Dealing With Uncle Sam The basic picture of the federal government you should have in mind is that it's essentially a huge insurance company with an army. - Paul Krugman, Nobel Laureate in Economics Aa Aaron Stevens EC1 EC171 71 11 O 11 Oct ctober 2 r 2011 11 1 Wh What You’ll ll Learn arn Today ay • Wh What taxes do do households pay? • At At what rate are households taxed? • H How t to ca calcu culate Fe Fede dera ral i inco come t taxes • W Wha hat a are re p payro roll t taxes a s and t d to w who hom do do they they appl apply? y? • Wh Which income has the best tax tr treatm eatment ent?
“Th Th The Only Thing That Is Certain In “ The Only Thing That Is Certain In Li Life fe Is s Death eath and and Taxes Taxes” ” Li Life fe Is s Death eath and and Taxes Taxes The The 4 4 Ta Tax Bases ses If you don’t If you don t drink, smoke, or drive a car, you’re you re a tax evader. - Thomas Fole ley, Former Speaker of the US Hou US House of of Re Representa ntati tives Wh What are the tax bases robust enough to to fund a m a moder odern gover governmen ent? t? In Incom come Wa Wages We Wealth Cons Consum umpti ption on
Wh What Taxes Wi Will You Pay? Fe Fede dera ral/S /State P Perso rsonal In Inco come T Tax Fe Fede dera ral/S /State C Corp rpora rate In Inco come T Tax Fe Fede dera ral/S /State E Est state a and G d Gift ft T Tax FIC FICA T Tax ( (“Pa Payroll Taxes”) State/M State/Muni unicipal pal Pr Proper operty ty taxes taxes Fe Fede dera ral E Exci cise se T Tax State State Sal Sales es Tax Tax Ci City Sal ty Sales es Taxes Taxes Taxe xes a are F Fun! Taxe xes a are F Fun! 17 17,000 p pages o s of IR f IRS C Code de 2, 2,728 728 Rul ules es in n Soc Social al Sec Secur urity ty Hand Handbook book Th Thous ousand ands of of Extr Extra a Rul ules es in S Soci cial S Secu curi rity P Pro rogra ram O Opera rating M Manual. Americans sp Ame Americans Ame sp spend $193 billion spend $193 billion per per year per per year year jus year jus ust ust t tr t tr tryi tryi ying ying ng to ng to to figur to figur figure figure out out how how much uch they they ow owe. e. out how out how much uch they they ow owe. e.
Ta Taxing ng Fa Fairly Th The e Adam ams fam amily y ear earns ns $50, $50,000 000 and and pays pays $5, $5,000 000 in n taxes taxes. Th The Br Brady bunch earns $75,000. How much should they pay in Ho n taxes? Pr Progr ogres essive ve taxati taxation on is th the e idea ea th that at thos those e who ho ear earn n mor ore e will pay pay taxes taxes at at a hi a higher gher ra rate. We We Pay Taxes at the Ma Margin Feder Federal al Mar argi ginal al Tax Tax Rat Rates es for 201 2010 Si Single Fi Filing St Status: Ma Married Filing Jointly: Th The e mar argi ginal nal tax tax rate ate is th the e tax tax rate ate th that at applies appl es to to the the las ast t dol dollar ar of of the the tax tax bas base. e.
