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Chapter © 2010 South-Western, Cengage Learning Federal Income Tax 7.1 7.1Our Tax System 7.2 7.2Filing Tax Returns 7
© 2010 South-Western, Cengage Learning SLIDE 2 Chapter 7 Purpose of Taxes In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes. These incoming funds to the government are called revenue. The government spends the revenues received according to priorities set by Congress.
© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 7 Progressive Taxes As income increases… Progressive taxes take a larger share INCOME TAX RATE
© 2010 South-Western, Cengage Learning SLIDE 4 Chapter 7 Regressive Taxes As income increases… Regressive taxes take a smaller share INCOME TAX RATE
© 2010 South-Western, Cengage Learning SLIDE 5 Chapter 7 Proportional Taxes As income increases… Proportional taxes remain at a constant rate INCOME TAX RATE FLAT
© 2010 South-Western, Cengage Learning SLIDE 6 Chapter 7 Components of the Tax System The power of The Internal Revenue System (IRS) ---To collect taxes, and enforce tax laws Paying your fair share Our income tax system is based on voluntary compliance---meaning??? It is solely the individuals responsibility to prepare, file, and pay taxes.
© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 7 Components of the Tax System Failure to pay taxes Failure to do so can result in a penalty. Penalties for not paying taxes could be interest charges on the taxes owed plus a possible fine. Willful failure to pay taxes is called tax evasion. Punishable by a fine, imprisonment, or both
© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 7 An IRS Audit Every year, the IRS calls millions of taxpayers for an audit, which is an examination of their tax returns. NEVER will they email or call and ask you your name and social security number!!! **Possible scam
© 2010 South-Western, Cengage Learning FILING TAX RETURNS Define basic tax terminology. SLIDE 9 Chapter 7
© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 7 Filing Status Filing status describes your tax-filing group. You must mark one of the following as your filing status on your tax form: Single person (not married) Married person filing a joint return Married person filing a separate return “Head of household” Qualifying widow(er)
© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 7 Exemptions An exemption is an amount you may subtract from your income for each person who depends on your income to live. Each exemption reduces your taxable income and thus your total tax.
© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 7 Gross Income Gross income is all the taxable income you receive. Common Types of Income (some are not taxable) Wages, salaries, and tips Interest income Dividend income Unemployment compensation Social security benefits Child support Alimony For details go to page 142 &143 in text book Just like we have Gross Pay before deductions(Fed. Income SS, and Medicare taxes) we have Gross Income, before adjustments, deductions and exemptions.
© 2010 South-Western, Cengage Learning SLIDE 13 Chapter 7 The law allows you to subtract some types of spending from gross income. These adjustments are subtracted from gross income to determine adjusted gross income. Adjustments reduce income that is subject to tax You will be asked for your AGI whenever you borrow money. Adjusted Gross Income
© 2010 South-Western, Cengage Learning SLIDE 14 Chapter 7 Adjusted Gross Income Gross income –Adjustments Adjusted gross income
© 2010 South-Western, Cengage Learning SLIDE 15 Chapter 7 Taxable Income Gross income –Adjustments Adjusted gross income –Deductions –Exemptions Taxable income Taxable income is the income on which you will pay tax.
© 2010 South-Western, Cengage Learning SLIDE 16 Chapter 7 Deductions Itemize deductions Examples include: Medical and dental expenses beyond a specified percentage of your income State and local income taxes Property taxes Home mortgage interest Gifts to charity USUALLY “older “people Standard deduction If you do not have many deductions, your tax may be less if you take the standard deduction. USUALLY “younger” less complicated finances.
© 2010 South-Western, Cengage Learning SLIDE 17 Chapter 7 Tax Credits A tax credit is an amount subtracted directly from the tax owed. The government allows tax credits for certain education expenses, child-care expenses, and other reasons from time to time. Usually special line on tax form (ex. Katrina) What others????
© 2010 South-Western, Cengage Learning SLIDE 18 Chapter 7 Preparing Your Income Tax Return Who must file? When to file? Which form to use? Where to begin? Filing electronically Tax preparation software
© 2010 South-Western, Cengage Learning Bring textbook to class Monday to look at 1040EZ, 1040A, 1040 SLIDE 19 Chapter 7
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