Federal income-based taxes

							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%