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Russell James, J.D., Ph.D., CFP®Professor, Texas Tech University
A Super Simple
Introduction to
Taxes
Income, Capital Gain, Estate, Gift and Generation Skipping
A Super Simple
Introduction to Taxes
Part 1: Tax Brackets
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.
The federal government charges these taxes
Most states do too
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.
The percentage we pay in taxes is not flat
2017 federal income tax brackets for a
single person
Marginal Tax Rate Taxable Income
10% $0 – $9,32515% $9,326 – $37,95025% $37,951 – $91,90028% $91,901 – $191,65033% $191,651 – $416,70035% $416,701 – $418,400
39.6% $418,401+
How much taxes are owed on $5,000?
$5,000 x 10% = $500
Tax Rate Taxable Income10% $0 – $9,32515% $9,326 – $37,95025% $37,951 – $91,90028% $91,901 – $191,65033% $191,651 – $416,70035% $416,701 – $418,400
39.6% $418,401+
How much taxes are owed on $10,325?
($9,325 x 10%) + ($1,000 x 15%) $1,082.50
Tax Rate Taxable Income10% $0 – $9,32515% $9,326 – $37,95025% $37,951 – $91,90028% $91,901 – $191,65033% $191,651 – $416,70035% $416,701 – $418,400
39.6% $418,401+
How much taxes are owed on $40,000?
($9,325 x 10%) + (($37,950-$9,325) x 15%) +(($40,000-$37,950) x 25%)$5,738.75
Tax Rate Taxable Income10% $0 – $9,32515% $9,326 – $37,95025% $37,951 – $91,90028% $91,901 – $191,65033% $191,651 – $416,70035% $416,701 – $418,400
39.6% $418,401+
A Super Simple
Introduction to Taxes
Part 1: Tax Brackets
A Super Simple
Introduction to Taxes
Part 2: Tax Deductions
A tax deduction
reduces taxable income
If I have $10,000 of taxable incomethen get a $1,000 deductionHow much taxable income do I have?
$10,000 - $1,000 = $9,000
If I have $100,000 of taxable incomethen get a $1,000 deductionHow much taxable income do I have?
$100,000 - $1,000 = $99,000
How much is a deduction worth?
The amount of the deduction X The marginal tax rate
Deduction value
Taxpayers can take either itemized deductions or the standard deduction
Standard Deduction
(2017)
$6,350 singleActual
itemized deductions
If all itemized deductions
combined are less than the standard
deduction, they are worth nothing
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)
High income earners can’t use the full deduction until after they have passed a minimum amount of deductions.
2017[income-$313,800]*3% married or [income-$261,500]*3% single
For our examples, we will assume other deductions have already absorbed this reduction or that donor income is below the threshold.
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 Income10% $0 – $9,32515% $9,326 – $37,95025% $37,951 – $91,90028% $91,901 – $191,65033% $191,651 – $416,70035% $416,701 – $418,400
39.6% $418,401+
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 Income10% $0 – $9,32515% $9,326 – $37,95025% $37,951 – $91,90028% $91,901 – $191,65033% $191,651 – $416,70035% $416,701 – $418,400
39.6% $418,401+
How much is a $1,000 deduction worth to a person with $10,000 of taxable income?($675 x 15%) +($325 x 10%)$133.75
Tax Rate Taxable Income10% $0 – $9,32515% $9,326 – $37,95025% $37,951 – $91,90028% $91,901 – $191,65033% $191,651 – $416,70035% $416,701 – $418,400
39.6% $418,401+
A Super Simple
Introduction to Taxes
Part 2: Tax Deductions
A Super Simple
Introduction to Taxes
Part 3: Capital Gain, Estate, Gift, and Generation Skipping Taxes
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 itCapital gain
What I sold it for – Basis = Capital gain
Instead of “What I paid for it”,
we use the term Basis
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
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%)
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.
There are no estate or gift taxes on up to $5,490,000 (in 2017) of transfers. The top rate is 40%.
Transfers to grandchildren with living parents, in excess of $5,490,000 (in 2017) total, may create generation skipping transfer taxes. This adds another 40% tax.
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%) => $86,700Fed. Income Tax ($86,700 x 39.6%) => $52,367Estate tax ($52,367 x 40%) => $20,947GST tax ($31,420 x 40%) => $12,568
$18,852
A Super Simple
Introduction to Taxes
Part 3: Capital Gain, Estate, Gift, and Generation Skipping Taxes
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Russell James, J.D., Ph.D., CFP®Professor, Texas Tech University
A Super Simple
Introduction to
Taxes
Income, Capital Gain, Estate, Gift and Generation Skipping