3Objectives Identify different types of income and employee benefits. Relate taxation to government spending.List goods and services government provides.Identify different types of taxes.Identify common tax forms.continued
4Objectives Describe basic procedures for filing a tax return. Explain the purposes and function of the Social Security system.
5The Many Forms of Income Income is money earned from employment and investmentsGovernments tax income and assets to create revenue that is used to provide public goods and services
6Foundations of Personal Finance Ch. 7 Money Earned from WorkIncome received from employment is earned incomecontinued
7Money Earned from Work Earned income includes wage (minimum wage for many unskilled and beginning workers)piecework incomesalarycommissiontipbonus
8Employee BenefitsSome of the most valuable forms of employee compensation are not monetaryEmployee benefits often includepaid vacation, holiday, and sick leavelife and health insuranceemployer-sponsored retirement savings plan
9Business Profit Income Income earned by the self-employedDisadvantages of self-employment:Must arrange and pay for own employee benefits; can be costlyMust pay entire Social Security and Medicare tax, rather than half the cost
10Foundations of Personal Finance Ch. 7 Payroll DeductionsNet income (take-home pay) is gross income minus payroll deductionscontinued
11Payroll DeductionsDeduction can lower a paycheck by 20 percent or moreBonuses increase gross incomecontinued
12Payroll Deductions Common payroll deductions: FICA (Federal Insurance Contributions Act): Social Security and MedicareFederal withholding taxState and city withholding taxes, if applicableOther benefits (insurance purchased through employers)
13Money Earned Outside Work Unearned income—income received from sources other than employmentearnings from investments, sale of assets, and interest paid on savings and bondsSocial Security and retirement account paymentsrent, inheritance, awards, gifts, alimonyunemployment compensation
14The Importance of Taxes Foundations of Personal Finance Ch. 7The Importance of TaxesGovernment uses its taxing authority togenerate revenue to provide goods and services for public’s benefitstabilize the economyaddress social challengesinfluence behavior
15Federal Government Spending Limited resources force governments to make choicesA budget reflects priorities and goals of government and its peopleWhen government spends more than it collects, it must borrow moneyDeficit spending increases the national debtcontinued
16Federal Government Spending Foundations of Personal Finance Ch. 7Federal Government Spending
17In Your OpinionWhat changes should be made to the way the government spends taxpayers’ money?
18Mandatory ExpensesPayments that must be made, even if the government must borrow money to do soMake up more than 60 percent of federal government’s budgetInclude entitlement programs and interest on the national debtcontinued
19Mandatory Expenses Entitlement programs: Social Security Medicare Medicaid (for older adults and people with disabilities)Veterans’ pensions and medical careNutrition and housing assistanceUnemployment compensationFederal employee retirement benefits
20Discretionary Expenses An expense that can be adjusted according to needs and revenuesInclude national defense expensesInclude nondefense expenses:Costs of government operations and programsFunds given to state and local governments
21State and Local Government Spending Foundations of Personal Finance Ch. 7State and Local Government SpendingTaxation and government spending vary widely between states and between citiesMost state and local government revenues come frompersonal and corporate income taxessales taxreal estate and personal property taxescontinued
22State and Local Government Spending Foundations of Personal Finance Ch. 7State and Local Government Spending
23Types of Taxes Direct—paid directly to government by taxpayers Indirect—imposed on one party, but paid by anotherProgressive—imposes a higher tax rate on those with higher incomescontinued
24Foundations of Personal Finance Ch. 7 Types of TaxesRegressive—has effect of imposing a higher tax rate on those with lower incomesProportional—imposes same tax rate on all regardless of income differences
25What Is Taxed? Personal income tax—your income Purchase tax—goods and servicesExcise tax—sale and transfer of certain items, including air travel, phone service, gasolinecontinued
26Foundations of Personal Finance Ch. 7 What Is Taxed?Property tax—real estate property tax and personal property taxWealth tax—assets (estate and gift taxes)
27Foundations of Personal Finance Ch. 7 Paying Income TaxesInternal Revenue Service (IRS) collects federal income taxesState tax returns are filed with departments of revenue in states that collect taxes
28Your Employer’s Role Employees fill out Form W-4 Employers withhold taxes from employees’ paychecksAt start of year, employers mail Form W-2 to employeescontinued
29Foundations of Personal Finance Ch. 7 Your Employer’s RoleForm W-4—taxes withheld depend on earnings and number of allowances claimedcontinued
30Foundations of Personal Finance Ch. 7 Your Employer’s RoleForm W-2—previous year’s pay and tax deductions are given
31Preparing Your ReturnEach year taxpayers must file a tax report with the government showing the taxes owedChoose one of three common forms: 1040EZ, 1040A, or 1040
32Choosing a Tax Form Use Form 1040, long form, if income is over a certain amountwhen adjustments to income, itemized tax deductions, and tax credits can reduce taxescontinued
33Foundations of Personal Finance Ch. 7 Choosing a Tax FormUse short forms, 1040A or 1040EZ, ifincome falls into certain limitsdeductions aren’t itemized
34Figuring Taxable Income Calculate gross income based on Forms W-2 and 1099sCalculate adjusted gross income by subtracting adjustments from total incomeSubtract allowable exemptions and deductions
35Foundations of Personal Finance Ch. 7 Figuring Taxes OwedIRS tax tables show taxes owed based on taxable incomeReduce the amount owed with tax credits
36Filing on TimeFiling deadline for federal taxes and most state taxes is April 15Tax avoidance—falsely reducing taxesTax evasion—failing to declare all income or falsifying documents
37State and Local Tax Forms Foundations of Personal Finance Ch. 7State and Local Tax Forms43 states collect income taxesTaxpayers in states that collect personal income taxes must submit state tax forms
38Electronic Filing Advantages of filing tax returns online: It’s simple and quickIf refund is due, it arrives soonerTeleFile allows taxpayers to file simple tax returns with touch-tone phones
39Sources of Tax Information and Assistance The IRS answers tax questions through free booklets, recorded messages, and a Web siteTax preparation services fill out tax forms for a feeMany taxpayers use tax preparation guides and software
40IRS Audits A detailed examination of taxpayer’s tax returns by the IRS During audit, taxpayers must answer IRS’s questions and provide documentation when askedTaxpayers have legal protections in their dealings with the IRS
41Foundations of Personal Finance Ch. 7 Tax System ReformLegislators make laws thatraise or lower taxesmake the tax burden fairersimplify the systemachieve other desired outcomes
42Tax Legislation Many citizens are concerned about rising taxes Questions asked when tax policy changes:Will revenues generated by the new tax exceed administration costs?Will it be fair to all taxpayers?Will it impact the economy negatively?
