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## Personal finance

### Course: Personal finance > Unit 8

Lesson 1: Personal taxes overview- Tax deductions introduction
- Standard and itemized tax deductions
- AMT overview
- Alternative minimum tax
- Estate tax introduction
- Tax brackets and progressive taxation
- Calculating federal taxes and take home pay
- Calculating state taxes and take home pay
- Marriage penalty
- Married taxes clarification

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# Calculating federal taxes and take home pay

Created by Sal Khan.

## Want to join the conversation?

- At0:43, Sal describes the standard deduction as the deduction for people who don't have other deductions for things like charitable donations. So, is it simply a fixed amount that is taken out of the taxable income for every taxpayer?(8 votes)
- Yes. The federal government allows you to choose between taking a standard deduction, which is a fixed amount based on your filing status (it's different if you're married filing joint vs. single...), or itemizing your deductions.

Often, the determining factor in this is whether you make mortgage payments as the interest on that is deductible and often a large enough amount to pass the standard deduction by.(7 votes)

- At minute4:18Sal starts calculating the employee FICA tax and he mentions
*"You don't take into account neither the standard deduction nor the personal exemption to calculate this tax."*My question is: If mortgages are tax deductable then this employee FICA tax is calculated directly over your gross salary income or over the result of your gross salary income minus your monthly mortgage?(6 votes)- Your employer doesn't know about your mortgage payment (or any other deduction you might take). FICA is calculated using standard assumptions, and then if you owe more or are owed a refund, that is taken care of when you file your tax return.(4 votes)

- When you were explaining the Standard Deduction, I was a bit confused. So, if you had other things that could be deducted (ex. charity, mortgage) would that be added to the Standard Deduction (so pretend you donated $10,000 to charity, so would your Standard Deduction be $16,100?) Or would it be a separate thing that could be deducted? Also, why do they have a Standard Deduction in the first place? Wouldn't it be the same if they lifted the Tax brackets the same amount as the Standard Deduction?(6 votes)
- You are correct, that they could just lift the tax brackets (actually lower them) by the standard deduction. In fact the standard deduction is relatively unfair. Tax deductions are given by the IRS for a variety of reasons. The standard deduction waters these down. For example, the IRS has determined deducting mortgage interest is something they want to promote. Perhaps it helps stimulate home sales. Now, Family A buys their home and accumulates 12,000 in mortgage interest over the course of the year. Family B does not buy a home, they instead rent and they take the married filing jointly standard deduction of 12,000. Both families get the same deduction, but family A bought their home. The did not truly benefit from the mortgage interest as they would have had a standard deduction anyway. This same philosophy apples to any of the deductions allowed on Schedule A. Lenders, charities etc will tell you "hey this is tax deductible" and although that is a true statement, it is not full value like it sounds. If you rent your dwelling and donate $400 to a charity, you will quickly find that at tax time, that contribution is not as deductible as the charity made it sound. You will not be able to get onto schedule A to deduct it. To be truly and fully deductible, the standard deduction must go away and deductions must be qualified for by those that meet the qualifications.(2 votes)

- So I notice that my pay stub already has a deduction for federal and state income tax. Does this amount that I have already paid throughout the year get reduced from my year-end calculation of how much tax I owe?

For the example in this video, if this guy that owes about $9,500 in federal tax already saw $7,000 stripped off his pay stubs throughout the year, would he just owe $2,500 at the end of it all?(4 votes) - whats the point of paying taxes, when we dont have a say in what way the taxes are used and where they go towards?

I'ts our money, so we should decide where this money of ours goes(2 votes)- We do have a say. We elect representatives to make decisions on our behalf.(4 votes)

- I am so dead in real life. How does anyone understand this?(3 votes)
- How do the tax brackets change? And what is the FICA tack used for?(2 votes)
- In most cases, they adjust along with inflation. However, gov could change the brackets through passing new laws as well, i.e. the 2013 obama tax hike adding a 39.6% new bracket and an increase on capital gain taxation.(2 votes)

- why do you even have a standard deduction or personal exemptions?(2 votes)
- A progressive tax is based on the idea that those who have the ability to pay more, do, and those who can't afford to pay, are required to pay less. Both the standard deduction and personal exemption support this idea.

The standard deductions serve two purposes. First, there are different deductions for different states in life (single, married, head of householder or surviving spouse.) Standard deductions are also higher for the blind and elderly. It benefits those who may need additional help and assures that those who only make a minimum amount (6100) per year, for example, don't have to pay taxes. It falls in line with a progressive tax schedule - the less you make, the lower you pay as a percentage of your income, all the way down to 0.

