Chapter 5 TAXES

Government Spending

Power To Influence

• Government use tax to do 2 things– Generate Revenue

– Influence consumer buying decisions• Example: “Sin Tax”

• The government taxes certain products to discourage their use because they are harmful to our bodies even though they are legal

• Millions of Americans buy and use these products anyway

• The government taxes these products higher because it is a choice to use them- not everyone uses them.

Government Spending

• The federal government spends $2.65 trillion each year– Roughly $15,000 for every person who lives

in the United States• Most of the government’s spending pays

for goods and services that benefit all Americans.– Public Goods: Roads, schools, national

defense, and services of various regulatory agencies.

Taxes Fund Public Goods and Services

National Defense

State and Local Police

Net Interest on Debt

Social Security, Medicare, and Retirement

Public Education

Foods Stamps and Unemployment

(Social Programs)

23%

36%

19%

12%2%

8%

Goods and Services State and Local Government Provide…

• Building and maintaining roads

• Operating police and fire protection system

• Maintaining a criminal justice system

• Building and staffing schools

• Building and operating state colleges and universities

• Supporting medical facilities

• Constructing and operating sewage treatment plants

• Operating unemployment compensation programs

State and Local Gov’t Regulations

• Rules are written into laws enforced by state and local government– Example:

• In order to drive, you must have a drivers license• To build a house you must have a permit

• These create order and safety in the state and local communities

Sources of Government Income

Personal Income Tax

39%

SS/ Medicare32%

Corporate Tax13%

Misc. Tax7%

Borrowing- Deficit9%

Individuals Contributions

• Social Security– Wages are taxed at a rate of 6.2%– Collected on gross income

• Medicare– Wages are taxes at a rate of 1.45%

• The total most people pay for SS and Medicare is 7.65% of gross income

Employer Contribution

• For each dollar you earn, your employer will pay 15.3 cents to the government for social security and Medicare taxes.

Principles Of Taxation

• A law that states every taxpayer should be treated equally

• This does NOT mean all taxpayers should pay the same amount.

• This law states that some people should pay MORE than others.

Benefit Principle

• States that those who use a good or service provided by the government should pay for it.

– Example: Toll Roads• Those who drive on the road pays tolls.

Ability To Pay Principle

• Those who have larger incomes should pay a larger share of what they receive.– Example: Federal Income Tax

Taxes and Income- 3 ways

• Progressive Tax• Regressive Tax• Proportional Tax

Progressive Tax

• Takes a larger share of income as income grows– Federal income tax- The more you MAKE

the more you PAY

Regressive Tax

• Takes a smaller portion of income as income grows– Sales tax– Lauren makes $16,000/ year– Sal makes $45,000/ year– They both buy a car for $10,000 and have to

pay 8% ($800) in sales tax.– $800 It is 5% of Laurens income but only

1.8% of Sal’s income

Proportional Tax

• Takes the same share of ALL incomes.

• This would occur if people were ALL taxed for example 10% of their income for something.

• This does not exist in our economy.

How Taxes Are Collected

• Direct Tax– Paid directly to government– Ex: Income and Property Tax

• Indirect Tax– Included in cost of goods and services– Part of rent is used for landlord to pay property tax

• Pay-As-You-Earn Taxes– Paid as you earn income– Federal Withholding Tax

Types of Taxes

• Income Taxes• Sales Tax• Property Tax• Excise Tax• Estate and Gift Tax• Business and License Tax

Types Of Taxes

• Income taxes– Withheld from paycheck– Ex. Federal, state, local taxes– Illinois State - 5.0%– Local taxes ~ 1-2%

• Sales Taxes– Taxes added to price of goods and services– Some states don’t have sales tax but they pay more

money in property or income tax to off set what they lose in state tax.

Types Of Taxes

• Property Tax– Taxes on the value of real property– Added to home or loan payments

• Excise Tax– Collected on the sale of specific goods and services

such as tobacco, gasoline, and alcoholic beverages

– Unlike sales tax, excise tax is included in the price charged to customers.

– Ex, when you pay for gas- the price includes both federal and state excise tax.

Types Of Taxes

• Estate Tax– Property tax given to someone legally entitled to an

estate when a person dies.

• Gift Tax– Taxes the giver of gifts may pay– Federal law allows people to make some gifts that

are not taxes– Maximum value of gifts that were not taxed was

$12,000 in 2008.

Types Of Taxes

• Business or license tax– Paid to receive licensing or a permit to

operate a type of business– Ex. To be a teacher you have to take

certification test which you pay for.

Customs Duties and Tariffs

• Customs Duties or Tariffs– Controls the flow of products imported into

the united states– This results in items from abroad being sold

at higher prices than they otherwise would be.

Payroll Taxes

• A tax placed on income earned by individuals

• Largest form of revenue received by government

• Paid to the government by individual employees and their employers.– The money from these taxes fund Medicare and Social

Security

• Amount taken out of each check varies– based on a person’s annual earnings

Income Taxes

• Taxes you pay on most types of income you receive

• The amount paid by each individual varies based on their income

• The money from these taxes go into a general fund

Pay Stub

Largest Deduction

Social Security

FICA

• Federal Insurance Contribution Act– A law that requires workers and their employers to

contribute to Social Security and Medicare

• Social Security is a program that helps provide benefits to those who have retired

• Medicare provides health insurance for seniors over the age of 65 as well as certain people with disabilities

Withholdings

• Money that is withheld from your paycheck

• Enables government to collect taxes at a steady rate (each pay period) instead of at the end of the year

• You pay little tax with each paycheck, so you don’t face a huge tax bill at the end of the year

Gross Income/Gross Pay

• Amount earned before taxes have been withheld

Net Income/ Net Pay

• Amount you receive after withholdings are subtracted from your gross pay

Gross Income vs. Net Income

Gross income

Net Income

Social Security

Medical/Dental insurance

401K / Retirement account

State taxes/withholdings

Medicare

Paystub Activity

• Pay Stub Activity

– Work on Paystub Activity 1 as class

– Complete Paystub 2 individually

Forms, Forms, FORMS!

