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Sales Taxes: Rates, Calculation, and Examples

Learn about sales taxes, including rates, calculations, and examples to determine the overall sales tax rate and total price including tax.

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Sales Taxes: Rates, Calculation, and Examples

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  1. Chapter 10 Taxes START EXIT

  2. Chapter Outline 10.1 Sales Taxes 10.2 Income and Payroll Taxes 10.3 Property Taxes 10.4 Other Taxes Chapter Summary Chapter Exercises

  3. 10.1 Sales Taxes • Sales taxes are taxes imposed by state and/or local governments on retail sales. • As of May 2007, state sales taxes are in place in 45 states, plus the District of Columbia • Only Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose state sales taxes.

  4. 10.1 Sales Taxes Example 10.1.1 • Problem • If the state sales tax rate is 4.5% and the local sales tax rate is 3.75%, what is the overall sales tax rate? • Solution 4.5% + 3.75% = 8.25%

  5. 10.1 Sales Taxes Example 10.1.2 • Problem • A sweater costs $42.95 and the sales tax rate is 7 3/8%. Calculate (a) the amount of sales tax and (b) the total price including tax. • Solution $42.95 x 7 3/8% = $3.17 $42.95 + $3.17 = $46.12

  6. 10.1 Sales Taxes FORMULA 10.1.1 Sales Tax Formula T = P(1 + r) where T represents the TOTAL PRICE INCLUDING TAX P represents the PRICE BEFORE TAX r represents the SALES TAX RATE

  7. 10.1 Sales Taxes Example 10.1.3 • Problem • Repeat Example 10.1.2, using Formula 10.1.1. • Solution T = P(1 + r) T = $42.95(1 + 0.07375) T = $46.12 $46.12 -- $42.95 = $3.17

  8. 10.1 Sales Taxes Example 10.1.4 • Problem • On a trip to his favorite local discount store, Jack bought a DVD player costing $79.95, a toaster for $29.95, and a case of cranberry juice for $12.75. The sales tax rate on all purchases is 6 ¼%. Find the total cost of his purchases including tax. • Solution T = P(1 + r) T = ($79.95 + $29.95 + $12.75)(1 + 6 ¼%) T = $130.32

  9. 10.1 Sales Taxes Example 10.1.6 • Problem • Amy is shopping for a new car. She figures she can afford a $325 monthly payment. On the basis of this payment and the rates she can get on a car loan from her credit union, she has determined she can afford to pay $21,900 for a new car. • Unfortunately, she forgot that in the county where she lives the sales tax rate is 8.75%. What price for the car can she really afford? How much sales tax would she then pay? • Solution T = P(1 + r) $21,900 = P(1 + 8.75%) P = $20,137.93 Sales Tax = $21,900 -- $20,137.93 = $1,762.07.

  10. 10.1 Sales Taxes Example 10.1.7 • Problem • A souvenir shop sets all of its prices to include 6.75% sales tax. For the month of June, sales totaled $16,739. How much sales tax is due on these sales? • Solution T = P(1 + r) $16,739 = P(1 + 6.75%) P = $15,680.56

  11. Section 10.1 Exercises

  12. Problem 1 • A dishwasher costs $289.99 and the sales tax rate is 7.5%. Calculate the amount of sales tax and the total price. CHECK YOUR ANSWER

  13. Solution 1 • A dishwasher costs $289.99 and the sales tax rate is 7.5%. Calculate the amount of sales tax and the total price. • T = P(1 + r) T = $289.99(1 + 7.5%) T = $311.74 Sales Tax = $311.74 -- $289.99 = $21.75 BACK TO GAME BOARD

  14. Problem 2 • You stopped by the grocery store without realizing that you only had $50 in your wallet. How much money can you spend and still have enough to pay the sales tax of 6%? CHECK YOUR ANSWER

  15. Solution 2 • You stopped by the grocery store without realizing that you only had $50 in your wallet. How much money can you spend and still have enough to pay the sales tax of 6%? • T = P(1 + r) $50 = P(1 + 6%) $50 = P(1.06) P = $47.17 BACK TO GAME BOARD

  16. 10.2 Income and Payroll Taxes • The 16th Amendment to the U.S. Constitution, ratified in 1913, provides that “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived…” The federal income tax has become an enormous source of revenue to the federal government. • Most states have some sort of personal income tax as well (as of May 2007, there is no state income tax in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). • Corporate income taxes differ from personal income taxes and also vary by jurisdiction.

