It’s tax season here in America, which means
it’s time for everyone to procrastinate and complain about how complicated they are. They’re really not that complicated. But there are people out there with a vested
interest in making you think they are. Whether it’s a politician who wants to use
simplifying the tax code as a campaign slogan or a company who wants you to sell you their
services in doing them for you. If you have a basic understanding of high
school algebra, you already know more than you need in order to understand taxes. We do make them needlessly complicated here
in America – so for any of you international viewers, feel free to compare your system
to ours – but still, they’re not that complicated. Let’s start with your paycheck. Feel free to tell me how much you make down
below and we can get started…. Okay since you’re apparently not going to
participate we’re going to have to make up an example. Let’s start with this guy. Raynor here. He’s single and makes $30,000 a year. That’s about twice minimum wage. Okay so I rounded down to make the numbers
easier to work with, sue me. Please don’t sue me. Anyway it’s pretty close to the average
individual income here in America. He gets paid twice a month, which comes out
to $1250. Right on. But as you probably all know, that’s not
what he ends up with. In Australia, when you get hired and they
tell you “you make 30,000 a year,” that’s how much you make, that’s your take-home
pay, they figure in how much taxes get taken out and don’t even tell you about it. How awesome would that be instead of it being
a mystery up until your first paycheck?! Anyway, let’s break down what happens to
that paycheck. First, 6.2% comes out for Social Security. For those of you not in the United States,
this is the mandatory socialized retirement program that everyone pays into and you only
reap the full benefit of when you turn 67. That comes out to $77.50. Next, 1.45% gets taken out for Medicare. For those of you not in the United States,
this is the mandatory socialized healthcare program that everyone pays into and you only
reap the full benefit of when you turn 65. Apparently, only old people get socialism
here in America… That comes out to be $18.13. These two together are called FICA – and
the government just takes it and you never see it again. Well unless you become old enough, I guess. The next bit to come out of your paycheck
is income tax, the part that most people do incorrectly. We’re going to ignore state income tax and
just focus on federal, because… I don’t want to make 43 different versions
of this video. The part of your paycheck that goes towards
federal income tax is called the federal income tax withholding. You pay a small portion of each paycheck is
withheld, and at the end of the year when you “do your taxes” you figure out whether
you owe more or more commonly get a refund. So how are people messing this up? Because how much goes towards your withholding
is based on your income, your filing status, and how many allowances you claim. This is called a W-4, you filled it out when
you started your job. Most people don’t even read it and just
put 0 – and this is the worst possible answer. This form is asking how many people this income
is meant to support - putting zero means nobody. So the government will take the maximum possible
amount. People like to claim zero because it gives
them a bigger refund. You’re not getting a refund because of a
defective product or shoddy service, it’s because you overpaid. But we’ll get to that in a moment. This guy claims zero, so combining that with
his income and crippling loneliness, the government takes 12.3%, which comes out to be $153.70. That number is figured out by your employer
using a really complicated set of tables that takes all three of those identifiers into
account. I wish I could tell you some sort of concrete
number, but it changes for literally everyone. So let’s look at someone who works at the
exact same job, for the exact same pay, but actually read his W-4. Ad victoriam
Enter 1 for yourself if no one else can claim you as a dependent. Enter 1 if you’re single and only have one
job. Or if you’re married or have a second job,
okay that doesn’t apply. Spouse, nope, dependents, nope, head of, child…
blah blah blah, whatever. 2. He claims two. So he gets the same $1250 paycheck, $77.50
out for Social Security, $18.13 out for Medicare, but his withholding is different, $103.08,
only 8.3%. That’s a difference of $50.62 per paycheck. The key here is that since they both make
the same amount and they both have the same depressing life circumstances, they both owe
the same amount at the end of the year. But, we’ll get to how we figure that out
in a moment. For now, just take my word for it that this
guy gets a $1215.05 refund at the end of the year, and this guy gets a $0.17 refund- though
since we round to the nearest dollar, no refund. This is usually the point where the guy who
claimed zero celebrates his gift from the government and laughs at the guy who claimed
two for doing his taxes wrong. But did he? He already has all of that money in the bank,
so it actually evens out. That guy just has a more accurate withholding
