Introduction to Federal Income Tax
Copyright © 2013 by M. Ray Gregg.
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2
Tally your results.
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3
Consider the Alternative
• How would you like to NOT pay tax?
• What situation would you likely be in
if you did not have to pay tax?
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Who Pays Tax?
•
•
•
•
Individuals
Corporations
Estates
Trusts
Any Surprises?
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Taxpaying Entities
Files a
Entity
Tax return? PaysTax?
Proprietorship
No
Partnership
Yes
1065
Income
Taxed?
No
Yes!
No
Yes!
Yes
Yes!
1120
Corporation
Yes
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Name as many as you can.
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Types of Taxes
• Sales
• Excise
• Income
– Federal
– State
– Local
•
•
•
•
•
•
Estate
Gift
Social Security
Unemployment
Personal property
Real property
Copyright © 2013 by M. Ray Gregg.
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Types of Taxes
• Sales
• Excise
• Income
–Federal
– State
– Local
• Estate
• Gift
• Social security
• Unemployment
This
course
• Personal property
• Real property
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• Proportional
• Progressive
• Regressive
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Tax
Base
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Tax
Base
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Tax
Base
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Marginal Costs
• Define from Economics
– “Marginal costs are the costs a
company incurs in producing one
additional unit of a good.”
Source: http://economics.about.com/cs/economicsglossary/g/marginal_cost.htm
– “In economics and finance, marginal
cost is the increase in total cost that
arises when the quantity produced (or
purchased) increases by one unit.”
Source: http://en.wikipedia.org/wiki/Marginal_cost
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History of Marginal Rates
• For individuals
• For corporations
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U.S. Tax Rates
1909 - 1999
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U.S. Tax Rates
1909 - 1999
WW I
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U.S. Tax Rates
1909 - 1999
Great Depression
Stock Market Crash
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U.S. Tax Rates
1909 - 1999
WW II
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U.S. Tax Rates
1909 - 1999
Korean War
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U.S. Tax Rates
1909 - 1999
Kennedy Tax Cut
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U.S. Tax Rates
1909 - 1999
Vietnam War
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U.S. Tax Rates
1909 - 1999
Regan Tax Cut
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Marginal Rates
1913 - 2008
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
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Marginal Rates
1913 - 2008
Regan Tax Cut
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
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Marginal Rates
1913 - 2008
Regan Tax Cut
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
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Marginal Rates
1913 - 2008
Bush Tax Increase
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
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Marginal Rates
1913 - 2008
Bush Tax Cut
http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-bracket.html
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Consider these facts…
• For current year
• All Income
• Exempt Income
140,000
25,000
Determine:
• Marginal Rate
• Average Rate
• Effective Rate
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All Income
Less: Exempt Income
Sub-total
Exemption
3,900
Std Deduction
6,100
Taxable Income
140,000
25,000
115,000
10,000
105,000
Tax Calculation:
TI
105,000
- Base
87,850
x Mar Rate
Sub-Total
+ Tax on Base
Total Tax
Marginal Rate
Average Rate
Effective Rate
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17,150
0.28
4,802
17,891
22,693
28.0%
21.6%
16.2%
38
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All Income
Less: Exempt Income
Sub-total
Exemption
3,900
Std Deduction
6,100
Taxable Income
140,000
25,000
115,000
10,000
105,000
Tax Calculation:
TI
105,000
- Base
87,850
x Mar Rate
Sub-Total
+ Tax on Base
Total Tax
Marginal Rate
Average Rate
Effective Rate
Copyright © 2013 by M. Ray Gregg.
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17,150
0.28
4,802
17,891
22,693
28.0%
21.6%
16.2%
42
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43
All Income
Less: Exempt Income
Sub-total
Exemption
3,900
Std Deduction
6,100
Taxable Income
140,000
25,000
115,000
10,000
105,000
Tax Calculation:
TI
105,000
- Base
87,850
x Mar Rate
Sub-Total
+ Tax on Base
Total Tax
Marginal Rate
Marginal Rate
Average Rate
Effective Rate
Copyright © 2013 by M. Ray Gregg.
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17,150
0.28
4,802
17,891
22,693
28.0%
21.6%
16.2%
44
28%
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45
Tax
Taxable Income
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46
All Income
Less: Exempt Income
Sub-total
Exemption
3,900
Std Deduction
6,100
Taxable Income
140,000
25,000
115,000
10,000
105,000
Tax Calculation:
TI
105,000
- Base
87,850
x Mar Rate
Sub-Total
+ Tax on Base
Total Tax
Marginal Rate
Average Rate
Effective Rate
Copyright © 2013 by M. Ray Gregg.
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17,150
0.28
4,802
17,891
22,693
28.0%
21.6%
16.2%
47
21.6%
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48
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49
Tax
All Income
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50
All Income
Less: Exempt Income
Sub-total
Exemption
3,900
Std Deduction
6,100
Taxable Income
140,000
25,000
115,000
10,000
105,000
Tax Calculation:
TI
105,000
- Base
87,850
x Mar Rate
Sub-Total
+ Tax on Base
Total Tax
Marginal Rate
Average Rate
Effective Rate
Copyright © 2013 by M. Ray Gregg.
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17,150
0.28
4,802
17,891
22,693
28.0%
21.6%
16.2%
51
$22,693
$140,000
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52
All Income
Less: Exempt Income
Sub-total
Exemption
3,900
Std Deduction
6,100
Taxable Income
140,000
25,000
115,000
10,000
105,000
Tax Calculation:
TI
105,000
- Base
87,850
x Mar Rate
Sub-Total
+ Tax on Base
Total Tax
Marginal Rate
Average Rate
Effective Rate
Copyright © 2013 by M. Ray Gregg.
All rights reserved.
17,150
0.28
4,802
17,891
22,693
28.0%
21.6%
16.2%
53
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54
assume 30% tax rate
• Mother-in-law
– Turned down raise
• Employees appeal to boss
– Boss agrees to raise costing $100,000
• Doctor bills patients near end of yr
• You contribute $1,000 to church
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