- AGI or Adjusted Gross Income
for Ramona and Kay is 83,000 dollars.
So the computation of Ramona and Kay's income tax bill
is going to be starting from that AGI number
of 83,000 dollars, and we see now that the news start
And we see now that newsstarts to get pretty good.
to get pretty good because now
Because now it's justdeductions and tax credits.
it's just deductions and tax credits.
The first deduction is the standard deduction
which for a married couple filing jointly is 24,000 dollars.
Tax payers frequently expend their money in ways
in ways that are deemedto be useful to society.
that are deemed to be useful to society,
for charitable contributions,
for payment of state and local taxes,
for paying home mortgage interest
to live in their home and so forth.
For efficiency purposes,
rather than requiring each tax payer
to keep track of these numbers and itemize and list them,
tax payers are allowed to deduct a standard amount.
Again, for Ramona and Kay that standard deduction amount
in 2018 is 24,000 dollars.
Most U.S tax payers can use the standard deduction amount.
Alternatively, a tax payer can elect to itemize deductions.
A couple would choose to do this,
if they thought that their actual deduction amounts,
charitable contributions, state taxes,
home mortgage interest, were going to be more
are going to be more than the$24,000 standard deduction.
than the 24,000 dollars standard deduction.
For example, in the year 2016,
53 percent of couples filing jointly
used the standard deduction,
47 percent itemize their deductions.
So we see that Ramona and Katy had 83,000 dollars
in Adjusted Gross Income.
They subtracted 24,000 dollars
for their standard deduction
and we see finally that they're left
with 59,000 dollars in taxable income,
in taxable income.
that's the income on which you'll have to pay tax.
Remember they started clear up at 91,000 dollars in income,
Remember they started clearup at $91,000 in income
but they don't have to pay tax on all of that,
they only have to pay tax on 59,000 dollars.
The tax rate in the first tax bracket is 10 percent.
On the first 19,050 dollars in income,
they pay tax of 10 percent.
On taxable income above that,
they pay a tax rate of 12 percent.
So they pay 12 percent on the 39,950 dollars excess
of 59,000 dollars, over the 19,050 dollar threshold
over the $19,050 thresholdon the prior tax bracket.
on the prior tax bracket.
Their total tax is computed as 6,699 dollars,
which is 10 percent of 19,050 dollars or 1,905,
plus 12 percent of 39,950 dollars or 4,794.
Now we need to stop right there for just a minute,
because you've probably never done a calculation like this.
People who compute their taxes, usually use a tax table,
which includes pages and pages of numbers
that indicate how much tax you owe,
if you have a certain level of income.
Although, seemingly complex and mysterious tax tables
are based on this simple computation
that we've done right here.
Now just for fun,
let's compute how much tax Ramona and Kay would owe
Ramone and Kay would owe iftheir income for the year
if their income for the year were an even million dollars.
were an even million dollars.
This high income number will allow us
to use all seven tax brackets.
all seven tax brackets.
The income tax rates range from 10 percent on taxable income
between 0 and 19,050 dollars
to a rate of 37 percent on all taxable income greater
greater than $600,000.
than 600,000 dollars.
This one million dollars in taxable income
is taxed in the layers, with lower tax rates applied
with lower tax rates appliedto the lower income layers.
to the lower income layers.
As an example look at the 24 percent tax bracket,
this 24 percent rate applies to income between
between $165,000 and $315,000.
a 165,000 and 315,000 dollars.
A married couple with taxable income of 1 million dollars
A married couple withtaxable income of $1,000,000
has a 100,050 dollars of income in this 24 percent bracket.
has a $150,000 of incomein this 24% bracket.
The difference between a 165,000 and 315,000.
This 150,000 dollars in income
is taxed at a rate of 24 percent.
Yielding tax on the income
yielding tax on the incomein this bracket of $36,000
in this bracket of 36,000 dollars,
which is $150,000 times 0.24.
which is a 150,000 times 0.24.
The 36,000 tax on the income in this bracket
The $36,000 tax on theincome in this bracket
is added to the tax on the income in the other brackets.
is added to the tax on theincome in the other brackets.
The total tax on taxable income of 1 million dollars
The total tax on taxableincome of $1,000,000
is 309,379 dollars.
That seems like a lot of tax.
But hey, a million dollars is a lot of income.
But hey, a million dollarsis a lot of income.