- Email: [email protected]
Management
r How to Find Your New Tax Bracket
Knowing your tax bracket for the By C. LOUIS HOHENSTEIN coming year can mean money in your pocket. ....- - - - - - - - - - - - - This is because the true value of the tax bracket $35,200-45,800) is business and personal money transused to find a corresponding maractions depends on how much of ginal tax rate (like 39%), many peoeach dollar you actually keep-and ple use the term tax bracket synhow much the government takes onymously with marginal tax rate, back as taxes. Knowing your tax but they are different. bracket lets you estimate the tax Tax brackets and the associated consequences of a transaction or inmarginal tax rates are based on taxvestment, and allows you to find the able income-your gross income after bottom line-the amount you keep various exclusions and deductions after taxes. are subtracted. Normally, taxable Your tax rate is the percentage at which your next dollar of business income isn't figured until you do or personal income is taxed. The your tax return. However, for effecmore money you make, the greater tive tax planning, you need to estithe rate at which this next dollar of mate your taxable income for 1982. income is taxed. Because the signifiTo do this, use the figures on your cant figure is the tax rate for your last tax return as a guide, and make next, or "marginal" dollar of inround-number estimates of the come, as economists call it, the full main totals for this year: gross inname of your applicable tax rate is come, income deductions, total marginal tax rate. itemized deductions, exemptions, For example, if you earned a taxand finally, taxable income. Don't able income of $40,000 in 1981 and worry about trying to estimate these prepared an IRS tax return as a marfigures exactly. With the estimated ried taxpayer filing jointly, your taxable income find your tax rate earning falls into the tax bracket from tables 1 or 2, as we'll now $35,200-45,800, for which the corrediscuss, and use it for effective sponding 1982 marginal tax rate is planning. 39%-the rate at which your next Finding Your Tax Rate dollar of ordinary income is taxed (table 2, columns 1 & 2). The governThe only way to learn your actual ment gets 39¢ of that dollar. tax rate is from an IRS tax rate Your tax bracket is actually one schedule. Two reasons some people bracket into which taxable income don't learn their marginal tax rate at can fall. There are 15 brackets for tax time are: a tax pre parer does the married taxpayers and 16 for single return and figures only the tax persons. Because tax bracket (like amount due, or the tax instructions specify use of a tax table, which C. Louis Hohenstein, a management shows the tax due but not the tax specialist and author of numerous busirate. A tax table does not require ness and financial articles, is owner of any computation and eliminates Hohenstein Associates, 1175 Peachtree arithmetic errors for the IRS. Street NE, Atlanta, GA 30361. Tax rate schedules, on the other
48
hand, require some calculation 011 taxes owed, but they do show your marginal tax rate and taxable in· come as a part of the calculation. For this reason, when you complete your federal tax return each year uS! IRS Schedule TC-usually enclosed with your tax form package-along with the tax rate schedules to find\' your marginal tax rate. Do this even if the tax instructions tell you to use the tax tables. While it is helpful to determine your tax rate for your last taxable year, the real need is to know your tax rate for this year. Let's see how to figure out yourl' tax rate . Find your tax bracket on table 1 or 2, which show tax rates for single and married taxpayers respectively, for 1982 through 1984, The tables show your marginal tax rate comparable to the tax bracket,' entered. Take the following example: Bob Brown is married and will file a joint tax return for 1982. He and his wife expect a gross income of $50,000; they have $10,000 in various de· ductions providing a joint taxable in· I come of $40,000. Enter table 2 (for , married taxpayers filing jointly) with $40,000 taxable income and find the tax bracket of $35,20045,800 in the first two columns. l The corresponding 1982 marginal , tax rate applicable to ordinary in'l come is 39%. This is the marginal tax rate Brown should use for 1982 fi· nancial transactions involving ordinary income and short-term (less! than one year) capital gains. In the same way, the Browns may ( find their 1983 and 1984 marginal tax rates. A different tax rate applies I to long-term (more than one year) , capital gains. I
