 Hello and welcome to the session in which you would learn how to compute our taxes. There are two methods to compute your taxes. One way is to do it is through the tax table and the other way is through the tax rate schedule. When do you use the tax tables and when do you use the tax rate schedule? You can use the tax table if your income is below 100,000 and to illustrate this point I'm going to be using the 2022 tax table. So you might be looking at this recording in 2026. It does not make a difference. The concept is the same. How does it work? Well what you will do if it's less than 100,000 let's assume your taxable income is 55,275. This is your taxable income. You will go and you will figure out where is 55,000. Well we don't have 55,000 on this slide. Let's assume it's 51,360. That's your taxable income. So you will go to 51,360. So 51,350 to 51,400. Then you determine your filing status. Let's assume you're single. Your taxes will be 6,920. It's as simple as that. You would look up where do you fall? 51,360 falls between at least 51,350 less than 51,400 and that's your taxes. Now if you are married filing jointly, married filing separately, head of household you will have a different amount. Now what happens if your taxable income is more than 100,000? Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. If your taxable income is more than 100,000 you'll have to use the tax rate schedule. And here we're going to learn about the marginal tax rate versus the average tax rate. And our system is a progressive tax system so the more you make the more you pay. Now bear in mind this is again 2022 tax schedule. You could be looking at this recording in 2026, 2027. Those percentages will be different. The brackets will be different but the concept will be the same. So let's first read the table then we will work a quick example to illustrate the concept. And for the purpose of this illustration we are using a single taxpayer. If the taxable income starting from zero up to 10,275 well you'll pay any amount above zero up to this amount 10%. So if you make $10,000, $9,000 you pay 10%. It's as simple as that and your taxable will be $900. Then once your income, once your taxable income exceeds 10,275 up to $41,775 you are going to pay $1,027.50 plus 12% of the amount above $10,275. So how do you come up with this 10,1027? How did we come up with this? Remember up to 10,275 you pay 10% and this is going to give you $1027.50. So the tax bill here the way it's computed they're telling you how much you will need to pay up to 10,275 and any amount above 10,275 you will pay 12% and what you did you moved from one tax bracket from 10% to 12%. So this is how it works. Then it will work again and again as you go up you'll have to pay more taxes. The best way to illustrate this is to actually look at an example. Let's assume you are single and you have a taxable income of $134,000 and we're going to compute the tax bill, we're going to determine what's your marginal tax rate, what is your average tax rate? $134,000 and what you do is you will go to the bracket where this number falls. Again we're using a single individual and it falls right here. So if your taxable income is $134,000 your taxes will be $15,213.50 plus 24% of the amount above $89,075. So let's compute this amount, $134,000 minus $89,075. Let's compute this figure and this figure will be subject to how much will be subject to 24% and this amount is $44,925 we're going to multiply this by 24% and on this amount you will pay $10,782. Now your taxes are those two together, $10,782 plus $15,213.50 that's going to give us $25,995.50. So this is how we computed your taxes answering the first question. So we compute the taxes now we need to answer the following question, what is your marginal tax rate? Your marginal tax rate is the highest tax rate that you fall under, well the highest tax bracket is that you fell under based on 134 is 24%. It means any additional dollar you make you'll pay 24% on that additional dollar up until you hit a new tax bracket and you're not going to hit a new tax bracket until you reach $170,050. Once your taxable income exceeds that every additional dollar will be taxed at 32% and you will hit a new tax bracket and you will keep on going until you hit 37 which is the highest tax bracket. So this is what we mean by marginal tax rate or that's your tax bracket. What do we mean by your average tax rate? What is your average tax rate? Well let's think about this. You paid in total $25,995.50 and you paid this amount based on income of 134,000. If we take those two and we'll divide them if we take 25,995.50 divided by 134,000 your average is 19.4 so on average you paid so simply put if you take 134,000 times 19.4 let's take this number 134 exactly 134,000 times .1940 it's 19.3 it should be 25,996. Notice we come up to this number rounding you know 25,996 so on average each dollar you make you pay approximately a little bit less than 20% to the US government although your highest tax rate is 24 but for some amounts for some amounts you are paying 12 and 10 that's why it went down your average went down to 19.4. So here what we did is illustrated the difference between a marginal tax rate how to compute the marginal tax rate and the average tax rate it's very important to know the marginal tax rate versus the average the average will always be less than the marginal unless unless you are in the 0,10% bracket so your marginal and your average will be the same otherwise your average will be lower than the marginal because early on you pay less and because you pay less later on your average will be lower than your last tax bracket. What should you do now go to the four half lectures to practice more questions look at additional resources MCQs through false look at the notes that's going to help you understand this concept better marginal tax rate versus the average tax rate whether you are an accounting student enrolled agent or CPA candidate good luck study hard invest in yourself and stay safe.