Selected topics in finite mathematics/Taxes

Objectives

1. Understand how a tiered tax rate structure works.
2. Understand how capital gains taxes work and how they relate to the tiered rates.
3. Understand how Social Security and Medicare taxes work.

Note that (1) above is quite general, while (2) and (3) are more specific to the tax structure in the United States

Details

Income Taxes: Taxes are taxes that come directly from the income you make.Usually an individual's gross income is different from their taxable income. The taxable income is generally the income that is taxable after determining exemptions, deductions, and adjustments.

Income Filing as an Independent	Marginal Tax Rate	Long-term Capital Gains Rate
All income below $10,000	10%	0%
All income above $10,000	25%	15%

Exemptions: These are characteristics of one's income that are not considered taxable. In 2013, every person has an exemption of $3900 per person.

Deductions: When an individual files as an independent, they can either deduct $6,100 from their income that is not taxable, or deduct itemized deductions as income that is not considered taxable. Itemization must exceed the $6100 figure.

Adjustments:These are also types of expenses that won't be considered taxable.

Tax Credits: a credit that is counted directly toward the income taxes and individual pays. Purchases like environmentally friendly appliances often carry such a perk.

Capital Gains: A capital gain is a profit rom the sale of a capital asset such as stock. Capital gains are added to a person's taxable income directly but are taxed at different rates than the rest of the taxable income.

Payroll Taxes: These taxes are on your earned income, normally on a salary from a job but not unearned income. Social Security is a government-mandated program that came around during the Great Depression that provides retirement benefits. Medicare, a government program that provides healthcare for the elderly, is another example of a payroll tax.

Social Security: a government-mandated program providing retirement benefits.

Medicare: a government mandated program providing healthcare for the elderly.

Gross Income Filing as an Independent	Social Security: Employee	Social Security: Employer	Medicare: Employee	Medicare: Employer
All Income Below $100,000	7%	7%	1%	1%
All Income Above $100,000	0%	0%	1%	1%

Examples

Lucy works full time as a cashier in Starbucks and has a taxable income of 14,000. How much does she pay in income tax?

Income filing as an independent	Marginal Tax Rate	Long-term Capital Gains rate
All income below $10,000	10%	0%
All income above $10,000	25%	15%

(10,000 × 0.1) + (4,000 × .25)= $2,000 in income tax

Danny works as a teacher and has a gross income of $41,255. He has a wife and two kids(exemptions).

Gross Income:41255

Taxable Income:41255-3900(4)-6100= 19555

Tax:(10000×.01) + (9555×.25)=2488.75 in income tax

[Give an example of income taxes with a deduction?]

[Give an example of income taxes with an adjustment?]

[Give an example of income taxes with a credit?]

[Give an example of income taxes with capital gains?]

[Give an example of payroll taxes?]

Homework

If a family of 3 (one child) has a gross income of $40,000, how much do they pay in taxes?

Solution [You can add the solution to the problem here!]

If a family of 3 (two children) has a gross income of $40,000, how much do they pay in taxes?

Solution [You can add the solution to the problem here!]

If a family of 3 (one child) has a gross income of $40,000 but also donated $10,000 to a charity, how much do they pay in taxes?

Solution [You can add the solution to the problem here!]

If a family of 3 (one child) has a gross income of $40,000 but also saved $10,000 in a tax-deferred fund, how much do they pay in taxes?

Solution [You can add the solution to the problem here!]