  17. 10.2 Income and Payroll Taxes • The first step to calculating the amount of income tax to be paid is to determine just how much income is subject to tax. This portion of income is known as taxable income. • Tax exemptions and deductions are subtracted from income before the tax is calculated. Taxpayers are generally allowed to exempt a certain amount of income for themselves and for each person they can claim as a dependent. • In addition, many expenses are tax deductible, meaning that they can be subtracted from income before it’s taxed (e.g. educational expenses, charitable contributions, etc.).

  18. 10.2 Income and Payroll Taxes In 2013, taxpayers were allowed to exempt $3,900 for a single taxpayer. • Taxpayers with significant tax deductible expenses file a form with their tax returns where they itemize these deductions, listing the expenses of each type so that they can be deducted. • Taxpayers who choose not to itemize may usually take a standard deduction instead. The standard deduction amount in 2013 for a married couple filing jointly could take is $12,200. And $6,100 for a single.

  19. 10.2 Income and Payroll Taxes Example 10.2.1 • Problem • Lisa and Al are a married couple who had a joint income of $68,579 in 2013. They have two dependent children. They paid $3,450 in state and local taxes in 2013 and gave $3,700 to charity. What was their taxable income in 2013 if the tax exemption is $3,900 and the standard deduction for a married couple filing their taxes jointly is $12,200? • Solution • Lisa and Al can claim four exemptions, two for themselves and two for their dependent children. • Total Exemptions = 4 x $3,900 = $15,600 • Total Deductions = $3,450 + $3,700 = $7,150 • However, the standard deduction of $12,200 is greater so they are better off without itemizing. • Total Taxable Income = $68,579 -- $15,600 -- $12,200 = $40,779

  20. 10.2 Income and Payroll Taxes • While income taxes are calculated and owed on the basis of the taxpayer’s annual income, the government is not content to sit around and wait until the end of the year to collect the tax owed. • The income tax you owe for your income must be paid when you earn it. To make sure that happens, employers are responsible for withholding money for taxes from their employees’ paychecks and forwarding this money to the Internal Revenue Service (for federal taxes) and state tax agencies. • An employer is responsible for withholding taxes on the basis of withholding rates published by the IRS.

  21. 10.2 Income and Payroll Taxes FINDING FEDERAL TAXES!!! 9-21

  22. 10.2 Income and Payroll Taxes • Income tax withholding is not the only tax collection for which an employer is responsible. The taxes that fund the U.S. Social Security system and Medicare are also collected by withholding from an employee’s paycheck. • The law that requires these payments is known as the Federal Insurance Contributions Act, and hence these taxes are commonly referred to by the acronym FICA. • For 2013, the Social Security portion of the FICA tax was 6.2% up to $113,700 of gross wages. • This percent is paid by both the employee and the employer, so in actuality this totals 12.4%. • The Medicare portion of FICA was 1.45%, also paid by both employee and employer, though without any upper limit.

  23. 10.2 Income and Payroll Taxes Example 10.2.8 • Problem • Suppose that Ashley earns a gross salary of $43,500 per year and is paid biweekly. She pays $150 with each paycheck for deductions for health insurance and other benefits. How much will be deducted from her biweekly paycheck for FICA? • Solution • Ashley’s gross biweekly pay is $43,500/26 = $1,673.08 • Subtracting her deductions leaves $1,673.08 -- $150 = $1,523.08 • The Social Security tax will be 6.2% x $1,523.08 = $94.43 • The Medicare tax will be 1.45% x $1,523.08 = $22.08 • FICA taxes = $94.43 + $22.08 = $116.51

  24. 10.2 Income and Payroll Taxes Example 10.2.9 • Problem • Ray earned a gross annual salary of $148,900. Calculate his total annual FICA taxes. • Solution • The Social Security tax applies only to the first $113,700 of income, so Ray will pay $113,700 x 6.2% = $7,049.40. • The Medicare tax will be $148,900 x 1.45% = $2,159.05 • FICA Taxes = $7,049.40 + $2,159.05 = $9,208.45

