 Hello, and welcome to the session in which we would learn a very important topic, which is how to compute the tax liability using both the tax tables as well as the tax rate schedule. So as an accounting student, especially taking this introductory accounting course, you need to understand how to compute the taxes using both. I'll also show you how to find out what's your marginal tax rate and average or effective tax rate. You can find those topics before, but I will apply them in this example as well. Before I start, I would like to remind you that if you are a CPA candidate or an accounting student, I strongly suggest you check out my website, farhatlectures.com. If you're a CPA candidate, I don't replace your Becker, Roger, Gleam, or Wiley. I can be a useful addition to your CPA review course. I can add those 10 to 15 extra points that's going to help you get to your CPA. How so? I explain the material differently than your CPA review course. Your CPA review course works fast, assumes you know the knowledge. I don't assume anything. I start from scratch. Check out one monthly subscription. That's your risk. Your return is passing the exam. I do have other accounting, audit, governmental costs, advance other courses as well. Please connect with me on LinkedIn and you can check out my LinkedIn recommendation. Like this recording, share it on YouTube, connect with me on Instagram, and follow me on Facebook. So how do we compute tax liability using both the tax tables as well as the tax rate schedule? Now before I do that, what I have to do is I have to show you where do you find the tax tables before you know how to use them. You have to know where to find them. Now I'm going to show you where to find them in a typical textbook. Now if you still have any issues, you should talk to your professor. Tell them, where do I find this tax table or the tax rate schedule? They're both on the IRS website, but most likely if you're using a textbook, they will be in your textbook summer. So I'm going to show you where in your textbook they would be typically found. For the sake of illustration, in this textbook that I am using, the tax tables can be found in appendix D IRS tax table. So these are the tax table appendix D for the purpose of what I'm showing you. Now in your textbook, it could be appendix A, it could be appendix B, it could be at the end of the chapter. I really would not know, okay? But it's someplace in your textbook and I'm going to show you how to use it in a moment. Notice here you have, although you can't see it very well, but I'm sure you can barely see it. For example, it says if line 15 is your, if your taxable income is at least 3,000, but between 3,000 and 3,050, your taxes, if you are single, 303, married filings separately 303, married filings separately 303, let's go to a separate where there is a difference between them. Well, let's assume you are, you make between 30,000 and 30,050. If you are single, your tax will be 3,406, married filings only 3,208. If you are married filings separately 3,406, if you're ahead of a household 3,321. So this is how you would find your tax based on this bracket. For example, if you're between, if your taxable income between 30 and 30,500, this is how you will find it. And this tax table will go up to 100,000. If you are more than 100,000, you have to use, you have to use another, another, another source, which is the federal tax rate schedule. And again, it will be provided for you and my textbook, it's appendix F and this is what it looks like. There is one for, if you are single, you would use the one for single. I will show you how I'm going to be using it. One for married filing jointly, quantify widow or widower, married filing separately, head of a household. Now, the first thing you want to make sure is you're selecting the right table, okay? Because what happened is some students, they made the mistake of finding the answer in the wrong table. So if the tax, if the person that you're finding the answer with is filing single, you would use this table. Married filing jointly, you would use this table. So on and so forth. Now, I'm going to, I'm going to go back and show you how to use those tables to solve the problems that you're going to have to deal with in your course and to prepare you for the scores as well as for the CPA exam. So let's go back to this problem to illustrate how to compute the taxes. We have Homer and Marge are married and will file a joint return. Homer has a W2 income of $38,588, Marge has a W2 income of $49,438. What is their tax liability? Now, you have to be careful. They're giving you the W2 income. They're not giving you their taxable income. So what you have to do first is take $38,588 plus $49,381. That's their income together, okay? But what we have to do is after we compute the income for them, let me just keep this calculator here because we are going to use it, $38,588 plus $49, let me reset this and then go through the plus. So we're going to have $38,588 plus $49,381. So their total taxable income together is $87,969, I'm sorry, that's their total income. Now we have to deduct the standard deduction and the standard deduction for married, fighting jointly for married, fighting jointly happens to be $24,800 for year 2020 because we're dealing with year 2020. Now this could be different. If you're doing this in a different year, make sure you would use a different standard deduction. So I'm going to deduct from their income, the standard deduction of $24,800 and that's going to give me a taxable income of $63,169. This is their, we call this their taxable income, okay? This was their total income. This was their total income and this was the standard deduction, which is a deduction giving based on your filing status and they told us their married, fighting jointly. Now we haven't answered any questions yet. Now we have to find out what is their tax liability, how much taxes do they owe using thirsty tax tables. So again, I snipped the tax table and they are at the $63,169, so I'm going to go up here and this is the $63,000. I'm going to go $63,000, so they're between $63,150 and $63,200, they're in this bracket right here. They're married, fighting jointly, therefore their tax bill is $7,186, so $7,186. That's it. They're in this, they're in between those two and $7,186, therefore for the first answer from the tax table their bill is $7,186. Now I'm going to show you how to do the same computation using the tax rate schedule. Now with the tax rate schedule I snipped it and I snipped two, so I'm going to be using this tax, this table, this table and the way it works is this, remember their taxable income is $63,169. Now here's how it works. The first $19,000, so their income from zero to $19,750, so from zero to $19,750 they will pay 10% on that, so let's say $19,750 times 10% and that's going to, they'll be responsible for $1,975 for this first amount. The amount they earned above $19,750 up to $80,250 they're going to have to