1. Taxes
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2. PERFORMANCE OBJECTIVES
Section I Sales and Excise Taxes 18-1: Determining sales tax by using sales tax tables 18-2: Calculating sales tax by using the percent method 18-3: Calculating selling price and amount of sales tax when total purchase price is known 18-4: Calculating excise tax Section II Property Tax 18-5: Calculating the amount of property tax 18-6: Calculating tax rate necessary in a community to meet budgetary demands
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3. PERFORMANCE OBJECTIVES
continued
Section III Income Tax 18-7: Calculating taxable income for individuals 18-8: Using the Tax Table to determine tax liability 18-9: Using the Tax Computation Worksheet to calculate tax liability 18-10: Calculating an individual’s tax refund or amount of tax owed 18-11: Calculating corporate income tax and net income after taxes
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4. Sales and Excise Taxes taxation sales tax
The imposition of a mandatory levy or charge by a government unit to provide financing for public services.
sales tax
A tax based on the retail selling or rental price of tangible personal property, collected by the retailer at the time of purchase, and paid to the state or local government.
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5. Sales and Excise Taxes sales tax rate excise tax
continued
sales tax rate
Sales tax expressed in its most common form, as a percent of the retail price of an item.
excise tax
A tax levied by federal, state, and local governments on certain luxury or nonessential products and services such as alcoholic beverages, furs, tobacco products, telephone service, and airline and cruise ship tickets.
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6. To determine sales tax due on an item by using sales tax tables
Step 1 Locate the taxable retail price in the Amount of Sale column.
Step 2 Scan to the right to locate the amount of tax due in the Tax column.
Note: Exhibit 18-1 is only a partial listing. Complete sales tax tables are available in most states from the Department of Revenue
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7. EXHIBIT 18-1 6 ½ % Sales Tax Brackets
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8. Sales Tax Example
Use Exhibit 18-1 to determine the amount of sales tax at 6½ percent with a retail price of $9.99.
From Exhibit 18-1, sales tax on $9.99 is found by locating the row on the chart.
The amount of the tax is listed as $.65
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9. Sales tax = Selling price × Sales tax rate
To calculate sales tax and total purchase price by using the percent method
Step 1 Calculate the sales tax by multiplying the selling price of the good or service by the sales tax rate.
Sales tax = Selling price × Sales tax rate
Step 2 Compute the total purchase price by adding the selling price, the sales tax, and any other additional charges.
Total purchase price = Selling price + Sales tax + Other charges
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10. Sales Tax Example
Helena purchased a refrigerator for $ The delivery charge was $20 and the ice maker hookup fee amounted to $55. The state sales tax rate is 6½% and the city tax is 1.3%. Calculate the total amount of sale tax and the total purchase price.
Sales tax = Selling price × Sales tax rate
Sales tax =
× ( ) =
$70.19
Total purchase price = Selling price + Sales tax + Other charges
Total purchase price = =
$1,045.09
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11. To Calculate selling price and amount of sales tax
Step 1 Calculate selling price of an item by dividing the total purchase price by 100% plus the sales tax rate.
Selling price =
Step 2 Determine the amount of sales tax by subtracting the selling price from the total purchase price.
Sales tax = Total purchase price – Selling price
Total purchase price
100% + Sales tax rate
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12. Sales Tax Example
At the end of a business day, the cash register at a gift shop showed total sales, including sales tax, of $3,520. If the state and local taxes amounted to 8½%, what is the amount of actual sales? How much sales tax was collected that day?
3,520
1.085
=$3,244.24
Sales tax = Total purchase price – Selling price
Sales tax = 3,520
- 3, =
$275.76
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13. To calculate the amount of excise tax
Step 1 When expressed as a percent: Multiply the selling price of an item by the excise tax rate.
Excise tax = Selling price × Excise tax rate
When expressed as a fixed amount per unit: Multiply the number of units by the excise tax per unit.
Excise tax = Number of units × Excise tax per unit
Step 2 Calculate the total purchase price by adding the selling price plus sales tax plus excise tax.
Total purchase price = Selling price + Sales tax + Excise tax
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14. Excise Tax Example
A hunting bow at a sporting goods store in Cincinnati, Ohio, retails for $ Ohio sales tax is 5% and the federal excise tax on the item is 11%. What is the amount of each tax, and what is the total purchase price?
