Income Taxes

Tax evasion: failure to pay taxes or a deliberate underpayment of taxes (this is an illegal activity)

Tax avoidance: actions taken to lessen one’s tax liability and maximize after-tax income (this is a legal activity for individuals to take)

Withholding:• Employers deduct money from

employee’s paychecks.• This money is deposited with the

IRS on behalf of the employee in order to pay the employee’s income tax.

• This is done with each paycheck, to help pay the taxes as the income is earned.

• Employees get to count the amount withheld against the tax liability they actually owe.

Payroll Deduction• The tax an employer withholds from an

employee’s pay

• And/or: the tax an employer pays on behalf of their employees based on the wage or salary of the employee.

• Used in most cases for income tax payments as well as payments for Social Security and Medicare

The wages of sin is death… (from the Bible, Romans 6:23)

…but after taxes are taken out it’s just a really tired feeling.(from comedienne Paula Poundstone)

Exemptions and Deductions• Exemptions:

reductions to income for the taxpayer; if certain income is qualified by tax law to be exempt then it is not subject to taxation at all

• Deductions: allowable subtractions from one’s total income to decrease taxable income

Dependents:

• individuals who reside with a taxpayer and count on that taxpayer for at least half of their support;

• a taxpayer is allowed to deduct from their adjusted gross income some of the expenses to provide support to these individuals;

• there are specific rules (including age, ability, and residency) for a person to qualify as a dependent

Tax Credits:• amounts that tax law allows you

to count toward the tax payments you’ve already paid

• it basically lets you pretend you’ve paid more taxes than you really have

• these amounts are usually based on expenses for specific items for which you’ve already paid