Understand statutory and effective tax rates – get your taxes correct!

What is a Statutory Tax Rate (STR)?

A statutory tax rate (STR) refers to the tax rate that is set as a percentage of income by law. Under this system, individuals and businesses must repay a fixed percentage of taxable income to the government in the form of taxes. This fixed rate is usually higher than the actual effective rate they may be likely to pay, due to tax deductions and relief applicable to the taxpayer.

Examples of statutory tax rates include:

• Income Tax – An individual’s or non-profit’s income is taxed at progressive rates, ranging from 10% to 37%.
• Corporation tax – For businesses, the tax rate is set at 21%.
• Sales Tax – Depending on the state, sales tax rates can vary and are usually between 5% and 10%.
• Property Tax – Property tax is determined by property value and local jurisdiction and can range from 0.1% to 1.2%.

It is important to remember that the total amount an individual or business owes in tax is not equal to the statutory tax rate alone. Depending on deductions, rebates and other concessions, the taxpayer may be liable for a lower amount.

When filing your taxes or making investment decisions, it’s important to calculate the effective tax rate you may be required to pay after all deductions and allowances. It will help to make smarter decisions.

Key points to remember:

• Statutory tax rates are the government mandated tax rates set by the IRS.
• Statutory tax rates vary according to income levels and the type of taxpayer, such as an individual or a corporation.
• Effective tax rates are the rates after deductions, credits, and exemptions that may reduce the overall amount of taxes owed.
• Be aware of the tax incentives you are eligible for to maximize your tax benefits.

What are the current statutory tax rates?

The current statutory tax rate determines the income tax a business is required to pay when filing its annual tax return. The statutory tax rate may change depending on geographic location and type of business.

Generally, federal business income is taxed at the current statutory tax rate of 21%. However, some businesses are eligible for reduced tax rates. For example, some qualified small businesses, cooperatives and S-Corporations may have a statutory tax rate as low as 15%.

Similarly, statutory tax rates also apply to personal income. Depending on the income bracket, the designated tax rate can vary from 10% to 37%.

The following chart outlines the current tax brackets for 2020:

• 10% for taxable income up to ,875 for single filers.
• 12% for taxable income from ,876 to ,125 for single filers.
• 22% for taxable income from ,126 to ,525 for single filers.
• 24% for taxable income from ,526 to 3,300 for single filers.
• 32% for taxable income from 3,301 to 7,350 for single filers.
• 35% for taxable income from 7,351 to 8,400 for single filers.
• 37% for taxable income over 8,401 for single filers.

The US Internal Revenue Service provides a comprehensive table of current income-based statutory tax rates. For more information, visit irs.gov.

Who determines the statutory tax rate?

The statutory tax rate is a tax rate set by the government. It applies to all taxpayers and is used to calculate federal income tax obligations. The rate is a percentage of taxable income or the amount of income subject to income tax. The statutory tax rate is determined by the Internal Revenue Service (IRS) and is set annually. Taxpayers can also refer to IRS Publication 17 for more information regarding current requirements and rates. Generally, the statutory tax rate is set in tiers, as income levels increase, so does the rate, so does the rate. Taxable income up to a specific threshold is taxed at a lower rate, and increased profits are taxed at a higher rate. Examples of the current statutory tax rate include:

• 10% of taxable income up to ,875 for those filing single, household head or eligible widow (ER)
• 12% of taxable income up to ,126 for those filing single, head of household or eligible widow (ER)
• 22% of taxable income up to ,375 for those filing single, head of household or eligible widow (ER)
• 24% of taxable income up to 4,925 for those filing single, head of household or qualifying widow (ER)

Tips to help determine the statutory tax rate include:

• Check the statutory tax rate each year as tax regulations may change.
• Remember that the statutory tax rate applies to all taxpayers, regardless of individual/family income level.
• Use IRS Publication 17 to review percentages for lower and higher income levels.

What is the difference between a statutory tax rate and an effective tax rate?

Statutory and effective tax rates are extremely important when considering the amount of taxes owed on an individual’s or business’s income. Statutory tax rates are the rates used by government legislation and generally vary depending on the type of income earned. For example, companies are generally subject to a higher rate than individuals. Effective tax rates, on the other hand, take into account deductions, credits, and adjustments that can be used to reduce the overall amount of taxes owed.