Sales tax = Selling price x Sales tax rate
Sales tax = x
.05 =
$6.50
Excise tax = Selling price x Excise tax rate
Excise tax = x
.11 =
$14.29
Total purchase price = Selling price + Sales tax + Excise tax
Total purchase price =
+ 6.50 =
$150.74
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15. Property Tax ad valorem or property tax real estate, or real property
A tax based on the assessed value of property, generally collected at the city or county level as the primary source of revenue for counties, municipalities, school districts, and special taxing districts.
real estate, or real property
Land, buildings, and all other permanent improvements situated thereon.
personal property
For ad valorem tax purposes, divided into tangible personal property and supplies and household goods.
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16. Property Tax assessed value fair market value
continued
assessed value
The value of property for tax purposes, generally a percentage of the fair market value.
Property tax = Assessed value of property × Tax rate
fair market value
The value of property based on location, size, cost, replacement value, condition, and income derived from its use.
tax assessor, or property appraiser
The city or county official designated to determine assessed values of property.
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17. Property Tax
continued
Property tax rates may be expressed in the following ways:
Decimal or percent of assessed value:
Example: .035 or 3.5%
Per $100 of assessed value:
Example: $3.50 per $100
Per $1,000 of assessed value:
Example: $35.00 per $1,000
Mills (one one-thousandth of a dollar):
Example: 35 mills
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18. To calculate property tax when the tax is expressed as a percent
Step 1 Convert the tax rate percent to a decimal by moving the decimal point two places to the left.
Step 2 Multiply the assessed value by the tax rate as a decimal.
Property tax = Assessed value × Tax rate
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19. Property Tax as a Percent Example
Mark’s home has a market value of $125,000. The assessment rate in the county is 70% and the tax rate is 1.944%. What is the assessed value of the home and the amount of the property tax?
Assessed value = Purchase price x Assessment rate
Assessed value = 125,000 x
.70 =
$87,500
Property tax = Assessed value x Tax rate
Property tax =
87,500 x =
$1,701
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20. Property tax = Number of $100 × Tax per $100
To Calculate property tax when the tax is expressed per $100 of assessed value
Step 1 Divide the assessed value by $100 to determine the number of $100 the assessed value contains.
Number of $100 =
Step 2 Calculate the property tax by multiplying the number of $100 by the tax per $100.
Property tax = Number of $100 × Tax per $100
Assessed value
100
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21. Property Tax Expressed per $100 of Assessed Value Example
Tracy Randall’s home has an assessed value of $89,700. The tax rate is $1.944 per $100. What is the amount of the property tax?
89,700
100
= 897
Property tax = Number of $100 × Tax per $100
Property tax = 897
× =
$1,743.77
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22. Property tax = Number of $1,000 × Tax per $1,000
To Calculate property tax when the tax is expressed per $1,000 of assessed value
Step 1 Divide the assessed value by $1,000 to determine the number of $1,000 the assessed value contains.
Number of $1,000 =
Step 2 Calculate the property tax by multiplying the number of $1,000 by the tax per $1,000.
Property tax = Number of $1,000 × Tax per $1,000
Assessed value
1,000
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23. Property Tax Expressed per $1,000 of Assessed Value Example
Tracy purchased a home with an assessed value of $89,700. The tax rate is $19.44 per $1,000. What is the amount of the property tax?
89,700
1,000
= 89.7
Property tax = Number of $1,000 × Tax per $1,000
Property tax = 89.7 ×
19.44 =
$1,743.77
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24. To calculate property tax when the tax is expressed in mills
Step 1 Because mills means 1/1,000 (.001) of a dollar, convert tax rate in mills to tax rate in decimal form by multiplying mills times .001.
Tax rate in decimal form = Tax rate in mills × .001
Step 2 Calculate the tax due by multiplying the assessed value by the tax rate in decimal form.
Property tax = Assessed value × Tax rate in decimal form
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25. Property Tax When the Tax is Expressed in Mills Example
Tracy Randall’s home has an assessed value of $89,700. The tax rate is mills. What is the amount of the property tax?
Tax rate in decimal form = Tax rate in mills x .001
Tax rate in decimal form =
× .001 =
.01944
Property tax = Assessed value × Tax rate in decimal form
Property tax = 89,700
× =
$1,743.77
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26. Total assessed property value
To compute tax rate
Step 1 Calculate tax rate per dollar of assessed property value by dividing the total taxes required by the total assessed property value.
