1. Chapter 4 Federal Income Tax
Tax Man Max Video

2. Government
Is made up of institutions, laws and customs through which a political unit is directed.
Federal: Nation as a whole
State: Communities; people who live or work in the state
Local: County, city, townships, villages and school districts.

3. Our Tax System
Money is collected by the government from citizens and businesses in the form of taxes.
The money they collect is called revenue, and is redistributed (spent) according to the needs and priorities determined by Congress.
The largest source of revenue for the government is personal income taxes. Other forms of revenue include borrowing to cover the deficit, social security, corporate, excise, customs, estate, gift and other taxes.
On the local level, taxes provide services such as education, parks, recreation, streets and roads, police, fire and health departments.
On the national level they provide salaries for Congress and funds for national defense, highways, parks, welfare, foreign aid, and other services. Provide for the general welfare of all citizens, though as an individual, you may not benefit directly.

4. Taxes
Money that citizens are required to pay to maintain and finance the cost of their government.
Every wage earner, consumer, investor and saver in the U.S. has a legal obligation to pay taxes to his/her federal, state and local governments.
Approximately 1/3 of each dollar you earn goes to pay taxes!
“Tax Freedom Day” is usually late April… meaning that the average person works from January 1 until late April to pay their tax obligation for the year.

5. History of Taxes
Taxes were imposed on and off during history to finance wars.
In 1913, Congress ratified the 16th Amendment to the Constitution.
Was instituted as a progressive tax rate and has remained the same since.
Congress has the power to raise/lower taxes.

6. Federal Taxes Provide National defense National weather services
National parks and recreation sites
Interstate highways
Regulations and agencies to enforce safety and health standards
Student loans and aid programs
Relief when disasters strike (hurricanes, earthquakes, floods, etc.)

7. Why Pay State & Local Taxes?
Taxes collected on the state and local levels provide the following benefits to the state and local population:
Education
State welfare programs
Streets, roads, and state highways
Police, fire, and health departments
Local recreation, safety, and service programs
Ohio.gov Dept. of Taxation

8. Four Types of Taxes Taxes on Purchases Taxes on Property
Sales tax & excise tax (Regressive)
Taxes on Property
Real estate property tax (Proportional)
Personal property tax
Taxes on Wealth
Federal estate tax, state inheritance tax (Progressive)
Taxes on Earning
Income, Social Security taxes (Progressive)
Gov’t collects $ from citizens and businesses in the form of taxes.
Progressive – take larger share of income as amount of income grows. Tax rates, brackets, 15% vs. 28%.
Regressive – smaller share of income as amount of income grows. Lower income, pay a larger percent of that income. ALL consumption taxes. EXCISE
(gas, cig, alcohol)
Proportional – flat taxes. Rate stays same, regardless of income. All in a community pay same tax rate no matter what property is worth. 8

9. Are taxes fair?
Ability to pay principle- Is a commonly accepted theory of tax fairness that individuals with different amounts of wealth or income should pay different amounts of taxes.
Higher Income = Higher Taxes

10. Regressive Tax
Regressive Taxes are those that decrease in proportion to income.
-The person with the higher income pays a lower percentage of income in taxes than a lower income person.
Almost all consumption taxes are regressive:
Sales Tax- Is calculated as a percentage of the purchase price of a wide variety of items that you buy. (It is added to the sale price).
Excise Tax - Gasoline, Airline Tickets, Liquor, Tobacco, Hotel Rooms, Amusement Parks. (Usually included in the price).
Tariff - Tax paid by a foreign business on each product it sends to the U.S.

11. Proportional Taxes (Flat Tax)
Proportional Taxes are those for which the rate stays the same even though the amount being taxed increases.
Property Tax: Is based on property value
It is a major source of revenue for state and local govt’s
Helps fund: schools, local services like police, fire, libraries, parks, water & sanitation.
Estate & Inheritance Tax: Is based on value of property left at death
Gift Tax: Tax paid on property given away during one’s lifetime. (Includes money)

12. Internal Revenue Service (IRS)
An administrative agency of the Department of Treasury responsible for collecting taxes for the federal government and enforcing laws.

13. Progressive Tax Tax that increases in proportion to income.
-Tax rates increase as the level of taxable income increases.
-The person with the higher income not only pays more taxes but pays them at a higher rate.
Income Tax is progressive
- Income Tax is the largest source of revenue for the Federal Government. (pay as you go)
Tax Rates/Tax Brackets
Graduated System

14. Paying Your Fair Share
Voluntary Compliance - means all citizens are expected to prepare and file tax returns.
Due on or before April 15 of each year.
Willful failure to pay taxes is called tax evasion and is punishable by a fine and/or imprisonment.

15. What Is NOT Taxable? Accident and health insurance proceeds
Gifts and inheritances
Housing allowance for ministers
Interest on state and local bonds
Life insurance proceeds
Military allowances
Veteran’s benefits
Welfare and public assistance benefits
Worker’s compensation benefits for sickness and injury

16. Balanced Budget The budget is balanced when: Revenue (money received)
Expenditures (money spent) = EQUAL
Example: If the government receives $1.9 trillion, they should only spend $1.9 trillion. When they spend more than they receive they are operating in a deficit. (They are borrowing money to pay for expenditures).
Our nation’s debt currently exceeds 17 trillion dollars!
As of January 2014

17. What is a trillion dollars?
$1,000,000,000,000
If you laid a $100 bill end to end it would make a chain that would go from the earth to the sun 200 times.
What does a trillion dollars look like?

