Ch 12 Tax Planning Flashcards
average tax rate
The percentage of a taxpayer?s income that is paid in taxes (i.e., computed by dividing the current-year tax liability by the taxpayer?s income). The average tax rate is computed as a percentage of total taxable income (this generates the taxpayer?s average nominal tax rate) or as a percentage of the taxpayer?s total economic income (this generates the taxpayer?s average effective tax rate).
effective average tax rate
The proportion of a taxpayer?s economic income that was paid to the government as a tax liability (i.e., it is computed by dividing the tax liability by the taxpayer?s economic income for the year). Economic income includes nontaxable sources of income, such as gifts and inheritances, and tax-exempt interest.
marginal tax rate
The proportion of the next dollar of gross income (or other increase in the tax base) that the taxpayer must pay to the government as a tax. Thus, the marginal tax rate conveys the proportionate value of an additional deduction, or the cost of an increase to the tax base. Tax-effective decisions must take into account the marginal (and not the average or nominal) tax rate.
nominal average tax rate
Determined by an inspection of the applicable rate schedule. The average nominal rate at which the taxpayer?s total taxable income is taxed is computed by dividing the taxpayer?s total tax liability by his or her taxable income. Tax-exempt income is not included in the denominator of this fraction.
progressive tax rates
If the marginal rates of a tax rate schedule increase as the magnitude of the tax base increases, the schedule includes progressive tax rates.
proportional tax rate
If the marginal rates of a tax rate schedule remain constant as the magnitude of the tax base increases, the schedule includes proportional tax rates.
regressive tax rates
If the marginal rates of a tax rate schedule decrease as the magnitude of the tax base increases, the schedule includes regressive tax rates.
