Federal income-based taxes

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```							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
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
MARGINAL TAX RATE

\$319,000   35%

TAXABLE INCOME              33%

\$146,750

28%

\$70350
25%
\$29050
15%
\$7150   10%
\$0
Example of finding taxes owed
 Taxable income = \$80,000
 Taxes owed =
7150*.10+
[29050-7150]*.15+
[70350-29050]*.25+
[80000-70350]*.28 =
715+3285+10325+2702 =
\$17,027
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
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 =0.062*\$80,000
= \$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.
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*.015=\$1,200.
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
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%
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%

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