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## Finance and capital markets

### Course: Finance and capital markets > Unit 4

Lesson 1: Personal taxes- Basics of US income tax rate schedule
- Tax deductions introduction
- AMT overview
- Alternative minimum tax
- Estate tax introduction
- Tax brackets and progressive taxation
- Calculating state taxes and take home pay
- Marriage penalty
- Married taxes clarification

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# Basics of US income tax rate schedule

Understanding that a marginal tax rate does not apply to all of income. Created by Sal Khan.

## Want to join the conversation?

- Why couldn't you add up all the percents and then multiply by $100,000?(6 votes)
- Good question. It's because each bracket is taxed differently. For example, let's say you make $33,500 dollars/year. 10% of $8,350 is $835. 15% of the next 25,600 is $3,840. If you add $835 and $3,840, you get $4,675. If you calculate it by taxing the total dollars/year by 25%, you get $8,375. Also, how do you calculate it the way you suggested if you make somewhere between one of the brackets? Hope this helps.(22 votes)

- What if you earn a lot of money and the bracket goes very high up, then can the percentage become 100?(1 vote)
- the highest current Federal tax bracket is 39.6% for anybody making over 400,000 a year or married making over 450,000(20 votes)

- Whats the difference between flat tax and progressive tax?(5 votes)
- A progressive tax is a tax like the one Sal described in the video. A flat tax is a tax with a constant rate. Perhaps 20% of a person's income will be taxed, regardless of which tax bracket they sit in.(6 votes)

- I am horrendously confused about something here but not sure how to word it:

The first tax bracket has him paying 10% on 8350, then the second has him paying 15% on 33950, yet he subtracts the initial 8350 he paid the 10% for, so he'd only end up paying 15% on 25600. Why does he do this and not just pay 15% on 33950? If that makes any sense.(4 votes)- Because you should only be taxed once on the money. The first bracket taxes you 10% for the 8350$. When you now try to calculate for the second bracket, you deduct the amount that has already been taxed in the first bracket because again it has already been taxed. Hope I made it clear.(6 votes)

- How do we find the effective tax rate? I see how the brackets work, but where would you get that tax percentage rate?(6 votes)
- Lets look at this example. the total was around 21.7K so thats around 22%. Even when the math was being done, i was expecting it to be between 25% and 28% so the amount was a little surprising. It might just be that jump between 15% and 25% was scaling it slower. If the difference in rates are lower in brackets, you can see that the value will converge to the tax% of the bracket.(2 votes)

- The more money you earn in a year, you get taxed more? So, what if every year you only earned $10,000 for 3 years but one year you earned $900,000. That would mean you'd get taxed on the $900,000, but because you only earned 30,000 in those 3 years, and that was the money you had, you would not have the money to pay for the tax. Would the government take that into consideration too? I know it's not likely, but still?(2 votes)
- The tax comes straight out of your income. So, if you have to pay a tax of $278430, you would find that your employer will pay $900000, but you would get $621,570. So how would you not be able to pay for it? You still have a surplus of $621,570. The tax will always be less than the amount that you are getting for your money.(6 votes)

- I still don't understand... Can someone help?(1 vote)
- Is there a specific aspect you don't understand?(3 votes)

- so what happens when you're at the borderline?(2 votes)
- at0:45-4:08where did the 8,500 come from and the 10%(1 vote)
- In Sal's example he said, according to the US tax code, the first $8,500 of income is taxed at 10%. $8,500 x 0.10=$850. This is the amount of taxes owed on the first $8,500 of income.(1 vote)

- Does all the states in the U.S have the same amount of taxes(1 vote)
- No they dont. It depends on the state. you can search up "US states by taxes" and see a whole list of them(1 vote)

## Video transcript

What I want to do
in this video is try to get a good understanding
of how the US federal income tax rate schedule
works, and also what people mean when
they say tax brackets, or what does it mean
to be in a tax bracket. So let's say that I make
$100,000, and I'm single, and I'm not going to go into
the deductions or anything fancy like that. So let's say I make
$100,000 in a given year. And these numbers will change
as the tax code changes, but the general idea
is the same thing, although the details
might change. So the way the
rate schedule works is that the first $8,350 of my
$100,000 will be taxed at 10%. So the first $8,350
will be taxed at 10%. So I'll be paying, what, that's
pretty easy to calculate-- I'll pay $835 on
that first $8,350. Now, the next $25,600, or
from $8,350 to $33,950, that will be taxed at 15%. So this amount right over here,
I will have to pay 15% on that. And so that the difference
between $33,950 and $8,350 is $25,600 times 15%. I'll calculate it all at
the end using a calculator. Now, the next $48,300 is
going to be taxed at 25%. So let me draw that over here. So the next-- this next
slug right over here is going to be taxed at 25%. So this is the difference
between $82,250 and $33,950. That's $48,300. So it's going to be
$48,300 times 25%. And then finally, the remainder,
the amount above $82,250, since I don't get into the
next bracket above that, this part right here is
going to be taxed at 28%. And let me get my
trusty calculator out to figure out what that is. So, if that's going to be
taxed at-- so the difference between $100,000 and $82,250. So $100,000 minus
$82,250 is $17,750. So it is $17,750 times 28%. And now I could
use the calculator to calculate all of these. So it's going to be--
let's do it all at once-- 17,750 times 28%-- so
I'll say that its 0.28-- plus 48,300 times 25%, 0.25,
plus $25,600 times 15%, 0.15. Finally, plus $835. I'm going to pay $21,720. So the sum of all
of these, in total, I'm going to pay-- I already
forgot the number-- $21,720. And I want to make sure you
don't have the misconception-- notice, you only pay the 28%
on the incremental amount when you enter that bracket. You don't pay this 28%
on the entire $100,000, just on the increment
above $80,250. You don't pay the 25%
on the entire amount, just on the increment
between $33,000 and $82,000.