Taxes 101 (Tax Basics 1/3) — Transcript

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1. 0:03Meet Ray.
2. 0:04Ray is an incoming senior at State University who just finished a summer internship at Corporate
3. 0:08Co. Ray had an great experience, and also made a lot of money.
4. 0:13There’s just one problem.
5. 0:16Ray has no idea how to pay taxes, or even if the money he made requires him to do so.
6. 0:22What should Ray do?
7. 0:23Well, we’ve got him covered.
8. 0:25Let’s start with the basics: how does the U.S. tax system actually work?
9. 0:29Well, paying your taxes is a lot like filling up a line of progressively larger buckets.
10. 0:34Each bucket corresponds to a specific tax rate, like 10%, and to a specific range of
11. 0:40income, like, $0 to $9,225.
12. 0:44As your income grows, you fill up more and more of these buckets, called brackets, each
13. 0:48one with its own tax rate.
14. 0:51In addition to this, you’ll also need to pay what’s called a FICA tax, which is a
15. 0:54flat 7.65% tax on any money you've earned.
16. 0:59Sounds simple enough right?
17. 1:00Well, unfortunately taxes in real life are a bit more complicated, so let’s use a more
18. 1:05detailed example.
19. 1:06Let’s say Ray made $30,000 last year.
20. 1:09That’s his gross income, literally the amount of money he made at Corporate Co. before taxes.
21. 1:15This number can then be refined into what’s called adjustable gross income, or AGI, by
22. 1:18subtracting certain expenses called adjustments or above-the-line deductions.
23. 1:24For example, if Ray paid $1,000 in combined student loan interest, his AGI would move
24. 1:29from $30,000 to $29,000.
25. 1:33This AGI can then be lowered even further if Ray takes an exemption.
26. 1:37An exemption is a flat $4,000 reduction in AGI available to each taxpayer for himself,
27. 1:43his spouse, and each of his dependents.
28. 1:46For example, if Ray takes his exemption, his AGI, currently at $29,000, will be lowered
29. 1:52to $25,000.
30. 1:54Ray can lower his AGI even further by taking a deduction.
31. 1:58Unlike exemptions, deductions depend on the expenses of each taxpayer.
32. 2:03So what does that even mean?
33. 2:04Well, there are several types of expenses, like charitable donations or mortgage interest,
34. 2:09that can be used lower AGI.
35. 2:11These are called itemized or below-the-line deductions.
36. 2:14If Ray lacks these specific expenses, he can instead take a standard deduction, which is
37. 2:19a flat, $6,300 reduction in AGI as of 2015.
38. 2:23However, there’s a catch: if you choose to take the standard deduction, you can’t
39. 2:29also itemize your deductions, so be sure to pick whichever one is greater.
40. 2:33So let’s assume Ray takes the standard deduction.
41. 2:37That means his AGI, currently sitting at $25,000, will be lowered to $18,700.
42. 2:43That number is Ray’s taxable income, literally the amount of money eligible to be taxed by
43. 2:48the IRS.
44. 2:50From there, if Ray plugs that number into the 2015 tax brackets, he’ll find Ray owes
45. 2:54about $2,300 in federal income tax.
46. 2:58Considering that Ray started with $30,000 in gross income, that seems like a pretty
47. 3:02good deal.
48. 3:03However, there’s actually one more tool Ray can use to save money: tax credits.
49. 3:08Unlike exemptions and deductions, which lower AGI, tax credits directly lower your actual
50. 3:13tax payments.
51. 3:15For example, let’s say Ray is eligible for a $1,000 tax credit.
52. 3:19This credit can then be used to offset his $2,300 tax bill, leaving him owing $1,300
53. 3:25in income tax, plus the money for the FICA tax, which will have already been taken automatically
54. 3:30from his paycheck.
55. 3:32So that’s the end of taxes right?
56. 3:35Well, not quite.
57. 3:37Ray may also have to supplement his federal taxes with state income taxes.
58. 3:41Thankfully however, these taxes are calculated in a very similar manner to federal taxes,
59. 3:46and are almost always lower.
60. 3:49Hopefully you and Ray now have better understand how taxes work.
61. 3:52Be sure to check out our next video, where we’ll teach you whether or not you need
62. 3:55to actually file a tax return, and be sure to check out our website, where you can find
63. 3:58more educational material and free recommendations for great tax-filing software.