43Paying Social Security Taxes FICA taxes calculated as a percentage of income; deducted from gross payEmployers and workers split FICA taxesEmployees pay 6.2 percent for Social Security and 1.45 percent for MedicareEmployers contribute an additional 7.65 percentcontinued
44Paying Social Security Taxes Foundations of Personal Finance Ch. 7Paying Social Security TaxesThe self-employed pay all FICA taxes themselvesFederal government receives FICA contributions and credits them to employees’ accounts
45Your Social Security Number Social Security Administration uses SSNs to keep records of earnings; records determine benefit amountsIRS uses SSN as taxpayer ID numberEach SSN is uniqueSafeguard your SSN
46Social Security Benefits If you work, your Social Security taxes pay for benefits others receiveWhen you no longer work (retire, become disabled, or die), you and your dependents will get benefits provided by other workers’ Social Security taxescontinued
47Social Security Benefits Types of benefits:RetirementDisabilitySurvivors’Benefits for divorced people
48Social Security System Reform Benefits paid out will soon exceed tax collectionSocial Security fund will be depleted; no money to pay benefits of workers paying into the system nowTaxes may have to be raised, benefits decreased, or both
49Central Ideas of the Chapter Taxes reduce each individual’s income and wealth.The taxes of many make it possible for government to provide public goods and services that benefit all.
50Glossary of Key TermsBackbonus. Money added to an employee’s base pay. It is usually a reward for performance or a share of business profits.commission. Income paid as a percentage of sales made by a salesperson.compensation. Payment and benefits received for work.disability. A limitation that affects a person’s ability to function in major life activities.
51Glossary of Key Terms earned income. Income from employment. Backearned income. Income from employment.employer-sponsored retirement savings plan. A tax-deferred investment program that helps employees save for retirement.employee benefit. A form of nonmonetary compensation received in addition to a wage or salary.
52Glossary of Key TermsBackentitlement. A government payment or benefit promised by law to eligible citizens, such as Social Security and Medicare benefits, unemployment benefits, veterans’ services, food stamps, and housing assistance.exemption. A tax benefit that reduces the amount of income a person is taxed on.
53Glossary of Key TermsBackFICA (Federal Insurance Contributions Act). The law that requires the collection of social security payroll taxes.Form W-2. A Wage and Tax Statement that states the amount an employee was paid in the previous year. It also gives the amounts of income, Social Security, and Medicare taxes withheld from an employee’s income during the year.
54Glossary of Key TermsBackForm W-4. The Employee’s Withholding Allowance Certificate that tells the employer how much tax to withhold from an employee’s paycheck.gross income. A worker’s earnings before deductions.interest. Payments from financial institutions, businesses, and government to use customers’ money.
55Glossary of Key TermsBackMedicaid. A government program administered by the states that pays certain health care costs for eligible low-income individuals and families.Medicare. A federal government program that helps pay the medical expenses of people 65 and older and others with certain disabilities.
56Glossary of Key TermsBackminimum wage. The lowest hourly wage employers can pay most workers by law.net income. Gross income (plus bonuses) minus payroll deductions.payroll deduction. An amount subtracted from gross income.piecework income. A wage that is based on a rate per unit or item completed.
57Glossary of Key TermsBacksalary. Payment for work that is expressed as an annual figure.Social Security. The federal government’s program for providing income when earnings are reduced or stopped because of retirement, disability, or death.tax credit. An amount that can be subtracted from the taxes a worker owes, if eligible.
58Glossary of Key TermsBacktax deduction. An expense that can be subtracted from a worker’s taxable income.tip. Money paid for service beyond what is required.unearned income. Earnings from sources other than work.wage. A payment in exchange for an employee’s labor or services. The payment, which is usually in money, is paid by the hour, day, or by the piece.