18. Taxes 2012

19. 2012 Income in $$$$ $2,450,000,000,000 (Trillion)
$784 (Billion) Personal Income Tax 32%
$735 (Billion) Borrowing to cover Deficit 30%
$588 (Billion) Social Security & Medicare 23%
$171.5 (Billion) Excise Tax, Customs, Estates, Gifts 6%
$171.5 (Billion) Corporate Income Taxes 5% 19

20. 2012 Outlays in $$$ $3,537,000,000,000 Trillion
$1,344,060,000,000 (Trillion) Social Security & Medicare 38%
$ (Billion) National Defense 24%
$ (Billion) Social Programs 21%
$ (Billion) Physical, Human & Community Development 9%
$ (Billion) Net Interest on the Debt 6%
$ (Billion) Law Enforcement/General Govt’ 2%
= Additional Deficit in 2012 of $1.087 Trillion 20

21. History of National Debt http://www.usdebtclock.org
The U.S. has had debt since our inception Revolutionary War debt of 74 million (1791)
Went to ZERO in Under President Andrew Jackson Then grew again...
After the Civil War $2.7 Billion
After WWI $22 Billion
After WWII $260 Billion
Debt more than tripled between
The debt ceiling acts as a check on that overall debt: When Treasury needs to issue debt above the ceiling, Congress raises the ceiling.
The US has been in debt ever year except for 1835!

22. Form W-4
A form that helps the employer determine how much to withhold from an employees paycheck for federal income tax purposes.

23. 3 Types of Tax Return Forms
Form 1040EZ - Most students complete 1040EZ
Single or Married with No dependents claimed
Taxable income $100,000 or less
Less than $1,500 of taxable interest
No itemized deductions
Form 1040A
Adjustments to income are allowed
Tax credits for child care & dependent care are allowed
Form 1040
Taxable income over $50,000
Itemized deductions
3 basic forms. Depends on type and amt of income, # deductions, and complexity. Over 50,000 must use itemize 1040.
Tax credit for child-care expenses, education expenses, elderly or disabled, retirement savings, child tax credit, adoption credit 23

24. Exemptions
An exemption is an allowance a taxpayer claims for each person dependent on the taxpayer’s income.
You automatically get one exemption for yourself unless someone else claims you on their return (parents).

25. Deductions
Are expenses the law allows taxpayers to subtract from adjusted gross income.
Some people itemize deductions where they list certain expenses which help to reduce their tax liability.
Instead of itemizing most people choose to use the standard deduction which is a base amount that will reduce a person’s tax liability.

26. Tax Credit vs Tax Deduction
$100 Tax Credit reduces your taxes by $100
DEDUCTION
$100 Tax Deduction reduces taxes by $28 if you are in the 28% bracket

27. Calculate Taxable Income
Gross Income
All taxable income received
Wages, salaries, tips interest, dividends, unemployment, alimony, workers’ compensation, etc.
Gambling winnings, bartering, pensions, annuities, social security, self-employment income, rental income, royalties, etc.
Adjusted Gross Income
Gross income less allowable adjustments
Taxable Income
Adjusted gross income less deductions and exemptions
Amount of income used to determine tax
NOT taxable – child support, gifts, inheritances, life insurance benefits, veterans’ benefits. WAGES – all income from employer, reported on W-2. INTEREST – banks, savings bonds INT. ADJ GROSS – law allows you to subtract some types of spending (contributions to IRA. Reduce income subject to tax, thus reducing your total tax. 27

28. How Federal Taxes Are Determined
GROSS INCOME
-Adjustments (IRA’s Alimony, Business Deductions)
ADJUSTED GROSS INCOME
-Itemized Deductions or the Standard Deduction
Exemptions
TAXABLE INCOME
Tax is based on the tax tables or schedules

29. W-2
Statement of income earned and taxes deducted during the preceding year.
Sent to you by each employer you worked for that year.
Must be mailed out by January 31.

30. Completing Your Federal Income Tax Return
April 15th
Summary of tax calculation:
Filing status and exemptions
Income
Adjustments to income
Tax computation
Tax credits
Other taxes (such as from self-employment)
Payments (total withholdings, estimated payments)
Determine if you are due a refund or owe
Sign your return
DUE DATE to be mailed of April 15th

31. Tax Assistance Tax Information Sources
IRS, Tax Publications, the Internet
Electronic Filing
Tax Preparation Software
Tax Preparation Services
Computerized Software, H&R Block, Accountants, and Attorneys
If your professional tax preparer makes a mistake, you are still responsible for paying the correct amount, plus any interest & penalties.
Apr 15 unless weekend or holiday then next business day. Save all receipts for itemized deductions, paystubs (receive by 1-31) you are responsible for accuracy even if you pay someone!! Save all copies for 6 yrs. IRS EFILE. Pay with cc or refund directly deposited. SOFTWARE-turbotax, tax cut, tips and add’tl info, all necessary forms, leads you thru entire process step-by-step. Errors 31

32. Tax Audit Process About 1% of all returns are audited
If you claim large or unusual deductions you are more likely to be audited
3 Types of Audits
Correspondence for minor questions
Office audit-takes place at IRS office
IRS agent visits your home, business or accountant’s office
Amended Return 1040X 32