I
American Pharmacy Vol. NS22, No, 3, March 19S2'1 i
\
r
I Capital Gains For gains on property owned for more than a year and then sold, the marginal tax rate is 40% of the ordinary marginal tax rate . New capital gains tax rates are also shown in tables 1 and 2 for your convenience. For example, if the Browns sold a lot they've owned for several years and made a profit, the gain would be taxed at the Browns' longterm capital gains rate of 15.6% (39% x 40%). From these long-term tax rate tables you can figure the tax advantage of selling securities, real estate, or other property long-term instead of short-term. Now that you know your tax rate, how can you use it? Basically, you will use it to translate before-tax dollars of any deal to after-tax dollarsand therefore find the real consequences of money in or out of your pocket. Also, when you get tax-free dollars, you can find the extra worth of these dollars over what they would be worth as taxable dollars. Let's look at several examples . Income Boost What does a business promotion or new compensation arrangement mean to you? Compensation can be in two forms: taxable (like salary), and nontaxable benefits (like "free" medical benefits or use of a company car) . In evaluating a salary increase---or two separate compensation programsit's what's left after tax that counts. Knowing your tax bracket, you may find how much of any income increase you will keep. You can then add to this amount the dollar value of any nontaxable benefits you obtain. For example, Bob Brown receives a salary increase, boosting his taxable income by $5,000. In addition, he receives an improved medical insurance program worth $1,000. He will pay 39% (tax rate) of his $5,000 increase in taxes, or $1,950, and therefore will keep $3,050. To this amount kept after tax, he will add the $1,000 additional value of the insurance program, and we have then a net benefit of $4,050the after-tax value of this increase . If the taxable portion of an income
Arnerican Pharmacy Vol. NS22, No. 3, March 19821161
I Table 1
Tax Rate Schedules for Single Taxpayers Marginal Tax Rates (%) On
Taxable Income
Ordinary Income
Long-Term Capital Gain
Over
But Not Over
1982
1983
1984
1982
1983
1984
0 $ 2,300 3,400 4,400 6,500 8,500 10,800 12,900 15,000 18,200 23,500 28,800 34,100 41,500 55,300 81,800
$ 2,300 3,400 4,400 6,500 8,500 10,800 12,900 15,000 18,200 23,500 · 28,800 34,100 41,500 55,300 81,800 Up
0 12 14 16 17 19 22 23 27 31 35 40 44 50 50 50
0 11 13 15 15 17 19 21 24 28 32 36 40 45 50 50
0 11 12 14 15 16 18 20 23 26 30 34 38 42 48 50
0.0 4.8 5.6 6.4 6.8 7.6 8.8 9.2 10.8 12.4 14.0 16.0 17.6 20.0 20.0 20.0
0.0 4.4 5.2 6.0 6.0 6.8 7.6 8.4 9.6 11.2 12.8 14.4 16.0 18.0 20.0 20.0
0.0 4.4 4.8 5.6 6.0 6.4 7.2 8.0 9.2 10.4 12.0 13.6 15.2 16.8 19.2 20.0
Source: Ordinary income tax rates from Economic RecOt!ery Tax Act of 1981 . Long-term capital gains tax rates ca/culated at 40% of ordinary income tax rates.
Table 2
Tax Rate Schedules for Married Taxpayers Filing Joint Returns Marginal Tax Rates (%) On
Taxable Income
Over 0 $ 3,400 5,500 7,600 11,900 16,000 20,200 24,600 29,900 35,200 45,800 60,000 85,600 109,400 162,400
But Not Over $ 3,400 5,500 7,600 11,900 16,000 20,200 24,600 29,900 35,200 45,800 60,000 85,600 109,400 162,400 Up
Ordinary Income
Long-Term Capital Gain
1982
1983
1984
1982
1983
1984
0 12 14 16 19 22 25 29 33 39 44 49 50 50 50
0 11 13 15 17 19 23 26 30 35 40 44 48 50 50
0 11 12 14 16 18 22 25 28 33 38 42 45 49 50
0.0 4.8 5.6 6.4 7.6 8.8 10.0 11.6 13.2 15.6 17.6 19.6 20.0 20.0 20.0
0.0 4.4 5.2 6.0 6.8 7.6 9.2 10.4 12.0 14.0 16.0 17.6 19.2 20.0 20.0
0.0 4.4 4.8 5.6 6.4 7.2 8.8 10.0 11.2 13.2 15.2 16.8 18.0 19.6 20.0
Source: Ordinary income tax rates from Economic RecOt!ery Tax Act of 1981 . Long-term capital gains tax rates ca/culated at 40% of ordinary income tax rates.
