Notes
Why taxes exist
- Taxes fund public goods and services such as roads, schools, emergency services and programs like Social Security. Tax rates in this course are made up for practice.
Types of taxes
- Income tax on earnings, payroll tax (FICA) for Social Security and Medicare, sales tax on purchases, property tax on land and buildings.
- Tax amount $=$ price or value $\times$ rate. A $50 item with 6% sales tax costs $53.
Filing
- A tax return uses forms like the W-2 to find taxable income (income minus deductions). If withholding exceeds tax owed, you get a refund; if not, you owe.
Brackets, deductions and credits
- In a progressive system, each slice of income is taxed at its own marginal rate. Effective rate $\displaystyle = \frac{\text{total tax}}{\text{taxable income}}$.
- A deduction lowers taxable income; a credit lowers the tax itself, dollar for dollar.
Topics in this unit
Each topic has its own short notes and practice.
Practice
Sales tax is added when you buy goods.
Tax is $6, so the total is $126.
$200000 \times 0.015 = 3000$.
$0.10 \times 10000 = 1000$ and $0.25 \times 8000 = 2000$, total $3,000.
$\displaystyle \frac{2500}{25000} = 10\%$.
A credit reduces tax by $300; the deduction saves $300 \times 0.20 = 60$.
Free response
Write your answer first, then open the scoring guide.
Free-response question
Use these made-up brackets: 10% on the first $10,000 of taxable income, 20% on income from $10,000 to $40,000, and 30% on income above $40,000. Priya earns $34,000 and has a $4,000 deduction.
(a) Find her taxable income.
Show the answer and scoring guide
$34000 - 4000 = 30000$, so $30,000.
Check off the points you earned:
(b) Calculate her income tax.
Show the answer and scoring guide
First $10,000 at 10% is $1,000. The next $20,000 at 20% is $4,000. Total tax is $5,000.
Check off the points you earned:
(c) Find her effective tax rate, and explain whether her whole income is taxed at 20%.
Show the answer and scoring guide
$\displaystyle \frac{5000}{30000} \approx 16.7\%$. No. Only income in the 20% bracket is taxed at 20%; the first $10,000 is taxed at 10%, so the effective rate is lower than 20%.
Check off the points you earned: