Unearned Income and PaymentsPersonal financial Literacy – Chapter 2 Section 2

GoalsName private and governmental

sources of unearned incomeList the types of taxes levied

against individuals and businesses

Discuss the benefits of paying taxes, both direct and indirect

Key TermsUnearned

incomeInterestDividendsTransfer

paymentsIn-cash

paymentsIn-kind payments

Use taxesExcise taxesSales taxesProperty taxesPublic goods

Unearned IncomeUnearned Income

◦Money received from sources other than working

Can come from ◦Private sources◦Government Transfer Payments

Private SourcesInterest

◦Money earned on savings accounts and other funds

◦You earn interest on: Savings account deposits

Bank will use deposited money to make loans and investments and will pay you interest to use your money

Certificates of Deposit (CD) U.S. Savings bonds

You loan money to the government by purchasing bonds and receive interest

Private SourcesDividends

◦ A portion of a corporations profits distributed to stockholders

◦ Stockholders are the people who buy stocks in a corporation

Types of Dividends◦ Cash dividend

Payment is money shared with the stockholders when the company makes a profit

◦ Stock dividend Payment made in the form of additional stock in the

company You do not receive cash, but the added stock increases

your wealth.

Private SourcesOther private sources of

unearned income◦Pension payments or other forms of

retirement benefits from employer pension funds or individual retirement accounts

◦Winnings or prizes from the lottery or other contests

Private SourcesVariable income

◦Defined by the Internal Revenue Service (IRS)◦Refers to money received from some type of

activity other than from working under the direct control of another person or company May be earned or unearned, depending on the

situation in which it is received.

◦Royalties – payments for the use of copyrighted material, such as books of songs

◦Rent Variable income is often unpredictable

from year to year

Private sourcesMost forms of unearned income

and variable income are fully taxable

Tax rates may be lower than income tax rates on earned income

Chart on next slide shows types of income

Types of IncomeEarned Income Unearned Income Variable Income

Salaries and wages Interest Business profits

Tips Dividends Rents

Commissions Capital gains Royalties

Bonuses Gambling winnings Farm income

Professional fees Alimony

Social security benefits

Pensions

Annuities

Unemployment compensation

Government Transfer PaymentsTransfer payments

◦Money and benefits received from local, state, or federal governments

◦Made from many different programs◦Increase disposable income of those

who receive them◦In the United States, many of these

benefits are intended as temporary help until people can get back on their feet again In the event of job loss, injury, natural

disaster, etc.

Government Transfer PaymentsIn the case of social security and

Medicare, these programs are intended for retirees because they have paid into them over their working years through payroll tax deductions. ◦Not meant as temporary help, these

programs last from retirement to death.

Government Transfer PaymentsIn-cash payments

◦Money in the form of check, debit card, or other direct payment given to a person needing assistance Some examples: Social security payments,

unemployment benefits, workers’ compensation

In-kind payments◦Payments made indirectly on a person’s

behalf or in a form other than money Examples include: food stamps, rent

subsidies, Medicaid

Transfer PaymentsType of Benefit: Paid to:

Temporary assistance for needy families (TANF)

Needy families with children; varies by state

Medicaid Low-income families

Veterans’ benefits Veterans and their families

Supplemental Security Income (SSI)

Low-income elderly and disabled

State-provided medical plans Low-income residents

Social Security Retirees, disabled workers, dependents

Medicare Retired people with social security

Unemployment compensation Laid-off workers; varies by state

Workers’ compensation Workers injured on the job

What Types of Taxes Do You Pay?Direct tax

◦Consumers pay the taxes directly to the government

Indirect tax◦Taxes charged on goods or services

bought by the consumer

Taxes Based on ConsumptionBased on what consumers use or

buy◦Indirect tax – you pay the tax when

you make a purchase and the business sends it later

Use taxes◦Taxes based on the use of goods and

services provided by the government Tolls on bridges Tolls on roads Entrance fee for a national park

Taxes Based on ConsumptionExcise tax

◦Taxes charged on the purchase of specific goods and services Gasoline tax Cigarette tax Utilities Phone service

◦Luxury tax An excise tax on a product that is not

considered essential for a normal standard of living

Taxes Based on ConsumptionSales tax

◦Taxes levied on consumer purchases of goods and services

◦A percentage of the cost of the purchase price◦ Items not taxed in PA:

Food that you prepare at home Candy and gum Most clothing Textbooks Computer services Pharmaceutical drugs Residential heating fuels (oil, electricity, gas, coal,

firewood)

Taxes Based on ConsumptionSales tax is charged on most

other purchases, including prepared foods or restaurant foods◦Regressive taxes

Take a larger percentage of income from lower-income people than from higher-income people.

Taxes Based on IncomeIncome tax

◦A direct tax paid directly to the government Taxes must be paid on earned and

unearned income

◦Called a progressive tax The more you earn, the more you pay in

tax

◦Income tax is levied by: Federal government State governments Many cities or counties

Taxes Based on WealthDirect taxLevied against the value of the

property and assets that you ownProperty taxes:

◦Wealth taxes based on the assessed value of owned real estate

◦Assessed value Determined by the county or other taxing

authority May or may not be the same as market value

Market value: the highest price for which the property would sell to a willing buyer

Taxes Based on WealthBusiness personal property tax

◦A tax on property other than real estate that is used by the business to generate income Example: equipment

Federal estate tax or State inheritance tax◦Taxes levied against the estate of a person who

has died or the person who inherits the deceased’s money or property In many cases, the estate must be worth more than

$3 million to be subject to this tax

Gift tax◦Tax paid by those who give more than $13,000

to any person within a tax year

Direct Benefits of Paying Taxes

Provide Public Goods◦Government provided goods and

services paid for by taxes National defense Public education Police protection National parks Roads and highways

Unique Qualities of Public GoodsEveryone benefits from them

(they raise the overall standard of living in the country)

No one can be excluded from the benefits

People do not benefit in direct proportion to taxes paid; those who benefit the most often pay less

Indirect Benefits of Paying TaxesGovernment transfer payments

◦Free vaccinations – protect others from the spread of illness

◦Public education – produces a higher-quality workforce, giving you better products and services

Taxes paid benefit society as a whole.

Without the benefit of the goods and services that taxes provide, citizens would be worse off