49
-----------------------------------------------------------------------------------~~ increase boosts your income Over
Investment Tax Equivalence Computing Scale
two tax brackets, estimate how much will fall in each of the two brackets, and apply the appropriate tax rate to each portion of the increase. Your accountant or tax adviser can help you with this.
KEY
Taxes & Investments A
c
40% 3%
30% 4%
5% 20% 6%
B 7% 15%
50% 40% 30% 20% 10% 0%
8% 9% 10% 11%
10%
TAX RATE 9%
12% 13%-
8%
14% 15% 16% 17% 18%
7% 6%
AFTER-TAX RATE
5%
BEFORE-TAX RATE 50
A tax-free dollar of income is worth more to you than a dollar subject to tax. This is because you keep all of the tax-free dollar and only part of the taxable dollar. On the other hand, the interest rate on taxfree investments (like all-savers certificates) is less than interest rates on taxable investments . The decision of whether it's better to invest in the lower yielding tax-free investments (where you keep all of the income dollars) or the higher yielding taxable investments (where you keep , only a part of the income dollars) . depends on your tax rate. For instance, which is better-Jn investment yielding 12% in tax-free interest or one yielding 17% taxable interest? To help you make decisions like this, use the diagram in the figure along with your tax rate to find the taxable yield necessary to J equal the tax-free yield. Let's say you can obtain a 12% taxfree yield on an investment and your marginal tax rate is 40%. Since you will get 12% interest after tax, start with 12% on the right scale la- . beled C and marked after-tax rate. Locate your tax rate of 40% on the center scale B. Draw a line through these two points and to the left scale A. Read 20% on the left before-tax scale. To better a 12% tax-free return, then, you must earn more than 20% on a taxable investment. In this example, the 12% tax-free investment is better. In this way you may find the equivalent rate of return on investments for any combination of before- and after-tax interest rates.
Tax-Deductible Expenses Just as a dollar of tax-free income is worth more to you than a dollar of taxable income, a dollar of tax-de- : ductible expense costs you less than a dollar you spend that is not tax deductible. How much less depends on your tax bracket. American Pharmacy Vol. NS22, No. 3, March 1982/162
\
L. i
For instance, if your tax bracket is 40% and you give $100 of your earnI ings to a charity with tax-exempt status, the contribution does not cost you the entire $100. This is because you deduct the $100 from your gross income when you are finding your taxable income. Therefore you don't pay $40 in taxes you'd otherwise pay if you didn't make 1 the contribution. As a result, your contribution only costs you $60 out-of-pocket in after-tax dollars (although the recip, ient of your contribution gets the full $100) . You can see that the actual after-tax cost of this contribution or any tax-deductible expense varies with your tax rate. In short, all tax-deductible expenses cost you less than non-taxdeductible expenses, because you don't pay the tax on these tax deductible amounts that you would pay if they weren' t deductible. This is true for every item you deduct as itemized expenses on your tax return, including medical expenses, taxes, casualty losses, and loan interest.
Real Cost of a Loan As just mentioned, interest on loans is tax deductible. Using the procedure just described, you can figure the real cost of interest to you after tax. For instance, you pay $1,000 in interest on a loan and your tax bracket is 40%. Because you deduct the $1,000 from your gross income to find taxable income, you don't pay $400 in taxes you'd otherwise pay, and the out-of-pocket cost to you of the interest is only $600 in after-tax dollars ($1 ,000 minus $400). However, it's often helpful to think of loans not in dollars but in terms of interest rate. Since the interest on loans is generally deductible, the real cost of a loan to you is not the quoted interest rate, but rather the effective after-tax interest rate. For instance, you are quoted an annual interest rate of 15% for a loan and your tax rate is 40 %. You will not pay the entire 15% in after-tax dollars, but rather only 60 % of the interest rate (100 % minus 40%). Thus, the real interest rate is only
American Pharmacy Vol. NS22, No. 3, March 19821163
Table 3
Tax Rate Schedule for Corporations Tax Rates (%) for Tax Years Beginning In
Profits
$
Over
But Not Over
1982
1983
0 25,000 50,000 75,000 100,000
$ 25,000 50,000 75,000 100,000 Up
16 19 30 40 46
15 18 30 40 46
Source: Economic Recuuery Tax Act of 1981. Tax rates for 1984 are the same as those for 1983 .