which lets him keep more of his own money each paycheck. So, read your W-4, don’t just write zero. If you already work somewhere, ask for a new
W-4. Say this was a cell phone bill and you owed
$60 a month, but you decide to play it safe and pay $70 a month, so you get a $120 refund
at the end of the year. You would seriously reconsider how much you’re
paying every month… at least I hope you would. Your refund is not a gift from the government,
you’re not sticking it to anyone by getting a refund, you’re getting it because you’re
overpaying. No, you can’t tell your employer to take
out nothing for income tax, despite what any Sovereign Citizen might tell you. The government totally has the power to tax
personal income. There’s also a number of youtube videos
that tell you how to get out of paying taxes by claiming 9 or 10. Unless you’re John and Kate plus Eight,
don’t do that. You can actually claim more than nine or ten
but at that point you’re just being a pain to your employer, not the government. It’s a logarithmic function, you’ll get
it infinitely close to zero, but you’ll never actually get to zero. If you don’t pay your income taxes, they
will eventually send someone with a gun to your house. And most likely, you’re going to get everything
you paid in taxes back anyway, so it’s just not worth it – pay your taxes. Let’s figure out how much this guy owes. Anyway, here is where we’re going to dispel
a few more myths. We use a progressive tax system here in America,
which means the more money you make the more that money is taxed. Actually, most countries use this system. It’s a common misconception that if you
make this much money, you’re taxed at this rate, but if you make just one dollar more,
all of your money is taxed at a higher rate. Which just isn’t true, so let’s look at
how it works. We’re going to be working with the 2017
brackets since that’s what you’ll be filing your taxes under this year, near the end I’ll
talk about the 2018 changes. Like the other guy, he’s single and makes
$30,000 a year. The first $9325 is taxed at 10% - so of that,
he owes $932.50. The remaining $20,675 is taxed at 15%, coming
out to $3101.25. So, in total he owes $4033.75. Well that wasn’t a very good example, it
only crosses two brackets. Alright, let’s look at his boss. One Enclave, One America. Who is also single but makes $100,000 a year. Again, the first $9325 is taxed at 10%. The 15% bracket goes up to $37,950, which
means only $28625 of his income is taxed at that rate. The next bracket goes up to $91,900 and is
taxed at 25%. And his final $8100 is taxed at 28%. His final tax bill is $20,981.75, so even
though his income falls into the 28% bracket, not all of his income is taxed at that rate. 28% is what is called his top marginal tax
rate, while his effective tax rate is only 20.98%
There are other proposed tax systems, like the regressive system, which means the more
money you make the less that money is taxed. Which obviously disproportionately benefits
the rich, which is why no country on earth uses it. And then there is the flat tax, which means
all income is taxed at the same rate, which sounds fair… which is why every few years
someone tries to push for it. But let’s look at it in practice. In order for a flat tax to work, it would
have to be high enough that the government doesn’t lose any revenue. In order to keep that same level of revenue,
it would have to be something like 36%, which is insane. So let’s use a number that has been proposed
before – 18%. This guy would see his taxes go up and this
guy would see his taxes go down. Just like the regressive system, it disproportionately
helps the wealthy. Imagine if he was making millions or even
billions of dollars. In 2012, a presidential candidate suggested
a 9-9-9 plan, which included a 9% flat income tax, which is excessively low, but introduced
a new 9% national sales tax to make up the difference. So effectively, your federal taxes would be
18% total. In the US, sales tax is a local and state
consumption tax on only certain goods. Essential items like food are not taxed. But for frivolous items like cars, tvs, and
tampons, it gets a little messy… gross. Tampons should not be taxed. Since it’s state and local, it changes city
to city, but on average it’s 7%. Adding a national 9% sales tax would suddenly
mean everything costs 16% more than what it says on the price tag. In Ireland it’s called the Value Added Tax,
or VAT, and it’s 23% nationwide But you wouldn’t know it, because that price is
figured into the price tag – it’s not a surprise when you get to the register. Why do we have to go and make things so complicated? Speaking of complicated, while I figured out
the tax brackets, I’m sure some of you were furiously writing out comments about how I
forgot about deductions, exemptions, and credits. I didn’t forget, it said that in the bottom
cor- let’s explain those now. Let’s just focus in on this guy, but since
he’s single, he doesn’t really qualify for any of the fun stuff. So let’s complicate things by giving him
custody of one child. Ad victoriam. Let’s not make him married though, life’s