Tot Total & & Ef Effect ective ve Ta Tax Ra Rates es Tax r x rate te on on next $ xt $1 of of in income come Taxe xes Tota otal I Income come Exa xamp mple: Exa xamp mple: $60,000 income $60,000 come $320,000 $320,000 income come Shor Short For Form m Examp mple
1040E 1040EZ Ta Tax Calcul culation on Ex Exampl mples es Single person. Wages of $45, Si $45,000. 000. Ca Calculate amount of tax. x. Wh What is the taxable income? (line 6 = line 4 4 - line 5) $45, $45,000 000 - $9350 $9350 = $35, $35,650 650 Wh What is the tax due? 25% 25% of of ($35650 - $34,000) + $4681.25 = = 0.25 * * $1650 = = $412.50 + + $4681.25 = $5093.75 Wh What is the marginal tax rate? 25% 25% Wh What is the ef effective tax rate? 11% 11%
Ta Tax Calcul culation on Ex Exampl mples es Ma Married couple. Wages of $85,000. Wh What is the taxable income? (line 6 = line 4 4 - line 5) $85, $85,000 000 - $1 $18, 8,700 700 = $66, $66,300 300 Wh What is the tax due? 15 15% of of (66,300 - $16,750) + + $1675 = = 0.15 * * $49,550 + + $1675= = $9107.50 Wh What is the marginal tax rate? 15 15% Wh What is the ef effective tax rate? 11% 11% The The Lo The Lo The Long Long ng Fo ng Fo Form Form rm rm… … “ “10 10 1040” 1040 ” Wa Wages, Salaries, Tips, Interest + + Dividend ends, Capi Capital al Gai ains ns, et etc. + + Bus Busines ness Inc ncome, e, Rent ents, et etc. = Total = otal Incom come - - Above ove the the line e deducti deduction ons (al alimon ony y pai paid, d, studen tudent t loan oan inter teres est, t, etc. etc.) = = Adj djus usted ted Gros oss Incom come - - Item temized zed Deducti eduction ons Re Reduce Taxable Income! - - Exem Exempti ption ons = = Taxab axable e Incom come …us use marginal tax rates, fi find tax = = Tax ax - Tax - ax Credi edits ts Directly Re Di Reduce Tax Du Due! = To Total Tax - - Paym aymen ents ts & Withhol thholdi dings gs = = Tax ax Due/R ue/Ref efun und
Di Different Types of Income It It’s not what you ea earn, it’s s ho how you ea earn it. Ex Examp mple: e: • Engineer earning $110,000 per year. • Hedge fund manager earning $10,000,000. • Warren Buffet, earning $100,000 per year; change in net worth: $10,000,000,000. Top marginal tax rate on wage (W2) income: 35% Top tax rate on dividends and capital gains: 15% Top tax rate on unrealized capital gains: 0% Thef Theft in n the he Wor orkpl place ce JACKIE: I know in orientation we talked about theft in the workplace, so I would like to report a theft - from my check! Now, I don't know who FICA is, but that bitch stole like 10% of my money.
Pa Payrol oll Ta Taxes JACKIE: I know in orientation we talked about theft in the workplace, so I would like to report a theft - from my check! Now, I don't know who FICA is, but that bitch stole like 10% of my money. FICA: The e Fed eder eral Insurance e Contributions Act You and your emp employer er ea each pay: • 6.2 .2% fo for Social Sec ecurity, on wages es to $1 $106,800 • 1.4 .45% fo for Med edicare, e, on all wages es (no limi mit) This is a total of f 15.3 .3% tax on payrolls. Total & Tot & Ef Effect ective ve Ta Tax Ra Rates es Tax r x rate te on on next $ xt $1 of of in income come Taxe xes Tota otal I Income come Exa xamp mple: Exa xamp mple: $60,000 $60,000 income come $320,000 $320,000 income come
Di Different Types of Income It It’s s not just what you earn, it’s s how you earn it! Engineer earning $110,000 per year. Federal Tax: $22,728 (20.8% effective rate) Payroll Taxes: $8222 (7.47% effective rate) Total Effective Tax Rate: 28% Hedge fund manager earning $10,000,000 per year. Federal Tax: $1,500,000 (15% capital gains rate) Payroll Taxes: $0 Total Effective Tax Rate: 15% Warren Buffet, earning $100,000 per year. Change in net worth: $10,000,000,000. Federal Taxes: 19,928 Payroll Taxes: $7650 Total Effective Tax Rate: 0.0000027578% Uncl Uncle e Sa Sam an and Cy Cy + S S = W – Ty Ty + + By By Taxes when Taxes when Benefits Benefits Young Young when Young when Young Co = S Co S + rS rS – T To + + Bo Bo Benefits Benefits Taxes when Old Taxes when Old when Old when Old
Uncl Uncle e Sa Sam m Ta Takes es Some Some and nd Gi Gives Some Some Ai Aid to fami milies with De Dependent Children Fo Food S d Stamps; E s; Energ rgy A Assi ssist stance ce; H ; Housi sing A Assi ssist stance ce; M ; Medi dica caid. d. Soc Social al Sec Secur urity ty • re retire rement b benefi fits • sp spousa sal b benefi fits • Wi Widow/widower benefi fits • di disab sability b ty ben enefits efits • Di Divorce benefi fits Wh What You Learned Today Wh What You Learned Today The The man any y taxes axes yo you u face ace Ma Marginal versus effective tax rates Deduct Deductions an and d credi credits Ho How w yo you ear arn yo your income mat atters!
Announc Announceme ment nts and nd To o Do Do Readings: • TFB: What is your ma marginal tax rate? e? (t (today) • Wikiped edia: : “Income me Tax in the e United ed States es” Homew mework 4: Ballpark Es Estima mate e due e Wed ednes esday 10/12 by ema email Homew mework 5 will be e assigned ed nex ext Tues esday. Recent Recent Ef Effect ective ve Ta Tax Ra Rates es
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