2 Topics Purpose of taxes Different types of taxes What taxes you can expect to payHow to calculate the amount of federal income tax you oweComplete a 1040EZ
3 What is the purpose of taxes Support schoolsSupport buildingMaintain roadsProvide for the nation’s defense
4 Tax Required contribution of money Ultimately paid to the government Raise revenue to pay the cost of government
5 Direct Tax Paid directly to the government Examples: income tax and property tax
6 Indirect Tax Shifts the tax burden Example buy gasoline, cigarettes – then pay tax on them
7 Direct Tax Can Become An Indirect Tax Landlords property taxes increase (direct tax)Your rent increases due to it (indirect tax)
8 Types of Taxes Income Tax Paid based on the money you earn and profits a business makesPaid to Federal, State and sometimes Local GovernmentPaid on salary, wages, tips and savings and investment incomePay for the overall costs of governments
9 Types of Taxes - Continued Payroll TaxPaid to support Soc. Security taxesBoth you and your employer make a contributionHelp provide you with retirement income/benefitsSome occupations (teachers and government workers) pay into a state retirement program rather than Soc. Security
10 Types of Taxes - Continued Sales TaxState and Local GovernmentsTax is added to the cost of the itemsSales tax in Illinois is 6.25%
11 Types of Taxes - Continued Estate, Inheritance and Gift TaxEstate tax – assessed on the value of the deceased’s property before it is passed onInheritance tax – taken out of each person’s share of the willFederal – Estate TaxState (some) – both Inheritance and estate taxGifts up to a certain amount are tax free. Over that amount a gift tax is imposed
12 Income Tax History 1913 – Federal Income tax imposed The 16th amendment gave the government the right to taxWisconsin – 1st state to administer an income taxBy mid-1970’s – almost all states have an income tax
13 Federal Income Tax Who Must Pay? Individuals Corporations Trusts EstatesBusiness owners (pay through their individual income taxes)Citizens of other countries who earn income in the U.S.
14 Federal Income Tax Who Doesn’t Have to Pay? Low Income Families Nonprofit Organizations (churches, charities)Some hospitals
15 Federal Income Tax Part of being a good citizen Graduated income tax Seen as fairest type of taxThose who earn more – pay a higher percentage
17 State Income Tax Most have a graduated income tax Some use a flat rate Your income is $25,000 and your spouse’s income is $35,000, therefore, you would pay 6% on all income or $3,600
18 Taxable Income Your total income - Adjustments to Income (paid alimony, contributions to IRA)=Your adjusted gross incomeDeductions and ExemptionsTaxable Income
19 Reduction of Income Tax Tax laws: Those who meet certain requirements can reduce the amount of income which is taxed
20 Determining Your Deductions Mortgage InterestProperty TaxesContributions to Charities and Churches
21 Tax-Free Income Allows a certain level of tax-free income Thus, Marital statusNumber of dependentsThus,Larger families generally pay less taxMarried couples generally pay less tax
22 Determining Your Exemptions Yourself (if not claimed by your parents)Any Dependents
23 Taxable Income Your total income - Adjustments to Income (paid alimony, contributions to IRA)=Your adjusted gross incomeDeductions and ExemptionsTaxable Income
24 Taxable Income and Tax Table Use Taxable IncomeDetermine the Amount of Tax you Owe
25 Taxable Income and Tax Table $15,235Tax (single)$1,919
26 Your TurnBased on the table, how much tax does a married couple filing jointly owe on an income of $15,742?How much does a single person owe on the same amount?
27 Tax Credits May Reduce Your Figure from the Tax Table Amount of tax due may reduce by any tax creditsChild Care
28 Compare Tax Owe to Tax Paid If too much withheld – refund If too little withheld –owe difference
29 Tax FormDue April 15SignInterest and Penalty if late
30 “Filing” Process of completing and submitting an income tax return Can be simple or complexNot Filing = Tax Evasion
31 Eligibility for filing a 1040EZ Filing status – single or married filing jointlyNo dependentsNo student loan interest deduction or an education creditNot age 65 or over (you or your spouse)Taxable Income less than $100,000
32 Eligibility for filing a 1040EZ – Cont. Only had wages, salaries, tips and taxable scholarships, unemployment compensation, qualified state tuition program earnings or Alaska Permanent Fund dividendsAND your taxable interest income was not more than $1,500.Did not receive any Advance earned income credit paymentsDid not owe any household employment taxes on wages you paid to a household employee
36 IntroductionIn 2005, John Nye worked after school and all day Saturday at Rudden’s Ice Cream Parlor.In late January 2006, John received a W-2 Wage and Tax Statement from his employer.John went to the post office and picked up a Form 1040EZ and the instructions for completing this form. (You can also download them from the web site).
37 Introduction - Continued John also received a 1099-int – Interest income earned from from his local bank. He had earned $63.00 in interest income.With this information he was able to complete his 1040EZ.
40 Other Types of 1040’s 1040A 1040 Dividend and Capital Gains from Stock Deductible Student Loan Interest1040Itemize rather than taking the standard deductionsReceive income from rental property
41 Let’s Do Some Calculations! Suppose you make $370 a week. Each year you pay $2,884 in federal income tax, $578 in state income tax, $262 in sales tax, $88 in property tax, $1,472 in FICA tax, and $158 for other taxes. How much do you pay for taxes during the year? How many weeks must you work just to pay taxes?
42 Calculation #2Suppose you earned an annual salary of $27,000 and your spouse earned $32,000. If there were a flat tax on income of 5%, how much income tax would your family have to pay?
43 Calculation #3Using the tax table, determine the amount of tax you owe, if your wages were $15,178.00, tips were $1, and interest income was $ The amount of tax withheld from your employer was $1,
44 Review Questions What do taxes pay for? Name some types of taxes What is it called if you have earned income and fail to file an income tax return?If you are married, can you use form 1040EZ to file your federal income tax return?What is a Graduated Income Tax?
45 Review Questions - Continued What is a flat rate tax?What are deductions?What are exemptions?What date must you file your taxes by?