The personal exemptions serve the same purpose. Imagine a husband and wife with four children. They have 6 personal exemptions, and the possibility for 4 child tax credits. The government understand that they may have less of an ability to pay compared to a family of 3 making the same amount.(2 votes)

- Why is the take home pay after federal taxes equal to ($50,000-$9,754= $40,246) instead of ($40,000-$9,754= $30,246)? Shouldn't we use the $40,000 instead of $50,000?(2 votes)
- If I make $50,000 in the state of Utah at a normal 9-5 office job and pay about $10,000 in taxes, $7000 of that being federal and state. How much will I get on my tax return?(2 votes)

## Video transcript

Voiceover: Let's say that
you're a single person who is making $50,000 a year. Let's figure out what
your actual take-home pay would be after paying
federal income taxes, and then in a future video, we can also think about what your state income taxes might be if you're in a state
that has income taxes. So the first thing we need to think about is what is our taxable income? This $50,000, which is what you kind of think your salary is, this is your gross income, and to get your taxable income, we have to think about things like exemptions and deductions. I'm not going to go into a bunch of depth right over here, but if we just assume that you are a very plain vanilla tax filer, you're just going to take
the standard deduction, and you don't have a bunch of, you know, donations to charity or whatever else, or a mortgage, interest, or whatever else you might want to deduct. You would take the standard deduction, and then if you're just an individual, you're only taking ownership for yourself, only responsibility for yourself, you get to have the personal exemption. If you have a spouse, if you have kids, you might have larger
exemption right over here. The key about the
deduction and the exemption is these aren't deducted from your taxes. These reduce your taxable income, so you started at a
gross income of $50,000. Let's subtract out 6,100
for the standard deduction and then 3,900 for the personal exemption, and so your taxable income, at the federal level, is going to be 50,000 minus this stuff, so this stuff adds up
to $10,000 of deductions and exemptions, so your taxable income is $40,000. Now, from this $40,000, we can figure out how much you pay in federal income taxes. Right over here, I've done part of the current federal tax brackets. These change over time, so the real basic idea for this video is to get the idea of
how these brackets work. These brackets might
change from year to year, and many people say, "Okay, $40,000. "It falls into this
bracket right over here, "and this bracket's at 25%, "so the federal income tax must be 25% "of the $40,000." That is not how a tax bracket works. The way it works is you
pay 10% on the first 8,925, then 15% on the increment up to 36,250, and then 25% on the amount
that is above 36,250. So let's calculate what that is. Get the calculator out. We're going to pay 10% of the first 8,925, 8,925. I have trouble pressing
buttons on this calculator. And then to that, we're going to pay 15% on the next increment up to 36,250, so that increment is 36,250 minus 8,925. Once again, I have trouble
typing in a 5 there. And then, I'm going to
pay 25% on the increment, on the increment above 36,250, so our taxable income is 40,000, so it's 40,000 minus 36,250. And, let's see. Did I type that in right? Yup, that looks pretty right, and I get 5,92-, I'll just round, $5,929. So this gets us to $5,929
of just straight up, what I'll just call straight up federal, federal income tax. Let me put that here. This
is federal income tax. Now, we aren't done at the federal level. You also have what's
often called the FICA tax, or your share of the FICA tax. This stands for the federal insurance, Federal Insurance Contributions Act, FICA, and this is essentially what you pay in into social security and Medicare. Right over here, although "emp" could be an employer or employee, so let me make this clear, this is the employee's share of FICA, which you pay 6.2% for social security, 1.45%, and you don't take
into account deductions or exemptions, so you're going to pay it
on the original $50,000, so let's calculate what
that's going to be. So it's 50,000 times, and you're going to pay 0.062, 6.2% for social security, and then you're going
to pay another 1.45%, 1.45% for Medicare, and then that gives you your FICA tax. It's $3,825, so $,3825 in your share of FICA taxes, and I keep talking about
your share of FICA taxes. Your employer will also separately, this is the part that
gets taken out of your, out of your salary. Your employer will also pay another 3,825 that you will never see. So this is essentially
half of the FICA taxes that will go to the government due to the fact that you are working for your employer. But now we have all of the taxes that you are going to pay, or all of the things that are going to come out of your, out of your payroll, and so we can add those two things up. We have the 3,825 plus the $5,929 gets us to 9,754. 9,754 in total federal things that are taken out of your paycheck, and so your take-home pay is going to be $50,000 minus this right over here, so that's going to be 50,000 minus 9,754, 54, it gets us to 40,246, so 40,246 is what you are left with if we just take into
account the federal things, the taxes and the FICA tax that are taken out of your pay, out of your paystub, essentially. Now, if you are in a state that does not have state income taxes, and a city that does not
have local income taxes, you're done. This would be your take-home pay. In the next video, we'll think about how much more will be taken out of your, out of your pay if you are in a state that has state income taxes.