1. Lesson 12 Paying Your Taxes
Look up tax rates and amounts for standard deduction, maximum FICA wages for current year and update slides.

2. Key Terms 1040EZ 1099INT 1099MISC FICA Gross Income Income Tax
Standard Deduction
Tax Audit
Tax Deduction
Tax Exemption
Tax Refund
Tax Table
W-2
W-4

3. Taxes
Money taken from your paycheck by the government to pay for government services
Military
Roads
Other
Entitlements
Unemployment
Welfare
Types of taxes
Payroll Taxes
Income Tax

4. What Does the Federal Government Use Taxes For?

5. What Are Payroll Taxes?
Money taken from your paycheck to pay for services you may directly receive (now or in the future)
Called Federal Insurance Contributions Act (FICA) Taxes
Since you may receive direct benefit from these services, it is a form of insurance
FICA taxes
Social Security (FICA-SS)
Money you will receive when you reach retirement (currently age 65)
Amount of benefit you will receive is capped, so you only pay FICA-SS on a maximum of $110,100 (in 2012) of earnings
Current rate: 6.2% of all earnings below $110,100
Look up and revise maximum FICA-SS every year as necessary

6. Your employer is required to match your FICA contributions
Medicare
Pays for health care for those individuals who qualify for it
Intended primarily for retirees over age 65
Current tax rate: 1.45% of all earnings
Your employer is required to match your FICA contributions
You pay 7.65% of your income in FICA contributions
Your employer has to provide an identical amount from its earnings to the government
The cost of your labor to an employer is more than just the wage you earn!
Look up and revise Medicare tax rate annually as required

7. What Is Income Tax?
Tax the government collects on each income earner to use for government services
Taxes withheld from each of your paychecks and sent by your employer to the Internal Revenue Service (IRS)
Government agency in charge of collecting taxes
Amount withheld varies based on tax allowances claimed on W-4

8. A Note on Tax Allowances
When you get a job, you will fill out a W-4 form claiming how many allowances you want on your income tax withholding
Can get 1 allowance for each member of your household
Additional allowance possible
The number of allowances will determine how much is withheld from each paycheck
The more allowances, the less withheld from your paycheck
IRS publishes withholding tables telling employers how much to withhold from your paycheck based on your earnings & number of allowances
Intent is to minimize the amount you may have to pay in taxes at the end of the year when you file your tax return
Show W-4 to class. Look up latest W-4 annually and revise as necessary.

9. US Federal Tax System Progressive income tax
The more you make, the larger percentage of your income you pay in income tax
Tax rate determined by tax brackets
Different parts of your taxable income are taxed at different rates

10. Taxable Income
Gross Income (total of all income earned through work, investments, etc.) minus allowed tax deductions
Tax deduction – something the IRS allows you to deduct off of your income
Tax deductions reduce your taxable income

11. Types of Tax Deductions
Standard Deduction – flat amount set annually by the IRS
$9,750 for tax year 2012
Itemized deductions – sum total of all allowed tax deductions (charitable contributions, property taxes, mortgage interest, etc.)
Can only use one or the other, not both
Usually use larger amount of the two
Cannot itemize deductions if using 1040EZ

12. Example of Taxable Income
Gross Income
(sum total of all income earned through work, investment, interest on savings accounts, etc.)
$35,000
Standard Deduction
$9,750
Taxable Income
(gross income – standard deduction)
$25,250

13. Tax Brackets 2012 Single Adult
Taxable Income Earned Between
Tax Rate
$0 - $8,700
10%
$8,700 - $35,350
15%
$35,350 - $85,650
25%
$85,650 - $178,650
28%
$178,650 - $388,350
33%
$388,350 +
35%
Look up annually and revise as necessary
Source:

14. Taxable Income Between
Example
Gross Income
$75,000
Taxable Income
$65,250
Taxable Income Between
Amount
Tax Rate
Tax Liability
$0 - $8,700
$8,700
10%
$870.00
$8,700 - $35,350
$26,650
15%
$3,997.50
$35,350 - $85,650
$29,900
25%
$7,475.00
Total Tax Liability
$12,342.50
Effective Tax Rate
16.46%
Change annually as tax brackets and percentages change

15. When Do I Pay My Taxes?
Employer pays your taxes to the IRS throughout year
After end of the calendar year, you must determine if you have paid enough, too little, or too much
Too little: must pay more
Too much: you will get a refund

16. You must file a tax return every year with the IRS showing
How much you earned
How much you paid in income tax
How much you should have paid in income tax
and
Whether you still owe more or should get a refund
Deadline: April 15 (or April 16 or 17 if April 15 is on a weekend)
Do tax return as early as possible to determine if getting refund or owe money
If you owe money, this gives you more time to come up with the money you owe
File as early as possible if getting refund

17. What Do I Need To File My Tax Return?
Appropriate 1040 form (1040, 1040A, 1040EZ)
W-2s from all employers from previous year
1099-INTs from all interest-earning accounts
1099-DIVs from all investments for which you were paid dividends
1099-MISC for all other sources of income not covered by previous forms
You should receive all forms by the end of January each year
Receipts/documentation for deductions (if itemizing)
Not needed if using 1040EZ

18. 1040, 1040A, 1040EZ: Which One To Use? 1040EZ 1040A & 1040
Taxable income below $100,000
Filing status Single or Married Filing Jointly
Under age 65 and not blind
Not claiming any dependents
Interest income $1,500 or less
Not claiming any additional deductions for real estate taxes, taxes on purchase of new motor vehicle, or disaster losses
Most appropriate form for teenagers and young adults
1040A & 1040
For more complicated tax situations
Check with IRS or accountant to see which form you need to use
Check IRS Web site (link in slide) to see if anything has changed.

19. Steps To Filling Out 1040EZ Step 1: Determine Gross Income
Add up income on all W-2s and 1099s
There are separate lines on 1040EZ for this
Step 2: Determine Taxable Income
Figure out Standard Deduction (will be less than normal if you are claimed on someone else’s tax return)
Subtract Standard Deduction from Gross Income
Step 3: Determine How Much You Paid in Taxes
Add up all taxes paid shown on W-2s and 1099s

20. Step 4: Determine How Much You Should Have Paid in Taxes
Based on your Taxable Income (the smaller amount), look up your tax liability in the tax tables in the 1040EZ Instructions
Step 5: Determine Your Refund or Amount You Owe
If the amount you paid is more than the amount you should have paid, you will get a refund
If the amount you paid is less than the amount you should have paid, you will owe the IRS money
See 1040EZ extract from 2006 to show them tax tables. These tax tables should be given to them along with VBPF Lesson 12 Computer Exercise; have them use the tax table to determine the tax liability on the taxable income instead of trying to do the calculation.

21. How Do I File My Taxes Mail in Paper Copy of All Tax Documents Online
Takes longer for IRS to process
Delays getting your refund if you are due one
Online
May be able to file directly from IRS Web site
Can use tax software (TurboTax, TaxCut, etc.) to file electronically
Normally pay fee to do this

22. How Can I Receive My Refund?
Paper Check Mailed to You
Takes longer to receive refund
Direct Deposit
Quickest way to receive refund