust.

Revocable Trust Meaning

Many use revocable trust estate planning to pass on a family company or perhaps some other part of the grantor’s estate to a revocable trust beneficiary. Beneficiaries are usually the grantor’s immediate family, but it can be anyone established within the contract. The main benefit is that the assets will be transferred to who the grantor desires. The grantor can still generate cash flow from the assets as well. Another primary benefit is that the grantor can change the terms at anytime to accommodate the grantor’s changing needs.

Revocable Trust Example

For example, Bob owns a bicycle shop chain named Pedal Bikes Co., which is a Sole Proprietorship. He has two sons and would like them to take over the company whenever he has passed away. Bob talked to his lawyer. The lawyer advised Bob that he should start up a revocable trust. The assets are then transferred to the newly formed Pedal Bikes Partnership under the revocable trust agreement. The two sons start running the chain while Bob comes into help them every now and then and provide oversight. Bob also receives payments from the company under the trust agreement.

When Bob passes away, the assets are then considered permanently transferred and are completely absorbed into the newly formed partnership. However, if one of Bob’s sons or both of them do not want to run the chain then Bob has the ability to change the terms of the contract to one of the sons or another party. This also insures that Bob receive payments in his later years and that his legacy lives on through his bike store chain.

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Gross Up

See Also:
Adjusted Gross Income Definition
Gross Profit Margin Ratio Analysis
PEO Arrangement Compared to Outsourcing Payroll
Payroll Accounting
Purchase Option

Gross Up Definition

Defined as paying a full amount without any deductions, gross up is most often used in terms of salary for employees.

Gross Up Explanation

Gross up, explained as a method for human resources to gain the benefit of their wages as soon as possible, is more simple than it appears. When salary is grossed up it is paid fully without any deductions that are not required, like 401k payments. This allows the employee to begin using their entire income as soon as possible. Though gross up wages are paid in full, deductions required by the government still occur. An employee will not be able to avoid income tax when they gross up; taxes will still need to be paid before the final amount is then given to the worker.

Other payments can also receive the gross up calculation. For example, a payment for the purchase of a business can be grossed up. In this case, the receiving party will take their full amount of payment rather than having to wait some time for completion. This allows the previous owner more freedom than if some of the payment is withheld. Gross up operating expenses and other payments occur, as well.

Example

Stella works for a financial services company. Stella, an investment advisor, has a keen sense for prudent investments. Through her years of experience she has earned this skill as well as the art of negotiation. Both of these abilities have worked to her advantage.

Stella is interviewing for a new job. The employer knows that Stella is well suited for the work. Stella also knows this. The interview runs smoothly as Stella continues providing answers.

When it comes time to negotiate salary Stella prepares her words. She begins with the salary she deserves, which it appears her employer is ready to accept. Then Stella brings up the option of her receiving a gross up paycheck, calculator in hand, with some figures. She shows the interviewer how she can make more income while saving the company money. Her explanation is simple; she can invest her wages and receive greater gain in the long run if she is fully paid now. On the other hand, the company will only feel a slight decrease in cash holdings from this. Stella’s resume and years of experience give backing to her claims, that she can be trusted, and the validity of her gross up formula calculation.

Stella completes her argument and is granted a gross up salary. She is satisfied that she has created a good situation for her and her company. She leaves the office with a smile on her face.

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Flat Tax Rates

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

Flat Tax Rates Definition

Flat tax rates refers to a single tax rate that is applied to all levels of income. In a flat tax rate system individuals with lower levels of income are taxed at the same rate as individuals with higher levels of income.

A flat tax rate system is in contrast to a progressive tax rate system, in which individuals with different levels of income are taxed at different tax rates. There are arguments for the benefits of a flat tax rate system and arguments that emphasize the problems with a flat tax rate system.

Flat Tax Example

Here is a flat tax example. 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 flat tax rate for this example is 20%.

