{"id":3582,"date":"2023-05-25T18:00:07","date_gmt":"2023-05-25T18:00:07","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/quantitativereasoning\/?post_type=chapter&#038;p=3582"},"modified":"2024-11-01T20:20:37","modified_gmt":"2024-11-01T20:20:37","slug":"income-tax-and-paycheck-deductions-fresh-take","status":"web-only","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/quantitativereasoning\/chapter\/income-tax-and-paycheck-deductions-fresh-take\/","title":{"raw":"Income Tax and Paycheck Deductions: Fresh Take","rendered":"Income Tax and Paycheck Deductions: Fresh Take"},"content":{"raw":"<section class=\"textbox learningGoals\">\r\n<ul>\r\n\t<li>Determine gross income, adjustable gross income, taxable income and calculate federal income tax<\/li>\r\n\t<li>Apply exemptions, deductions, and credits to basic income tax calculations<\/li>\r\n\t<li>Calculate federal income tax<\/li>\r\n\t<li>Determine social security and Medicare taxes<\/li>\r\n<\/ul>\r\n<\/section>\r\n<h2>Gross, Adjusted Gross, and Taxable Income<\/h2>\r\n<div class=\"textbox shaded\">\r\n<p><strong>The Main Idea\u00a0<\/strong><\/p>\r\n<p><strong>Gross income<\/strong> refers to the total amount of income or earnings a person receives before any deductions or taxes are taken out. It includes all sources of income, such as wages, salaries, tips, bonuses, commissions, rental income, and any other forms of earnings.<\/p>\r\n<p><strong>Adjusted Gross Income<\/strong>, commonly referred to as AGI, is the total income earned by an individual or household after certain deductions have been subtracted from their gross income.<\/p>\r\n<p>Tax <strong>deductions <\/strong>are specific expenses, contributions, or allowances that individuals can subtract from their total income, thereby reducing the amount of income that is subject to taxation.<\/p>\r\n<p>Adjusted gross income = Gross income - Deductions<br \/>\r\n<br \/>\r\nTax <strong>exemptions<\/strong> reduce the taxable income of individuals or households.<\/p>\r\n<p><strong>Taxable income <\/strong>is the portion of an individual's income that is subject to taxation. It is determined by subtracting deductions, exemptions, and other adjustments from the adjusted gross income (AGI). Taxable income is the basis on which income tax is calculated, and it is used to determine the tax rate and the amount of tax owed to the government.<\/p>\r\n<p style=\"text-align: center;\"><strong>Taxable income = Adjusted gross income - Exemptions<\/strong><\/p>\r\n<\/div>\r\n<section class=\"textbox watchIt\">\r\n<p>[embed]https:\/\/www.youtube.com\/embed\/yWI8SAaZ4Gs[\/embed]<\/p>\r\n<p>You can view the\u00a0<a href=\"https:\/\/course-building.s3.us-west-2.amazonaws.com\/Quantitative+Reasoning+-+2023+Build\/Transcriptions\/Adjusted+Gross+Income%2C+Explained+in+Four+Minutes+_+WSJ.txt\" target=\"_blank\" rel=\"noopener\">transcript for \u201cAdjusted Gross Income, Explained in Four Minutes | WSJ\u201d here (opens in new window).<\/a><\/p>\r\n<\/section>\r\n<section class=\"textbox example\">Chloe prepares for her taxes by collecting her W-2 and her 1099-MISC documents. The wages from her regular job were [latex]$41,780[\/latex]. She did some freelance work and earned [latex]$5,500[\/latex] from that job. What is Chloe\u2019s gross income?[reveal-answer q=\"330548\"]Show Solution[\/reveal-answer]<br \/>\r\n[hidden-answer a=\"330548\"]<br \/>\r\nChloe's gross income is the sum of all her wages from her regular job and freelance work is equal to [latex]$47,280[\/latex].<br \/>\r\n[\/hidden-answer]<\/section>\r\n<section class=\"textbox example\">Isabelle\u2019s gross income is [latex]$93,450[\/latex]. She paid [latex]$7,840[\/latex] in mortgage interest and [latex]$3,810[\/latex] in property taxes. She also donated [latex]$1,500[\/latex] to her favorite charity. What is Isabelle\u2019s AGI?[reveal-answer q=\"330547\"]Show Solution[\/reveal-answer]<br \/>\r\n[hidden-answer a=\"330547\"]<br \/>\r\n[latex]$80,300[\/latex]<br \/>\r\n[\/hidden-answer]<\/section>\r\n<h2>Tax Credits<\/h2>\r\n<div class=\"textbox shaded\">\r\n<p><strong>The Main Idea\u00a0<\/strong><\/p>\r\n<p><strong>Tax credits<\/strong> are direct reductions in the amount of tax liability owed to the government.<\/p>\r\n<\/div>\r\n<section class=\"textbox watchIt\">\r\n<p><iframe src=\"\/\/plugin.3playmedia.com\/show?mf=10356048&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=GGbANc-iFzE&amp;video_target=tpm-plugin-6vkdbpay-GGbANc-iFzE\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\r\n<p>You can view the\u00a0<a href=\"https:\/\/course-building.s3.us-west-2.amazonaws.com\/Quantitative+Reasoning+-+2023+Build\/Transcriptions\/Tax+Deductions+vs.+Tax+Credits.txt\" target=\"_blank\" rel=\"noopener\">transcript for \u201cTax Deductions vs. Tax Credits\u201d here (opens in new window).