9% (15 % X 0.60) in your after-tax dollars . You may use the figure to find effective after-tax interest rates. Start with 15% before-tax interest rate on scale A. Find your tax bracket on scale B (40% in this example) . Draw a line between these two points to scale C, and read 9% effective aftertax interest rate.
State Tax Rates Usually your federal tax bracket is the bulk of taxes paid . Many people use only federal tax rates when making decisions. But state, and possibly local, income taxes can apply to your tax rate. State income taxes usually add several percentage points to your federal tax rate . Keep your state income tax package that shows your state tax rate so you can figure your total state and federal marginal tax rate. For example, let's say your federal tax rate is 40% and your state marginal tax rate is 10%. This doesn' t come to a 50% total tax rate because you will deduct 40% of your state taxes from your federal tax return. Therefore, to figure total approximate marginal tax rate we may deduct 40% of the 10% state tax leaving 6% effective local tax, or 46% total marginal tax rate . If you would rather find this by plugging the numbers into a formula, here it is (MTR means marginal tax rate percentage): Total marginal tax rate
Corporate Tax Rates Corporate marginal tax rates are like those for individuals, except the tax is figured on business profit rather than taxable income. Decisions regarding alternative courses of business action involving corporate marginal tax rates must be made by corporations just as they are by individuals. Corporate marginal tax rates are shown in table 3. One of the several reasons it is desirable for an individual in business to form a corporation is to create a new taxpayer-the corporation-with a lower marginal tax rate than the individual would have . Any person considering this should consult an attorney, accountant or tax adviser before taking this step. You can see your current marginal tax rate is an important decisionmaking tool. The tables included in this article will help you closely estimate your tax rates, enabling you to make better business and personal financial decisions-and to keep more of each dollar you earn. 0
= Federal + [state MTR
MTR
x
(1
Fed MTR) ] 100 51
Knowing your tax bracket for the By C. LOUIS HOHENSTEIN coming year can mean money in your pocket. ....- - - - - - - - - - - - - This is because the true value of the tax bracket $35,200-45,800) is business and personal money transused to find a corresponding maractions depends on how much of ginal tax rate (like 39%), many peoeach dollar you actually keep-and ple use the term tax bracket synhow much the government takes onymously with marginal tax rate, back as taxes. Knowing your tax but they are different. bracket lets you estimate the tax Tax brackets and the associated consequences of a transaction or inmarginal tax rates are based on taxvestment, and allows you to find the able income-your gross income after bottom line-the amount you keep various exclusions and deductions after taxes. are subtracted. Normally, taxable Your tax rate is the percentage at which your next dollar of business income isn't figured until you do or personal income is taxed. The your tax return. However, for effecmore money you make, the greater tive tax planning, you need to estithe rate at which this next dollar of mate your taxable income for 1982. income is taxed. Because the signifiTo do this, use the figures on your cant figure is the tax rate for your last tax return as a guide, and make next, or "marginal" dollar of inround-number estimates of the come, as economists call it, the full main totals for this year: gross inname of your applicable tax rate is come, income deductions, total marginal tax rate. itemized deductions, exemptions, For example, if you earned a taxand finally, taxable income. Don't able income of $40,000 in 1981 and worry about trying to estimate these prepared an IRS tax return as a marfigures exactly. With the estimated ried taxpayer filing jointly, your taxable income find your tax rate earning falls into the tax bracket from tables 1 or 2, as we'll now $35,200-45,800, for which the corrediscuss, and use it for effective sponding 1982 marginal tax rate is planning. 39%-the rate at which your next Finding Your Tax Rate dollar of ordinary income is taxed (table 2, columns 1 & 2). The governThe only way to learn your actual ment gets 39¢ of that dollar. tax rate is from an IRS tax rate Your tax bracket is actually one schedule. Two reasons some people bracket into which taxable income don't learn their marginal tax rate at can fall. There are 15 brackets for tax time are: a tax pre parer does the married taxpayers and 16 for single return and figures only the tax persons. Because tax bracket (like amount due, or the tax instructions specify use of a tax table, which C. Louis Hohenstein, a management shows the tax due but not the tax specialist and author of numerous busirate. A tax table does not require ness and financial articles, is owner of any computation and eliminates Hohenstein Associates, 1175 Peachtree arithmetic errors for the IRS. Street NE, Atlanta, GA 30361. Tax rate schedules, on the other