The first individual, the person with a salary of $20,000, pays taxes of $4,000. The second individual, the person earning $50,000 dollars, ends up paying taxes of $10,000. While the third individual, the one making $150,000 dollars, ends up paying $30,000 dollars. So the amount of taxes paid, but the percentage of income that must be paid in taxes is the same for all income levels.

Flat Tax Benefits

There a several benefits to using a flat tax rate system. Those who argue for the benefits of a flat tax rate claim that it is simple and fair. In addition, they claim it motivates individuals to work harder in order to earn a higher salary.

The simplicity of the flat tax rate system comes from the fact that everyone pays taxes at the same rate. This is simpler than a progressive tax rate system in which individuals at different income levels pay different tax rates. The proponents of the flat tax rate system also claim that it is fair – more fair than a progressive system because of the equality in taxation. Everyone is taxed at the same rate, so it is a fair system.

And finally, because those earning higher salaries would not be taxed at higher rates, proponents of the flat tax rate system claim that it motivates individuals to work harder so as to earn more. The idea being that with a higher salary and a flat tax rate, individuals get to keep more of their income then they would with a progressive tax system.

Flat Tax Problems

Those who argue against flat tax rates claim that it is unfair and it punishes those individuals who earn lower incomes. For individuals with lower incomes it is more of a burden to pay taxes. Even though the tax rates are the same, individuals with lower income have less income to live comfortably and find it harder to pay taxes at the same rate as the individuals with higher incomes and more breathing room in terms of affording a comfortable standard of living.

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Economic Income Definition

See Also:
Economic Order Quantity (EOQ)
Accounting Income vs. Economic Income
Economic Production Run (EPR)
Problem With Days Sales Outstanding Example

Economic Income Definition

Economic income is the way for companies to account for changes in the value of a given asset in the market. It generally recognizes unrealized gains, in addition to recognizing realized gains.

A change in market value rather than cash received is the perfect example of an economic income. Economic income or loss recognizes all gains and losses whether realized or unrealized. This differs from accounting income which only recognizes realized gains: gains resulting from an actual business transaction. This defines the difference of accounting earnings vs economic earnings.

For income to be realized it must result from actual business transactions. A change in market value rather than cash received is economic income and not accounting income. When a gain or loss is unrealized it may or may not be accounted for in general. This depends on the placement of the gaining or losing asset in the balance sheet. Despite that this gain or loss may be accounted for, the fact that it is unrealized makes it an economic income or loss. The term economic income was born out of the need for financial accounting income vs economic income comparisons.

Economic Income and Time

Economic income assists companies in knowing the value of an asset if it was sold at a given time. Key to the economic income discussion is the current value of the asset. By then selecting a time period, research can estimate what price will be paid for the asset. This, as compared to estimations of market performance for the time period, can allow for projections of the market value of the asset in the future.

“If the current price of the land is $100,000 and we expect the market to increase by 10% next year, then the value of the land will be somewhere around $110,000 by the end of next year ($100k + $10k = $110k)”.

These measurements allow projections which influence decisions of financing, cash flow, insurance, timing of the asset sale, and other important decisions. Including costs in the decision can expand further to allow for net accounting income vs net economic income comparisons.

Economic Income Example

A perfect example of economic income occurs every day. Realco is a company which sells land. Realco purchased, last year, a piece of land for $100,000. The following year Realco notices the land is selling for $110,000. What is Realco’s economic income?

Realco has not sold the land. As a result it experienced an economic income of $10,000. This is proven by the fact that Realco did not have a transaction in which cash increased by $10,000. The economic income concept revolves around the recognition of income in spite of the fact that no sale has taken place.

If Realco sold the property, then it would have experienced an accounting income. Their land was sold for $10,000 more than initially worth. Thus, Realco has a realized gain of $10,000. The accounting earnings vs economic earnings calculation is the same: The difference is whether Realco gains $10,000 from the sale or not.