Tax rate per dollar (decimal form) =
Round your answer to ten-thousandths (four decimal places). In most states, the rounding is always up, even if the next digit is less than 5.
Step 2 To convert tax rate per dollar to:
percent, move the decimal point two places to the right and add a percent sign.
tax rate per $100, multiply by $100.
tax rate per $1,000, multiply by $1,000.
mills, divide by .001.
Total taxes required
Total assessed property value
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27. Tax Rate Necessary to Meet Budgetary Demands Example
The city budget planners have determined that $3,435,000 will be needed to provide city services for the next year. The total assessed property value in the city is $71,800,000. Determine what tax rate must be imposed to meet budgetary demands. Express your answer in each of the four ways.
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28. Tax Rate Necessary to Meet Budgetary Demands Example
continued =
$.0479
Percent,
.0479 =
4.79% of assessed value
Per $100,
.0479 × 100 =
$4.79 per $100
Per $1,000,
.0479 × 1,000 =
$47.90 per $1,000
47.9 mills per $1.00
Mills,
.0479 ÷ .001 =
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29. Income Tax income tax tax return taxable income
A pay-as-you-go tax based on the amount of income of an individual or corporation.
tax return
The official Internal Revenue Service forms used to report and pay income tax for income earned during the previous calendar year.
taxable income
The amount of income that tax rates are applied to in order to calculate the amount of tax owed for the year.
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30. To calculate income tax for individuals
Step 1 Determine total income by adding all sources of taxable income.
Step 2 Calculate adjusted gross income by subtracting the sum of all adjustments to income from total income.
Step 3 Subtract the sum of the itemized deductions or the standard deduction (whichever is larger) from the adjusted gross income.
2012 Standard Deductions
Single $5,950
Married, filing jointly, or Qualifying widow(er) $11,900
Married, filing separately $5,950
Head of household $8,700
65 or older and/or blind See IRS instructions to find standard deduction.
Step 4 Multiply $3,800 by the total number of exemptions claimed and subtract from the amount in Step 3. The result is taxable income.
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31. Procedure to Calculate Taxable Income
EXHIBIT 18-2
Procedure to Calculate Taxable Income
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32. Taxable Income Example
Nick is single, claiming two exemptions. He earns $35,000 in wages per year. Last year, he also earned $1,200 in cash dividends from his investment portfolio.
Nick contributed $1,500 to his individual retirement account and gained $5,000 from the sale of stock.
His itemized deductions amounted to medical expenses of $1,000 in excess of IRS exclusions; $1,945 in real estate taxes; $2,500 in mortgage interest; and $300 in charitable contributions.
From this information, calculate his taxable income.
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33. Taxable Income Example
continued
$35,000 Wages
Cash dividends
Sale of stock (gain)
$ Total income
Retirement contributions
$ Adjusted gross income
1,200
Compare standard deduction of $5,950 with itemized deduction of $5,745. Choose the larger one: $5,950.
5,000
$ 41,200
1,500
$39,700
Itemized deductions:
Medical expenses
Real estate taxes
Mortgage interest
Charitable contributions
Itemized deductions
$1,000
Adjusted gross income
Itemized deductions
(3,800 x 2) exemptions
Taxable income
$39,700
1,945
5,745
2,500
7,600
300
$26,355
$5,745
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34. Using the Tax Table to Determine Liability
The IRS chart used to find the amount of income tax due for individuals with taxable income of under $100,000.
Tax Computation Worksheet
The IRS chart used to calculate the amount of income tax due for individuals with taxable income of $100,000 or more.
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35. To Determine tax liability using the tax table, taxable income under $100,000
Step 1 Using Exhibit 18-3, read down the “If line 43 (taxable income) is—” columns to find the line that includes the amount of taxable income. Note: Line 43 refers to the line on the 1040 tax form where taxable income is listed.
Step 2 Find the tax liability by scanning across the “And you are—” column containing the appropriate filing status.
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36. EXHIBIT 18-3
Tax Table
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37. Individual Tax Liability Example
Joshua and his wife, Katie, had taxable income last year amounting to $65,780.
Their filing status is married, filing jointly.
