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