INCOME TAXES, PAYROLL TAXES,

AND OTHER DEDUCTIONS

Cash Flow and Budgeting 2

Income Taxes

Generally includes both State and Federal Taxes

Progressive Tax – an income system in which the tax rates increase as the amount subject to taxation increases.

Both Arizona and Federal Income taxes are progressive.

The tax rates on the next few slides represent Marginal Tax Rates:

Federal Income Tax Rates

Taxable Income Tax Rate

$0 – $9,075 10%

$9,075 – $36,900 15%

$36,900 – $89,350

25%

$89,350 – $186,350

28%

$186,350 – $405,100

33%

$405,100 – 406,750

35%

$406,750 and above

39.6%

Single Tax Brackets 2014

Taxable IncomeTax Rate

$0 – $8,700 10%

$8,700 – $35,350 15%

$35,350 – $85,650

25%

$85,650 – $178,650

28%

$178,650 – $388,350

33%

$388,350 and above

35%

Single Tax Brackets 2012

Federal Taxes Example

Example: You are filing single for 2012 and you make $80,000 per year. Find the amount of federal taxes.

(8700 – 0)(0.10) = 870(35350 – 8700)(.15) = 3997.50(80,000 – 35,350)(.25) = 11162.50

Total Federal Taxes : $16,030

Effective Tax Rate: 16,030/80,000 = .2004 = 20.0%

You try…

Example: You are filing single for 2014 and you make $80,000 per year. Find the amount of federal taxes and effective tax rate.

(9,075 – 0)(.10) = 907.50(36,900 – 9075)(.15) = 4,173.75(80,000 – 36,900)(.25) = 10,775

Total FIT: $15,856.25

Effective tax rate: $15,856.25 / 80,000 = .1982 = 19.8%

Federal Income Tax Rates

Go to http://www.moneychimp.com/features/tax_brackets.htm to look at others (married filing jointly, married filing separately, head of household)

Note: Our examples are without ANY tax credits or deductions. Almost no one pays this full amount.

Arizona Income Tax Rates

Tax Bracket (Single) Marginal Tax Rate

$0+ 2.59%

$10,000+ 2.88%

$25,000+ 3.36%

$50,000+ 4.24%

$150,000+ 4.54%

State Taxes Example

Example: You are filing single for 2012 your gross income is $80,000. Find the amount of state taxes taken out.

(10,000 – 0)(.0259) = $259(25,000 – 10,000)(.0288) = $432(50,000 – 25,000)(.0336) = $840(80,000 – 50,000)(.0424) = $1,272

Total State Taxes: $2,803

Effective Tax Rate: 2803/80000 = 3.5%

Payroll Taxes

In the US, the most common payroll taxes are for Social Security and Medicare:

Social Security Tax Rate: 6.2%Medicare Tax Rate: 1.45%

Total Taxes Example

Example: Total tax in 2012 on $80,000 gross income.

Federal Income Tax: Arizona Income Tax: Social Security: Medicare:

Total Tax:

Where do our Tax Dollars Go?

State Taxes vs. Federal Taxes

Other Deductions from your Paycheck

Health Insurance- In general, you and your employer will share the cost of your health insurance.

Retirement Accounts- 401k and 403b: Ex.) You elect to place $150 of your income into a 401k and you will be able to use the money that you invested later in life.

- Pensions: Similar to a 401k but is not owned by you, but rather a membership into a retirement program.

- (A pension is a contract for a fixed sum to be paid regularly to a person, typically following retirement from service)

A Paycheck – This pay is biweekly

Homework # 1

Take your assigned professionCalculate the Gross Income using Salary.comCalculate the Monthly Gross IncomeCalculate the Marginal Federal and State Taxes

NOTE: Again, no one pays this much. Taxes are much more complicated then we are doing.

Go to Cigna, Blue Cross Blue Shield, United Healthcare, or Humana One and find a health insurance plan. We will assume that your employer will cover 80% of the cost. Pick a good plan.

Calculate your payroll deductions. If you are a wise person you are putting AT LEAST 10% of your gross pay into a retirement account.

Calculate your Monthly Net payCreate a paycheck stub for your profession