<\/a><\/p>\r\n<\/section>\r\n<section class=\"textbox example\">Antonio\u2019s taxes owed based on his income are [latex]$3,950[\/latex]. However, he qualifies for the earned income tax credit of [latex]$1,925[\/latex] and a child tax credit of [latex]$2,000[\/latex]. How much does Antonio owe after applying the tax credits?[reveal-answer q=\"330546\"]Show Solution[\/reveal-answer]<br \/>\r\n[hidden-answer a=\"330546\"]<br \/>\r\nThe amount of taxes Antonio owes is his calculated tax of [latex]$3,950[\/latex] minus the credit he receives. The amount he owes in taxes is [latex]$3,950\u2212$1,925-$2,000=$25[\/latex].<br \/>\r\n[\/hidden-answer]<\/section>\r\n<section class=\"textbox example\">Ismail owes [latex]$2,350[\/latex] in taxes. He has a child tax credit of [latex]$2,000[\/latex] and an earned income tax credit of [latex]$1,640[\/latex]. After applying the tax credit, how much does Ismail owe or how much does he get in a refund?[reveal-answer q=\"330545\"]Show Solution[\/reveal-answer]<br \/>\r\n[hidden-answer a=\"330545\"]<br \/>\r\nAdding Ismail \u2019s tax credits together, we find the total to be [latex]$3,640[\/latex]. That is more than the tax he owes, which was [latex]$2,350[\/latex]. Each of those credits is refundable, which means he will receive a refund. Subtracting the credits from the tax owed yields [latex]$2,350\u2212$3,640=\u2212$1,290[\/latex]. This is negative, so represents a refund of [latex]$1,290[\/latex].<br \/>\r\n[\/hidden-answer]<\/section>\r\n<h2>Calculating Your Income Tax<\/h2>\r\n<div class=\"textbox shaded\">\r\n<p><strong>The Main Idea\u00a0<\/strong><\/p>\r\n<p>U.S. income tax is based on taxable income, following a progressive system with marginal rates, meaning higher income brackets are taxed at higher rates.<\/p>\r\n<p>The five filing statuses provided by the IRS are: Single, Married filing jointly, Married filing separately, Head of household, and Qualifying surviving spouse.<\/p>\r\n<p>Taxable income is categorized into brackets, each having different tax rates, and is also influenced by your filing status. Below are the 2023 marginal tax rates for individuals filing with statuses single, married filing jointly, and head of household.<\/p>\r\n<table class=\"thick\">\r\n<caption>2023 Marginal Tax Rates<\/caption>\r\n<thead>\r\n<tr>\r\n<th style=\"text-align: center;\">Tax Rate<\/th>\r\n<th style=\"text-align: center;\" width=\"35%\">For Single Filers<\/th>\r\n<th style=\"text-align: center;\" width=\"35%\">For Married Individuals Filing Joint Returns<\/th>\r\n<th style=\"text-align: center;\" width=\"35%\">For Heads of Households<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td style=\"text-align: left;\">[latex]10\\%[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$0\\text{ to } $11,000[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$0\\text{ to } $22,000[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$0\\text{ to } $15,700[\/latex]<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"text-align: left;\">[latex]12\\%[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$11,000 \\text{ to }$44,725[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$22,000 \\text{ to }$89,450[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$15,700 \\text{ to }$59,850[\/latex]<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"text-align: left;\">[latex]22\\%[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$44,725 \\text{ to }$95,375[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$89,450 \\text{ to }$190,750[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$59,850 \\text{ to }$95,350[\/latex]<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"text-align: left;\">[latex]24\\%[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$95,375 \\text{ to }$182,100[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$190,750 \\text{ to }$364,200[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$95,350 \\text{ to }$182,100[\/latex]<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"text-align: left;\">[latex]32\\%[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$182,100 \\text{ to }$231,250[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$364,200 \\text{ to }$462,500[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$182,100 \\text{ to }$231,250[\/latex]<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"text-align: left;\">[latex]35\\%[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$231,250 \\text{ to }$578,125[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$462,500 \\text{ to }$693,750[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$231,250 \\text{ to }$578,100[\/latex]<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"text-align: left;\">[latex]37\\%[\/latex]<\/td>\r\n<td style=\"text-align: left;\">[latex]$578,125[\/latex] or more<\/td>\r\n<td style=\"text-align: left;\">[latex]$693,750[\/latex] or more<\/td>\r\n<td style=\"text-align: left;\">[latex]$578,100[\/latex] or more<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>Calculating tax liability involves determining taxable income, identifying applicable tax brackets, calculating tax for each bracket, and summing these amounts to find total tax liability.