GOVT 2305. Module 16 Taxes

Federal Tax Revenues by Source What does FY mean? Fiscal year, which means budget year, the federal fiscal year runs from Oct. 1 to Sept. 30.

Income Tax Brackets, 2016 Tax filers can claim a personal exemption of $4,050 for themselves and each dependent. The dollar amounts are for taxable income, not net income.

Is less more? Suppose you, a single person, are earning $9,000 a year in taxable income in a part-time job. Your employer offers you more hours. Your total taxable income will rise to $9,500. Do you take the promotion or pass it up because the extra income will push you into a higher tax bracket? You take the raise because the higher tax rate is ONLY assessed on income over $9,275. You are never worse off making more money.

LeBron gets a raise Suppose LeBron James negotiates a $1 million raise for next season. How much additional money does he get after taxes? LeBron James earns $21 million a year.

Tax brackets & marginal rates What is LeBron’s tax bracket for 2015? Does that mean that all of his earnings are taxed at that rate? He is in the 39.6 % tax bracket. Only money earned above $415,050 is taxed at 39.6 %. Of LeBron’s million dollar raise, he keeps $604,000 and pays $396,000 in taxes.

$250 because you are in the 25 % bracket. You Being Generous Assume that your taxable income is $50,000. You decide to give HCC $1,000 for its scholarship fund. How much will that gift reduce your income tax liability? $250 because you are in the 25 % bracket.

Figuring Your Income Tax Suppose your taxable income is $25,000. How would you calculate your tax owed?

Progressive taxation The federal income tax is an example of a progressive tax, a tax system that taxes people earning higher incomes at a higher rate than it does individuals making less money. Why do some people believe that progressive taxation is fair? Why do others believe it is unfair?

Ability to pay theory The advocates of progressive taxation often defend the concept on the basis of the ability to pay theory of taxation, an approach to government finance that holds that taxes should be based on an individual's ability to pay.

Taxation is Theft Critics of high taxes on the rich believe that they punish the successful in order to provide government benefits to the less successful. They also believe that policies that enable successful individuals to accumulate wealth benefit the economy because they will invest the money in new and expanded businesses.

Who would most benefit from Trump’s plan? Trump tax plan Donald Trump wants only three brackets 12 % 25 % 33 % Who would most benefit from Trump’s plan?

The rich

A tale of two families The Sanchez family and the Khan family are next door neighbors. Each of the houses in which they live is valued at $200,000. Each family has four members—a married couple and two school-age children. The adults in each family work and the family income for each family is around $90,000 a year. Nonetheless, the Sanchez family pays several thousand dollars more a year in federal income tax. How could that be? The Khans are home owners. The Sanchez family rents. Home owners enjoy tax breaks that renters do not have.

Tax Preferences A tax exemption is the exclusion of some types of income from taxation. Veterans' benefits, pension contributions and earnings, and interest earned on state and local government bonds are exempt from the income tax. Money spent by an employer on worker health insurance is tax exempt for the employee. A tax deduction is an expenditure that can be subtracted from a taxpayer's gross income before figuring the tax owed. Home mortgage interest, property taxes paid, charitable contributions, etc. are tax deductible. Deductions are common. A tax credit is an expenditure that reduces an individual's tax liability by the amount of the credit. A tax credit of $500 reduces the amount of tax owed by $500. The Hope Scholarship, for example, grants first- and second-year college students annual tax credits up to $2,500 to cover the cost of college tuition and fees. Tax credits are relative rare.

Capital Gains Tax Rate A capital gain is profit on the sale of an asset that was purchased at a lower price, such as stocks, bonds, precious metals (gold, silver, etc.), and property. Congress and the president increased capital gains taxes in early 2013.

Capital Gains Controversy Many conservatives want to reduce or eliminate capital gains taxes in order to stimulate investment and spur economic growth.

Capital Gains Controversy In contrast, critics charge that low capital gains tax rates enable many wealthy individuals to pay a lower percentage of their income in taxes than average Americans. Note: These data do not reflect the capital gains tax increase adopted in 2013.

Many Pay No Income Taxes Nearly half of American households pay no income tax at all because they don’t make enough money. Despite relatively low capital gains tax rates and other tax breaks, the wealthiest 5 percent of Americans pay a majority of income taxes.

Effective Tax Rates Low income people may not pay income taxes, but they do pay other taxes.

What You Have Learned What are the most important federal tax sources? How does the federal income tax work? How do tax preferences affect an individual’s tax bill? What are capital gains and how are they taxed? Why is it that many Americans pay no income tax? Does that mean that many Americans pay no taxes at all?