Earning Money and Paying Taxes Professor Annette Nellen
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Transcript of Earning Money and Paying Taxes Professor Annette Nellen
Earning Money and Paying Taxes
Professor Annette Nellenhttp://www.cob.sjsu.edu/nellen_a/
Agenda
Why we have taxes What types of taxes we pay and how we pay
them Who pays taxes Where we pay taxes Some financial planning reminders regarding
taxes Seeking advice
Why we have taxes
“Taxes are what we pay for a civilized society.”
Oliver Wendell Holmes, former Justice of the US Supreme Court (1927)
IRS headquarters at 1111 Constitution Avenue in Washington DC
Purpose of taxes Primary purpose – raise funds for government operations Secondary purposes:
Change behavior – penalties (negative) and credits (positive) Examples:
Tax on cigarettes Penalty for paying your taxes late Tax credit for buying a hybrid car
Provide assistance and subsidies Examples:
Earned Income Tax Credit (EITC) Stimulus payments Home mortgage interest deduction Various deductions and tax credits for higher education
What types of taxes we pay and
how we pay them
ABC Department Store
10/13/09
Jeans $45.99Tax $ 4.25Total $50.24
Please come again!
Types of taxesType of tax Federal California San Jose
Income tax X X
Sales tax X X
Use tax X X
Property tax X
Excise taxes X X
Employment X X
Estate/gift X X
Business license X
Transient occupancy tax
X
Your paycheck
http://www.taxes.ca.gov/Income_Tax/paycheckind.shtml
Being self-employed
Many tax obligations: Quarterly estimated income tax payments to federal and
state governments (and some cities, such as NYC, have income taxes) Also owe self-employment tax (similar to what employees
pay for Social Security and Medicare taxes) Penalties if pay late or don’t pay enough
Business license tax If required to charge sales tax to customers, must register
with state to collect sales tax and file quarterly forms May be other types of taxes depending on your business
and where it operates
Who pays taxes
Federal taxes
IRS, Fiscal year 2007, http://www.irs.gov/pub/irs-pdf/i1040.pdf
California taxes
California Revenues
http://www.lao.ca.gov/2006/cal_facts/calfacts_budget_2006.pdf
Paying directly and indirectly
Per US Census Bureau Total state and local taxes paid as percent of
income for a family of 3 living in Los Angeles for 2006 $25,000 10.8% $50,000 9.9% $75,000 10.0% $100,000 9.7% $150,000 10.4%
[http://www.census.gov/compendia/statab/tables/09s0429.pdf]
Where we pay taxes - 1
Income taxes – paid through withholding from paychecks or estimated tax payments, but also file Form 1040 (federal) or Form 540 (California) annually.
Sales tax – when we buy something; seller collects
Use tax – when we buy a taxable item but were not charged sales tax. Pay the use tax on your California income tax form (540)
Where we pay taxes - 2
Property taxes – County assessor sends us a bill OR you may have arranged for your mortgage lender to handle payment
Business taxes Various forms Federal + State(s) + cities and counties and
special districts
Financial Planning Recordkeeping – so can file accurate tax return
Question – what to keep track of? Don’t forget about the effect of taxes on financial plans:
Retirement savings (usually not taxed currently, but taxed when withdrawn at retirement)
Comparing different investment strategies – look at after-tax rates of return.
Tax aspects of finances Look into available tax breaks (tax rules that will reduce your
taxes) Be sure taxes are paid on time. Don’t forget that you may be directly liable for more than income
taxes. EX – business owner, including a self-employed consultant, probably
owes business license tax to city(ies) in which they work
Advice from the IRS
“After you enter the workforce, it is essential to keep accurate financial records.” http://www.irs.gov/app/understandingTaxes/stude
nt/whys_thm06_les02.jsp IRS website has lots of helpful information to
explain taxes and tax effect of investments and retirement plans + many publications in easy-to-read style. www.irs.gov
Seeking advice
Not everyone who prepares returns and offers financial advice for a living knows what they are talking about. There are many unscrupulous tax preparers out there. Ask about their experience and certification. If they tell you something that sounds odd – do research on
your own or get a new preparer or adviser.
Be savvy enough (such as by taking this class) so you can ask good questions
Tax return preparers
CPAs and attorneys - licensed and follow a code of conduct; have varying degrees of tax knowledge depending on their area of practice
Enrolled agents (EA) – certified by the IRS; must pass a tax exam and take continuing education
California requires return preparers to pass a 60-hour course and post a bond. Thereafter, must get 20 hours of annual education.
IRS currently working on a plan that may require all paid tax return preparers to be registered or certified in some way.