<\/p>\r\n<\/div>\r\n<section class=\"textbox example\">Akio\u2019s taxable income is [latex]$73,500[\/latex]. Find how much income tax he owes if he is filing with a single status.<br \/>\r\n[reveal-answer q=\"330542\"]Show Solution[\/reveal-answer]<br \/>\r\n[hidden-answer a=\"330542\"]<br \/>\r\nUsing our table above, we can find which tax rates Akio will have to pay.<br \/>\r\n<br \/>\r\n[latex]10\\%[\/latex] for [latex]$0\\text{ to } $11,000[\/latex],<br \/>\r\n[latex]12\\%[\/latex] for [latex]$11,000 \\text{ to }$44,725[\/latex],<br \/>\r\n[latex]22\\%[\/latex] for [latex]$44,725 \\text{ to }$95,375[\/latex].<br \/>\r\n<br \/>\r\nWe can use this to calculate the tax owed in each bracket.<br \/>\r\n<br \/>\r\n[latex]10\\%[\/latex] on the income up to [latex]$11,000[\/latex] (taxable income [latex]= $11,000 - $0 = $11,000[\/latex])<br \/>\r\n<br \/>\r\n[latex]\\text{Tax } = 0.10 * $11,000 = $1,100[\/latex]<br \/>\r\n<br \/>\r\n[latex]12\\%[\/latex] on the income between [latex]$11,000[\/latex] and [latex]$44,725[\/latex] (taxable income [latex]= $44,725 - $11,000 = $33,725[\/latex])<br \/>\r\n<br \/>\r\n[latex]\\text{Tax }= 0.12 * $33,725 = $4,047[\/latex]<br \/>\r\n<br \/>\r\n[latex]22\\%[\/latex] on the income between [latex]$44,725[\/latex] and [latex]$95,375[\/latex] (taxable income [latex]= $73,500 - $44,725 = $28,775[\/latex])<br \/>\r\n<br \/>\r\n[latex]\\text{Tax }= 0.22 * $28,775 = $6,331[\/latex]<br \/>\r\n<br \/>\r\nNow we must add up all the taxes from each bracket to get the total amount owed.<br \/>\r\n<br \/>\r\n[latex]\\text{Total tax }= $1,100 + $4,047 + $6,331 = $11,478[\/latex]<br \/>\r\n<br \/>\r\nAkio owes [latex]$11,478[\/latex] in income tax.<br \/>\r\n[\/hidden-answer]<\/section>\r\n<section class=\"textbox example\">Kameron is preparing his taxes. His W-2 from work shows gross income for the year of [latex]$39,885[\/latex]. He also has a 1099-INT for a savings account, amounting to [latex]$378[\/latex]. Kameron also deposited [latex]$2,500[\/latex] into a tax-deferred retirement plan. He also qualified for [latex]$2,000[\/latex] in child tax credits and [latex]$4,000[\/latex] in child and dependent care tax credit. Based on this information, how much tax does Kameron owe or how much does he receive in a refund? Assume he is filing with a single status.<br \/>\r\n[reveal-answer q=\"330541\"]Show Solution[\/reveal-answer]<br \/>\r\n[hidden-answer a=\"330541\"]<br \/>\r\nWe need to know Kameron\u2019s taxable income, based on gross income, deductions, and exemptions. His gross income is the amount from his W-2 and his 1099-INT. Adding these gives a gross income of [latex]$39,885+$378=$40,263[\/latex]. Subtracting his deductions will yield his AGI. His deductions are the [latex]$2,500[\/latex] he added into a tax-deferred retirement plan. Subtracting the deductions from the gross income, we find his AGI to be [latex]37,763[\/latex]. Kameron seems to have no exemptions, so his AGI and his taxable income are the same.<br \/>\r\n<br \/>\r\nUsing our table above, we can find which tax rates Kameron will have to pay.<br \/>\r\n<br \/>\r\n[latex]10\\%[\/latex] for [latex]$0\\text{ to } $11,000[\/latex],<br \/>\r\n[latex]12\\%[\/latex] for [latex]$11,000 \\text{ to }$44,725[\/latex].<br \/>\r\n<br \/>\r\nWe can use this to calculate the tax owed in each bracket.<br \/>\r\n<br \/>\r\n[latex]10\\%[\/latex] on the income up to [latex]$11,000[\/latex] (taxable income [latex]= $11,000 - $0 = $11,000[\/latex])<br \/>\r\n<br \/>\r\n[latex]\\text{Tax } = 0.10 * $11,000 = $1,100[\/latex]<br \/>\r\n<br \/>\r\n[latex]12\\%[\/latex] on the income between [latex]$11,000[\/latex] and [latex]$44,725[\/latex] (taxable income [latex]= $37,763 - $11,000 = $26,763[\/latex])<br \/>\r\n<br \/>\r\n[latex]\\text{Tax }= 0.12 * $26,763 = $3,212[\/latex]<br \/>\r\n<br \/>\r\nNow we must add up all the taxes from each bracket to get the total amount owed.<br \/>\r\n<br \/>\r\n[latex]\\text{Total tax }= $1,100 + $3,212 = $4,312[\/latex]<br \/>\r\n<br \/>\r\nThe total in taxes Kameron owes is [latex]$4,312[\/latex].<br \/>\r\n<br \/>\r\nNow let's consider his tax credits. He has [latex]$2,000[\/latex] in child tax credits and [latex]$4,000[\/latex] in child and dependent care tax credits. These credits reduce the amount of tax owed, so we subtract these from the tax owed: <br \/>\r\n<br \/>\r\n[latex]$4,312- $2,000 - $4,000 = -$1,688[\/latex].<br \/>\r\n<br \/>\r\nSince the amount is negative, Kameron doesn't owe any taxes. Instead, he would receive a refund of [latex]$1,688[\/latex].