In this video, we're going to talk about how to calculate income tax. Let's start with this example. Karen's taxable income was $85,000 in 2018. So using the tax income rate table that we see below, how much did she pay in federal income taxes in 2018? So what do we need to do?
The first thing you want to do is look at the first row. The first $9,525 that she earns, she's going to pay 10% on that money. So what is 10% of $9,525?
To calculate 10% of that, multiply that number by 0.10. You can get 0.10 by taking 10% and dividing it by 100. That's how you convert a percentage into a decimal. So it's 95.25 times 0.10. And so she's going to pay $952.50 on this amount.
But we're not done yet. We need to get up to $85,000. Now, let's move on to the second row. What we're going to do is we're going to subtract the higher value minus the lower value.
So if you take $38,700 and subtract it by $9,525, you should get this figure, $29,175. Now the tax rate for that portion of the income is 12%. So what we're going to do is take that number and multiply it by, now 12 divided by 100 is 0.12.
And so that's going to give us $3,501. Now let's move on to the next tax bracket. So from $38,700 to $82,500, Karen's going to pay 22% of that income. So let's subtract the higher number by the lower number. So $82,500 minus...
$38,700. That gives us $43,800. So she's going to pay 22% on this income. And so let's multiply $43,800 by 0.22.
And so you should get $9,636. Now we need to move on to the next tax bracket, the 24% level. Now her income is $85,000.
So we're not going to go to $157,500. We're going to stop at $85,000. So we're going to subtract $85,000 by this number, $82,500. $85,000 minus $82,500, that's $2,500. And so she's going to pay 24% of that income.
So 2,500 times 0.24, that's going to give us 600. By the way, if you add these values, you should get 85,000. So if you add 9525 plus 29175 plus 43800 plus 2500. you should get $85,000 just to make sure that you're on the right track. Now, to get the final answer for this problem, we need to add up these values that we see here. So $952.50 plus $35.01 plus $96.36 and then plus $600. So the total amount that she's going to pay in income tax is $14,000.
I'm running out of space here. $689.50. So that's how you can calculate the amount of federal income tax that a person has to pay given the tax rate table.
Now let's move on to our next problem. John is self-employed. He generated $170,000 in revenue in 2018. His business expenses for that year was $50,000. What is John's net income for that year?
So his net income is going to be the difference between his revenue and his business expenses. So that's going to be $170,000 minus $50,000. So $170,000 minus $50,000, I mean $170,000 minus $50,000. Or you can think of $17,000 minus $5,000, you get $12,000. So this is going to be $120,000.
So that's his net income for the year. Now what about Part B? If he received $12,000 in tax deductions, that is apart from his business expenses, how much did he pay in federal income taxes?
So now we need to calculate his taxable income. So his taxable income is going to be the net income, which is $120,000 minus the tax deductions of $12,000. And so his taxable income is $108,000.
So we need to calculate the amount of federal income taxes he's going to pay on this amount using this table. So let's focus on the first row. He's going to pay 10% of...
$9,525. So 10% of that, we know it's $952.50. Now let's move on to the next row.
Let's begin by subtracting $38,700 by $9,525. And so that's going to give us 27, I'll take that back, that's $29,000. 175, and he's going to pay 12% on that portion.
So let's multiply 29,175 by 0.12 or 0.12. So this is the same number that we had before, 3501. Now let's move on to the third row. Let's subtract 82,500 by 38,700. And so that's going to be 43,800. And we're going to multiply that by 22%, which is 0.22.
So that's going to give us 9,636. Now, her taxable income level is in the fourth row. So we're going to take this number, $108,000, and we're going to subtract it by this number, $82,500.
So $108,000 minus $82,500, that's going to be $25,500. And John is going to pay 24% on that portion. So he's in a 24% tax bracket. So $25,500 times 0.24.
That's $6,120. So now to calculate his total tax bill, we're going to add up everything that we see right here. So $952.5 plus $3501 plus $9636 plus $6120. So his tax bill for the year is $20,209. and 50 cents.
Now let's move on to part C. How much would he pay in federal income taxes if he received a 12,000 tax credit instead of 12,000 in tax deductions? So this is the amount that he would have to pay if he received a tax deduction. Now this part of the problem, it's really going to show the effect of having a tax credit over a tax deduction.
What we need to understand is that the tax deduction reduces the taxable income, whereas a tax credit, it reduces your tax bill. So with the tax deduction, the taxable income was $108,000. With the tax credit.
we need to recalculate the taxes. The taxable income is now $120,000. So we're going to have to calculate our tax bill based on this number and not the $108,000. So let's start from the beginning.
We know that John's going to pay 10% on the first $9,525 that he earns. So that's going to be $9.52 and 50 cents. And then subtracting these two numbers, 38,700 by 95.25, we know he's going to pay 12% on this portion, which is 35.01. And then subtracting these two numbers.
which is 43,800. He's going to pay 22% of that. So 43,800 times 0.22, that's 96,36. Now this part is where it's going to be different.
We're going to subtract 120,000 by 82,500. And so that's going to give us 37,500 and he's going to pay 24%. that so multiply 37 500 by 0.24 and that's going to give you 9000 now let's go ahead and add these numbers let's calculate the tax bill before a tax credit is applied so we have 952 50 plus 3501 plus 96 36 plus 9000 So right now his tax bill without the $12,000 in tax deductions is $23,089.50.