48
hand, require some calculation 011 taxes owed, but they do show your marginal tax rate and taxable in· come as a part of the calculation. For this reason, when you complete your federal tax return each year uS! IRS Schedule TC-usually enclosed with your tax form package-along with the tax rate schedules to find\' your marginal tax rate. Do this even if the tax instructions tell you to use the tax tables. While it is helpful to determine your tax rate for your last taxable year, the real need is to know your tax rate for this year. Let's see how to figure out yourl' tax rate . Find your tax bracket on table 1 or 2, which show tax rates for single and married taxpayers respectively, for 1982 through 1984, The tables show your marginal tax rate comparable to the tax bracket,' entered. Take the following example: Bob Brown is married and will file a joint tax return for 1982. He and his wife expect a gross income of $50,000; they have $10,000 in various de· ductions providing a joint taxable in· I come of $40,000. Enter table 2 (for , married taxpayers filing jointly) with $40,000 taxable income and find the tax bracket of $35,20045,800 in the first two columns. l The corresponding 1982 marginal , tax rate applicable to ordinary in'l come is 39%. This is the marginal tax rate Brown should use for 1982 fi· nancial transactions involving ordinary income and short-term (less! than one year) capital gains. In the same way, the Browns may ( find their 1983 and 1984 marginal tax rates. A different tax rate applies I to long-term (more than one year) , capital gains. I
I
American Pharmacy Vol. NS22, No, 3, March 19S2'1 i
\
r
I Capital Gains For gains on property owned for more than a year and then sold, the marginal tax rate is 40% of the ordinary marginal tax rate . New capital gains tax rates are also shown in tables 1 and 2 for your convenience. For example, if the Browns sold a lot they've owned for several years and made a profit, the gain would be taxed at the Browns' longterm capital gains rate of 15.6% (39% x 40%). From these long-term tax rate tables you can figure the tax advantage of selling securities, real estate, or other property long-term instead of short-term. Now that you know your tax rate, how can you use it? Basically, you will use it to translate before-tax dollars of any deal to after-tax dollarsand therefore find the real consequences of money in or out of your pocket. Also, when you get tax-free dollars, you can find the extra worth of these dollars over what they would be worth as taxable dollars. Let's look at several examples . Income Boost What does a business promotion or new compensation arrangement mean to you? Compensation can be in two forms: taxable (like salary), and nontaxable benefits (like "free" medical benefits or use of a company car) . In evaluating a salary increase---or two separate compensation programsit's what's left after tax that counts. Knowing your tax bracket, you may find how much of any income increase you will keep. You can then add to this amount the dollar value of any nontaxable benefits you obtain. For example, Bob Brown receives a salary increase, boosting his taxable income by $5,000. In addition, he receives an improved medical insurance program worth $1,000. He will pay 39% (tax rate) of his $5,000 increase in taxes, or $1,950, and therefore will keep $3,050. To this amount kept after tax, he will add the $1,000 additional value of the insurance program, and we have then a net benefit of $4,050the after-tax value of this increase . If the taxable portion of an income
Arnerican Pharmacy Vol. NS22, No. 3, March 19821161
I Table 1
Tax Rate Schedules for Single Taxpayers Marginal Tax Rates (%) On
Taxable Income
Ordinary Income
Long-Term Capital Gain
Over
But Not Over
1982
1983
1984
1982
1983
1984
0 $ 2,300 3,400 4,400 6,500 8,500 10,800 12,900 15,000 18,200 23,500 28,800 34,100 41,500 55,300 81,800
$ 2,300 3,400 4,400 6,500 8,500 10,800 12,900 15,000 18,200 23,500 · 28,800 34,100 41,500 55,300 81,800 Up
0 12 14 16 17 19 22 23 27 31 35 40 44 50 50 50
0 11 13 15 15 17 19 21 24 28 32 36 40 45 50 50
0 11 12 14 15 16 18 20 23 26 30 34 38 42 48 50
0.0 4.8 5.6 6.4 6.8 7.6 8.8 9.2 10.8 12.4 14.0 16.0 17.6 20.0 20.0 20.0
0.0 4.4 5.2 6.0 6.0 6.8 7.6 8.4 9.6 11.2 12.8 14.4 16.0 18.0 20.0 20.0
0.0 4.4 4.8 5.6 6.0 6.4 7.2 8.0 9.2 10.4 12.0 13.6 15.2 16.8 19.2 20.0
Source: Ordinary income tax rates from Economic RecOt!ery Tax Act of 1981 . Long-term capital gains tax rates ca/culated at 40% of ordinary income tax rates.
