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Wilmington NC CPA discusses the Three Types of Taxes on IRS Form 1040

Wilmington NC tax accounting and tax preparation

Gary Bode, CPA: there are three different types of taxes calculated on IRS Form 1040! If you'd like a free initial consult with a Wilmington NC CPA, please call (910) 399-2705.

Taxes: three different types are calculated on Form 1040—strange for an IRS tax form titled “US Inidividual Income Tax”!  The three forms are:

  1. Income Tax: the “normal” tax.
  2. Self Employment Tax: employment like taxes on self employed income.
  3. Excise Tax: an indirect, “because they can” type of tax.  One example is the excise tax on excess pension plan contributions.  

The Three Types of Taxable Income for Form 1040 Tax Preparation

Form 1040 has three types of taxable income on it too:  

  1. Ordinary Income includes things like wages, interest, dividends, etc.  Finally, on December 17th, Congress voted to keep the Bush tax cuts in place for 2010 income tax preparation.  This means the marginal tax rates on ordinary income for individuals stays at 10%, 15%, 25%, 28%, 33%, and 35%.  Please read below for more information on the progressive tax system used in the US and marginal tax rates.
  2. Self Employment Income escapes employment taxes during the year.  The tax rate, technically, is 15.3%, but you also get to take half the tax amount as an adjustment to Gross Income, on page one of Form 1040, which softens the blow a bit.  So, the effective rate also depends on your marginal tax rate.  But let’s say 13% for conversational purposes.
  3. Capital Gain is the amount of profit you make off of things you buy and then sell.  One example is stock market trading.  The rate is lower if you hold the asset more than one year.

Having tax preparation or IRS problems?  Please consider calling us for a free initial consult at (910) 399-2705.  We’re a Wilmington NC CPA Accounting firm offering tax services.  Please read any of our posts to get a feel for our expertise, proactive attitude, and commitment to customer service. 

Progressive Tax System on Marginal Tax Rates

The US uses a progressive tax system.  This means the tax rate increases as taxable income increases.  For example, a single person pays 10% of the first $8,375 of taxable income, 15% on taxable income of $8,376 to $34,000, and, 25% of taxable income from $34,001 to $84,200.  One can see the aggregate tax rate for a single person, with taxable income of $84,000, is less than the marginal tax rate of 25%.  CPAs and tax accountants talk about marginal tax rates, because our strategies generally eliminate taxable income.  So, if the tax accountant reduced our single taxpayer’s taxable income to $82,000, the actual savings would be 25% * (84,000-82,000) = $500.  Of course CPAs look for tax credits, too.  A tax credit reduces the taxes you owe, not just the taxable income.

If you’d like a free initial consult with a tax accountant, please consider calling us at (910) 399-2705.  We offer a unique blend of accounting and tax expertise, proactive attitude, business savvy and commitment to customer service.  We’re a Wilmington NC CPA firm primarily serving three NC counties: New Hanover, Brunswick and Pender.  But because of the portability of the CPA license, we operate in multiple States.  No CPA can guarantee a tax refund, but we try every legitimate angle, on every tax form.  We view a tax refund as only part of the service.  Your small business accounting or QuickBooks bookkeeping is where we try to increase your company’s positive cash flow on a year round basis.  Sometimes this is through a Performance Dashboard, which is a monthly collection of financial ratios and trend graphs, organized and formatted to the way you intuitively think about your business.

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