pay the $19,75 that I just computed plus, so the $19,75 plus 12% of the amount in access of $19,750. So look, so they have in total $63,169 of this amount, $169 of this amount, I'm going to use a different color to show you that of this amount $19,750 was already taxed at a rate of 10%, so I'm going to deduct from this amount $19,750. The remaining is $43,419. Now this amount it's going to be taxed in the next bracket and maybe it might exceed the next bracket, but look, the next bracket and what I mean by the next bracket, let me highlight the next bracket, I'm going to highlight the, this is the next bracket and let me show you how much, how big is that bracket, so this bracket is between $19,750 and $80,000, so $80,250 minus $19,750, the next bracket, the next bracket, this bracket here is, oops, let me go back, this bracket here and what I mean by bracket is as long as you are below this amount, $60,500, the difference between those two, as long as you don't make more than $60,500, okay, you're going to be taxed, your tax will be the previous amount plus 12% of the amount in access of this and notice the remaining to be taxed is only $43,412, so this is the amount remaining that need to be taxed and this amount, how much are we going to pay on this amount, 12%, this is the remaining amount, okay, let's do this, so I just wanted to show you that the next $60,500 will be taxed at 12%, but they're below this amount, what remain is $43,419, let's assume the remaining was $100,000 then let's assume the remaining was $100,000, then $60,500 will be taxed at 12% and any extra will go into the third bracket, okay, so now $43,000, $43,419 and we're going to multiply this by 0.12 and that's equal to $5,210.28, but remember we're going to have to add those two numbers, it's $1,975, this number plus this number, let's add them together, plus $19.75 and that's going to give us $7,185.28, so according to the tax, according to this computation, the tax rate schedule, the tax bill will be $71.85.28, so according to the tax schedule, $71.85.28, the difference is because there's, you know, there will be some difference because the tax rate schedule, it gives you between, you know, 60, the tax rate schedule will give you between $63,150, the tax between and $63,200, so it's going to give the, it's going to compute the tax based on the mid-range, that's why there's a slight difference between the two, in case you're wondering why the tax rate schedule is more accurate because you will compute this exactly per dollar amount, okay, now so that's that, so we computed the tax liability which is you need to know how to do this, which is you need to know how to do this, if I ask you what is their marginal tax rate, what's their marginal tax rate, their marginal tax rate is based on the last dollar they earn, how much was the last dollar was taxed at, let's go back down here, the last dollar was taxed at 12%, therefore we say their marginal tax rate is 12% because they're in the 12% tax bracket, therefore their marginal tax rate is 12%, their marginal tax rate is 12%. What is their average tax rate? Well, their average tax rate is how much that they have to pay taxes based on their taxable income, well we're going to go with the tax rate schedule, they have to pay 71, they're responsible for 71.85.28 and their taxable income is 63.169, now what we can do is we can find out what's their average or effective tax rate, effective tax rate 71.85 divided by 63.169 and their average tax rate is 11.37 and hopefully the average tax rate makes sense 11.37 and why did I say it has to make sense? It has to be less than 12 because that's the highest and remember they paid some money on 10% and they paid some taxes based on 12%, therefore it has to be in the middle but remember they paid more toward 12%, therefore 11.37 makes sense, makes sense. So this is how we compute the average or effective tax rate, so remember you need to know the difference between the marginal during the 12% marginal rate and here their marginal rate and their average rate are very close because they did not really deviate a lot from the, deviate a lot, you know, between they went from 10% marginal tax rate to 12 and they stopped there, so there's not much difference between 10 and 12, that's why the average is between the two and very close to the marginal, okay? So that's basically how we do the computation. Now again, how would you learn how to do, how to do the computation? You work exercises, you work practices, I just showed you how to do this, so you have to practice more exercises using the tables. For example, if somebody is making, if their taxable income is 70,000, you have to go through the same thing, the first 17th and 19,750, they all pay 10%, well actually I went through this step by step, but really you don't have to, I showed you this step by step, actually let me show you how to compute this, let's assume someone's taxable income is 70,000, you don't have to do it the way I did it, the way I did it, I just wanted to show you the, how we come up with this 17, 1975. So if someone's taxable income is 70,000, you don't have to go through every step, you would say 70,000 belongs to this bracket here, 70,000 is between 19,750 and 80,250, so what you do is, you would say my taxes will be 1,975, which is, I showed you how to do this, plus the amount and access of 19,750. Now you say, okay, 70,000 minus 19,750, let's do this computation, I will do it on my phone, it's much easier than using the calculator on the computer because it's the, the keys are very small, so I'm going to take 70,000 minus 19,750 minus 1,9750 and that's going to give me 50,250 and that amount is subject to 12% times 0.12 and that's equal to $6,030. Therefore, their tax will be 1975 plus $6,030 plus 1975 and their tax liability will be $8,005. Same concept will apply, if I told you someone's taxable income is 100 and, let me make it 180,000. If someone is 180,000 is their taxable income, they belong in this tax bracket. The marginal rate, it's going to be 24% and what you do, it's, you would say it's 29,211, right here, plus the amount and access of 171,171,50, so 171,50, therefore I'm going to take 180,000 minus 171,50, let me do that, find that access minus 171,50 and that's going to give me $8,950, therefore it's $29,211 plus $8,950 and their total tax will be $38,161. So what's their marginal tax rate? Their marginal tax rate is 24%. They're in the 24% tax bracket. So this is how you find the tax using the tax rate schedule, the tax rate schedule, which is more accurate than the tax table. But for your homework, make sure to follow what they're asking you. Are you being asked to compute the number using the tax table or are you being asked to use the tax rate schedule to different computation? At the end of this recording, I would like to remind you to check out my website for head lecturers.com for additional resources, especially if you are a CPA candidate. Good luck, study hard and stay safe.