<br \/>\r\n[\/hidden-answer]<\/section>\r\n<h2>Computing FICA Taxes<\/h2>\r\n<div class=\"textbox shaded\">\r\n<p><strong>The Main Idea\u00a0<\/strong><\/p>\r\n<p>FICA (Federal Insurance Contributions Act) taxes fund Social Security (or Old Age Survivors, and Disability Insurance - OASDI) and Medicare, and are distinct from federal income tax.<\/p>\r\n<p>OASDI consists of Old Age Insurance (retirement benefits), Survivors Insurance (benefits for family members of deceased workers), and Disability Insurance (financial assistance for individuals with disabilities).<\/p>\r\n<p>Medicare taxes fund the federal health insurance program, primarily for individuals aged 65 and older or certain individuals with disabilities.<\/p>\r\n<p>A total of [latex]7.65\\%[\/latex] of your gross pay is withheld for FICA taxes, equally matched by your employer. This is divided into [latex]6.2\\%[\/latex] for OASDI and [latex]1.45\\%[\/latex] for Medicare.<\/p>\r\n<p>The OASDI program has a contribution and benefit base, limiting the amount of earnings subject to taxation. For 2023, this limit is [latex]$160,200[\/latex], meaning an individual earning at or above this would contribute [latex]$9,932.40[\/latex] to OASDI. Medicare tax applies to all gross income, without a limit. Rates differ for self-employed individuals.<\/p>\r\n<table class=\"thick\">\r\n<caption>2023 FICA Tax Rates<\/caption>\r\n<thead>\r\n<tr>\r\n<th>\u00a0<\/th>\r\n<th>Individual (Employee) Rates<\/th>\r\n<th>Employer Matching Rates<\/th>\r\n<th>Self-Employed Rates<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td><strong>OASDI Tax Rates<\/strong><\/td>\r\n<td>[latex]6.2\\%[\/latex] on wages below [latex]$160,200[\/latex], any wage above [latex]$160,200[\/latex] is charged a OASDI tax fee of [latex]$9,932.40[\/latex]<\/td>\r\n<td>[latex]6.2\\%[\/latex] on wages below [latex]$160,200[\/latex], any wage above [latex]$160,200[\/latex] is charged a OASDI tax fee of [latex]$9,932.40[\/latex]<\/td>\r\n<td>[latex]12.4\\%[\/latex]<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Medicare Tax Rates<\/strong><\/td>\r\n<td>[latex]1.45\\%[\/latex] on all wages<\/td>\r\n<td>[latex]1.45\\%[\/latex] on all wages<\/td>\r\n<td>[latex]2.90\\%[\/latex]<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<section class=\"textbox watchIt\">\r\n<p>[embed]https:\/\/www.youtube.com\/embed\/3Hsn78cjLZQ[\/embed]<\/p>\r\n<p>You can view the\u00a0<a href=\"https:\/\/course-building.s3.us-west-2.amazonaws.com\/Quantitative+Reasoning+-+2023+Build\/Transcriptions\/Who+Is+FICA+And+Why+Is+He+Getting+All+My+Money_.txt\" target=\"_blank\" rel=\"noopener\">transcript for \u201cWho Is FICA And Why Is He Getting All My Money?\u201d here (opens in new window).<\/a><\/p>\r\n<\/section>\r\n<section class=\"textbox watchIt\">\r\n<p>[embed]https:\/\/www.youtube.com\/embed\/UP9xy2eVj7s[\/embed]<\/p>\r\n<p>You can view the <a href=\"https:\/\/course-building.s3.us-west-2.amazonaws.com\/Quantitative+Reasoning+-+2023+Build\/Transcriptions\/FICA+tax+_+American+civics+_+US+government+and+civics+_+Khan+Academy.txt\" target=\"_blank\" rel=\"noopener\">transcript for \u201cFICA tax | American civics | US government and civics | Khan Academy\u201d here (opens in new window).<\/a><\/p>\r\n<p><em>Note: This video references the base limit of OADSI tax from 2011 of [latex]$106,800[\/latex]. It is now [latex]$160,200[\/latex].<\/em><\/p>\r\n<\/section>\r\n<section class=\"textbox example\">Aniyah earned [latex]$3,200[\/latex] over a 2-week pay period. How much FICA tax does she pay, and how much of that is for OASDI?<br \/>\r\n[reveal-answer q=\"330544\"]Show Solution[\/reveal-answer]<br \/>\r\n[hidden-answer a=\"330544\"]<br \/>\r\nThe FICA tax is [latex]7.65\\%[\/latex] of her gross earnings. [latex]7.65\\%[\/latex] of her [latex]$3,200[\/latex] is [latex]$244.80[\/latex]. OASDI is [latex]6.2\\%[\/latex] of her income, or [latex]$198.40[\/latex].<br \/>\r\n[\/hidden-answer]<\/section>\r\n<section class=\"textbox example\">Andy earned [latex]$169,450[\/latex] in wages this year. How much in OASDI taxes does Andy owe?<br \/>\r\n[reveal-answer q=\"330543\"]Show Solution[\/reveal-answer]<br \/>\r\n[hidden-answer a=\"330543\"]<br \/>\r\nSince Renard earned more than the taxable limit of [latex]$160,200[\/latex] dollars, he only pays the [latex]6.2\\%[\/latex] OASDI tax on [latex]$160,200[\/latex]. This comes to [latex]$9,932.40[\/latex].<br \/>\r\n[\/hidden-answer]<\/section>","rendered":"<section class=\"textbox learningGoals\">\n<ul>\n<li>Determine gross income, adjustable gross income, taxable income and calculate federal income tax<\/li>\n<li>Apply exemptions, deductions, and credits to basic income tax calculations<\/li>\n<li>Calculate federal income tax<\/li>\n<li>Determine social security and Medicare taxes<\/li>\n<\/ul>\n<\/section>\n<h2>Gross, Adjusted Gross, and Taxable Income<\/h2>\n<div class=\"textbox shaded\">\n<p><strong>The Main Idea\u00a0<\/strong><\/p>\n<p><strong>Gross income<\/strong> refers to the total amount of income or earnings a person receives before any deductions or taxes are taken out. It includes all sources of income, such as wages, salaries, tips, bonuses, commissions, rental income, and any other forms of earnings.