Personal Finance: Module 1 Lesson 4

Tolls Along the Way

Taxes, after all,

are dues that we pay for the

privileges of membership in an

organized society.

Franklin D. Roosevelt, 32nd President

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“

”

What are Taxes?

Taxes are required monetary payments to

a government.

Governments uses taxes

to pay for and to provide

services designed to protect

and enhance the life of its

citizens.

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The History of Taxes

Systems for collecting taxes date back

to ancient civilization.

Taxation of income in the United States

began in the 19th century.

The Internal Revenue Service

(IRS) is the tax collection agency

for the U.S. federal government.

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Why do we pay taxes? We pay taxes because the services they provide are

necessary and essential for all citizens.

The price of these services would be too high for most

citizens to provide these services just for their family!

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Your role as a taxpayer

Why Pay Taxes?

Progressive Tax System Based on the individual’s ability to pay

Lower income earners pay less tax

Income tax is an example of a progressive tax

Regressive Tax System

Tax percentage is same regardless of income

Places a greater tax burden on those with less income

Sales tax is an example of a regressive tax

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United States Tax Systems

Each branch of government usually collects a

separate set of taxes to fund it’s operations.

However, taxes collected at one level may also

be combined to help fund programs at another!

Federal (U.S.) State Local (county & city)

Who collects taxes?

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Property Taxes are paid by people who own property

(land, a home, or real estate).

Transaction Taxes are paid on goods and services.

o Sales Tax is charged when a consumer makes a purchase.

This tax is a percentage of the total price of the purchase.

o Excise Tax is charged on the purchase of specific goods

such as motor fuel, cigarettes, or alcohol. This tax is usually

included in the price of the item.

Taxes Collected by a County or City

What is taxed and why

Federal/State/Local Taxes

Tax Terms Withholdings – money that is required by

law to be deducted from an employee’s

pay Income Tax (Federal & State)* Social Security Tax Medicare Tax

Gross Income – employee’s total earnings

Net Pay (also called take-home pay) –

money remaining after withholdings and

other deductions are subtracted

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*Not all states collect a separate state income tax!

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Federal income tax is the largest tax amount

deducted or withheld from your paycheck.

The amount withheld is based on the employee’s

income and number of allowances.

Allowances reduce the amount of federal income

tax withheld from your paycheck.

Allowances are claimed when an employee completes the

required IRS Form W-4 Employee Withholding Allowance Certificate.

Federal Income Tax

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To view W-4 worksheet:Form W-4 Employee Withholding Allowance Certificate

Form W-4

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Most−but not all−states have an income tax.

State income tax is also withheld and reported on W-2.

If state requires it—also complete a state income tax

return it to your state’s Department of Revenue.

State income taxes fund

many of the same types

of programs and projects

as federal taxes!

State Income Tax

Additional Payroll Taxes

Social Security Tax provides income for retired

workers and their dependents as well as for the

disabled and their dependents.

Medicare Tax pays for health insurance to offset

the cost of medical care for retired persons

(and their spouses) who are eligible to receive

Social Security benefits.

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Example of a Paycheck StubEmployee

NameEmploye

e IDPay Period

John Doe 00258 2/10/13 – 2/23/13

Earnings Hours Rate Gross Income

Year-To-Date

Regular 80 $15.00 $1,200.00 $4,800.00

Taxes

Federal Income Tax

$74.54 $298.16

Social Security $48.30 $193.20

Medicare $16.68 $66.70

State Income Tax $29.76 $119.04

Benefit Deductions

Health Insurance $120.00 $480.00

Dental Insurance $10.00 $40.00

Life Insurance $15.00 $60.00

401(k) Retirement Plan

$50.00 $200.00

Net Income $832.90 $3,331.60

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Links and Activities

These links and activities help you understand more

about withholdings and other payroll deductions:

Payroll Taxes and Federal Income Tax Withholding

What Ate My Paycheck?

Read and Interpret Pay Stubs (pages 5-7)

Understanding My Pay Stub

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Filing Your Income TaxesForm W-2 Wage and Tax Statement

Lesson with worksheetsPayroll Deductions and Earning Statements

Shows taxable income actually received (#1)

Shows total amount of income taxes already withheld (#2)

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Filing Your Income Taxes

Once you receive your W-2 form, the IRS expects you to:

1. Fill out an income tax return and calculate the correct

amount of federal income tax that should be owed (or

refunded).

2. File it (electronically or by mail) by the deadline

(which usually falls on April 15).

Wage and tip income

Using Your W-2

to File Your 1040EZ

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Filing Your Income Taxes

1040

1040EZ

1040A

Tax basics

The Final Step: Filing Taxes

Tax Return Forms

? ?

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Taxes, after all, are dues that we

pay for the privileges of membership

in an organized society.

Franklin D. Roosevelt, 32nd President

What do you think he meant by “an organized society”?

Without taxes, where would you go to school? What

would you do with your trash? Who would build the

roads, bridges, and interstates you travel on?

“

”

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