Using the Tax Table, determine their tax liability.
Using Exhibit 18-3, the federal tax liability for Joshua and Katie is $8,996.
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38. Section B – Married filing jointly or qualifying widow(er)
To calculate tax liability using the tax computation worksheet—taxable income of $100,000 or above
Step 1 Locate the section corresponding to the appropriate filing status:
Section A – Single
Section B – Married filing jointly or qualifying widow(er)
Section C – Married filing separately
Section D – Head of household
Step 2 Read down the first column, “Taxable income. If line 43 is—,” to find the range containing the taxable column.
Step 3 Multiply the taxable income by the “multiplication amount” listed in column (b) for that range.
Step 4 Calculate the tax liability by subtracting the “subtraction amount” listed in column (d) for that range from the result in Step 3.
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39. 2012 Computation Worksheet—Line 44
EXHIBIT 18-4
2012 Computation Worksheet—Line 44
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40. Tax Liability for Taxable Income of $100,000 or Above
Felix had taxable income of $123,545 last year. If he files as head of household, what is his tax liability?
Using Exhibit 18-4, Section D:
Taxable income
× Tax rate
Computed tax
– Subtraction amount
Tax liability
$123,545.00
.28
34,592.60
9,024.00
$ 25,568.60
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41. To calculate an individual’s tax refund or amount of tax owed
Step 1 Subtract total credits from the tax liability.
Step 2 Add total of other taxes to the tax liability to get total tax.
Step 3 If total payments are greater than total tax, a refund of the difference is due. If total payments are less than total tax, the difference is the tax owed.
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a publicly accessible website, in whole or in part.

42. An Individual’s Tax Refund or Amount of Tax Owed Example
Krista had a tax liability of $14,600 last year. In addition, she owed other taxes of $2,336. She was entitled to a child care credit of $668 and a foreign tax credit of $1,719. If her employer withheld $270 per week for 52 weeks, does Krista qualify for a refund or owe more taxes? How much?
$ Tax liability
Other taxes owed
Child care credit
Foreign tax credit
Total tax
$ 14,600
2,336
668
1,719
$ 14,549
Employer withheld =
270 ×
52 =
$14,040
Tax owed = Total tax – Payments
Tax owed = 14,549
– 14,040 =
$509
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43. To calculate Corporate income tax and net income after taxes
Step 1 Using the Corporate Tax Rate Schedule, read down the “Over—” and “But not over—” columns to find the range containing the taxable income of the corporation.
Step 2 Subtract the lower number of the range from the taxable income.
Step 3 Multiply the result from Step 2 by the tax rate listed for that range.
Step 4 Calculate the tax liability by adding the result from Step 3 to the dollar amount of tax indicated for that range.
Step 5 Calculate income after taxes by subtracting the tax liability from the net income before taxes.
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44. Corporate Tax Rate Schedule
EXHIBIT 18-6
Corporate Tax Rate Schedule
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45. Calculating Corporate Income Tax and Net Income after Taxes Example
A firm had taxable income of $311,200 last year. Use the Corporate Tax Rate Schedule to calculate the amount of income tax due and the company’s net income after taxes.
Using Corporate Tax Rate Schedule, Exhibit 18-6:
Income before taxes
Lower number on range $
× Tax rate
Computed tax
Amount of tax
$ Tax liability
$ 311,200
$ Income before taxes
Tax liability
$ Net income after tax
311,200
100,000
104,618
211,200
206,582
.39
82,368
22,250
$104,618
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46. Chapter Review Problem 1
Dimitri purchased an oven for $ The delivery charge was $69. The state sales tax rate is 6½% and the city tax is 1.4%. Calculate the total amount of sale tax and the total purchase price.
Sales tax = Selling price × Sales tax rate
Sales tax = ×
( ) =
$61.62
Total purchase price = Selling price + Sales tax + Other charges
Total purchase price =
69.00 =
$910.61
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47. Chapter Review Problem 2
Isabelle’s home has a market value of $238,000. The assessment rate in the county is 65% and the tax rate is 1.944%. What is the assessed value of the home and the amount of the property tax?
Assessed value = Purchase price x Assessment rate
Assessed value =
238,000 x
.65 =
$154,700
Property tax = Assessed value x Tax rate
Property tax =
154,700 x =
$3,007.37
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