Lecture on Calculating Income Tax

Key Concepts

• How to calculate federal income tax using a tax rate table
• Differentiating between tax deductions and tax credits
• Calculating Social Security and Medicare taxes for self-employed individuals
• Estimating state income taxes

Example 1: Karen's Federal Income Tax (2018)

• Karen's Taxable Income: $85,000
• Federal Income Tax Calculation:
  • 1st Bracket (10%):
    • First $9,525 taxed at 10%
    • $9,525 * 0.10 = $952.50
  • 2nd Bracket (12%):
    • Income from $9,525 to $38,700
    • $29,175 * 0.12 = $3,501
  • 3rd Bracket (22%):
    • Income from $38,700 to $82,500
    • $43,800 * 0.22 = $9,636
  • 4th Bracket (24%):
    • Income from $82,500 to $85,000
    • $2,500 * 0.24 = $600
  • Total Federal Tax: $14,689.50

Example 2: John's Income and Tax Calculation

• John's Revenue & Expenses:
  • Revenue: $170,000
  • Expenses: $50,000
  • Net Income: $120,000
• Tax Deductions: $12,000
• Taxable Income: $108,000
• Federal Income Tax Calculation:
  • Using similar brackets as Karen for calculation
  • Total Federal Tax: $20,209.50
• With a $12,000 Tax Credit:
  • Adjusted Tax Bill: $11,089.50

Example 3: Sally's Income Tax & Other Taxes

• Sally's Taxable Income: $200,000
• Federal Income Tax Calculation:
  • Total Federal Tax: $45,689.50
• FICA Taxes (Social Security & Medicare):
  • Social Security:
    • 12.4% on first $128,400
    • Tax: $15,921.60
  • Medicare:
    • 2.9% on $200,000
    • Tax: $5,800
  • Additional Medicare on Income over $200,000:
    • 3.8% on excess income
• State Income Tax Calculation:
  • Total State Tax: $11,810
• Total Tax Bill: $79,221.10
• Effective Tax Rate:
  • Total Tax Bill / Taxable Income
  • Rate: 39.6%

Conclusion

• Understanding of calculating federal and state income taxes
• Impact of tax deductions vs. tax credits
• Importance of considering FICA taxes in overall tax liability

Additional Notes

• Always cross-check calculations using the tax bracket limits.
• Understand the distinction between tax deductions (reducing taxable income) and tax credits (directly reducing tax owed).
• Effective tax rate provides an overall picture of tax liability relative to income.