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Income Averaging |
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Income AveragingA method of figuring income tax by paying tax on the average income per year for the past five years. For example: A, a real estate salesperson, earns $10,000 taxable income for 4 years. In the fifth year, A sells a shopping center and earns $100,000 taxable income. A-could take the total income for 5 years ($140,000), divide by 5 ($28,000), and pay tax on $28,000 for the past 5 years, less what A has already paid.Income Averaging Similar MatchesDollar cost averagingDollar cost averagingIn the US, a plan which enables investors to accumulate shares in stock or a mutual fund by purchasing on a regular basis (for example monthly) with a fixed dollar amount. When the price is low, more shares will be purchased and fewer when the price is high. Also known as constant dollar plan. Known as pound cost averaging in the UK. Dollar cost averagingDollar cost averagingSee: Constant dollar plan AveragingAveragingThe purchase of additional shares in a company when the price has fallen.The point of averaging (also known as 'Pound cost averaging') is that it lowers the average price of the shares you own in the company, as can be seen by the following example:Jan 1st: purchase of 1,000 shares at 150p (average cost of all shares owned on Jan 1st is 150p)Feb 1st: purchase of 1,000 shares at 100p (average cost of all shares owned on Feb 1st is 125p)The questionable thinking behind this is that, on February 1st, the owner of the shares will be making a profit on his investment if the share price rises above 125p - whereas prior to the second purchase the threshold was 150p. Forward averagingForward averagingA method of calculating taxes on a lump-sum distribution from a qualified retirement plan that enables the tax payer to pay less than the current tax rate. AveragingAveragingSee: Constant dollar plan. Further Suggestionspound cost averaging |
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