Understanding the U.S. Tax System for Beginners

Introduction

• Overview of Ray's situation coming from a summer internship.
• Ray needs to understand how and if he should pay taxes.

Basics of the U.S. Tax System

• The tax system involves filling up progressively larger buckets (tax brackets).
  • Each bracket has a specific tax rate (e.g., 10%) for a range of income.
• FICA Tax:
  • A flat 7.65% tax on earned income.

Example Scenario: Ray's Income and Tax Calculation

• Gross Income: Ray made $30,000 at Corporate Co.
• Adjustable Gross Income (AGI):
  • AGI = Gross Income - Adjustments (e.g., student loan interest).
  • Example: $30,000 - $1,000 (student loan interest) = $29,000.

Reducing AGI

• Exemptions:
  • Flat $4,000 reduction per taxpayer, spouse, or dependent.
  • Ray's AGI after exemption: $29,000 - $4,000 = $25,000.
• Deductions:
  • Itemized deductions for specific expenses like charitable donations.
  • Standard deduction (2015): $6,300.
  • Ray opts for the standard deduction: $25,000 - $6,300 = $18,700.

Calculating Taxable Income

• Taxable Income: $18,700.
• Federal Income Tax Liability:
  • Based on 2015 tax brackets, Ray owes $2,300.

Tax Credits and Final Tax Bill

• Tax Credits:
  • Directly lower the tax payment.
  • Example: $1,000 tax credit reduces Ray's tax bill to $1,300.

Additional Considerations

• FICA Tax: Automatically deducted from paycheck.
• State Income Taxes: Calculated similarly to federal taxes, usually lower.

Conclusion

• Overview of how taxes work for Ray.
• Encouragement to watch further educational content and use recommended tax-filing software.

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These notes summarize the essential elements of understanding how Ray should approach his tax filings based on his income from a summer internship, considering federal and possible state obligations.