Wh What Youll ll Learn arn Today ay Wh What taxes do do - - PDF document

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Aa Aaron Stevens EC1 EC171 71 11 O 11 Oct ctober 2 r 2011 11

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

Wh What You’ll ll Learn arn Today ay

• Wh

What taxes do do households pay?

• At

At what rate are households taxed?

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How t to ca calcu culate Fe Fede dera ral i inco come t taxes

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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?

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Which income has the best tax tr treatm eatment ent?

“ “Th The Only Thing That Is Certain In Th 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

Wh What are the tax bases robust enough to to fund a m a moder

• dern gover

governmen ent? t? In Incom come Wa Wages We Wealth Cons Consum umpti ption

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If you don If you don’t t drink, smoke, or drive a car, you you’re re a tax evader.

• Thomas Fole

ley, Former Speaker of the US US Hou House of

• f Re

Representa ntati tives

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

• perty

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

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ands of

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Extra a Rul ules es in S Soci cial S Secu curi rity P Pro rogra ram O Opera rating M Manual. Ame Americans Ame Americans sp spend $193 billion sp spend $193 billion per per year year jus ust t tr tryi ying ng to to figur figure per per year year jus ust t tr tryi ying ng to to figur figure

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how much uch they they ow

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e.

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• ut how

how much uch they they ow

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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. Ho How much should they pay in n taxes? Pr Progr

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essive ve taxati taxation

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the e idea ea th that at thos those e who ho ear earn n mor

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e will pay pay taxes taxes at at a a hi 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 appl applies es to to the the las ast t dol dollar ar of

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the tax tax bas base. e.

Tot Total & & Ef Effect ective ve Ta Tax Ra Rates es

Tax r x rate te on

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next $ xt $1 of

• f in

income come Taxe xes Tota

• tal I

Income come Exa xamp mple: $60,000 $60,000 income come Exa xamp mple: $320,000 $320,000 income come

Shor Short For Form m Examp mple

1040E 1040EZ Ta Tax Calcul culation

• n Ex

Exampl mples es

Si Single person. Wages of $45, $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

• f ($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

• n 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

• f (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 Long ng Fo Form rm The The Lo Long ng Fo Form rm… … “ “10 1040 10 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

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the line e deducti deduction

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temized zed Deducti eduction

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Exempti ption

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= = Taxab axable e Incom come …us use marginal tax rates, fi find tax = = Tax ax

• Tax

ax Credi edits ts = To Total Tax

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aymen ents ts & Withhol thholdi dings gs = = Tax ax Due/R ue/Ref efun und Re Reduce Taxable Income! Di Directly Re Reduce Tax Du Due!

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

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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

• ll 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.

Tot Total & & Ef Effect ective ve Ta Tax Ra Rates es

Tax r x rate te on

• n

next $ xt $1 of

• f in

income come Taxe xes Tota

• tal I

Income come Exa xamp mple: $60,000 $60,000 income come Exa xamp mple: $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 Co Co = S S + rS rS

Taxes when Taxes when Young Young Benefits Benefits when Young when Young Taxes when Old Taxes when Old Benefits Benefits when Old when Old

– Ty Ty + + By By – T To + + Bo Bo

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

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retire rement b benefi fits

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spousa sal b benefi fits

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Widow/widower benefi fits

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disab sability b ty ben enefits efits

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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

• 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