Tax Unit Objective:Learn how the government

taxes the US worker, what types of taxes there are and how to fill out a tax form

Targets: State the type of taxes and how income level effects how much you may pay.

The Taxes People Pay 52 Types at state and local level in Michigan

Income Tax Earned (and unearned) income is subject to taxation

Social Security Tax 6.2% of income is paid

Medicare Tax 1.45% of income – no income cap

State Income Tax Varies state to state

TX and FL no state income tax

Sales Tax Paying a % of money on goods and services

Property Tax – based on value of property owned

Other Taxes

Excise or Luxury or Sin Tax: tax paid when buy certain products, often deemed dangerous or unnecessary Tanning, 10% Gasoline Smoking - $0.10 a cigarette or $2 a pack

Use Tax: applies to purchases when sales tax is not charged (6%) Buy car not from a dealer Renting rooms

Relationship of Taxes to Income Proportional or Flat taxes

TAKING THE SAME % OUT OF EVERYONE’S INCOME: Rate stays the same

Example: A person who earns $25,000 paying the same rate as one who earns $75,000. Example: MI State Income Tax – 4.35%

Relationship of Taxes to Income

Progressive taxes People with higher incomes pay a higher rate of

taxation Example: US Personal Income Tax

Regressive taxes Tax which takes a larger % of low income salaries

Example: Sales tax (Charge same % for all purchases) Persons with incomes of 25K and 100K pays

SAME $ of tax (if buy same item) Also – Social Security Tax !!

Tax terminology you need to know! Tax Liability

The amount of tax YOU OWE Tax Deduction

An expense that reduces your taxable income Example: IRA, Student loan interest

Standard Deduction If you do not itemize deductions, this amount is

automatically excluded from income tax Tax Credit

An amount DIRECTLY deducted from tax owed

Tax terminology you need to know! Tax Exemptions: Some income is exempt

or excused from tax, based on number of people in the household. Qualifiers: Spouse, Dependents

Dependent Person who relies on another taxpayer for at least

½ of his or her support You can be claimed if under 19 years of age, or

19-24 years if a student

Tax terminology you need to know! Withholding: Amount taken from each check

Pay as you earn tax

Allowances: Factors that affect how much tax is withheld from each paycheck The more allowances / exemptions = less taken

0 or 1 = maximum amount withheld Do you want to over or under withhold? What is best?

FORMS W-4 Form

Fill out at start of a job

THIS FORM TELLS YOUR EMPLOYER HOW MUCH TAX TO HOLD FROM YOUR CHECK!

The more exemptions = lower the tax amount that is withheld from your paycheck Must be filled out before starting work

Other Important Information

What is “TAX DAY?” The day your taxes must be postmarked and

mailed to the Internal Revenue Service (IRS)

Target

Comprehend what the different forms are used forUse / fill out tax forms

Free File Irs.gov

Check your last year's tax return for a quick estimate of your adjusted gross income (AGI).

Did you know: Approximately 70% of all taxpayers have an AGI of

$57,000 or less? Income tax first appeared in 1862 to support the Civil

War. It was eliminated in 1872, but came back between 1894-1895.

In 1913 it was brought back and provided a seemingly unlimited source of funds to the growing government

Can get more money back than pay Not often

Stimulus EITC: Earned Income Tax Credit

Started to make it so you would earn more working than on welfare

http://apps.irs.gov/app/eitc2011/SetLanguage.do?lang=en

As a dependent you are not eligible

FORMS

W-2 Form Lists your wages and

withholdings Fed Inc. Tax, Social

Sec, Medicare Will be mailed to you by

your employer by Jan 31 ATTACH TO YOUR TAX

RETURN

FORMS

Form 1099-INT Form sent by savings institution State amount of interest earned during the

year

EZ FORM…….use if You are single or married, filing jointly

Taxable Income<$100,000

Earned under $1500 in unearned income (interest)

Earned income: wages Unearned income: interest which is taxable

Do not have itemized deductions

Practice Problem

1040A Form…use if

Single, or married filing separately or jointly

Have children or other dependents Each exemption worth 3000 deduction

Taxable income less than $100,000

Have Capital Gains income, IRA’s

Do not have to itemize deductions

1040 Form…use if

You want to itemize deductions

You have any amount of income (Including over $100,000- if you earn over this amount, you must use this form to file)