SHE’S THE WHOLE PACKAGE

She even pays her taxes!

Name that song……

UNDERSTANDING TAXES

Taxes

Payments YOU make to the government to support/pay for government services

Taxes are collected by the IRS

Internal Revenue Service

WHY DO WE HAVE TAXES?

To raise revenue (money) to fund new and ongoing programs Law enforcement

Transportation/Roads – building and maintenance

Military Defense

Education/School Funding

Health

Postal Services

To regulate business activities Certain foreign goods are taxed.

Higher taxes on alcohol and tobacco,

VARIOUS TAX SYSTEMS….

Progressive

•Graduated•Make more, take more•Based on ‘ability to pay’•Example: Federal Income Tax

Proportional

•Aka: Flat Tax•Pay same rate, regardless of income•State Income Tax•Name other taxes that are Flat……

WHAT MUST YOU PAY TAXES ON?

Income Profits or earnings Interest

Who is collecting? State and Federal

Withhold Employer deducts from paycheck

WHAT YOU PAY TAXES ON?

Sales Tax (Flat Tax) Retail: price of goods and services

Collected at the State and City level

Excise Tax tax on specific goods such as alcohol/tobacco

Property Tax Material goods owned

Collected at the local level

Based on the value of property—generally land and buildings

Main source of money for local governments

W-4 VS. W-2

HiredPersonal Info

AllowancesDeductions

ExemptSign & Date

W-4From Employer

DeadlineJanuary 31st

Verify InfoWages, Taxes

W-2

COMPLETE WHEN HIRED

W-4

FEDERAL TAX FORM W-2RECEIVE FROM EMPLOYER

A Control Number

B Employer Identification Number 1 Wages, Tips, Other Compensation

$3,900.00

2 Federal Income Tax W/held

$ 196.00

C Employer’s name, address and ZIP code

3 Social security wages 4 Social security tax w/held

5 Medicare wages and tips 6 Medicare tax w/held

7 Social security tips 8 Allocated tips

D Employee’s social security number 376-19-1411

9 Advance EIC Payment 10 Dependent care benefits

E Employee’s name, address, and ZIP code

Laura Lou1411 Stanton AvenueLansing, Illinois 46004

11 Nonqualified plans 12 Benefits included in box 1

13 See Instrs. for box 13 14 Other

15 Statutory Deceased Pension Legal Deferred

employee plan rep. compensation

16 St Employer’s state ID

17 State wages, tips, etc.

18 State Inc tax Illinois

19 Locality name

20 Local wages, tips

21 Local inc. tax

$ 142

W-2January

31st

DO THE MATH….. You pay the following taxes in a year

$1770 federal income tax $482 in state income tax $218 in sales tax $373 in property tax $990 in FICA (social security tax) $132 A variety of other taxes

What is your yearly income? What is the total amount of taxes paid during the year? How many weeks must you work just to pay taxes?

You make $305 a week in salary for 52 weeks.

ANSWERS

Yearly income 305*52=$15,860

Total Taxes = $3,965 3965 / 305 = 13 weeks

KEY TERMS TO KNOW…

Voluntary compliance It is left up to the taxpayer to keep

the necessary records, file a return on time pay required taxes etc.

Pay-As-You-Go methods Taxpayer must pay the tax as income

is earned or received during the year.

Gross Pay vs. Net Pay

REDUCE YOUR TAX LIABILITY

An exemption is a fixed amount of money that is excused from taxes.

A dependent is someone you support financially Son, daughter, grandchild, niece etc.

– under 19, and 24 if a student, provided ½ of their support, lived w/ you for at least ½ of the year (see page 19 of the manual).

A deduction is an expense that taxpayers are allowed to subtract from their income when figuring the amount of tax they must pay, such as certain medical or business costs, student loan interest.

Standard Deductions single: $6,200

married:$11,600, or

head of household: $8,500 or

Itemized Deductions. Look at the schedule A

REDUCE YOUR TAX LIABILITY

Understanding Taxes The three levels of government are:

federal (the whole country),

state (the 50 states), and

local (counties, cities, and towns).

Understanding Taxes Tax forms can be completed on the IRS Web site and then submitted to the IRS.

Taxes paid to the IRS go into the U.S. Treasury.

Income TaxesIncome is calculated as a percentage of the taxable income you earn.

Taxable income is your income after you subtract certain permitted amounts.

