What Is a Tax Base? Definition, Formula, and Examples

What Is a Tax Base?

A tax base is the total value of all of the assets, income, and economic activity that can be taxed by a taxing authority, usually a government. It is used to calculate tax liabilities.

Tax liabilities are the portion of the tax base that is collected, and they come in many forms, including income, property, capital gains, and sales taxes.

Understanding the Tax Base

A tax base is the total value of all assets, properties, individual income, and corporate income in a certain area or jurisdiction. 

To calculate the total tax liability, you must multiply the tax base by the tax rate: 

• Tax Liability = Tax Base x 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.

Income As a Tax Base

Let's take personal or corporate income as an example. In this case, the tax base is the minimum amount of yearly income that can be taxed. This is taxable income. The Internal Revenue Service (IRS) assesses income tax on both personal income and the net income generated by businesses. 

For example, using the formula above, we can calculate a person's tax liability. Say Margaret earned $10,000 last year and the minimum amount of income that was subject to tax was $5,000, at a tax rate of 10%. Her total tax liability would be $500, calculated using her tax base ($5,000) multiplied by her tax rate (10%):

• $5,000 x 10% = $500

To figure tax liabilities for personal income, you use IRS Form 1040, the federal income tax return for individuals. 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, 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 the initial tax calculation so additional items are added to the return. 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 stock investments are sold. Say an investor owns an asset, and it rises in value. If they sell the asset for a gain, it is a realized capital gain, and they will owe taxes. If the investor 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. Any capital losses reduce the tax base of the gain. 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 taxes at the state and local levels in several 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.

All but five states also assess sales tax, which is imposed on most purchases. The tax base for sales tax in this case is the retail price of goods purchased by the consumer.

The Bottom Line

There are a variety of tax bases at the local, state, and federal levels. A single individual may have assets or participate in activities in several distinct tax bases. For example, if you work, you pay income taxes, placing you within the tax base of the United States. If you own a home, you're part of the local tax base and are subject to property taxes. If you buy a drink, your purchase is part of the sales tax base, and if that drink is alcoholic, your purchase may be part of a "sin tax" base as well.