CHAPTER 5 TAXES How Much of Your Income Will You Keep? Economic Education for Consumers 4/27/2017 CHAPTER 5 TAXES How Much of Your Income Will You Keep? WHAT’S AHEAD 5.1 Taxes and Your Paycheck 5.2 File a Tax Return 5.3 Taxes and Government 5.4 Government Spending CHAPTER 5

LESSON 5.1 Taxes and Your Paycheck GOAL Describe payroll taxes and factors that determine withholding. © 2010 South-Western, Cengage Learning

KEY TERMS payroll tax income tax Federal Insurance Contributions Act (FICA) withholding gross income net income Form W-4 Internal Revenue Service (IRS) allowance © 2010 South-Western, Cengage Learning

KEY TERMS payroll tax – a tax placed on income earned by individuals. (Note: the federal gov’t receives the largest part of its revenue from payroll taxes). income tax – a tax you pay on most types of income you receive (including what you earn at work and other income). Federal Insurance Contributions Act (FICA) – the law that requires workers and their employers to contribute to Social Security and Medicare. withholding – the method by which your employer collects payroll taxes from your wages. gross income – the amount you earn before taxes are withheld.

KEY TERMS net income – the amount you receive after withholdings are subtracted from your gross pay. Form W-4 – provides information your employer needs to determine the proper amount to withhold from your paycheck. Internal Revenue Service (IRS) – the federal agency that collects income taxes. allowance – a number that reduces the amount of income withheld from your pay.

Payroll Taxes Income taxes FICA, or contributions to Social Security and Medicare © 2010 South-Western, Cengage Learning

Withholding Your paycheck stub Form W-4 Gross income Net income Your responsibility for proper withholding Allowances Adjusting your allowance Overwithholding as a way to save © 2010 South-Western, Cengage Learning

Checkpoint 5.1 What are payroll taxes and how is the amount that is withheld from income determined? © 2010 South-Western, Cengage Learning

Checkpoint 5.1 answer What are payroll taxes and how is the amount that is withheld from income determined? Payroll taxes are calculated according to income as it is earned and paid by employee, employers, or both. The amount that is withheld is based on the employee’s level of income and information provided on the W-4 form completed by the employee. © 2010 South-Western, Cengage Learning

LESSON 5.2 File a Tax Return GOALS Identify sources of information you need to complete your income tax return. Complete a federal Form 1040EZ. Describe how taxes differ for a self-employed person versus an employee. Explain why more than half of individual income tax returns are filed online. © 2010 South-Western, Cengage Learning

KEY TERMS tax return Form W-2 Form 1099-INT Form 1040EZ dependent deduction Social Security number taxable income © 2010 South-Western, Cengage Learning

KEY TERMS tax return – a set of forms that taxpayers use to calculate their tax obligation. Form W-2 – a summary of your earnings and withholdings for the year. Form 1099-INT – a statement of the interest your bank paid on your savings for the year. Form 1040EZ – the simplest form for filing federal income tax returns. (Note: most young people qualify to use this form).

KEY TERMS dependent – people you support financially, such as children. deduction – expenses you can legally subtract from your income before calculating your taxes. Social Security number – a unique number assigned to you by the federal government. taxable income – the income figure that is used to determine your taxes.

Sources of Information for Your Tax Return Form W-2 Form 1099-INT © 2010 South-Western, Cengage Learning

Income Tax Forms Form 1040EZ Form 1040A or 1040 © 2010 South-Western, Cengage Learning

How to Complete a 1040EZ Identify yourself Income Payments and tax Refund Amount you owe Sign Check for accuracy and file your return © 2010 South-Western, Cengage Learning

Self-Employment Tax Paying on a quarterly basis Schedule C (1040) © 2010 South-Western, Cengage Learning

Electronic Filing Advantages of electronic filing Filing options Shorter processing time Faster refund Filing options IRS web site Tax preparation software © 2010 South-Western, Cengage Learning

Checkpoint 5.2 What tax information is provided to you by your employer and your bank? What information do you need to calculate the amount of additional tax you owe or refund that is owed to you using a Form 1040EZ? What are the differences in the way traditional employees and self-employed people pay their taxes? How can you file your tax return online? What is the advantage of filing online? © 2010 South-Western, Cengage Learning

Checkpoint 5.2 answers What tax information is provided to you by your employer and your bank? Employers provide Forms W-2, which summarize earnings and withholdings. Banks provide Forms 1099-INT, which summarize interest income. © 2010 South-Western, Cengage Learning

Checkpoint 5.2 answers What information do you need to calculate the amount of additional tax you owe or refund that is owed to you using a Form 1040EZ? Amount of your earned income Interest income Income tax withholdings © 2010 South-Western, Cengage Learning