<\/p>\n<p><strong>Adjusted Gross Income<\/strong>, commonly referred to as AGI, is the total income earned by an individual or household after certain deductions have been subtracted from their gross income.<\/p>\n<p>Tax <strong>deductions <\/strong>are specific expenses, contributions, or allowances that individuals can subtract from their total income, thereby reducing the amount of income that is subject to taxation.<\/p>\n<p>Adjusted gross income = Gross income &#8211; Deductions<\/p>\n<p>Tax <strong>exemptions<\/strong> reduce the taxable income of individuals or households.<\/p>\n<p><strong>Taxable income <\/strong>is the portion of an individual&#8217;s income that is subject to taxation. It is determined by subtracting deductions, exemptions, and other adjustments from the adjusted gross income (AGI). Taxable income is the basis on which income tax is calculated, and it is used to determine the tax rate and the amount of tax owed to the government.<\/p>\n<p style=\"text-align: center;\"><strong>Taxable income = Adjusted gross income &#8211; Exemptions<\/strong><\/p>\n<\/div>\n<section class=\"textbox watchIt\">\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"Adjusted Gross Income, Explained in Four Minutes | WSJ\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/yWI8SAaZ4Gs?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>You can view the\u00a0<a href=\"https:\/\/course-building.s3.us-west-2.amazonaws.com\/Quantitative+Reasoning+-+2023+Build\/Transcriptions\/Adjusted+Gross+Income%2C+Explained+in+Four+Minutes+_+WSJ.txt\" target=\"_blank\" rel=\"noopener\">transcript for \u201cAdjusted Gross Income, Explained in Four Minutes | WSJ\u201d here (opens in new window).<\/a><\/p>\n<\/section>\n<section class=\"textbox example\">Chloe prepares for her taxes by collecting her W-2 and her 1099-MISC documents. The wages from her regular job were [latex]$41,780[\/latex]. She did some freelance work and earned [latex]$5,500[\/latex] from that job. What is Chloe\u2019s gross income?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q330548\">Show Solution<\/button><\/p>\n<div id=\"q330548\" class=\"hidden-answer\" style=\"display: none\">\nChloe&#8217;s gross income is the sum of all her wages from her regular job and freelance work is equal to [latex]$47,280[\/latex].\n<\/div>\n<\/div>\n<\/section>\n<section class=\"textbox example\">Isabelle\u2019s gross income is [latex]$93,450[\/latex]. She paid [latex]$7,840[\/latex] in mortgage interest and [latex]$3,810[\/latex] in property taxes. She also donated [latex]$1,500[\/latex] to her favorite charity. What is Isabelle\u2019s AGI?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q330547\">Show Solution<\/button><\/p>\n<div id=\"q330547\" class=\"hidden-answer\" style=\"display: none\">\n[latex]$80,300[\/latex]\n<\/div>\n<\/div>\n<\/section>\n<h2>Tax Credits<\/h2>\n<div class=\"textbox shaded\">\n<p><strong>The Main Idea\u00a0<\/strong><\/p>\n<p><strong>Tax credits<\/strong> are direct reductions in the amount of tax liability owed to the government.<\/p>\n<\/div>\n<section class=\"textbox watchIt\">\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=10356048&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=GGbANc-iFzE&amp;video_target=tpm-plugin-6vkdbpay-GGbANc-iFzE\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the\u00a0<a href=\"https:\/\/course-building.s3.us-west-2.amazonaws.com\/Quantitative+Reasoning+-+2023+Build\/Transcriptions\/Tax+Deductions+vs.+Tax+Credits.txt\" target=\"_blank\" rel=\"noopener\">transcript for \u201cTax Deductions vs. Tax Credits\u201d here (opens in new window).<\/a><\/p>\n<\/section>\n<section class=\"textbox example\">Antonio\u2019s taxes owed based on his income are [latex]$3,950[\/latex]. However, he qualifies for the earned income tax credit of [latex]$1,925[\/latex] and a child tax credit of [latex]$2,000[\/latex]. How much does Antonio owe after applying the tax credits?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q330546\">Show Solution<\/button><\/p>\n<div id=\"q330546\" class=\"hidden-answer\" style=\"display: none\">\nThe amount of taxes Antonio owes is his calculated tax of [latex]$3,950[\/latex] minus the credit he receives. The amount he owes in taxes is [latex]$3,950\u2212$1,925-$2,000=$25[\/latex].\n<\/div>\n<\/div>\n<\/section>\n<section class=\"textbox example\">Ismail owes [latex]$2,350[\/latex] in taxes. He has a child tax credit of [latex]$2,000[\/latex] and an earned income tax credit of [latex]$1,640[\/latex]. After applying the tax credit, how much does Ismail owe or how much does he get in a refund?