Table 2
Tax Rate Schedules for Married Taxpayers Filing Joint Returns Marginal Tax Rates (%) On
Taxable Income
Over 0 $ 3,400 5,500 7,600 11,900 16,000 20,200 24,600 29,900 35,200 45,800 60,000 85,600 109,400 162,400
But Not Over $ 3,400 5,500 7,600 11,900 16,000 20,200 24,600 29,900 35,200 45,800 60,000 85,600 109,400 162,400 Up
Ordinary Income
Long-Term Capital Gain
1982
1983
1984
1982
1983
1984
0 12 14 16 19 22 25 29 33 39 44 49 50 50 50
0 11 13 15 17 19 23 26 30 35 40 44 48 50 50
0 11 12 14 16 18 22 25 28 33 38 42 45 49 50
0.0 4.8 5.6 6.4 7.6 8.8 10.0 11.6 13.2 15.6 17.6 19.6 20.0 20.0 20.0
0.0 4.4 5.2 6.0 6.8 7.6 9.2 10.4 12.0 14.0 16.0 17.6 19.2 20.0 20.0
0.0 4.4 4.8 5.6 6.4 7.2 8.8 10.0 11.2 13.2 15.2 16.8 18.0 19.6 20.0
Source: Ordinary income tax rates from Economic RecOt!ery Tax Act of 1981 . Long-term capital gains tax rates ca/culated at 40% of ordinary income tax rates.
49
-----------------------------------------------------------------------------------~~ increase boosts your income Over
Investment Tax Equivalence Computing Scale
two tax brackets, estimate how much will fall in each of the two brackets, and apply the appropriate tax rate to each portion of the increase. Your accountant or tax adviser can help you with this.
KEY
Taxes & Investments A
c
40% 3%
30% 4%
5% 20% 6%
B 7% 15%
50% 40% 30% 20% 10% 0%
8% 9% 10% 11%
10%
TAX RATE 9%
12% 13%-
8%
14% 15% 16% 17% 18%
7% 6%
AFTER-TAX RATE
5%
BEFORE-TAX RATE 50
A tax-free dollar of income is worth more to you than a dollar subject to tax. This is because you keep all of the tax-free dollar and only part of the taxable dollar. On the other hand, the interest rate on taxfree investments (like all-savers certificates) is less than interest rates on taxable investments . The decision of whether it's better to invest in the lower yielding tax-free investments (where you keep all of the income dollars) or the higher yielding taxable investments (where you keep , only a part of the income dollars) . depends on your tax rate. For instance, which is better-Jn investment yielding 12% in tax-free interest or one yielding 17% taxable interest? To help you make decisions like this, use the diagram in the figure along with your tax rate to find the taxable yield necessary to J equal the tax-free yield. Let's say you can obtain a 12% taxfree yield on an investment and your marginal tax rate is 40%. Since you will get 12% interest after tax, start with 12% on the right scale la- . beled C and marked after-tax rate. Locate your tax rate of 40% on the center scale B. Draw a line through these two points and to the left scale A. Read 20% on the left before-tax scale. To better a 12% tax-free return, then, you must earn more than 20% on a taxable investment. In this example, the 12% tax-free investment is better. In this way you may find the equivalent rate of return on investments for any combination of before- and after-tax interest rates.
