1Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

Finish W4 and I9 if not completed…

2Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

The Federal Income Tax

• What are taxes for?

3Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

• Federal government spending 2010

4Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

What kinds of taxes can you name? (there are many)

http://whatistaxed.com/other_taxes.htm

5Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

Most Important: the Federal Income Tax

• The personal income tax is the federal government’s main source of revenue.–What is “income”?

6Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

Gross (Total) Income

Any money that “comes in” to a household Earned income (job) Interest income (savings; CDs) Dividend income (investments)

Gross and Adjusted Gross Income

The IRS measures your “gross income” or “total income” before making adjustments based on need and your family situation:

7Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

Who must file?

8Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

The Income Tax Return

Understanding Income Taxes

You determine the amount of tax you owe when filling out your income tax returns. Some examples of these forms include:

1040 1040EZ

If the income tax you paid through your employer is greater than your tax liability, you will receive a refund.

income tax returna form on which a taxpayer reports how much money he or she received from working and other sources, and the exact taxes that are owed

9Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

How much will I owe?

(Step 0 – Calculate your Gross Income)

Add up all your income, earned and unearned.

Jobs, tips, wages, investment income, interest, and gambling wins all count here.

10Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

How much will I owe?

(Step 1 - figure out Adjusted Gross Income)

You pay income tax on your adjusted gross income, not on your gross income.

Reduce your income (with reductions, or adjustments) through such items as:

Contributions to an IRA Student loan interest

Money used towards these does not count towards your income taxes!

adjusted gross income

your gross income after calculating certain reductions

11Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

How much will I owe?

(Step 2: Figure Out Your Taxable Income)

After you have your adjusted gross income, you may further reduce your taxable income by using deductions and exemptions!

What are some ways I’ve already shared that you can pay less in taxes?

taxable income

your adjusted gross income less any allowable tax deductions and exemptions

12Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

Tax Deduction

•an expense that you can subtract from your adjusted gross income to figure your taxable income

Two types of deduction:–Itemized

• Calculated from a list of items that can be taken off your taxes

–Standard•A set dollar amount: no calculation required

13Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

Tax DeductionsEvery taxpayer receives at least the standard deduction. If qualified for both – choose which is more

• Standard Deduction– Single: $6,100– Head of Household: $8,950– Married Filing Joint

: $12,200– Married Filing Separately

: $6,100

• Itemized Deduction– Calculated by

receipts/spending in: • Medical expenses• Charity donations• State and local taxes• Real estate taxes• Mortgage spending• Some work expenses• Fees paid to tax preparers

14Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

Exemptions

A tax deduction (from your adjusted gross income) for your dependents

A dependent must not earn more than a set amount unless he or she is under age 19 or is a full-time student under age 24.

He or she must be a specified relative or live in the home of the taxpayer who claims him or her on the tax return.

More than half of a dependent’s support must be provided by the taxpayer who claims him or her on the tax return.

exemptiona deduction from adjusted gross income for the taxpayer, the spouse, and qualified dependents

15Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

How Much Do I Owe?

(Part 3: Calculating Your Tax)Once you know your taxable income, you can calculate how much income tax you owe by using a:

Tax Table Tax Rate Schedule

Your income tax may be reduced by a tax credit. A tax credit:

Is an expense that you can subtract from your adjusted gross income

Results in a dollar-for-dollar reduction in the amount of taxes you owe

tax creditan amount of money that can be subtracted directly from taxes you owe

16Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

Review: How Much Do I Owe?

• How do I figure out how much I owe?

17Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

How Much Do I Owe?

• Find Gross Income• Find Adjusted Gross Income (take out

reductions)• Find Taxable Income (take out

deductions and excemptions)• Look at a table (and take out “tax

credits”)

18Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

19Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill

• Break for the “Income Tax Worksheet”