A way, way, way too simple introduction to income, capital gains, estate, gift, and generation skipping taxes Russell James, J.D., Ph.D., Dept. of Personal Financial Planning, Texas Tech University
Simple introduction to taxes
May 07, 2015
A way, way, way too simple introduction to income, capital gain, estate, gift, and generation skipping taxes
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A way, way, way too simple
introduction to income, capital gains, estate,
gift, and generation
skipping taxes
Russell James, J.D., Ph.D., Dept. of Personal Financial Planning, Texas Tech University
We pay taxes on money we earn.
We pay taxes on money we earn. We call these income taxes.
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 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
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 (sometimes) pay taxes on money we leave to other people when we die.We call these estate taxes.
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 (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.
The percentage we pay in taxes is not flat.
As incomeincreases the income tax percentage increases.
The percentage we pay in taxes is not flat.
As incomeincreases the capital gain tax percentage increases.
The percentage we pay in taxes is not flat.
As estate size increases the estate tax percentage increases.
The percentage we pay in taxes is not flat.
As gift size increases the gift tax percentage increases.
2011 federal income tax brackets for a
single person
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $5,000?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $5,000?
$5,000 x 10% = $500
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $9,500?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $9,500?
($8,500 x 10%) + ($1,000 x 15%) $1,000
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $9,500?
($850) + ($150) $1,000
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $40,000?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $40,000?
($8,500 x 10%) + (($34,500-$8,500) x 15%) +(($40,000-$34,500) x 25%)$6,125
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $40,000?
($8,500 x 10%) + ($26,000 x 15%) +($5,500 x 25%)$6,125
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much taxes are owed on $40,000?
($850) + ($3,900) +($1,375)$6,125
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?
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?
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?
How much is a deduction worth?
The amount of the deduction X The marginal tax rate
Deduction value
How much is a $1,000 deduction worth to a person with $8,000 of taxable income?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $8,000 of taxable income?
$1,000 x 10% = $100
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $90,000 of taxable income?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $90,000 of taxable income?
$1,000 x 28% = $280
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $500,000 of taxable income?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $500,000 of taxable income?
$1,000 x 35% = $350
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $9,000 of taxable income?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $9,000 of taxable income?($500 x 10%) +($500 x 15%)$125
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $9,000 of taxable income living in Utah (with a 5% flat income tax)?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $9,000 of taxable income living in Utah (with a 5% flat income tax)?
($500 x (10%+5%)) +($500 x (15%+5%))$175
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $9,000 of taxable income living in Utah (with a 5% flat income tax)?
($500 x 15%) +($500 x 20%)$175
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $9,000 of taxable income living in Utah (with a 5% flat income tax)?
($75) +($100)$175
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $500,000 of taxable income living in Utah (with a 5% flat income tax)?
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
How much is a $1,000 deduction worth to a person with $500,000 of taxable income living in Utah (with a 5% flat income tax)?
$1,000 x 40% = $400
Marginal Tax Rate Taxable Income
10% $0 – $8,50015% $8,501 – $34,50025% $34,501 – $83,60028% $83,601 – $174,40033% $174,401 – $379,15035% $379,151+
If I sell something for more than I paid for it, that profit is taxed as a capital gain
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
2013Ordinary
Income Tax Rate
Short-term Capital Gains
Long-term Capital Gains
Tax Rate Tax Rate15% 15% 10%28% 28% 20%31% 31% 20%36% 36% 20%
39.60% 39.60% 20%
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 $5,000,000 of transfers. The top rate is 35%.
For anyone dying after Dec. 31, 2012, there are no estate or gift taxes on up to $1,000,000 of transfers. The top rate is 55%.
Transfers to grandchildren with living parents, in excess of $5,000,000 total, may create generation skipping transfer taxes. This adds another 35% tax.
After Dec. 31, 2012, transfers to grandchildren with living parents, in excess of $1,000,000 total, may create generation skipping transfer taxes. This adds another 55% tax.
If, after Dec. 31, 2012, I earn an extra $100,000 to give to my grandchildren, how much will they get (if I live in California at all top marginal rates)?
If, after Dec. 31, 2012, I earn an extra $100,000 to give to my grandchildren, how much will they get (if I live in California at all top marginal rates)?
Fed. Income Tax ($100,000 x 39.6%) = $39,600Cali. Income Tax ($100,000 x 10.3%) = $10,300Gift tax ($50,100 x 55%) = $27,550GST tax ($22,550 x 55%) = $12,402
$10,147
A way, way, way too simple
introduction to income, capital gains, estate,
gift, and generation
skipping taxes
Russell James, J.D., Ph.D., Dept. of Personal Financial Planning, Texas Tech University
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