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q330545\">Show Solution<\/button><\/p>\n<div id=\"q330545\" class=\"hidden-answer\" style=\"display: none\">\nAdding Ismail \u2019s tax credits together, we find the total to be [latex]$3,640[\/latex]. That is more than the tax he owes, which was [latex]$2,350[\/latex]. Each of those credits is refundable, which means he will receive a refund. Subtracting the credits from the tax owed yields [latex]$2,350\u2212$3,640=\u2212$1,290[\/latex]. This is negative, so represents a refund of [latex]$1,290[\/latex].\n<\/div>\n<\/div>\n<\/section>\n<h2>Calculating Your Income Tax<\/h2>\n<div class=\"textbox shaded\">\n<p><strong>The Main Idea\u00a0<\/strong><\/p>\n<p>U.S. income tax is based on taxable income, following a progressive system with marginal rates, meaning higher income brackets are taxed at higher rates.<\/p>\n<p>The five filing statuses provided by the IRS are: Single, Married filing jointly, Married filing separately, Head of household, and Qualifying surviving spouse.<\/p>\n<p>Taxable income is categorized into brackets, each having different tax rates, and is also influenced by your filing status. Below are the 2023 marginal tax rates for individuals filing with statuses single, married filing jointly, and head of household.<\/p>\n<table class=\"thick\">\n<caption>2023 Marginal Tax Rates<\/caption>\n<thead>\n<tr>\n<th style=\"text-align: center;\">Tax Rate<\/th>\n<th style=\"text-align: center; width: 35%;\">For Single Filers<\/th>\n<th style=\"text-align: center; width: 35%;\">For Married Individuals Filing Joint Returns<\/th>\n<th style=\"text-align: center; width: 35%;\">For Heads of Households<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td style=\"text-align: left;\">[latex]10\\%[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$0\\text{ to } $11,000[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$0\\text{ to } $22,000[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$0\\text{ to } $15,700[\/latex]<\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: left;\">[latex]12\\%[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$11,000 \\text{ to }$44,725[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$22,000 \\text{ to }$89,450[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$15,700 \\text{ to }$59,850[\/latex]<\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: left;\">[latex]22\\%[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$44,725 \\text{ to }$95,375[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$89,450 \\text{ to }$190,750[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$59,850 \\text{ to }$95,350[\/latex]<\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: left;\">[latex]24\\%[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$95,375 \\text{ to }$182,100[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$190,750 \\text{ to }$364,200[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$95,350 \\text{ to }$182,100[\/latex]<\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: left;\">[latex]32\\%[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$182,100 \\text{ to }$231,250[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$364,200 \\text{ to }$462,500[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$182,100 \\text{ to }$231,250[\/latex]<\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: left;\">[latex]35\\%[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$231,250 \\text{ to }$578,125[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$462,500 \\text{ to }$693,750[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$231,250 \\text{ to }$578,100[\/latex]<\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: left;\">[latex]37\\%[\/latex]<\/td>\n<td style=\"text-align: left;\">[latex]$578,125[\/latex] or more<\/td>\n<td style=\"text-align: left;\">[latex]$693,750[\/latex] or more<\/td>\n<td style=\"text-align: left;\">[latex]$578,100[\/latex] or more<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Calculating tax liability involves determining taxable income, identifying applicable tax brackets, calculating tax for each bracket, and summing these amounts to find total tax liability.<\/p>\n<\/div>\n<section class=\"textbox example\">Akio\u2019s taxable income is [latex]$73,500[\/latex]. Find how much income tax he owes if he is filing with a single status.<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q330542\">Show Solution<\/button><\/p>\n<div id=\"q330542\" class=\"hidden-answer\" style=\"display: none\">\nUsing our table above, we can find which tax rates Akio will have to pay.<\/p>\n<p>[latex]10\\%[\/latex] for [latex]$0\\text{ to } $11,000[\/latex],<br \/>\n[latex]12\\%[\/latex] for [latex]$11,000 \\text{ to }$44,725[\/latex],<br \/>\n[latex]22\\%[\/latex] for [latex]$44,725 \\text{ to }$95,375[\/latex].<\/p>\n<p>We can use this to calculate the tax owed in each bracket.<\/p>\n<p>[latex]10\\%[\/latex] on the income up to [latex]$11,000[\/latex] (taxable income [latex]= $11,000 - $0 = $11,000[\/latex])<\/p>\n<p>[latex]\\text{Tax } = 0.10 * $11,000 = $1,100[\/latex]<\/p>\n<p>[latex]12\\%[\/latex] on the income between [latex]$11,000[\/latex] and [latex]$44,725[\/latex] (taxable income [latex]= $44,725 - $11,000 = $33,725[\/latex])<\/p>\n<p>[latex]\\text{Tax }= 0.12 * $33,725 = $4,047[\/latex]<\/p>\n<p>[latex]22\\%[\/latex] on the income between [latex]$44,725[\/latex] and [latex]$95,375[\/latex] (taxable income [latex]= $73,500 - $44,725 = $28,775[\/latex])<\/p>\n<p>[latex]\\text{Tax }= 0.22 * $28,775 = $6,331[\/latex]<\/p>\n<p>Now we must add up all the taxes from each bracket to get the total amount owed.<\/p>\n<p>[latex]\\text{Total tax }= $1,100 + $4,047 + $6,331 = $11,478[\/latex]<\/p>\n<p>Akio owes [latex]$11,478[\/latex] in income tax.\n<\/div>\n<\/div>\n<\/section>\n<section class=\"textbox example\">Kameron is preparing his taxes. His W-2 from work shows gross income for the year of [latex]$39,885[\/latex]. He also has a 1099-INT for a savings account, amounting to [latex]$378[\/latex]. Kameron also deposited [latex]$2,500[\/latex] into a tax-deferred retirement plan. He also qualified for [latex]$2,000[\/latex] in child tax credits and [latex]$4,000[\/latex] in child and dependent care tax credit. Based on this information, how much tax does Kameron owe or how much does he receive in a refund? Assume he is filing with a single status.<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q330541\">Show Solution<\/button><\/p>\n<div id=\"q330541\" class=\"hidden-answer\" style=\"display: none\">\nWe need to know Kameron\u2019s taxable income, based on gross income, deductions, and exemptions. His gross income is the amount from his W-2 and his 1099-INT. Adding these gives a gross income of [latex]$39,885+$378=$40,263[\/latex]. Subtracting his deductions will yield his AGI. His deductions are the [latex]$2,500[\/latex] he added into a tax-deferred retirement plan. Subtracting the deductions from the gross income, we find his AGI to be [latex]37,763[\/latex]. Kameron seems to have no exemptions, so his AGI and his taxable income are the same.<\/p>\n<p>Using our table above, we can find which tax rates Kameron will have to pay.<\/p>\n<p>[latex]10\\%[\/latex] for [latex]$0\\text{ to } $11,000[\/latex],<br \/>\n[latex]12\\%[\/latex] for [latex]$11,000 \\text{ to }$44,725[\/latex].<\/p>\n<p>We can use this to calculate the tax owed in each bracket.<\/p>\n<p>[latex]10\\%[\/latex] on the income up to [latex]$11,000[\/latex] (taxable income [latex]= $11,000 - $0 = $11,000[\/latex])<\/p>\n<p>[latex]\\text{Tax } = 0.10 * $11,000 = $1,100[\/latex]<\/p>\n<p>[latex]12\\%[\/latex] on the income between [latex]$11,000[\/latex] and [latex]$44,725[\/latex] (taxable income [latex]= $37,763 - $11,000 = $26,763[\/latex])<\/p>\n<p>[latex]\\text{Tax }= 0.12 * $26,763 = $3,212[\/latex]<\/p>\n<p>Now we must add up all the taxes from each bracket to get the total amount owed.<\/p>\n<p>[latex]\\text{Total tax }= $1,100 + $3,212 = $4,312[\/latex]<\/p>\n<p>The total in taxes Kameron owes is [latex]$4,312[\/latex].<\/p>\n<p>Now let&#8217;s consider his tax credits. He has [latex]$2,000[\/latex] in child tax credits and [latex]$4,000[\/latex] in child and dependent care tax credits. These credits reduce the amount of tax owed, so we subtract these from the tax owed: <\/p>\n<p>[latex]$4,312- $2,000 - $4,000 = -$1,688[\/latex].<\/p>\n<p>Since the amount is negative, Kameron doesn&#8217;t owe any taxes. Instead, he would receive a refund of [latex]$1,688[\/latex].\n<\/div>\n<\/div>\n<\/section>\n<h2>Computing FICA Taxes<\/h2>\n<div class=\"textbox shaded\">\n<p><strong>The Main Idea\u00a0<\/strong><\/p>\n<p>FICA (Federal Insurance Contributions Act) taxes fund Social Security (or Old Age Survivors, and Disability Insurance &#8211; OASDI) and Medicare, and are distinct from federal income tax.<\/p>\n<p>OASDI consists of Old Age Insurance (retirement benefits), Survivors Insurance (benefits for family members of deceased workers), and Disability Insurance (financial assistance for individuals with disabilities).<\/p>\n<p>Medicare taxes fund the federal health insurance program, primarily for individuals aged 65 and older or certain individuals with disabilities.<\/p>\n<p>A total of [latex]7.65\\%[\/latex] of your gross pay is withheld for FICA taxes, equally matched by your employer. This is divided into [latex]6.2\\%[\/latex] for OASDI and [latex]1.45\\%[\/latex] for Medicare.<\/p>\n<p>The OASDI program has a contribution and benefit base, limiting the amount of earnings subject to taxation. For 2023, this limit is [latex]$160,200[\/latex], meaning an individual earning at or above this would contribute [latex]$9,932.40[\/latex] to OASDI. Medicare tax applies to all gross income, without a limit. Rates differ for self-employed individuals.