Checkpoint 5.2 answers What are the differences in the way traditional employees and self-employed people pay their taxes? Taxpayers who work for an employer have their taxes deducted each pay period. Self-employed taxpayers calculate the amount of tax they owe each quarter and pay that amount to the government. © 2010 South-Western, Cengage Learning

Checkpoint 5.2 answers How can you file your tax return online? What is the advantage of filing online? Use your tax preparation software to enter your tax information electronically or pay a tax service to do it for you. Online filing generally allows you to get your tax refund faster. © 2010 South-Western, Cengage Learning

LESSON 5.3 Taxes and Government Objectives: By the end of class, students will be able to: Describe where the federal government gets the money it spends. Explain principles and types of taxation. © 2010 South-Western, Cengage Learning

KEY TERMS Sales tax Property tax Excise tax Estate tax Gift tax Business or license tax Customs duty or tariff © 2010 South-Western, Cengage Learning

Sources of Federal Government Income for 2006 Personal income taxes 39% Borrowing to cover deficit 9% Excise, customs, estate, gift, and miscellaneous taxes 7% Social Security, Medicare, and unemployment and other retirement taxes 32% Corporate income taxes 13% © 2010 South-Western, Cengage Learning

Social Security and Medicare Contributions to Social Security Contributions to Medicare Your employer’s contribution © 2010 South-Western, Cengage Learning

Principles of Taxation Benefit principle Ability-to-pay principle © 2010 South-Western, Cengage Learning

Taxes and Income Progressive taxes Regressive taxes Proportional taxes © 2010 South-Western, Cengage Learning

How Taxes Are Collected Direct taxes Indirect taxes Pay-as-you-earn taxes © 2010 South-Western, Cengage Learning

Types of Taxes Income taxes Sales taxes Property taxes Excise taxes Estate and gift taxes Business and license taxes Customs duties and tariffs © 2010 South-Western, Cengage Learning

Checkpoint 5.3 What are the major sources of revenue for the federal government? What is the main difference between state or local taxes and federal income taxes? © 2010 South-Western, Cengage Learning

Checkpoint 5.3 answers What are the major sources of revenue for the federal government? Personal income taxes Social Security and Medicare taxes Corporate income taxes Borrowing Other taxes that include excise, customs, estate, gift, and miscellaneous taxes © 2010 South-Western, Cengage Learning

Checkpoint 5.3 answers What is the main difference between state or local taxes and federal income taxes? Federal taxes take a larger percentage of consumers’ income than do state and local taxes. © 2010 South-Western, Cengage Learning

LESSON 5.4 Government Spending GOALS Identify how taxes can influence consumer decisions. Explain how the government spends the money it receives. © 2010 South-Western, Cengage Learning

KEY TERM public good © 2010 South-Western, Cengage Learning

The Power to Influence “Sin” taxes Tax cuts Charities © 2010 South-Western, Cengage Learning

Government Spending Social Security, Medicare, and other retirement Social programs National defense, veterans, and foreign affairs Physical, human, and community development Net interest on the debt Law enforcement and general government Debt reduction © 2010 South-Western, Cengage Learning

U.S. Government Spending for 2006 2% Law enforcement and general government 36% Social Security, Medicare, and other retirement 19% Social programs 23% National defense, veterans, and foreign affairs 12% Physical, human, and community development 8% Net interest on the debt © 2010 South-Western, Cengage Learning

Examples of What State and Local Governments Provide Building and maintaining roads Operating police and fire protection services Maintaining a criminal justice system Building and staffing schools Building and operating state colleges and universities Supporting medical facilities Constructing and operating sewage treatment plants Operating unemployment compensation programs © 2010 South-Western, Cengage Learning

Checkpoint 5.4 How can taxes influence your buying decisions? How can your local government use taxes to help local workers? Describe the categories of federal government spending. What types account for the largest part of the total? © 2010 South-Western, Cengage Learning

Checkpoint 5.4 answers How can taxes influence your buying decisions? How can your local government use taxes to help local workers? Taxes influence buying decisions by raising or lowering prices. Local governments can lure businesses to an area by offering lower taxes to businesses willing to locate there. © 2010 South-Western, Cengage Learning

Checkpoint 5.4 answers Describe the categories of federal government spending. What types account for the largest part of the total? Types of federal spending include Social Security, Medicare and other retirement programs; social programs; national defense; physical, human, and community development; law enforcement; and payments of interest on the national debt. More than half of total federal spending goes for Social Security/Medicare (36%) and for national defense (23%). © 2010 South-Western, Cengage Learning