Week 2: Credit, Debt & Taxes

Week 2: Credit, Debt & Taxes > Taxes > Taxes

• Go ahead and pause this video and think about a few things that your tax dollars can be used for.
• Just remember these are your tax dollars hard at work, so it’s definitely worth figuring out how much of your money is going to taxes, and it’s also worth being civically engaged to elect a government that will spend money the way you want.
• As I think you’ll see, a lot of tax policy and choices ultimately boil down to public policy priorities.
• In Berkeley, you actually would have had to pay $15 in city sales tax.
• You don’t have to pay sales tax on many necessities like food and medicines.
• As you will see, many states have no sales tax while others, including California, have sales taxes higher than 7%. So sales taxes are one kind of tax.
• The federal government requires that you pay a certain portion of your income to them in the form of income tax.
• California has one of the more progressive state income tax systems in the nation.
• Let’s now take a closer look at how the federal income tax works.
• Once you have your taxable income, the federal income tax is determined as follows.
• The first $9,075 of taxable income are taxed at a rate of 10%. So if you only have taxable income of $9,075 during the year, you would pay the government $907.50 in the form of income tax.
• If your taxable income is higher, anything between $9,075 and $36,900, is taxed at a rate of 15%. That’s the idea of progressivity.
• The next chunk of your income, between $35,900 and $89,350, is taxed at an even higher rate of 25%. The next chunk is taxed at a rate of 28%, the next at 33%, and so on.
• It’s pretty easy to compute your tax with a tax table after you know your taxable income.
• In this case it’s shaded in gray, and you would be able to compute your income tax.
• By tax bracket we just mean the tax rate that applied to your last dollar of income.
• Just because you pay 25% on your last dollar of income doesn’t mean that all your income was taxed at 25%. The first few dollars were taxed at a much lower rate of 10%, meaning that on average, you paid less than 25% of your taxable income for taxes.
• That’s your average tax rate, and we computed it by dividing your total taxes by your taxable income.
• The different filing statuses are single, married filing jointly, married filing separately, head of household- which means not married but covering more than half the cost of yourself and a qualifying person- and another tax status is qualifying widow or widow with dependent child.
• Any salary above that $117,000, you didn’t have to pay the social security tax on.
• If you put income into a tax-deferred retirement account, you don’t pay income tax on it now, but you will pay income tax on it later when you take the money out of your retirement account.
• If you hold an asset for more than a year and sell it for a profit, your gains are taxed at a much lower rate than your marginal income tax rate.
• If you are in the 10% or 15% tax brackets- the lower two brackets- you actually pay no tax on your capital gains.
• If you’re in the 25% to 35% tax brackets, you only pay 15% on your capital gains.
• Certain stock dividends also qualify for this lower capital gains tax rate if they meet certain criteria.
• As a tax planning strategy, it’s good to think about how you can invest in a way that allows your gains to be taxed at the capital gains rate instead of the income tax rate.
• In California, you pay property tax on the value of your home.
• In other states you may pay property tax on other large items like cars and boats.
• The Tax Policy Center has a nice interactive map that shows you the effective tax rates for each county in the US. Finally, the last form of tax we are going to talk about are estate taxes.
• So although the tax rate sounds scarily high at 40%, very few people actually pay any estate tax.
• Your $5.4 million estate tax exemption applies to the combination of lifetime gifts you make and the estate you have once you die.
• Does that mean you can’t give somebody $100 for a birthday present without counting it toward your estate tax exemption? No. In fact, in 2015 you can give an unlimited number of people gifts of up to $14,000 a year without it counting toward your lifetime limit of estate tax exemption.
• Imagine you have $55,000 of taxable income this year and are in the 25% federal tax bracket.
• It’s not like you can go out and buy something for $0.60 because you need to have some money left over to pay the sales tax.
• How high is that compared to other countries? Well, one way to make comparisons across countries is to look at the share that tax revenue makes up of a country’s gross domestic product, or GDP for short.
• I do want to show you how income tax burden in the US does vary by income level.
• They are making about 89% of the income and paying 97% of the tax.
• If we look at just the top quarter of earners, they are paying 86% of all tax revenue raised, and they’re actually making about 67% of all the income earned.
• These considerations are important to keep in mind when considering income and tax inequalities.
• Hopefully it also provides the impetus to get involved with the public policy making process around you so that you have some say in how your tax dollars are working for you.