Federal income-based taxes

1
Federal income-based taxes

• How are you taxed at the federal level?

• Three income based federal taxes
• Personal income tax
• Social security tax
• Medicare tax

2
Federal personal income tax

• Based on income reported on your 1040 form
• Used for general spending
• Tiered system designed so that those with higher
  incomes pay higher percentages

3
MARGINAL TAX RATE
35
319,000
33
TAXABLE INCOME
146,750
28
70350
25
29050
15
7150
10
0
4
Example of finding taxes owed

• Taxable income 80,000
• Taxes owed
• 7150.10
• 29050-7150.15
• 70350-29050.25
• 80000-70350.28 7153285103252702
• 17,027

5
Social Security tax rates

• Two tier rate system
• Used to pay current beneficiaries
• Also known as a payroll tax since your employer
  pays an amount equal to what you pay

6
Social Security tax rates

• Each dollar of earned income up to 84,900 income
  is taxed at 6.2.
• Example social security taxes owed on earned
  income of 80,000 0.06280,000 4,960.
• Each dollar of earned income over 84,900 is
  taxed at 0.
• Example for an earned income of 90,000 social
  security taxes owed are
• 84,900.062 (90,000-84,900)0 5263.80.

7
Medicare tax

• There is only one tax rate on income to support
  the Medicare program of health insurance for the
  elderly.
• The Medicare tax rate 1.5, 1.5 cents per dollar
• Example. 80,000.0151,200.

8
Tax burden

• Progressive tax tax rate increases with income
• Example federal personal income tax
• Proportional tax tax rate is constant
  regardless of income
• Example Medicare tax
• Regressive tax tax rate decreases with income
• Example Social Security tax

9
Tax burden

• Average tax burden
• Sum all taxes owed
• Divide by income
• Example Income 80,000
• 17,027 federal income tax
• 4,960 social security tax
• 1,200 medicare tax
• 23,187 paid in taxes
• Average tax burden 23,187/80,000 .289 or
  28.9

10
Tax burden

• Example Income 80,000
• 17,027 federal income tax
• 4,960 social security tax
• 1,200 medicare tax
• 23,187
• Average tax burden 23,187/80,000 .289 or
  28.9