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Social Security Rate

Social Security Rate Definition

The social security rate definition is a tax taken out of employees and employers salaries and wages. This tax goes towards the social security program in the United States. The founders built this program to provide benefits to eligible retired persons.

Social Security Tax Rate Meaning

The current social security tax rate withheld from each paycheck is in the amount of 6.2%, and is equally contributed for by the employer making the total 12.4%. For example, the social security tax cap 2010 is equal to $106,800. This means that once an employee has made earnings of this amount there can be no further tax taken out for that employee’s paychecks. Furthermore, these calculations are normally not performed by the employee. Instead, the payroll department or an outsourced function calculates the social security rate.

Social Security Tax Rate Example

For example, Bob works for Testacorp Inc. his annual salary is $200,000 which he receives in a paycheck every two weeks for $8,333. Therefore, Social Security requires Bob to pay a social security tax. The amount for his first 13 paychecks equals $516. After these paychecks, Bob’s cumulative earnings are above the threshold of $106,800.

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social security rate, Social Security Tax Rate

See Also:
Payroll Accounting
Deferred Income Tax
Tax Brackets
Flat Tax Rates
How to Maintain an effective Job Schedule

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Marginal Tax Rate

See Also:
Tax Brackets
Prepaid Income Tax
Flat Tax Rates
Deferred Income Tax
Cash Flow After Tax

Marginal Tax Rate

The marginal tax rate is the tax rate that applies to an incremental dollar of a company’s pre-tax income. It is the tax rate paid on the last dollar earned.

A company may incur a certain tax rate on income up to a certain amount. Beyond that amount the tax rate may change to the tax rate that is marginal, which then applies to incremental income earned beyond that point.

Because it applies to incremental income, this rate is the most important tax rate in business decision making.

In the U.S., the marginal tax rate increases as a company’s income increases. So the more a company earns, the higher its tax rate is. Some economists think that this discourages productivity in business.

Marginal Tax Rate

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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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Dividends

See Also:
Dividend Yield
Capital Impairment Rule
Dividend Payout Ratio
Financial Ratios

Dividends Explained

Dividends are corporate profits distributed to shareholders. When a company makes a profit, the board of directors can decide whether to reinvest the profits in the company or to pay out a portion of the profits to shareholders as a dividend on shares. The board of directors determines the amount of the dividend on stocks, as well as the dividend payout dates.

Stockholders typically receive a certain amount of dividends per share for each share of stock they own. Tax rates on dividends, historically, have often differed from tax rates on capital gains from investments. If the dividend tax rate exceeds the capital gains tax rate, it may benefit the shareholders to avoid paying a dividend, and instead to carry out a stock repurchase.

Dividend Yield Definition

We define dividend yield as the dividend amount expressed as a percent of the current stock price. For example, if a stock will pay a $1 dividend at the end of this year, and today the stock price is $10, then that stock’s dividend yield is 10%.

10% = 1/10

Dividend yield equation

Dividend Yield = D1 / P0

D1 = Annual dividend per share amount (the dividend per share at time period one)
P0 = Current stock price (the price at time period zero)

Dividend Date Definitions

The process of distributing dividends to shareholders follows a set schedule. The board of directors announces the dividend on the dividend declaration date. Once the dividend has been declared, the company is legally obligated to pay the stated dividend to shareholders.

The next significant date is the ex dividend date. Investors who purchase the stock on or after the ex-dividend date will not receive the forthcoming dividend. Prior to the ex dividend date, the stock is considered cum dividend, or with dividend. This means that anyone buying the stock during this period will receive the forthcoming dividend.

The ex dividend day precedes the dividend record date, or the dividend date of record, by three days. Shareholders documented as owning the stock on the dividend record date will receive the dividend.

Last is the dividend payable date, or the dividend distribution date. This is the actual date on which the company pays out the dividends to its shareholders. The dividend payable date is typically about a month after the dividend date of record.

Dividend Payout Dates

• Dividend Declaration Date (stock is trading cum dividend)
• Ex-Dividend Date
• Dividend Record Date (three days after the ex-dividend date)
Payable Date for Dividend (one month after the dividend record date)

Dividend Signaling

Dividend signaling hypothesis refers to the idea that changes in a company’s dividend policy reflect management’s perceptions of the company’s future earnings outlook. Basically, it states that a change in a company’s dividend policy can be interpreted as a signal regarding future earnings. The problem is that a company can interpret the signals as contradictory messages.

Dividend Example

For example, if a company announces that it will increase its dividend yield, investors may interpret this as a positive signal. It could mean the company anticipates a profitable future and is allowing shareholders to benefit from these profits.

On the other hand, one can interpret an increase in the dividend payout rate as a negative signal. It could mean that the company has no good investment opportunities, and it has nothing better to do with its cash than to pay it out to shareholders as dividends.

Similarly, if a company announces that it will decrease its dividend payout rate, this can be interpreted as either a positive or negative signal. It could be interpreted as a positive signal because it could mean that the company has so many good investment opportunities that it needs all available cash for positive-NPV investments and projects. This could mean the company is growing and expanding.

On the other hand, if a company cuts its dividend rate, that could mean that the company anticipates lower earnings or even losses. This, of course, could be a bad sign. So as you can see, the logic behind the dividend signaling hypothesis makes sense, but because it can be interpreted in contradictory ways, the reading of the signals is not necessarily very meaningful.

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Capital Gains Tax Rates in 2013

Capital Gains Tax Rates in 2013

Capital gains are earnings from the sale of an asset. These assets include stocks, bonds, real estate, equipment, intangible assets, or other property. There are new capital gains tax rates in 2013 for taxpayers. Following are the new rates:

  • 0% capital gains tax rate for long-term capital gains and dividend earnings for the 10% and 15% tax brackets
  • 15% capital gains tax rate for long-term capital gains and dividend earnings for the 25%, 28%, 33%, or 35% tax brackets
  • 20% capital gains tax rate for long-term capital gains and dividend earnings for the 39.6% tax bracket.

Long-Term Capital Gains

Long-term capital gains refer to the profits earned when you sell an asset you have owned for at least one year. While short-term capital gains are taxed at the same rate as normal income, long- term capital gains have a lower tax rate than normal income. The government’s reasoning behind this is that lower tax rates for long-term gains promotes long-term investments. Critics of the capital gains tax argue that taxing investments will lead to less investment. Thus, it will lead to higher costs for companies to raise capital for new developments. Accordingly, fewer investors mean less-profitable companies and less wealth.While this may be going to the extreme, some people may indeed avoid purchasing an asset or investing in stocks in order to avoid capital gains taxes.

Short-Term Capital Gains

Short-term traders and investors have to pay a larger cut of their income than those who buy and hold. One way to pay no capital gains taxes is to never sell your asset or investment. As Warren Buffet once said in a 1988 letter to Berkshire Hathaway shareholders, “Our favorite holding period is forever.” In this statement, Buffett advises shareholders and investors that the ideal holding period is “forever” if you want to avoid paying the government capital gains taxes. This is ideal in theory, but most individuals don’t hold on to their asset or investment forever. With a long-term investment, take adequate time to analyze what you are investing in. How much are you paying? What kind of growth do you project over time? What will be the asset’s value in the long-run?

Capital Gains Tax Rates

See also:
Capital Gains
Exchange Traded Funds

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