  25. Section 10.2 Exercises

  26. Problem 1 • Vanessa and Michael are a married couple who had a joint income of $134,297 in 2013. They have one dependent child. They paid $7,100 in state and local taxes and contributed $10,000 to charity. They also take the standard deduction for a married couple filing jointly What is their taxable income for 2013? CHECK YOUR ANSWER

  27. Solution 1 • Vanessa and Michael are a married couple who had a joint income of $134,297 in 2013. They have one dependent child. They paid $7,100 in state and local taxes and contributed $10,000 to charity. They also take the standard deduction for a married couple filing jointly. What is their taxable income for 2013? • Exemptions = 3 x $3,900 = $11,700 • Deductions = $7,100 + $10,000 = $17,100 • Standard Deduction = $12,200 • Taxable Income = $134,297 -- $11,700 -- $17,100 -- $12,200 = $93,297

  28. Problem 2 • Michael’s biweekly pay is $2,972.54. Calculate his FICA taxes. CHECK YOUR ANSWER

  29. Solution 2 • Michael’s biweekly pay is $2,972.54. Calculate his FICA taxes. Social Security = $2,972.54 x 6.2% = $184.30 • Medicare = $2,972.54 x 1.45% = $43.10 • FICA Taxes = $184.30 + $43.10 = $227.40 BACK TO GAME BOARD

  30. 9.3 Property Taxes • Property taxes are, as name suggests, taxes that must be paid on certain types of property. • Real estate taxes is a most widespread and financially significant form of property taxes. • The amount of tax owed on a given property is determined by applying a tax rate to the property’s assessed value. • Even though the assessed value may differ dramatically from market value, we would expect that different properties in the same jurisdiction would be assessed at roughly the same percent of their market value. This percentage is referred to as the uniform assessment percent.

  31. 9.3 Property Taxes Example 9.3.1 • Problem • Josh’s house, assessed at $75,372, has a fair market value of around $250,000. Find the uniform assessment percent based on Josh’s assessment and use it to approximate the assessed value of a house worth $350,000 in this same tax jurisdiction. • Solution • $75,372/$250,000 = 30.15% of market value • $350,000 x 30.15% = $105,525 assessed value

  32. 9.3 Property Taxes Example 9.3.2 • Problem • Suppose that the uniform assessment rate is supposed to be 25% in Boltonboro township. What market value does a $53,502 assessment suggest? • Solution 25% x Market Value = $53,502 Market Value = $214,008

  33. 9.3 Property Taxes • The tax rate may be expressed in a number of different equivalent ways. • It may be expressed as a rate per thousand. • Mills are an equivalent way of expressing a rate per thousand. A mill is 1/1,100 of a dollar. • A tax rate may be expressed as a rate per hundred.

  34. 9.3 Property Taxes

  35. 9.3 Property Taxes Example 9.3.3 • Problem • Josh’s house has an assessed value of $75,372. He pays real taxes to his county, town, and school district. The county rate is 14 mills, the town rate is $8.57 per thousand, and the school district rate is $1.35 per hundred. How much does he pay to each of these, and how much does he pay in total? • Solution $75,372/1,000 = 75.372 County Tax = 75.372 x 14 = $1,055.21 Town Tax = 75.372 x $8.57 = $645.94 School Tax = 1.35% x $75,372 = $1,017.52 Total Taxes = $1,055.21 + $645.94 + $1,017.52 = $2,718.67

  36. 9.3 Property Taxes

  37. 9.3 Property Taxes Example 9.3.4 • Problem • The Bloome County legislature has set the overall property tax levy for 2008 to be $39,600,000. The total assessed value of taxable property in the county is $4,873,595,000. Determine the 2008 real estate tax rate for the county. Express the result as (a) percent, (b) a rate per hundred, (c) a rate per thousand, and (d) mills. • Solution Rate = $39,600,000/$4,873,595,000 = 0.0081254354 (a) 0.8125% (b) $0.813 per hundred (c) 0.0081254 x 1,000 = $8.13 per thousand (d) 8.13 mills

  38. 9.3 Property Taxes Example 9.3.5 • Problem • Suppose that the county sets the tax rate to be $8.13 per thousand. How much will the actual taxes total? • Solution 4,873,595 thousands x $8.13 per thousand = $39,622,327.35