hard enough as it is. But since he now has a dependent, he gets
to file as head of household, so the brackets get all messed up. Leave it to a kid to make a mess of things. The first $13350 is taxed at 10% and the remaining
$16650 is taxed at 15%. The first deduction he is going to take is
the Standard Deduction, which for head of household, is $9350. He could itemize, which means individually
deducting state income tax, social security and medicare, donations to charity, and even
things like sales tax, but – For most people, almost always, the Standard Deduction is higher. Unless you have some incredibly complicated
tax situation or make enormous amounts of money, which most of you don’t, just take
the Standard Deduction. Then he is going to claim two Personal Exemptions,
one for him, one for his child, totaling $8100. These two numbers, the Standard Deduction
and Personal Exemptions, are subtracted from his overall income of $30,000, meaning he
is only taxed on $12550. It would be nice if we lived in a country
where they just said your first however many dollars weren’t taxed, that system would
make so much more sense. But as far as I know, no such country exists,
so we’re left with having to do math. So that’s it, his income only falls into
the 10% bracket, so he owes $1255. But that’s not the entire story, because
while deductions reduce the amount of income you are taxed on, credits reduce the amount
of taxes you owe. There are all sorts of credits, like if you
bought an electric car or installed solar panels on your house, but we’re just going
to focus on the most popular two. The Child Tax Credit is just $1000 per child,
nice and easy. Now he only owes $255. Then there is the Earned Income Credit, which
is complicated because it scales depending on income. It’s not a case of, if you make below this
amount you get it, if you make above it you don’t. So if you’ve ever thought to yourself “if
I made just a hundred dollars less, I would have gotten that credit.” If you’re that close to the line, the credit
is worth single digits. But for this guy, it’s $1536. Which means on top of getting back all of
his federal income tax withholding from his paychecks throughout the year, the government
owes him an additional $1281. This is why an estimated 45% of Americans
pay no federal income tax, because of the deductions and credits from having kids and
stuff. But since we’re still dealing with 2017,
I would be remiss if I didn’t mention the opposite of credits – penalties. If you didn’t have health insurance in 2017,
you owe the government at least $695 per person. Either you owe in in addition to your taxes
or it gets taken out of your refund. But that penalty is going away in 2018 thanks
to the Tax Cuts and Jobs Act. I promised I would talk about the 2018 changes,
so here we go. Let’s start with this guy, single making
$30,000 a year. He got a $6350 Standard Deduction and $4050
Personal Exemption and no credits, so he owes $2473.75, an effective tax rate of 8.25%. The brackets shift a little bit and his top
bracket is now only 12%, but the biggest change is the near-doubling of the Standard Deduction
to $12,000. However, this is offset by the fact that the
new plan completely eliminates Personal Exemptions. So in the end, he now owes $1969.50, a savings
of $504.25. Now for the rich guy. In 2017, he owed $18,138.50. Again, his Standard Deduction and Personal
Exemption are rolled into one Standard Deduction, totaling $12,000, and the brackets shift a
bit again. His top bracket is now only 24% and his tax
burden falls to $15409.50, a reduction of $2729. And lastly, the complicated guy, earning $30,000
with one child as head of household. In 2017, he got a Standard Deduction and 2
Personal Exemptions, totaling $17,450. Those have been bundled together for a Standard
Deduction of $18,000. The Child Tax Credit doubles to $2000, and
the Earned Income Credit creeps up slightly to $1662. So he will now get a refund of $2462, almost
double what he got for 2017. The 2018 plan helps almost everyone – it
helps some people a lot more than others, but still, it helps most everyone. At times it seems like our system is incredibly
confusing when compared to others, and sometimes it seems like it’s that way on purpose. But it isn’t that confusing – I explained
it to you in only 15 minutes or so. Odds are that most of you are completely capable
of doing your own taxes, you don’t need to pay someone else. You can either do them with paper and pencil
or using something like TurboTax, either way – you can still do it yourself. And before you feel compelled to ask me a
question down below about your specific tax situation – I’m playing with funkopops
and monopoly money, don’t ask me! You really should know better… hey! So what are you going to do with your refund? Did you know I have a patreon? Because I have a patreon… if you’d like
to see more videos like this, consider donating a dollar or two and don’t forget to credit
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facebook and join us on the subreddit.
Holy smokes, and I feel like the Danish system is complicated!
This was literally posted like 5 days ago.
I still pay someone to do my taxes