Tax-Deductible Expenses Just as a dollar of tax-free income is worth more to you than a dollar of taxable income, a dollar of tax-de- : ductible expense costs you less than a dollar you spend that is not tax deductible. How much less depends on your tax bracket. American Pharmacy Vol. NS22, No. 3, March 1982/162
\
L. i
For instance, if your tax bracket is 40% and you give $100 of your earnI ings to a charity with tax-exempt status, the contribution does not cost you the entire $100. This is because you deduct the $100 from your gross income when you are finding your taxable income. Therefore you don't pay $40 in taxes you'd otherwise pay if you didn't make 1 the contribution. As a result, your contribution only costs you $60 out-of-pocket in after-tax dollars (although the recip, ient of your contribution gets the full $100) . You can see that the actual after-tax cost of this contribution or any tax-deductible expense varies with your tax rate. In short, all tax-deductible expenses cost you less than non-taxdeductible expenses, because you don't pay the tax on these tax deductible amounts that you would pay if they weren' t deductible. This is true for every item you deduct as itemized expenses on your tax return, including medical expenses, taxes, casualty losses, and loan interest.
Real Cost of a Loan As just mentioned, interest on loans is tax deductible. Using the procedure just described, you can figure the real cost of interest to you after tax. For instance, you pay $1,000 in interest on a loan and your tax bracket is 40%. Because you deduct the $1,000 from your gross income to find taxable income, you don't pay $400 in taxes you'd otherwise pay, and the out-of-pocket cost to you of the interest is only $600 in after-tax dollars ($1 ,000 minus $400). However, it's often helpful to think of loans not in dollars but in terms of interest rate. Since the interest on loans is generally deductible, the real cost of a loan to you is not the quoted interest rate, but rather the effective after-tax interest rate. For instance, you are quoted an annual interest rate of 15% for a loan and your tax rate is 40 %. You will not pay the entire 15% in after-tax dollars, but rather only 60 % of the interest rate (100 % minus 40%). Thus, the real interest rate is only
American Pharmacy Vol. NS22, No. 3, March 19821163
Table 3
Tax Rate Schedule for Corporations Tax Rates (%) for Tax Years Beginning In
Profits
$
Over
But Not Over
1982
1983
0 25,000 50,000 75,000 100,000
$ 25,000 50,000 75,000 100,000 Up
16 19 30 40 46
15 18 30 40 46
Source: Economic Recuuery Tax Act of 1981. Tax rates for 1984 are the same as those for 1983 .
9% (15 % X 0.60) in your after-tax dollars . You may use the figure to find effective after-tax interest rates. Start with 15% before-tax interest rate on scale A. Find your tax bracket on scale B (40% in this example) . Draw a line between these two points to scale C, and read 9% effective aftertax interest rate.
State Tax Rates Usually your federal tax bracket is the bulk of taxes paid . Many people use only federal tax rates when making decisions. But state, and possibly local, income taxes can apply to your tax rate. State income taxes usually add several percentage points to your federal tax rate . Keep your state income tax package that shows your state tax rate so you can figure your total state and federal marginal tax rate. For example, let's say your federal tax rate is 40% and your state marginal tax rate is 10%. This doesn' t come to a 50% total tax rate because you will deduct 40% of your state taxes from your federal tax return. Therefore, to figure total approximate marginal tax rate we may deduct 40% of the 10% state tax leaving 6% effective local tax, or 46% total marginal tax rate . If you would rather find this by plugging the numbers into a formula, here it is (MTR means marginal tax rate percentage): Total marginal tax rate
Corporate Tax Rates Corporate marginal tax rates are like those for individuals, except the tax is figured on business profit rather than taxable income. Decisions regarding alternative courses of business action involving corporate marginal tax rates must be made by corporations just as they are by individuals. Corporate marginal tax rates are shown in table 3. One of the several reasons it is desirable for an individual in business to form a corporation is to create a new taxpayer-the corporation-with a lower marginal tax rate than the individual would have . Any person considering this should consult an attorney, accountant or tax adviser before taking this step. You can see your current marginal tax rate is an important decisionmaking tool. The tables included in this article will help you closely estimate your tax rates, enabling you to make better business and personal financial decisions-and to keep more of each dollar you earn. 0
= Federal + [state MTR
MTR
x
(1
Fed MTR) ] 100 51