  39. Section 9.3 Exercises

  40. Problem 1 • Randy’s house has an assessed value of $94,230. The tax rate is $10.34 per thousand. What is the amount of his property tax? CHECK YOUR ANSWER

  41. Solution 1 • Randy’s house has an assessed value of $94,230. The tax rate is $10.34 per thousand. What is the amount of his property tax? • $94,230/1,000 = 94.23 94.23 x $10.34 = $974.34 BACK TO GAME BOARD

  42. Problem 2 • The Decatur County legislature has set the overall property tax levy for 2008 to be $63,000,000. The total assessed value of taxable property is $8,425,194,000. Determine the 2008 real estate tax rate for the county and express it in mills. CHECK YOUR ANSWER

  43. Solution 2 • The Decatur County legislature has set the overall property tax levy for 2008 to be $63,000,000. The total assessed value of taxable property is $8,425,194,000. Determine the 2008 real estate tax rate for the county and express it in mills. • Rate = $63,000,000/$8,425,194,000 = 0.0074775 • 0.0074775 x 1,000 = 7.48 mills BACK TO GAME BOARD

  44. 9.4 Other Taxes • Excise taxes are taxes levied on specific products or services. • A quick glance at the breakout of charges on your telephone bill will probably provide several examples of excise taxes. • Another example would be a tax on airplane tickets to pay for airport security or a tax on gasoline to pay for road maintenance. • They may be charged to discourage the purchase of certain products, such as cigarettes, alcohol, and firearms. • Luxury taxes are extra sales taxes on the sale of luxury items such as expensive sports cars, yachts, furs, jewelry, etc. • Actually, some taxes on home telephone service were originally considered luxury taxes because having a telephone at home used to be a luxury. 

  45. 9.4 Other Taxes Example 9.4.1 • Problem • For the New York gasoline tax of 4% up to $0.08 per gallon, what would the tax be on a gallon of gas if the price is (a) $1.79 per gallon, (b) $2.00 per gallon, or (c) $3.75 per gallon? • Solution (a) 4% x $1.79 = $0.0716 = 7 cents per gallon (b) 4% x $2.00 = $0.08 = 8 cents per gallon (c) 4% x $3.75 = $0.15 = 15 cents per gallon; however, the maximum is 8 cents per gallon, so the actual tax is 8 cents per gallon

  46. 9.4 Other Taxes • Items imported into the United States from overseas may be subject to duties, import fees, or tariffs. • Customs and duties can be of significance for individuals when traveling. Items that you buy overseas may be subject to duties when you bring them back to the United States.

  47. 9.4 Other Taxes Example 9.4.3 • Problem • Suppose that imports of wine are subject to an import duty of $8.00 per case. A case of wine is defined to be 9 liters. How much import duty would have to be paid on a shipment of 100 bottles, each of which contains 1.5 liters. • Solution • The total amount imported is 100 x 1.5 = 150 liters • Since there are 9 liters per case, this is 150/9 = 16.6667 cases • The duty would be $8.00 x 16.6667 = $133.33

  48. 9.4 Other Taxes • When someone dies, their property passes on to the survivors as specified in the will or ruled by the probate court if there is no will. • This property is referred to as the deceased person’s estate and estate taxes may be assessed against the value of the property in the estate. • Estate taxes apply only to a person’s taxable estate which is, generally speaking, the fair market value of the deceased person’s property, after subtracting the following: • The amount required to repay any debts • Funeral expenses • Gifts specified in the will for charities • Amounts left to a surviving spouse • Fees paid to the person selected to administer the estate and for legal expenses of administering the estate.

  49. 9.4 Other Taxes Example 9.4.5 • Problem • Suppose that Anselm died, leaving assets worth $925,063. His will left $400,000 to his wife, $75,000 to his church, and $35,000 to other charities. At his death, he had debts totaling $54,053 and his funeral expenses were $22,500. The executor’s and other legal fees amounted to $30,000. What was his taxable estate? • Solution • The money left to his wife, charities, and expenses are not taxable and come up to a total of $616,553. • The remaining taxable estate is $925,063 -- $616,553 = $308,510

  50. 9.4 Other Taxes

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