01.03 : PAYING TAXES

Hugh is a teacher. He made $49,000 in 2018. He took $9,000 in deductions for education, student loans, and his home. Therefore, he had $40,000 in taxable income for 2018. Let's figure out how much federal income tax Hugh would pay on $40,000, based on 2018 marginal tax rates.

First, calculate 10 percent of the first $9,525 of income. ($9,525 x 10% = $952.50) Next, calculate 12 percent of taxable income over $9,525 up to $38,700. ($38,700 - $9,525 = $29,175 $29,175 x 12% = $3,501) Now, calculate 22 percent of taxable income over $38,700 up to $40,000. Why $40,000 and not $82,500? Because Hugh's taxable income was $40,000, so we don't need to calculate tax beyond that amount. ($40,000 - $38,700 = $1,300 $1,300 x 22% = $286) Finally, find the sum of taxes calculated for each bracket. ($952.50 + $3,501 + $286 = $4,739.50) Therefore, Hugh owes $4,739.50 in federal income tax. If the tax rate was a simple 22% for his taxable income, he would pay $8,800 or 22% of $40,000. Marginal tax rates are an attempt to make the income tax system fair. Note that the marginal tax rates and the income ranges can change each year based on changes to tax law.

progessive tax

In a progressive tax system, as income increases, the percentage of taxes paid to the government also increases. In other words, the higher the income, the higher the tax rate. For example, in this scenario, a person who makes $30,000 a year is taxed at 12 percent, one who makes $60,000 a year is taxed at 22 percent, and one who makes $120,000 a year is taxed at 24 percent. The more money a person makes, the more they pay in taxes.

Proportional tx

In a proportional tax system, the tax rate is the same for all income levels. So whether people make $30,000 a year or $120,000 a year, they would be taxed at the same rate. For example, let's consider a flat tax of 25 percent. The rate is the same, but the amount paid in taxes is different since it is based on income. In other words, the higher the income, the higher the amount of taxes paid.

regressive tax

In a regressive tax system, the tax rate is the same regardless of income, but the proportion of income that goes toward taxes decreases as more income is earned. For example, Max and Elise are buying a vehicle, and the sales tax is 8 percent. Max makes $20,000 a year, and his vehicle costs $18,000. Elise makes $120,000 a year, and her vehicle costs $28,000. To calculate sales tax, multiply the tax percentage by the purchase price of the vehicle. Now, let's compare sales tax paid to annual income. In this case, 7.2 percent of Max's income was paid in sales tax, while 1.9 percent of Elise's income was paid in sales tax. Regressive taxes place a higher tax burden on low income individuals.

Internal Revenue Service, or IRS

It's a service of the government devoted to collecting taxes, interpreting laws about taxes, and holding people accountable to pay their taxes.

Personal property taxes are collected by local and state governments yearly. They are based on the assessed value of the item or property that is being taxed. In other words, you're only taxed on the value of the item or property at the time the taxes are evaluated.

Personal property taxes (direct)

Be sure not to confuse tax deductions with paycheck deductions.

Tax deductions are specified amounts the government has determined people can claim to lower their taxable income. This helps account for expenses, especially those related to earning income.

Taxes are payments for the services that the government provides.

The government needs tax money to pay government officials, build structures and roads, buy equipment, and fund programs that provide services like welfare, the military, police, courts, fire protection, and education. In addition, the more services a government provides, the more money it needs to collect through taxes to pay for those services.

payroll taxes include FICA Medicare and Social Security tax and are direct taxes.

These taxes paid on an employee's wages earned are split between employers and employees. If an individual is self-employed, he is responsible to pay both the employee and employer portion of the payroll tax.

Progessivity

as income rises, refers to whether the proportion of income to taxes increases, decreases, or stays the same

Corporate income taxes are paid by businesses on their profits to federal and, in some cases, state governments yearly. The corporation or business files a tax return yearly to calculate the amount of taxes owed and sends the taxes to the federal and state governments.

corporate taxes (direct)

Taxes paid straight to the government are

direct taxes

"Death," or estate, taxes are collected by the federal government on the value of a person's estate, or money and property, after they die. The person responsible for managing the will and estate must file a federal estate tax return within nine months of a person's death.

estate taxes (direct)

Gasoline taxes are added to the price of fuel. When people fill up their vehicles with gas, the price they pay per gallon includes the gasoline tax. In Alaska, the tax is around 14 cents a gallon. In Pennsylvania, it's almost 59 cents per gallon. The taxes are submitted to the state and federal governments to pay for road maintenance and similar expenses.

gasoline taxes (indirect)

Income taxes are collected by the federal and state governments and are more complicated than other taxes because they are based on income. An employee can estimate the amount of tax they will owe. Then, their employer can keep a portion of an employee's wages in anticipation of taxes owed and send them to the Internal Revenue Service, or IRS. Each year, individuals are required to submit a tax return to the IRS to report income earned and calculate taxes owed. If the amount the employer withheld is more than a person owes, the IRS will issue a refund. If the employer withheld less than a person owes, they will owe money to the IRS.

income taxes (direct)

the tax percentage that applies to the last dollar of income earned

marginal tax rates

Indirect tax

paid through an intermediary for rights, privileges, or activities

Real estate taxes are collected by state and local governments when a person buys property, like land or a home. The tax is added to the sale price of the home or property, then submitted to the state or local government.

real estate taxes (indirect)

ales taxes are added to the price of goods and services, like clothing, phones, or phone and internet service, when a person buys them. Food is usually exempt from sales tax. Most states have a sales tax that ranges between 2.9 and 9 percent. Some local governments also collect sales tax in addition to the state sales tax. Retailers submit the sales taxes to state and local governments to pay for services like schools and police and fire departments.

sales taxes (indirect)

911 emergency service fees on cell phone bills are taxes collected by state and local governments to pay for 911 emergency services. These fees are added to bills by service providers who submit them to state and local governments.

service fees (indirect)

taxable income

the amount of income subject to income tax under the law after deductions and credits