Income TaxesCurrently, the federal income tax ranges from 15 to 39.6 percent.

The higher your income, the higher the rate of income tax you must pay.

Income TaxesIn most states, people also pay state income tax.

Many cities also have income taxes.

Income TaxesIf you are self-employed, you are responsible for withholding your own taxes.

Income TaxesThe IRS requires self-employed people to pay income taxes quarterly (four times a year) based on the income they estimate they will make that year.

Social Security Taxes

Workers pay Social Security taxes so that they can receive benefits when they retire.

• Social Security taxes are figured as a percentage of the money you earn.

•Your paycheck stub shows the money withheld in a box labeled “FICA.”

•FICA stands for Federal Insurance Contribution Act, or “Social Security.”

Graphic Organizer23.1

Chapter 23 • Taxes and Social Security Succeeding in the World of Work

TaxesFEDERAL STATE LOCAL

incometax

salestax*

incometax*

salestax*

propertytax

incometax*

SocialSecurity

tax

*Not all jurisdictions levy these taxes.

It’s Your Responsibility We all have to split the bill for the services the government provides.

Since we all share the benefits, we should all contribute our fair share of taxes.

It’s Your Responsibility Some people disagree on what’s fair.

Some people think that high-income people should pay a larger share of their income than low- or middle-income people.

It’s Your Responsibility You can influence how federal, state, and local governments spend tax money.

You can also influence tax laws.

How? By voting.

It’s Your Responsibility It’s your responsibility as a citizen to vote for officials who represent your beliefs.

A Good Tax System The features of a good tax system are:

The system should be fair.Tax laws should be clear and simple.Taxes should be collected at a convenient time.The system should be stable.The system should be flexible.

Understanding Federal Income Tax Returns

An income tax return is a form that shows how much income a person received from working and other sources and how much tax that person must pay.

Understanding Federal Income Tax Returns

If your employer withheld more money from your paychecks than you owe, you’ll get a tax refund.

If your employer didn’t withhold enough, you will have to pay the difference.

How Do You File a Return? Generally, if you’re single and earn at least $6,400 in a calendar year, you must file an income tax return.

How Do You File a Return? To prepare a return, you’ll need Form W-2, which your employer will send to you.

A W-2 shows how much money you earned and how much was withheld by your employer for taxes.

How Do You File a Return? The three basic federal income tax forms are:

1040EZ1040A1040

How Do You File a Return? To relieve themselves of paying excessive taxes, many people try to reduce the amount of income they report.

Putting money in a 401(k), or donating to charity, can legally reduce your taxes.

How Do You File a Return? Resorting to illegal methods to lessen taxable income is called fraud or tax evasion.

The most common form of tax evasion is not declaring income.

How Do You File a Return? To deter illegal tax reporting, the IRS performs random audits.

During an audit, the IRS requires a business or individual to prove that the information on a tax return is accurate.

How Do You File a Return? You can file Form 1040EZ if:

You’re single and earned less than $50,000 during the year.You had no other income.You are not claiming an exemption for being over 65 or for being blind.You have no dependents.

How Do You File a Return? The steps to completing the 1040EZ form include:

Add up your total income from work and other sources.Subtract your standard deduction and personal exemption.

continued

How Do You File a Return? Use the tax table to find out how much tax is due on your income. By comparing this amount with the taxes withheld on your Form W-2, you’ll see whether you owe taxes or will get a refund.

How Do You File a Return? The IRS provides free publications that help you fill out your tax return.

You can also get help over the phone, on the Internet, and from books at the library.

How Do You File a Return? You can pay a tax-preparation service or an accountant to prepare your tax forms for you.

Key Concept CheckpointComprehension

1. List five characteristics of a good tax system. Why are these features desirable?

continued

SECTION 23.1 REVIEW

Key Concept CheckpointComprehension

2. How does the money you earn and the amount withheld determine whether you owe income tax?

continued

SECTION 23.1 REVIEW

Key Concept CheckpointComprehension

3. How will understanding such terms as exemption, dependent, and deduction help you complete a tax return?

continued

SECTION 23.1 REVIEW

Key Concept CheckpointCritical Thinking

4. Why do you think the taxation process involves so much paperwork?

SECTION 23.1 REVIEW

SECTION OPENER / CLOSERINSERT BOOK COVER ART

End of Section 23.1All About Taxes