PLUSPLUSTAX DUETAX RATE ON TAXABLE DOLLAR NUMBER $50,000Gradebuddy ECON 0110 1st EditionSECTION 10:THE TAX SYSTEMINDIVIDUAL INCOME TAX SYSTEMCALCULATE GROSS INCOME1. WAGES AND TIPS2. SALARY3. SOLE PROPRIETOR PROFITS4. PARTNERSHIP PROFITS5. TAXABLE INTEREST6. DIVIDENDS7. ROYALTIES8. RENT PROFITS9. CAPITAL GAINS10. SOCIAL SECURITY INCOME (partial)11. UNEMPLOYMENT COMPENSATION1Gradebuddy ECON 0110 1st EditionINCOME TAXES ARE PAID ON TAXABLE INCOME, NOT GROSS INCOMETO DETERMINE TAXABLE INCOME, VARIOUS ITEMS ARE SUBTRACTED FROM GROSS INCOMETHE MOST IMPORTANT SUBTRACTIONS ARE:1. PERSONAL EXEMPTIONS2. STANDARD DEDUCTIONOR2. ITEMIZED DEDUCTIONS3. CONTRIBUTIONS TO IRA’SPUBLICATION 17http://www.irs.gov/pub/irs-pdf/p17.pdf2Gradebuddy ECON 0110 1st Edition3Gradebuddy ECON 0110 1st Edition4Gradebuddy ECON 0110 1st Edition Lecture13PERSONAL EXEMPTIONSYou are permitted to subtract a specified amount from your gross income for each member of your householdEXAMPLE:In 2013, the personal exemption is $3,900 per personFAMILY OF 4$3,900 X 4 = $15,600THE TAXPAYER CAN SUBTRACT $15,600 FROM HIS GROSS INCOME BEFORE PAYING TAXESSUBTRACT FOR THE STANDARD DEDUCTIONOR FORITEMIZED DEDUCTIONSSTANDARD DEDUCTION: SINGLE = $6,100 (2013)MARRIED = $12,200ORB. LIST ITEMIZED DEDUCTIONSSUBTRACT FORSOME MEDICAL EXPENSESSTATE AND LOCAL TAXESREAL ESTATE TAXESHOME MORTGAGE INTERESTCONTRIBUTIONS TO CHARITYSOME WORK EXPENSES (UNION DUES)THEFT LOSSES AND CASUALTY LOSSES5Gradebuddy ECON 0110 1st EditionFEDERAL INCOME TAXES ARE BASED ON TAXABLE INCOME, NOT GROSS INCOMEGROSS INCOME – EXEMPTIONS – DEDUCTIONS = TAXABLE INCOMECAPITAL GAINS AND DIVIDENDS ARE TAXED AT SLIGHTLY LOWER RATES THAN OTHER SOURCES OF INCOME UNDER CURRENT LAWCURRENT MAX TAX RATE = 15% FOR LONG TERM CAPITAL GAINS AND DIVIDENDS6Gradebuddy ECON 0110 1st Edition2013 TAX TABLESMARGINAL TAX RATESRATE SINGLE MARRIED10% 0 - $8,925 0 - $17,85015% $8,925 - $36,250 $17,850 - $72,50025% $36,250 - $87,850 $72,500 - $146,40028% $87,850 - $183,250 $146,400 - $223,05033% $183,250 - $398,350 $223,050 - $398,35035% $398,350 - $400,000 $398,350 - $400,00039.6% $400,000 and over $400,000 and overEXAMPLE:SINGLE PERSONASSUME GROSS INCOME = $60,000SUBTRACT $3,900 FOR 1 PERSONAL EXEMPTIONSUBTRACT $6,100 FOR STANDARD DEDUCTIONTAXABLE INCOME = $60,000 - $3,900 - $6,100 = $50,0007Gradebuddy ECON 0110 1st EditionCALCULATION OF INCOME TAX DUESINGLE PERSON HAS TAXABLE INCOME = $50,00010% OF INCOME FROM $0 TO $8,925$8,925 X .10 = $ 892.50PLUS15% OF INCOME FROM $8,925 TO $36,250($36,250 - $8,925 = $27,325)$27,325 X .15 = $4,098.75PLUS25% OF INCOME FROM $36,250 TO $50,000($50,000 - $36,250 = $13,750)$13,750 X .25 = $3,437.50TAX DUE$892.50 + $4,098.75 + $3,437.50 = $8,428.75AVERAGE TAX RATE = TAX AMOUNT / GROSS INCOMEAVERAGE TAX RATE = $8,428.75/$60,000 = .1405= (14.05%)8Gradebuddy ECON 0110 1st EditionUPDATED 2015 TAX TABLES:MARGINAL TAX RATESRATE SINGLE MARRIED10% 0 - $9,225 0 - $18,45015% $9,225 - $37,450 $18,450 - $74,90025% $37,450 - $90,750 $74,900 - $151,20028% $90,750 - $189,300 $151,200 - $230,45033% $189,300 - $411,500 $230,450 - $411,50035% $411,500 - $413,200 $411,500 - $464,85039.6% $413,200 and over $464,850 and overPERSONAL EXEMPTION: $4,000 per personSTANDARD DEDUCTION:Single = $6,300 Married = $12,6009Gradebuddy ECON 0110 1st EditionMARGINAL TAX RATETAX RATE ON LAST DOLLAR OF TAXABLE INCOMEEXAMPLE:TAX RATE ON TAXABLE DOLLAR NUMBER $50,000MARGINAL TAX RATE = 25%WHAT IS A “FAIR” TAX SYSTEM?HORIZONTAL EQUITYPeople with equal incomes should payapproximately equal taxesPeople in the same situation should be treatedequally.PROBLEM WITH HORIZONTAL EQUITYPeople with equal incomes may have unequaldeductionsVERTICAL EQUITY:Vertical equity involves the “normative” opinion thatpeople in different situations “should” be treated differently.Example: People with higher incomes “should” paymore in taxesPROBLEM: What is “fair”. How much more taxes “should” the higher income person pay?10Gradebuddy ECON 0110 1st EditionHow much “should” we redistribute from the rich to the poor, (if at all), for example, in order to have a “better” society? With vertical equity, almost no two people have exactly the same opinions.11Gradebuddy ECON 0110 1st EditionCLASSIFICATION OF TAXESPROGRESSIVE, PROPORTIONAL, OR REGRESSIVEPROGRESSIVE TAX SYSTEM:MARGINAL TAX RATE INCREASES AS LEVEL OF INCOME INCREASESAs your income increases, the PERCENTAGE ofyour income that you pay in taxes increases.HIGH INCOME EARNERS PAY A HIGHER PROPORTION OF INCOME THAN LOW INCOME EARNERSEXAMPLE = Federal Individual Income Tax12Gradebuddy ECON 0110 1st EditionPROPORTIONAL TAX SYSTEM:MARGINAL TAX RATE IS CONSTANT REGARDLESS OF LEVEL OF INCOMEEVERYONE PAYS THE SAME PROPORTION OF INCOMEEXAMPLE = Pennsylvania Income Tax (3.07% of income)Pittsburgh Income Tax = 3.0% of earned income for cityresidentsMedicare tax = 1.45% of earned income with no cap onearningsSocial security tax = 6.2% of earned income (up to a cap of