<\/p>\n<table class=\"thick\">\n<caption>2023 FICA Tax Rates<\/caption>\n<thead>\n<tr>\n<th>\u00a0<\/th>\n<th>Individual (Employee) Rates<\/th>\n<th>Employer Matching Rates<\/th>\n<th>Self-Employed Rates<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><strong>OASDI Tax Rates<\/strong><\/td>\n<td>[latex]6.2\\%[\/latex] on wages below [latex]$160,200[\/latex], any wage above [latex]$160,200[\/latex] is charged a OASDI tax fee of [latex]$9,932.40[\/latex]<\/td>\n<td>[latex]6.2\\%[\/latex] on wages below [latex]$160,200[\/latex], any wage above [latex]$160,200[\/latex] is charged a OASDI tax fee of [latex]$9,932.40[\/latex]<\/td>\n<td>[latex]12.4\\%[\/latex]<\/td>\n<\/tr>\n<tr>\n<td><strong>Medicare Tax Rates<\/strong><\/td>\n<td>[latex]1.45\\%[\/latex] on all wages<\/td>\n<td>[latex]1.45\\%[\/latex] on all wages<\/td>\n<td>[latex]2.90\\%[\/latex]<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<section class=\"textbox watchIt\">\n<p><iframe loading=\"lazy\" id=\"oembed-2\" title=\"Who Is FICA And Why Is He Getting All My Money?\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/3Hsn78cjLZQ?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>You can view the\u00a0<a href=\"https:\/\/course-building.s3.us-west-2.amazonaws.com\/Quantitative+Reasoning+-+2023+Build\/Transcriptions\/Who+Is+FICA+And+Why+Is+He+Getting+All+My+Money_.txt\" target=\"_blank\" rel=\"noopener\">transcript for \u201cWho Is FICA And Why Is He Getting All My Money?\u201d here (opens in new window).<\/a><\/p>\n<\/section>\n<section class=\"textbox watchIt\">\n<p><iframe loading=\"lazy\" id=\"oembed-3\" title=\"FICA tax | American civics | US government and civics | Khan Academy\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/UP9xy2eVj7s?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/course-building.s3.us-west-2.amazonaws.com\/Quantitative+Reasoning+-+2023+Build\/Transcriptions\/FICA+tax+_+American+civics+_+US+government+and+civics+_+Khan+Academy.txt\" target=\"_blank\" rel=\"noopener\">transcript for \u201cFICA tax | American civics | US government and civics | Khan Academy\u201d here (opens in new window).<\/a><\/p>\n<p><em>Note: This video references the base limit of OADSI tax from 2011 of [latex]$106,800[\/latex]. It is now [latex]$160,200[\/latex].<\/em><\/p>\n<\/section>\n<section class=\"textbox example\">Aniyah earned [latex]$3,200[\/latex] over a 2-week pay period. How much FICA tax does she pay, and how much of that is for OASDI?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q330544\">Show Solution<\/button><\/p>\n<div id=\"q330544\" class=\"hidden-answer\" style=\"display: none\">\nThe FICA tax is [latex]7.65\\%[\/latex] of her gross earnings. [latex]7.65\\%[\/latex] of her [latex]$3,200[\/latex] is [latex]$244.80[\/latex]. OASDI is [latex]6.2\\%[\/latex] of her income, or [latex]$198.40[\/latex].\n<\/div>\n<\/div>\n<\/section>\n<section class=\"textbox example\">Andy earned [latex]$169,450[\/latex] in wages this year. How much in OASDI taxes does Andy owe?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><button class=\"show-answer show-answer-button collapsed\" data-target=\"q330543\">Show Solution<\/button><\/p>\n<div id=\"q330543\" class=\"hidden-answer\" style=\"display: none\">\nSince Renard earned more than the taxable limit of [latex]$160,200[\/latex] dollars, he only pays the [latex]6.2\\%[\/latex] OASDI tax on [latex]$160,200[\/latex]. This comes to [latex]$9,932.40[\/latex].\n<\/div>\n<\/div>\n<\/section>\n","protected":false},"author":15,"menu_order":18,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Contemporary Mathematics\",\"author\":\"Donna Kirk\",\"organization\":\"OpenStax\",\"url\":\"https:\/\/openstax.org\/books\/contemporary-mathematics\/pages\/6-13-income-tax\",\"project\":\"6.13 Income Tax\",\"license\":\"cc-by\",\"license_terms\":\"Access for free at https:\/\/openstax.org\/books\/contemporary-mathematics\/pages\/6-introduction\"},{\"type\":\"copyrighted_video\",\"description\":\"Adjusted Gross Income, Explained in Four Minutes | WSJ\",\"author\":\" Wall Street Journal (wsj.com)\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/yWI8SAaZ4Gs\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Tax Deductions vs. Tax Credits\",\"author\":\"Michael McLaughlin (Edspira.com)\",\"organization\":\" Edspira\",\"url\":\"https:\/\/youtu.be\/GGbANc-iFzE\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Who Is FICA And Why Is He Getting All My Money?\",\"author\":\"Information Station (InformationStation.org)\",\"organization\":\"Job Creators Network Foundation\",\"url\":\"https:\/\/youtu.be\/3Hsn78cjLZQ\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"FICA tax | American civics | US government and civics | Khan Academy\",\"author\":\"Sal Khan (KhanAcademy.org)\",\"organization\":\"Khan Academy\",\"url\":\"https:\/\/youtu.be\/UP9xy2eVj7s\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":89,"module-header":"fresh_take","content_attributions":[{"type":"cc","description":"Contemporary 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