lecture - taxes

7/31/2019 Lecture - Taxes

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Citizens Guide to EconomicsDr. Katie Sauer

Taxes Individuals Pay


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1. Federal Taxes

Income Tax

Payroll Tax

The Social Security tax is also called the FICA (Federal

Insurance Contributions Act) tax. (6.2%)

The Medicare Tax is used to provide medical benefits for

certain individuals when they reach age 65. (1.45%)

Estate Tax

Gift Tax

Gasoline Tax (18.4cents per gallon)


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Calculating your Federal Income Tax

1. compute gross income

- wages, salaries

- interest, dividends, rental income


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2. compute adjusted gross income

subtract off:

- retirement savings contributions

- alimony

- educator expenses

- contributions to HSAs- job-related moves expenses

- interest paid on student loans

- if self-employed:- health insurance premiums

- 50% of paid payroll taxes


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3. Subtract any exemptions

- fixed amount of money that is deducted for the

taxpayer, spouse, dependents

- indexed for inflation

2011: $3,700 per person

- if you are someones dependent, then you cannotclaim your own personal exemption

- cant claim as a dependent anyone who files a

joint tax return with a spouse

- spouses filing a joint return can claim two

personal exemptions


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Exemptions used to be phased out for very highincome levels.

- personal exemption phaseout (PEP)

These limits will not apply for the year 2010, 2011 or

2012.

The limits will come back in 2013 (unless furtherlegislation is passed).


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Income Range for PEP (2009)

Filing Status Phaseout Begins Phaseout Ends

Married Filing Jointly 250,200 372,700

Qualifying Widow(er) 250,200 372,700Head of Household 208,500 331,000

Single 166,800 289,300

Married Filing Separately 125,100 186,350


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4. Decide on deduction type

Standard Deduction:$11,600 for married couples filing jointly

$5,800 for singles

$5,800 for married individuals filing separately

$8,500 for heads of household

additional standard deduction for blind people

and senior citizens$1,150 for married individuals

$1,450 for singles and heads of household


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Itemized Deduction:

- medical and dental expenses exceeding 7.5%of AGI

- other taxes paid (state, local income tax)

- interest on mortgage

- charitable donations

- casualty and theft losses

- union dues and job travel expenses


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According to the IRS, 2 out of 3 tax payers takes the

standard deduction .(IR-2010-127, Dec. 23, 2010)


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5. Compute Federal Income Tax Owed

Here are the tax brackets for a single person for 2011:

Marginal Tax Tax Bracket

Rate over but not over

10% $0 $8,50015% $8,500 $34,500

25% $34,500 $83,600

28% $83,600 $174,400

33% $174,400 $379,150

35% $379,150


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Suppose you are single in 2011 and your AGI is $50,000.



10% $0 $8,500

15% $8,500 $34,500

25% $34,500 $83,600

28% $83,600 $174,40033% $174,400 $379,150

35% $379,150

On the first $8500, you pay 10% in taxes.8500 x 0.10 = 850


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10% $0 $8,500

15% $8,500 $34,500

25% $34,500 $83,600

28% $83,600 $174,40033% $174,400 $379,150

35% $379,150

On the next portion of income, you pay 15% in taxes.345008500 = 26000

26000 x 0.15 = 3900


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10% $0 $8,500

15% $8,500 $34,500

25% $34,500 $83,600

28% $83,600 $174,40033% $174,400 $379,150

35% $379,150

On the next portion of income, you pay 25% in taxes.5000034500 = 15500

15500 x 0.25 = 3875


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The total amount you pay in taxes is:

= (0.10)(8500) + (0.15)(34500-8500) + (0.25)(50000-34500)

= 850 + 3900 + 3875= 8625


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The marginal tax rate is the tax rate paid on an

additional dollar of income.

If your AGI is $50,000 and then you earn one extra

dollar of income, that dollar is taxed at a rate of25%.

Your current marginal tax rate is 25%.


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The average tax rate is the total taxes paid, divided bytotal income.

= 8625 / gross income

Suppose your gross income is $60,000.

= 8625 / 60000 x 100%

= 14.4% is your average tax rate


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2. Colorado State Taxes for Individuals

Income Tax (4.63%)

Sales Tax (2.9%)

Consumer Use Tax (purchases that did not includeColorado sales tax internet, mail order, phone)

(2.9%)

Estate and Trust Income Tax (4.63%)


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Gasoline Tax (22cents per gallon)

Cigarette Tax (4.2cents per cigarette, 2.9% per pack,

40% on other tobacco products)

Alcohol Tax (8cents per gallon beer/cider, 7.33centsper liter wine, 60.26cents per liter of spirits)


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3. Local Taxes and Fees

Motor Vehicle Registration

Property TaxCity Sales Tax


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4. Special District Taxes

RTD levies a sales/use tax of 1.0% .

The Football District has a 0.1% sales/use tax.

The Scientific and Cultural Facilities District

has a 0.1% sales/use tax.

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