$110,000 (revenue from sale) – $100,000 (cost of land) = $10,000 (profit from sale)

economic income           accounting income

$10,000                   $10,000

In addition to monitoring market value changes, economic income provides a place holder for an asset in company financials. This allows for managerial accounting income vs economic income decisions. Without economic income, you would only account for an asset when sold or purchased. Economic income allows the monitoring of an asset between the transaction. At the time of accrual accounting income vs economic income evaluations are not the most important matter. They do form an important issue, however, with the natural business cycle changes that result from time.

economic income definition

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Comprehensive Income

See Also:
Accounting Income vs. Economic Income
Accounting Income Definition
Economic Income
Income Statement
Net Income
Debt Restructuring
Maximizing Your Bottom Line In 3 Simple Steps
Net Profit Margin Analysis

Define Comprehensive Income

Define Comprehensive Income as the overall change in wealth for a company during a period. This includes not only the growth through income and size but also reflects equity changes among the firm as well as market conditions that arise. All of this information is generally summarized on the comprehensive income statement.

Meaning

This type of accounting was established to try and gauge a company better because it is left out of the calculation of net income. This was done because the items in comprehensive income do little to gauge the economic performance of the company. However, this type of income and net income differ in that the comprehensive income effects the assets and liabilities that are reported on the balance sheet.

Comprehensive Income Formula

Use the following comprehensive income formula:

Gross Profit Margin (RevenueCOGS)
Operating Expenses
(+/-) Other Income items
(+/-) Discontinued Operations (add if savings, subtract if loss)
Comprehensive Income

Comprehensive Income Example

For example, Casa entertainment is a company that provides VHS, DVD, TVs, as well as speaker system products to it’s customers. The company invest in securities on the side. They recently discontinued its VHS operation due to the fact that it has become unprofitable. Finally, the company asked Annie an accountant to calculate the comprehensive income given the following information for Casa Entertainment:

Gross Profit = $20 million
Operating expenses = $5 million
Other Income (Profit in Security Investments)= $2 million
Discontinued Operations (Savings from disposal of VHS operations) = $1 million

Thus using this equation above comes out to $18 million dollars.

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Budgeting vs Forecasting

See Also:
Forecasting
Comparison Analysis

Budgeting vs Forecasting

The budgeting vs forecasting process has been a good discussion between financial professionals. The argument of whether they serve the same purpose or if one is better than the other has lead to some interesting debates. The term has been used several times interchangeably. However let’s explore why this is incorrect by identifying the budget vs forecast difference. When it comes to planning and grading the company’s financial health, they are both tools that can be used by companies. Their managers to do just that. However, the proper way to use them both is in concert with one another and not particularly as a substitute for one another.

Budgeting

What is budgeting, definition-wise? It is the process used to compose a plan or create an estimate during a prior year or at the beginning of a current year to help manage and control the income and expenditures of the company for that year. Some have even defined a budget to be a road map or financial guide that recognizes the income of the company, while detailing the expense allowances with a not-to-exceed expectation for that given year. Now let’s examine the definition of forecasting to compare the differences between the budgeting and forecasting process.

Forecasting

Forecasting is another financial tool commonly used to help determine the financial status of a company. The meaning of financial forecasting is quite different from that of budgeting. Where the budget is used as a financial planner, the forecast uses this plan and compares it to the current financial direction of the company. They do this to predict where the company will end up by the end of that year. In other words, use the forecast to see if the company will meet or exceed the expectations from the budget allowing the managers and controllers to set future goals. They also use forecasts to identify trends that are used to grade the company’s financial position. They both seem to be very resourceful tools. Instead of comparing financial forecast vs budget, the more important discussion should be which tool is more effective.

Which is More Important?

So which tool in the financial forecast versus budget debate is more important? Let’s answer a few questions first. Can a business run productively without a budget, a plan of action for each year? Some do. However, to run a successful business without monitoring your financial status throughout the year to predict its financial grade by the end of the year can be very difficult. Budgeting can be a good tool to use to help plan the future of the business; however a greater predictor of future behavior is past behavior. The purpose of investing time to create a financial forecast is to predict the future based upon certain assumptions. In addition, use the past to defend those assumptions. Both tools are necessary for a business to be successful. In short, a budget sets the company’s goals while a forecast defines its expectations.

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