Taxes
10.1 Tax Basics
Activity (45 mins)
Name
How Much Do I Pay in Taxes? It Depends on...
Everyone has to pay taxes, but how much you pay depends on a lot of factors. In this activity, explore how three factors
(your salary, the state you live in, and the cost of living) can have a big impact on how much you pay in taxes and how
much you have leftover to spend on yourself.
Part I: Your Salary
The biggest variable in the amount of taxes you pay is how much you make. Using TurboTax’s TaxCaster: Free Tax
Calculator, compare the two individuals below and see how their tax burdens differ due to a large difference in salary.
Meet Marcel
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Meet Stephanie
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Marcel is in his first job after college, working at
City Center Bank as a teller.
He is not married, nor does he have any
dependents
He will be 23 on Dec. 31, 2015
He is not being claimed by his parents or anyone
else as a dependent
Marcel’s taxable wages1 is $35,000
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Neither has withheld any money towards federal or state taxes, and has no unemployment income2
They have no “Other Income,” “Business Income”
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Stephanie has been working at City Center Bank
for 5 years. She is now an assistant manager.
She is not married, nor does she have any
dependents
She will be 28 on Dec. 31, 2015
Se is not being claimed by her parents or anyone
else as a dependent
Stephanie’s taxable wages1 is $50,000
1 - Under the Your Income section, it is referred to as “Taxable Wages”. Under the Where You Stand section, it is referred to as “Total Income”.
2 - Most people have money withheld from each paycheck to avoid paying a huge bill at the end of every year. We’re assuming no withholdings to
illustrate the total amount in taxes paid throughout the year.
**Note - For this portion of the activity, we are only calculating Marcel and Stephanie’s federal taxes. We will tackle state taxes in the next part.
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1. How much would Marcel owe in taxes? (His refund is displayed as negative. This is how much he owes)
2. Why is Marcel’s “Taxable Income” only $24,700 when he makes $35,000?
3. How much does Stephanie owe in taxes?
4. What is the difference in their tax burdens (required to pay)?
5. Marcel’s “Marginal Tax Rate” is 15% but he isn’t paying 15% of his income to taxes. What is his “Effective Tax
Rate”? In other words, what’s the real percentage of his income going towards taxes?
To calculate his “Effective Tax Rate” (what he’s actually paying), use the following formula:
(Regular Taxes/Total Income)*100
Part II: What State You Live In
Another factor that greatly affects your taxes is the state you live in. Different states have different tax rates for a variety
of taxes. In this activity, we will focus exclusively on income tax rates.
To do this, we are going to use the State Tax Calculator. Here are the directions:
1) Find the correct state and select the salary value you want to see the income tax for.
2) Under the “Yearly” column, find the value for “[California] State Income Tax”
Let’s start with Marcel.
How about Stephanie?
First, let’s assume that Marcel lives in California.
First, what if Stephanie lives in California?
6. How much would Marcel pay in state income tax?
10. How much would Stephanie pay in state income
tax?
Now, what if Marcel lived in Oregon instead?
7. How much would Marcel now pay in state income Now, what if Stephanie lived in Oregon instead?
tax?
11. How much would Stephanie now pay in state
income tax?
8. How much more is Marcel paying if he lives in
Oregon? (Federal taxes are the same in each
state)
9. What percentage of his salary is Marcel sacrificing
if he lives in Oregon instead of California?
(State tax difference/$35,000)*100
12. How much more is Stephanie paying if she lives in
Oregon?
13. What percentage of her salary is Stephanie
sacrificing if she lives in Oregon instead of
California?
(State tax difference/$50,000)*100
14. Was the impact greater for Marcel or Stephanie? What does that tell you about who is affected more by states
with higher taxes, the rich or the poor?
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Part III: The Cost of Living
While taxes vary by state, another factor to keep in mind is cost of living, defined as “the amount of money needed to
sustain a certain level of living.” It includes things like the cost of housing, food, transportation, and more.
In this activity, let’s compare how costs vary between different locations using Bankrate’s Cost of Living Calculator. To
compare cost of living:
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Input one location in the “City you are moving from” box
Input the other location in the “City you are moving to” box
Enter your current income
Let’s use Marcel as our test case (again).
Let’s say that Marcel was trying to see the difference between living in San Francisco, CA and Portland, OR. Use the
Cost of Living Calculator to determine the price of a few items in each place, and the difference. Remember, he makes
$35,000
Product Cost
San Francisco-Redwood City-South
San Francisco CA Metro Div.
Portland-Vancouver-Hillsboro ORWA Metro - Portland OR
Difference
Apt. Rent
Dentist Visit
Gasoline
Half Gal. Milk
Dozen Eggs
15. Which city is more expensive to live in?
16. At the top of the page, there are two sentences. Fill them in here:
Equivalent income in the city you are moving to:
You may take a ________ decrease and still maintain your standard of living
If Marcel was still making $35,000 in Portland, would he be able to afford a higher standard of living? Or would
he need to lower his standard of living? How do you know?
17. What kind of place would you prefer to live in if you had to choose: a state with zero/low state income tax or an
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area with a low cost of living? Why?
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