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

1. A Super
Simple
Introduction
to
Taxes
Income, Capital
Gain, Estate, Gift,
and Generation
Skipping

2. All slides are
taken from this
book.
Available from
Amazon.com
Full Color version available at
www.createspace.com/4707238

3. We pay taxes
on money we earn.

4. We pay taxes
on money we earn.
We call these income
taxes.

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. 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. The federal government
charges these taxes

8. The federal government
charges these taxes
Most states do too

9. We (sometimes)
pay taxes on
money we leave
to other people
when we die.

10. We (sometimes)
pay taxes on
money we leave
to other people
when we die.
We call these
estate taxes.

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. 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. The percentage we pay in taxes
is not flat

14. The percentage we pay
in taxes is not flat.
As income
increases the
income tax
percentage
increases.

15. The percentage we pay
in taxes is not flat.
As income
increases the
capital gain tax
percentage
increases.

16. The percentage we pay
in taxes is not flat.
As estate size
increases the
estate tax
percentage
increases.

17. The percentage we pay
in taxes is not flat.
As gift size
increases the
gift tax
percentage
increases.

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. 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. 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. 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. 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. 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. 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. 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. 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. A tax
deduction
reduces
taxable
income

28. If I have $10,000 of taxable income
then get a $1,000 deduction
How much taxable
income do I have?

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. If I have $100,000 of taxable income
then get a $1,000 deduction
How much taxable
income do I have?

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. How much is
a deduction
worth?

33. How much is a deduction worth?
The amount of the deduction
X The marginal tax rate
Deduction value

34. Taxpayers can take either itemized
deductions or the standard deduction
Standard
Deduction
(2014)
$6,200 single
Actual
itemized
deductions

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. If all itemized
deductions
combined are less
than the standard
deduction, they are
worth nothing

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. If I sell something for more than I paid for
it, that profit is taxed as a capital gain

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. What I sold it for – Basis = Capital gain
Instead of
“What I paid for it”,
we use the term
Basis

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. 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. 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. 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. There are no estate or
gift taxes on up to
$5,340,000 (in 2014)
of transfers.
The top rate is 40%.

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. 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. 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. A Super
Simple
Introduction
to
Taxes
Income, Capital
Gain, Estate, Gift,
and Generation
Skipping

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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