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5.3 CALCULATE: What Affects How Much We Pay in Taxes?

Last updated 12 months ago
26 questions

Everyone has to pay taxes, but how much you pay depends on a lot of factors. In this activity, you will explore how three factors (your salary, the state you live in, and the cost of living) can have a big impact on how much you pay in taxes and how much you have left over to spend on yourself.

Day 1 1/17/23

Part I: Your Salary

The biggest variable in the amount of taxes you pay is how much you make. Use Nerdwallet's Federal Income Tax Calculator to compare the two individuals below and see how their tax burdens differ due to a large difference in salary.
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Using Nerdwallet Federal Income Tax Calculator, what is the estimate for much Marcel owes in taxes?

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What is Marcel's taxable income?

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What is Marcel's effective tax rate?

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Using Nerdwallet Federal Income Tax Calculator, what is the estimate for much Stephanie owes in taxes?

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What is Stephanie's taxable income?

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What is Stephanie's effective tax rate?

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10

Why are Marcel’s and Stephanie’s taxable incomes less than their annual salaries?

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10

What is the difference in their tax burdens?

Part II a: What State You Live In

Another factor that greatly affects your taxes is the state you live in. Different states have different tax rates for a variety of taxes. In this activity, we will focus exclusively on state income tax rates.
To do this, we are going to use the State Tax Calculator. Follow these directions:
  • Click on the correct state
  • Enter the tax year 2022, filing status, and the salary value you want to see the income tax for. Leave all other fields blank.
  • Under the “Yearly” column, find the value for “[State Name] State Income Tax”

Marcel

First, let’s assume that Marcel lives in California.
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How much would Marcel pay in state income tax?

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Now, what if Marcel lived in Oregon instead?
How much would Marcel now pay in state income tax?

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How much more is Marcel paying if he lives in Oregon? (Federal taxes are the same in each state)

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What percentage of his salary is Marcel sacrificing if he lives in Oregon instead of California?
(State tax difference/$35,000)*100

Part II b: What State You Live In

Another factor that greatly affects your taxes is the state you live in. Different states have different tax rates for a variety of taxes. In this activity, we will focus exclusively on state income tax rates.
To do this, we are going to use the State Tax Calculator. Follow these directions:
  • Click on the correct state
  • Enter the tax year 2022, filing status, and the salary value you want to see the income tax for. Leave all other fields blank.
  • Under the “Yearly” column, find the value for “[State Name] State Income Tax”

Stephanie

First, let’s assume that Stephanie lives in California.
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5

How much would Stephanie pay in state income tax?

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5

Now, what if Stephanie lived in Oregon instead?

How much would Stephanie now pay in state income tax?

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5

How much more is Stephanie paying if he lives in Oregon? (Federal taxes are the same in each state)

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What percentage of his salary is Stephanie sacrificing if she lives in Oregon instead of California?
(State tax difference/$75,000)*100

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Was the impact greater for Marcel or Stephanie? What does that tell you about who is affected more by states with higher taxes, the rich or the poor?

Day 2 1/18/23

Part III: The Cost of Living

While taxes vary by state, another factor to keep in mind is the cost of living, defined as “the amount of money needed to sustain a certain level of living.” It includes things like the cost of housing, food, transportation, and more


In this activity, let’s compare how costs vary between different locations using NerdWallet's Cost of Living Calculator. To compare cost of living:
  • Input one location in the “Current city” box
  • Input the other location in the “New city” box
  • Enter your current income
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Let’s use Marcel as our test case.
Let’s say that Marcel was trying to see the difference between living in San Francisco, CA and Portland, OR. Use the Cost of Living Calculator to determine the price of a few items in each place and the difference in costs.

Remember, he makes $35,000/year.

Cost of Living in San Francisco, Ca

2-Bed Apt. Rent
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Gasoline
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Dozen Eggs
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Gallon of Milk
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Movie ticket
_______
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Repeat the process from question 18 to find out how much Marcel will be paying in Portland, Oregon.

Remember, he makes $35,000/year.

Cost of Living in Portland, Oregon

2-Bed Apt. Rent
_______
Gasoline
_______
Dozen Eggs
_______
Gallon of Milk
_______
Movie ticket
_______
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Find the difference in price between San Francisco and Portland.

The difference in Price for a:
2-Bed Apt. Rent
_______
Gasoline
_______
Dozen Eggs
_______
Gallon of Milk
_______
Movie ticket
_______
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Which city is more expensive to live in?

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10

At the top of the page, you see a sentence that says ”To maintain your standard of living in Portland, OR, you’ll need a household income of…” followed by a specific salary. What does this mean?

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If Marcel was still making $35,000 in Portland, would he be able to afford a higher standard of living? Or would he need to lower his standard of living? How do you know?

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Pick another place you might be interested in moving to and find out what the cost of living looks like. Use this link if you pick someplace outside the US.

What place did you choose to live in?
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Cost of living:

2-Bed or 3-Bed Apt. Rent
_______
Gasoline
_______
Dozen Eggs
_______
Gallon of Milk
_______
Movie ticket
_______
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Based on where you decided to live, how much would you be paying in rent for the year on average?

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20

What kind of place would you prefer to live in if you had to choose: a state with zero/low state income tax or an area with a low cost of living? Why?