Below are some tips to consider when determining the tax rate:

• Know the sources of your income. This includes whether the income is fully taxable, partially taxable or non-taxable.
• Be aware of any tax incentives you qualify for, such as credits, deductions or exemptions.
• Stay up to date with the most current tax laws and regulations as they are subject to change.
• If you have questions, consider seeking professional advice from a tax attorney or accountant.

As an example, consider an individual earning 0,000 in taxable income. The statutory tax rate could be determined at 24% (federal tax rate). However, they are also eligible for a ,000 deduction, which resulted in their overall effective tax rate becoming only 20%.

What determines if a statutory tax rate is adjusted?

The statutory tax rate is an officially legislated tax rate imposed by the government. This rate may change over time due to various factors. Here are the main determinants of whether a statutory tax rate is adjusted:

• National economic performance: The strength of the economy and the state of global financial markets play a key role in adjusting the statutory tax rate. When the economy and markets are working well and economic activity is increasing, the tax rate can be reduced as a way to stimulate additional economic growth. On the other hand, if economic activity slows down, the government can raise the tax rate as a way to generate additional revenue.
• Regional tax policies: Each region has its own tax policies and these policies may cause variations in the statutory tax rate. For example, a high-tax state may implement a heavy tax reform package to attract businesses from other states, resulting in an adjusted statutory tax rate.
• Government Expenses: The government may also need to adjust the statutory tax rate in order to cover unforeseen expenses or pay for newly implemented programs. Government budget deficits generally require additional revenue, and therefore a higher tax rate may be necessary.
• Political Climate: A change in political leadership may also result in a change in the statutory tax rate. For example, a newly elected government may adopt an aggressive fiscal policy in an effort to generate more revenue. Likewise, if an incumbent government faces re-election, it may cut taxes in an attempt to curry favor with voters.

In conclusion, the statutory tax rate may be adjusted due to various factors including national economic performance, regional tax policies, government expenditures and political climate. Businesses should consider these factors when planning their tax strategies.

What are the consequences of a change in the statutory tax rate?

A change in the statutory tax rate can have far-reaching implications for businesses and individuals. It can impact the tax rate and potential deductions available. A change in the tax rate could affect overall government revenue, as well as individual and business income. Here are some of the potential consequences of changing the statutory tax rate:

• Increased/decreased income: A change in the tax rate can change the amount of money the government collects from individuals and businesses. If the rate is lowered, individuals may have an incentive to invest more of their money, leading to increased revenue for the government. However, if the rate increases, individuals may be less likely to invest and the government may collect less overall.
• Top/Bottom Income: A lower tax rate could mean increased income for individuals, businesses and the government. However, if the rate is increased, individuals may pay higher income taxes and businesses may be less likely to hire or invest in expansion projects.
• More/less investment: A lower tax rate could lead to increased investment, as individuals are disincentivized to keep money out of the market for fear of losing money due to tax. On the other hand, an increase in the tax rate could lead to less investment because individuals can choose to save more money instead of investing it.

A change in the statutory tax rate can have significant repercussions and it is important to weigh the pros and cons of any potential change. Business owners and individuals should take the time to understand the potential impact of any statutory tax rate changes on their income and investments.

How can businesses plan for changes in statutory tax rates?

Due to the ever-changing regulatory landscape of the economy and taxation, businesses must remain in addition to any potential changes in statutory tax rates. Businesses can prepare for these changes in the following ways:

• Regular meeting with a CPA: Companies can consult their CPA regularly to keep up with new tax regulations and plan accordingly. The CPA can provide support and guidance through government interactions if needed.
• Tracking updates: Businesses may want to keep an eye on the media for notable changes in tax regulations. Any help from professional organizations, like the Institute of Chartered Accountants of India, can also be helpful.
• Re-evaluate strategies: Businesses will also want to regularly evaluate their strategies to maximize tax savings. This includes reassessment of investments, credits, deductions, and any deferral opportunities available.

By remaining aware of possible changes in statutory tax rates, businesses can ensure that they plan for their tax compliance and tax liability. Businesses should recognize that any changes may have significant implications for their tax obligations and take appropriate steps to meet those obligations.

Conclusion: Understanding statutory tax rates and effective tax rates is essential to filing taxes accurately and maximizing your tax benefits. Be sure to stay up to date with the most current tax laws, regulations and incentives offered by the IRS. For more detailed information, you may also consider seeking professional advice from a tax attorney or accountant. [Right_ad_blog]