So this is his tax bill without any tax deductions applied to it or any tax credits. So with a $12,000 tax deduction, notice that his tax bill reduced almost... just under $3,000.
That's how much it decreased by. Now, if he were to receive a 12,000 tax credit, it would reduce this bill by 12,000. So 23,089.50 minus 12,000, his new tax bill would be $11,089.50. So as you can see, A tax credit has a much greater impact in reducing one's tax bill than a tax deduction.
Now let's work on number three. Sally is self-employed. Her taxable income is $200,000 in 2018. Part A, how much does she pay in federal income taxes?
Now for part B and C, I'm going to put the tax rate tables on the board later. Let's focus on part A. So for the first $9,525, she's going to pay 10%, which is $952.50. Now, just like we did before, we're going to subtract $38,700 by $95.25. And so that's going to give us $29,175.
and Sally's going to pay 12% on that portion of her income. So multiply 29,175 by 0.12, and that's going to give you $3,501. Now, let's move on to the third row. We're going to subtract $82,500 by $38,700, and so that's going to give us $43,000. 800 and she's going to pay 22% on this portion.
So 43,800 times 0.22, that's going to be $9,636. Now let's move on to the fourth row. So we're going to subtract 157,500 by 82,500.
And so that's going to be... a difference of 75 000 and at that level she's going to pay 24 so 75 000 times 0.24 that's going to give us 18 000. now her income which is 200 stop excuse me 200 000 it stops at this level so we're going to subtract 200 000 by 157,500 and so that's going to be 42,500 and she's going to pay 32% on this portion. So 42,500 times 0.32 that's 13,600.
So now let's add everything that we see here on the right side. So I got $45,689.50. So this is her tax bill for the year. Now let's move on to part B.
How much did she pay in FICA taxes? That is Social Security and Medicare taxes. She only pays...
12.4% on the first $128,400 of her income. So for Social Security, she doesn't pay 12.4% on $200,000, only on this portion and nothing more than that. So let's multiply this number by 0.124.
$128,400 times 0.124 is $15,921.60. So this is how much she's going to pay in Social Security taxes. Now let's see how much she's going to pay in Medicare or Medicare taxes. So her income is only $200,000. So she's only going to pay 2.9% of that.
So we're going to take this number and multiply it by 2.9 divided by 100, which is 0.029. So 0.029 times $200,000 is $5,800. So that's how much she's going to pay in Medicare taxes.
Now, just as a side question, let's say if her taxable income was $500,000. How much would Sally pay in Medicare taxes? Her Social Security taxes will still be the same. This is the maximum that she's going to pay.
Now, on the first $200,000, she's still going to pay $5,800. But from $200,000 to $500,000, she's going to pay 3.8%. 3.8%. on that portion. So if you subtract $500,000 by $200,000, you'll get a difference of $300,000.
And on this portion, she'll pay this higher tax rate. So if we multiply $300,000 by.038, this will give us $11,400. So add in these two, $5,800 plus $11,400.
That will give us her total Medicare tax bill, which will be $17,200 if her taxable income is $500,000. Now, let's assume that Sally lives in a state where she has to pay state income taxes. How much did she pay in state income taxes according to the information that we see in this table?
So let's find out. On the first $750 that she earns, she's going to pay 1% of that income. So 1 divided by 100, that's 0.01.
So we're going to multiply $750 by 0.01. And so that's going to be $7.50. Now let's move on to the second row. So let's subtract these two numbers, $2,250 minus $750.
And so that's going to give us a difference of $1,500. She's going to pay 2% on this portion. So $1,500 times 0.02, that is $30.
Now let's move on to the third row. Let's subtract $3,750 by $2,250. So that's going to give us $1,500 again.
And so she's going to pay 3% on that portion. So $1,500 times 0.03, that's going to be $45. Now moving on to the fourth row, we're going to subtract $52.50 by $37.50. And so that's another $1,500.
But this time she's going to pay 4%. So $1,500 times.04, that's $60. And now for the next one, if we subtract $7,000 by $52.50, that's going to give us $1,750. And she's going to pay 5% on this amount. So $1,750 times.05, that's going to be...
$87.50. Now on the last portion from 7,000 to 200,000, she's going to pay 6% on that portion. So first we need to subtract 200,000 by 7,000.
And so that's going to be $193,000. So we're going to take that number and multiply it by 0.06. And so she's going to pay $11,580. And that's basically where the bulk of the taxable is. So now let's add everything up to this point.
So this is going to be... $11,810 in state income taxes. So let's calculate the total amount of taxes that she pays. So in income taxes, it was $45,689.50. And then in social security taxes, It was $15,921.60.
And in Medicare taxes, Sally's going to pay $5,800. And then in state income taxes, she's going to pay $11,810. So let's take the sum of these four numbers.
So I got $79,221.10. So this is her total tax bill. for the year. Now there's one more calculation that I want to do, and that is to calculate the effective tax rate. So her total tax bill is this number, and her taxable income is $200,000.
So we're going to divide those two numbers and then multiply by 100%. So $79,221.10 divided by $200,000 and then multiply that number by 100. And so her effective tax rate is 39.6%. So out of her $200,000 taxable income, she's paying 39.6% of that in taxes. So that's it for this video. Now you know how to calculate or estimate the amount of federal income taxes that you may owe given your taxable income.
And you know how to estimate how much. You need to pay in state income taxes. and social security and medicare taxes if you're self-employed thanks for watching