Ch8.2 Income Tax
Section 8.2 Notes Page 1
Federal income taxes are a percentage of your taxable income, which is based on your earnings
in the calendar year.
Calculating your federal income tax begins with gross income, or total income for the year. This
includes income from wages, tips, interest or dividends from investments, unemployment
compensation, profits from a business, rental income, and even game-show winnings.
The next step is to determine your adjusted gross income. Adjusted gross income is figured by
taking gross income and subtracting certain allowable amounts, called adjustments. Adjustments
include contribution to certain retirement account and tax-deferred savings plans, interest paid
on student loans, and alimony payments. (In a traditional tax-deferred retirement plan, you get
to deduct the full amount of your contribution from your gross income. You pay taxes on the
money later, when you withdraw it at retirement.)
You are entitled to certain exemptions and deductions subtracted from your adjusted gross
income, before calculating your taxes. An Exemption is a fixed amount on your return for each
person supported by your income. You are entitled to this fixed amount ($3,800 in 2012) for
yourself and the same amount for each dependent.
A standard deduction is a lump-sum amount that you can subtract from your adjusted gross
income. The IRS set this amount. Most young people take the standard deduction because their
financial situations are relatively simple and they are not eligible for numerous deductions
associated with owning a home or making charitable contributions. Itemized deductions are
deductions you list separately if you have incurred a large number of deductible expenses.
Itemized deductions include interest on home mortgages, state income taxes, property taxes,
charitable contribution, and medical expenses exceeding 7.5% of adjusted gross income.
Taxpayers should choose the greater of a standard deduction or an itemized deduction.
Taxable income is figured by subtracting exemptions and deductions from adjusted gross
income.
Adjusted gross income = Gross income – Adjustments
Taxable income = Adjusted gross income – (Exemptions + Deductions)
Income tax = Tax computation – Tax credits
A tax table is used to determine how much you we based on your taxable income (tax
computation). However, you do not have to pay this much tax if you are entitled to any tax
Section 8.2 Notes Page 2
credits. Tax credits are sums of money that reduce the income tax owed by the full dollar-for
dollar amount of the credits.
In addition to income tax, we are required to pay the federal government FICA (Federal
Insurance Contributions Act) taxes that are used for Social Security and Medicare Benefits.
Gross pay, also known as base pay, is your salary prior to any withheld taxes for the pay period
to any withheld taxes for the pay period the check covers. Your gross pay is what you would
receive if nothing were deducted. Net pay is the actual amount of your check after taxes have
been withheld.
Section 8.2 Notes Page 3
Ex1. A single man earned wages of $46,500, received $1850 in interest from a saving account,
received $15,000 in winnings on a television fame show, and contributed $2,300 to a taxdeferred savings plan. He is entitled to a personal exemption of $3,800 and a standard
deduction of $5,950. The interest on his home mortgage was $6,500, he paid $2,100 in
property taxes and $1,855 in state taxes, and he contributed $3,000 to charity.
a) Determine the woman’s gross income.
b) Determine the woman’s adjusted gross income.
c) Determine the woman’s taxable income.
Ex2. A single woman earned wages of $87,200, received $2680 in interest from a savings
account, and contributed $3,200 to a tax-deferred savings plan. She is entitled to a personal
exemption of $3,800 and a standard deduction of $5,950. The interest on her home mortgage
was $11,700, she paid $4,300 in property taxes and $5,220 in state taxes, and she
contributed$15,000 to charity.
a) Determine the woman’s gross income.
b) Determine the woman’s adjusted gross income.
c) Determine the woman’s taxable income.
Section 8.2 Notes Page 4
Ex3. Calculate the federal income tax owed by a single woman with no dependents whose gross
income, adjustments, deductions, and credits are given. Use the 2012 marginal tax rates in table
8.1.
Gross income: $62,000
Adjustments: $4,000 paid to a tax-deferred IRA
Deductions: $7,500 mortgage interest $2,200 property taxes $2,400 charitable contributions
$1,500 medical expenses not covered by insurance
Tax credit: $500
Ex4. Calculate the federal income tax owed by a single man with no dependents whose gross
income, adjustments, deductions, and credits are given. Use the 2012 marginal tax rates in table
8.1.
Gross income: $40,000
Adjustments: $1,000 paid to a tax-deferred IRA
Deductions: $3,000 charitable contributions $1,500 theft loss $300 cost of tax preparation
Tax credit: $500
Section 8.2 Notes Page 5
Ex5. If you are not self-employed and earn $150,000, what are your FICA taxes?
Ex6. You would like to have extra spending money, so you decide to work part-time at the local
gym. The job pays $10 per hour and you work 20 hours per week. Your employer withholds 10%
of your gross pay for federal taxes, 5.65% for FICA taxes, and 3% for state taxes.
a) What is your weekly gross pay?
b) How much is withheld per week for federal taxes?
c) How much is withheld per week for FICA taxes?
d) How much is withheld per week for state taxes?
e) What is your weekly net pay?
f) What percentage of your gross pay is withheld for taxes? Round to the nearest tenth of
a percent.
Section 8.2 Notes Page 6
Ex7. You decide to work part-time at a local nursery. The job pays $12 per hour and you work 15
hours per week. Your employer withholds 10% of your gross pay for federal taxes, 5.65% for
FICA taxes, and 4% for state taxes.
a) What is your weekly gross pay?
b) How much is withheld per week for federal taxes?
c) How much is withheld per week for FICA taxes?
d) How much is withheld per week for state taxes?
e) What is your weekly net pay?
f) What percentage of your gross pay is withheld for taxes? Round to the nearest tenth
of a percent.