W-4 W-2 1099 1040EZ

Determines how much to withhold from your paycheck.

Given by your employer. Summary of how much money you made at a particular company and how much tax was taken out of your paycheck.

Form you receive at the end of the year that shows if you made money (interest) on an savings accounts.Also can be given if you were paid money (over $600) but not taxed.

Tax form filled out at the end of the year to determine if you get a refund or owe money.

W-4 Form

• The form that is filled out when you are first hired at a company

• Provides information your employer needs to determine how much to withhold from your paycheck

• http://www.irs.gov/pub/irs-pdf/fw4.pdf

Allowances

• A number that reduces the amount of income withheld from your paycheck

• Claiming a lower number on your W-4 form will result in – MORE money being withheld from your paycheck– may mean you will get back more money at the end of the year.

• The lowest number you can claim is 0

• Highest you can go up to is 9– you need to show proof to the IRS for this

IRS

• Federal agency that collects income taxes– Agency in the department of treasury– Headquarters: Washington D.C.

• Each year the IRS calls thousands of taxpayers for an audit– Examination of their tax return

Tax Return

• Set of forms a taxpayer uses to calculate their obligations (what they owe/don’t owe)

• This is the only way you can get money back. (Usually during Feb-April)

• You are responsible for information on tax return, if it is incorrect you are liable!

Tax Refund

• If your tax return shows you paid more money in withholdings than you owed, you will receive a refund

Taxes Owed

• If your tax return shows that your withholdings were not enough to cover the taxes you owe, you must pay the remaining amount to the government.

W-2 Form

• Summary of your earnings and withholdings for the year.

• You will receive a W-2 for each job you held during the year.

• When you file a tax return, you must include your W-2!

W-2 FormEmployer

Employee

Wages/TipsFed. Income

Tax

1099 Form

• If you have a savings account or any other investments where you earn money- you will receive a 1099 Form at the end of the year.

• Statement of the interest your bank paid on your savings that year

Tax Return Forms

• Forms to file your individual federal taxes– 1040– 1040A– 1040EZ

1040EZ

• Simplest Tax Return Form

• To qualify the following must be true:– You are single or married filing jointly with spouse– You have no dependents– You and your spouse are under 65 yrs – Neither you nor your spouse is blind– Your taxable income is less than $100,000– You have earned no more than $1,500 in interest– You have no other income besides wages, tips,

scholarships, or unemployment

Dependent

• Dependent– People who are supported financially

• Independent– Someone who is not supported by anyone

else financially

Deductions

• Expenses the law allows you to subtract from your adjusted gross income to determine you taxable income

• 4 kinds of deductions:

1. Business Deductions• Traveling, meals, gifts, use of car, health insurance, use of home, education,

employee pay, etc.

2. Adjustments• IRS or Alimony payments

3. Itemized/ Standard

4. Exemptions• You, your spouse, children

Examples Of Itemized Deductions

• Medical/dental expenses

• State and local taxes

• Property tax

• Mortgage interest

• Gifts to charity

• Losses from theft or property damage

• Moving expenses

• Investment expenses

You cannot use the 1040EZ

form if you are choosing to itemize your deductions!

Standard Deduction

• Specific dollar amount that you are allowed to subtract from your taxable income

Standard Vs. Itemized Deduction

• Standard– Set dollar amount- $9,500 (2012)

• Itemized– Allows you to list expenses– If your expenses add up to MORE than what

the standard deduction would be, then you should choose to Itemize your deductions

You have to choose one OR the other

YOU CANNOT DO BOTH!

Social Security Number

• Unique number assigned to you by the federal government

• No one else has the same number

• The government uses this number throughout your life to:– Identify you as a taxpayer– Keep track of your earnings and tax records– Pay you social security benefit when you reach

retirement

Taxable Income

• Income figure used to determine your taxes

How to fill out a 1040EZ!

Things you will need….

• 1040 EZ Form• W-2 Form

– This is REQUIRED in order to fill out your 1040EZ

• 1099 Form – If you have one!

• Tax Table

1040 EZ Scenario

• Jonathan Jackson– What items do you need to complete his

1040EZ?– Determine whether he is an independent or

a dependent– Complete the 1040EZ and determine if he is

going to receive a refund!

Step # 1: Fill In Your Basic Info!

• Name (first and last)• Address• Social Security Number

Step #1-4

1. Fill in Total Wages, Salaries, Tips

2. Fill in Taxable Interest Income– From 1099 form (interest from bank account)

3. Fill in Unemployment Compensations• Add them all up and you will get… -

Adjusted Gross Income

Step # 5

• If you are an independent and single you will put $9,500 on line 5

• If you are an independent, you will flip your sheet over to the back and fill in worksheet 5!

Step # 6

• Subtract like 5 FROM line 4• This is your taxable Income!

Step # 7 -Federal Income Tax Withheld

• This will be found on your W-2

Step #8 Earned Income Credit

• Workers with low incomes will qualify

• **We will not be spending time on this…

• Leave it blank!

Step # 9- Total Payments & Credit

• Add up the following:– Federal Income Tax Withheld (#7)– Earned Income Credit (#8)

• This will result in the total amount of your taxes that you have ALREADY PAID!

Step # 10- Tax Table

• http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

• Use the tax table to determine how much tax you can subtract from your total payments and credits

Step # 10 Continued…

Step # 11– Refund?

• If line 9 is larger than line 10, subtract line 10 from line 9.

This is the refund!

$648.00!!