Simple introduction to taxes

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A way, way, way too simple introduction to income, capital gain, estate, gift, and generation skipping taxes

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Simple introduction to taxes

  1. 1. A Super Simple Introduction to Taxes Income, Capital Gain, Estate, Gift, and Generation Skipping
  2. 2. All slides are taken from this book. Available from Amazon.com Full Color version available at www.createspace.com/4707238
  3. 3. We pay taxes on money we earn.
  4. 4. We pay taxes on money we earn. We call these income taxes.
  5. 5. We pay taxes on money we earn. We call these income taxes. We pay taxes when we sell something for more than we paid for it.
  6. 6. We pay taxes on money we earn. We call these income taxes. We pay taxes when we sell something for more than we paid for it. We call these capital gains taxes.
  7. 7. The federal government charges these taxes
  8. 8. The federal government charges these taxes Most states do too
  9. 9. We (sometimes) pay taxes on money we leave to other people when we die.
  10. 10. We (sometimes) pay taxes on money we leave to other people when we die. We call these estate taxes.
  11. 11. We (sometimes) pay taxes on money we leave to other people when we die. We call these estate taxes. To prevent tax free transfer of estates before death, we (sometimes) pay taxes on gifts to others.
  12. 12. We (sometimes) pay taxes on money we leave to other people when we die. We call these estate taxes. To prevent tax free transfer of estates before death, we (sometimes) pay taxes on gifts to others. We call these gift taxes.
  13. 13. The percentage we pay in taxes is not flat
  14. 14. The percentage we pay in taxes is not flat. As income increases the income tax percentage increases.
  15. 15. The percentage we pay in taxes is not flat. As income increases the capital gain tax percentage increases.
  16. 16. The percentage we pay in taxes is not flat. As estate size increases the estate tax percentage increases.
  17. 17. The percentage we pay in taxes is not flat. As gift size increases the gift tax percentage increases.
  18. 18. 2014 federal income tax brackets for a single person Marginal Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  19. 19. How much taxes are owed on $5,000? Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  20. 20. How much taxes are owed on $5,000? $5,000 x 10% = $500 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  21. 21. How much taxes are owed on $10,075? Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  22. 22. How much taxes are owed on $10,075? ($9,075 x 10%) + ($1,000 x 15%) $1,057.50 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  23. 23. How much taxes are owed on $10,075? ($907.50) + ($150) $1,057.50 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,075 – $36,900 25% $36,900 – $89,350 28% $89,350 – $186,350 33% $186,350 – $405,100 35% $405,100 – $406,750 39.6% $406,750+
  24. 24. How much taxes are owed on $40,000? Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  25. 25. How much taxes are owed on $40,000? ($9,075 x 10%) + (($36,900-$9,075) x 15%) + (($40,000-$36,900) x 25%) $5,856.25 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  26. 26. How much taxes are owed on $40,000? $907.50 + $4173.75 + $775.00 $5,856.25 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  27. 27. A tax deduction reduces taxable income
  28. 28. If I have $10,000 of taxable income then get a $1,000 deduction How much taxable income do I have?
  29. 29. If I have $10,000 of taxable income then get a $1,000 deduction How much taxable income do I have? $10,000 - $1,000 = $9,000
  30. 30. If I have $100,000 of taxable income then get a $1,000 deduction How much taxable income do I have?
  31. 31. If I have $100,000 of taxable income then get a $1,000 deduction How much taxable income do I have? $100,000 - $1,000 = $99,000
  32. 32. How much is a deduction worth?
  33. 33. How much is a deduction worth? The amount of the deduction X The marginal tax rate Deduction value
  34. 34. Taxpayers can take either itemized deductions or the standard deduction Standard Deduction (2014) $6,200 single Actual itemized deductions
  35. 35. If itemized deductions total less than the standard deduction, they are not used. Standard Deduction (2014) $6,200 single Actual itemized deductions $4,000
  36. 36. If all itemized deductions combined are less than the standard deduction, they are worth nothing
  37. 37. For the following examples, we will keep it simple by assuming the taxpayer is already itemizing deductions (i.e., they have other deductions exceeding the standard deduction amount)
  38. 38. High income earners can’t use the full deduction until after they have passed a minimum amount of deductions. 2014 [income-$305,050]*3% married or [income-$254,200]*3% single For our examples, we will assume other deductions have already absorbed this reduction or that donor income is below the threshold.
