Tax Base

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What is a 'Tax Base'

Tax base is defined as the income or asset balance used to calculate a tax liability, and the tax liability formula is tax base multiplied by tax rate. The rate of tax imposed varies depending on the type of tax and the tax base total. Income tax, gift tax and estate tax are each calculated using a different tax rate schedule.

BREAKING DOWN 'Tax Base'

The most common form of tax is income tax, which is assessed on both personal income and the net income generated by businesses; personal income tax is calculated using IRS Form 1040. The return starts with total income and then deductions and other expenses are subtracted to arrive at adjusted gross income (AGI). Itemized deductions and expenses reduce AGI to calculate the tax base, or taxable income, and the personal tax rates are based on the total taxable income.

An individual taxpayer’s tax base can change as a result of the alternative minimum tax (AMT) calculation. Under AMT, the taxpayer is required to make adjustments to his initial tax calculation so additional items are added to the return and the tax base and the related tax liability both increase. As an example, interest on some tax-exempt municipal bonds is added to the AMT calculation as taxable bond income. If AMT generates a higher tax liability than the initial calculation, the taxpayer pays the higher amount.

Factoring in Capital Gains

Taxpayers are taxed on realized gains when assets, such as real property or investments, are sold. If an investor owns an asset and does not sell it, that investor has an unrealized capital gain and there is no taxable event. Assume, for example, an investor holds a stock for five years and sells the shares for a $20,000 gain. Since the stock was held for more than one year, the gain is considered long term and the tax base of the gain is reduced by any capital losses. After deducting losses, the tax base of the capital gain is multiplied by capital gain tax rates.

Examples of Tax Jurisdictions

In addition to paying federal taxes, taxpayers are assessed tax at the state, city and local level in several different forms. Most investors are assessed income tax at the state level, and homeowners pay property tax at the local level. The tax base for owning property is the home or building’s assessed valuation. States also assess sales tax, which is imposed on commercial transactions. The tax base for sales tax is the retail price of goods purchased by the consumer.

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