Breakeven Tax Rate

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Breakeven Tax Rate

What is the Breakeven Tax Rate

A breakeven tax rate is a tax rate that is higher than what is required to make a transaction profitable. In other terms, the breakeven tax rate is the rate at which a company’s transaction is neither beneficial nor unfavorable. A breakeven tax rate encourages individuals to focus on the transaction rather than the tax breaks.

BREAKING DOWN Breakeven Tax Rate

The breakeven tax rate, unlike the Social Security tax rate, is not a fixed numerical number. The breakeven tax rate is basically a conceptual barrier in and of itself. When taxes climb over the breakeven point, the parties involved will not get enough profit or financial gain to justify the time and effort necessary to do business. As a result, anything below this rate would provide an incentive for investors or other parties to participate in a transaction, whilst anything beyond the breakeven tax rate would not.

A tax rate is the ratio at which a person or corporation is taxed, commonly stated as a percentage. There are various ways to display a tax rate, including statutory, average, marginal, and effective. These rates may also be expressed using other definitions of a tax base. A statutory tax rate is the rate that is legally imposed. A marginal tax rate is the tax rate that a person would pay on one more dollar of income. An average tax rate is the ratio of the total amount of taxes paid to the tax base.

An Example of Breakeven Tax Rate

Assume investor A holds 1,000 shares of ABC Company stock, and the price begins to fall. He paid $25 a share for the whole lot, and the stock is now worth around $100 per share. However, the corporation has been struck by a serious financial crisis, and the share price is fast declining. The investor has kept the shares for almost a year, which means the investor may either sell them now and pay ordinary income tax on the gain, or wait until the one-year holding period expires and then sell and pay capital gains tax at the lower capital gains rate. However, paying a higher rate on shares sold at $75 per share is certainly preferable than waiting for the stock to fall to $50 per share and then paying a lower rate on a smaller gain. The stock price movement will eventually decide whether option is preferable, but there will be a stock price at which the investor will come out the same whether they claim a short- or long-term gain.

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