  39. 39. How much is a $1,000 deduction worth to a person with $8,000 of taxable income? Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  40. 40. How much is a $1,000 deduction worth to a person with $8,000 of taxable income? $1,000 x 10% = $100 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  41. 41. How much is a $1,000 deduction worth to a person with $100,000 of taxable income? Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  42. 42. How much is a $1,000 deduction worth to a person with $100,000 of taxable income? $1,000 x 28% = $280 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  43. 43. How much is a $1,000 deduction worth to a person with $500,000 of taxable income? Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  44. 44. How much is a $1,000 deduction worth to a person with $500,000 of taxable income? $1,000 x 39.6% = $396 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  45. 45. How much is a $1,000 deduction worth to a person with $10,000 of taxable income? Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  46. 46. How much is a $1,000 deduction worth to a person with $10,000 of taxable income? ($925 x 15%) + ($75 x 10%) $146.25 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  47. 47. How much is a $1,000 deduction worth to a single person with $1,300,000 of taxable income in California? Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+ California levies a 13.3% state tax. But, state taxes are itemized federal deductions, making the effective rate 8.0332% (100% - Federal tax bracket) x State tax bracket
  48. 48. How much is a $1,000 deduction worth to a single person with $1,300,000 of taxable income in California? $1,000 x (39.6% + 8.0332%) $1,000 x (47.6332%) $476.33 Tax Rate Taxable Income 10% $0 – $9,075 15% $9,076 – $36,900 25% $36,901 – $89,350 28% $89,351 – $186,350 33% $186,351 – $405,100 35% $405,101 – $406,750 39.6% $406,751+
  49. 49. If I sell something for more than I paid for it, that profit is taxed as a capital gain
  50. 50. If I sell something for more than I paid for it, that profit is taxed as a capital gain What I sold it for – What I paid for it Capital gain
  51. 51. What I sold it for – Basis = Capital gain Instead of “What I paid for it”, we use the term Basis
  52. 52. What I sold it for – Basis = Capital gain Basis is + what I paid for it + any money I spent improving it - any depreciation tax deductions I have already taken on it
  53. 53. If I owned the item for more than one year, it is a long-term capital gain 2014 - Single Taxable income long-term capital gains + ACA 0-$36,900 0% $36,900-$200,000 15% $200,000-$406,750 18.8% 406,750+ 23.8%
  54. 54. If I owned the item for more than one year, it is a long-term capital gain Taxable income bracket Long-term capital gain + ACA 10% or 15% 0% 25%, 28%, 33%, or 35% 15% 25%, 28%, 33%, or 35% & modified AGI $200,000+ (single) or $250,000+ (married) 18.8% (15% + 3.8%) 39.6% + modified AGI $200,000+ (single) or $250,000+ (married) 23.8% (20% + 3.8%)
  55. 55. We (sometimes) pay taxes on money we leave to other people when we die. We call these estate taxes. To prevent tax free transfer of estates before death, we (sometimes) pay taxes on gifts to others. We call these gift taxes.
  56. 56. There are no estate or gift taxes on up to $5,340,000 (in 2014) of transfers. The top rate is 40%.
  57. 57. Transfers to grandchildren with living parents, in excess of $5,340,000 (in 2014) total, may create generation skipping transfer taxes. This adds another 40% tax.
  58. 58. If I earn an extra $100,000 to leave as an inheritance to my grandchildren, how much of it will they get (if I live in California at all top marginal rates)?
  59. 59. If I earn an extra $100,000 to leave as an inheritance to my grandchildren, how much of it will they get (if I live in California at all top marginal rates)? Cali. Income Tax ($100,000 x 13.3%) => $86,700 Fed. Income Tax ($86,700 x 39.6%) => $52,367 Estate tax ($52,367 x 40%) => $20,947 GST tax ($20,947 x 40%) => $18,852 $18,852
  60. 60. A Super Simple Introduction to Taxes Income, Capital Gain, Estate, Gift, and Generation Skipping
  61. 61. Help me HERE convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise donors and you reviewed these slides, please let me know by clicking
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  63. 63. This slide set is from the curriculum for the Graduate Certificate in Charitable Financial Planning at Texas Tech University, home to the nation’s largest graduate program in personal financial planning. To find out more about the online Graduate Certificate in Charitable Financial Planning go to www.EncourageGenerosity.com To find out more about the M.S. or Ph.D. in personal financial planning at Texas Tech University, go to www.depts.ttu.edu/pfp/ Graduate Studies in Charitable Financial Planning at Texas Tech University

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