Introduction to Finance: Markets, Investments, and Financial Management, 15th Edition

LEARNING EXTENSION 13

Federal Income Taxation

In addition to financing and risk factors, income tax liabilities may differ for each form of business organization selected. Income from partnerships and proprietorships is combined with other personal income for tax purposes. We show the sample tax rate schedules for a married couple filing jointly and for a single person.

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Get updated tax rate information and download forms from the IRS tax site, http://www.irs.gov.)

A cursory observation shows that personal income tax rates are progressive tax rates because the higher the income, the larger the percentage of income that must be paid in taxes. For example, let's assume the taxable income from a proprietorship is $50,000 and the owner has no additional income. If the owner is married and filing a joint return and the spouse has no reportable income, the income will be taxed as follows:

The marginal tax rate is the rate paid on the last dollar of income. In our example, it is 15 percent and applies to that portion of the taxable income between $16,750 and $68,000. The average tax rate is determined by dividing the tax amount of $6,662.50 by the $50,000 in taxable income; ...