Tax Unit Consumer Economics

Unit Overview I.Tax Structures II.Types of Taxes III.Personal Income Tax

Purpose of Taxes  To fund public goods and services  (roads, military, post office, police force)  To influence behavior  (alcohol, tobacco taxed to reduce consumption)  (tax breaks given for charitable giving to encourage giving)  To stabilize the economy  (raise taxes during inflation, lower during recession)  To redistribute income  (Robin Hood effect – take from the rich, give to the poor)

Tax Structures (cont’d) Progressive Tax (link) link  The more you make, the higher the % of your income you pay  Single people making $8,375 are in the 15% tax bracket  Single people making $171,850 are in the 33% tax bracket Regressive Tax  The more you make, the lower the % of income you pay  Generally viewed as unfair to poorer people  Food example on page 151 of text Flat Tax  Same tax rate for everyone, regardless of income level

II.Types of Taxes Federal, State, Local Taxes come in many varieties and are assessed at all levels Federal taxes – military, roads, clean food, air, water, FDIC, and other social programs such as Social Security / welfare State taxes – state roads, universities, state parks, police Local taxes – schools, parks, libraries, community services Excise Tax (link) (link)(link)  Imposed on manufacture or sale of goods or services  Can be used to encourage or discourage behavior  Examples include gasoline, firearms, alcohol, phone service

Types of Taxes (cont’d) Sales Tax  State tax imposed on sale of goods  Main source of revenue for state governments  Some items are not taxed or taxed at a lower rate  Food and prescriptions  Some states have no sales tax at all (New Hampshire, Oregon) Property Tax  State and local tax based on value of land and buildings  Main source of revenue for local governments  Illinois schools rely almost entirely on property taxes for funds

Types of Taxes (cont’d) Estate Based on the value of a person’s property after his/her death Although this number can change yearly, currently the exclusion is $5, Gift Tax (link) (link)(link) Giver must pay federal tax for any gift over $14,000 Includes money / items worth over $14,000

Personal Income Tax Tax occurring at federal and state level Seven states have no state income tax (link) (link) Taxable amount includes income, interest from investments Main source of revenue for federal government Don’t have to file federal tax return if you made less than $10,300 in 2015 and are single (link) link

FICA (Federal Insurance Contributions Act)  FICA tax supports both Medicare and Social Security programs  FICA tax is paid by both employer and employee  Social Security – each person pays 6.2% of first $118,500 you earn  Medicare – each person pays 1.45% of all earnings  Social Security used to pay retirement, disability and survivors benefits to workers and their families  Medicare is used to pay medical costs and prescription drug costs for people over 65 and people under 65 with certain disabilities

Unemployment Compensation (4.5)  Federal and state plan providing income to people who have lost their jobs  Employers pay 6.2% of the first $7,000 each employee earns  Employees pay 0%  If a company has 30 employees making over $7,000, they owe the government 30 * $7,000 * 6.2% = $13,020  Requirements to receive “unemployment:”  Unemployed through no fault of their own  Able to work and actively seeking employment

Personal Income Tax (cont’d) Forms  W-4 (link) (link)(link)  Completed first day(s) on a job and submitted to your employer  Required so your employer can withhold the correct federal income tax from your paychecks  If income status changes, you can submit a revised form  W-2 (link) (link)  Completed by employer and sent to you by January 31 st  Indicates wages, tips, and other income you’ve received  Must be submitted with other tax forms when due  Must receive and submit a W-2 for each job you held that year

Personal Income Tax (cont’d) Forms (cont’d) 1040, 1040A, 1040EZ  One of these forms must be completed by each person or couple  Forms mailed out to everyone in January or available at libraries, post offices, or on the IRS web site (  Which form do you use? Click here here 1099 INT  Form sent by a bank indicating interest you earned on an account  You must pay taxes on interest earned, as this is considered income 1099 DIV  Form indicating dividend earnings you obtained (i.e., stocks)  You must also pay taxes on this, as it is considered income

Personal Income Tax (cont’d) Filing Deadline April 15 of each year (video) (video)(video) If this occurs on a weekend, the deadline is the next Monday (April 15, 2007, occurred on a Sunday, so deadline is the 16th) You may file for an extension if this is impossible (out of the country, ill, etc.) Withholding  Amount taken out of each paycheck to predict tax liability  If withholding was calculated perfectly, you will owe no taxes  IRS provides a calculator to determine each person’s amount (link) (link)

Personal Income Tax (cont’d) Exemptions People living in your household whom you support financially Tax liability is reduced because you must support them Can be you, your spouse, and/or a dependent Dependents People who live with you and depend on you as a source of income Can be children, grandparents, friends of the family, … Deductions  Amount of money that reduces your total taxable income  Example: you give $100 to a church and make $45,800. You can “deduct” the $100 and are now only taxed on $45,700.

Personal Income Tax (cont’d) Itemizing Keeping track of specific deductions (need to keep receipts) If not itemizing, you may take the standard deduction (what the government allows you to take without a receipt) Keeping Records Keep previous year’s records handy as you work on current year Keep records for at least 7 years in case you are audited by IRS Tax Preparers  Paid individuals or companies that do your taxes for you  Make sure they guarantee their work (go with you if audited)  Can be expensive if your taxes are complicated

Personal Income Tax (cont’d) E-filing Can file through a bank, preparer such as H&R Block, or software such as TurboTax If expecting a refund, it will arrive much faster

Personal Income Tax (cont’d) Non-compliance (not in book)  Tax Avoidance  Legal means of reducing your tax liability through deductions, exemptions, etc.  Tax Evasion  Illegal means of reducing your tax liability through lying, not completing forms, etc. (video) video  Criminals are required to report illegal forms of income on their taxes (gambling, theft, drug trafficking), but rarely do so and are thereby guilty of this crime (Al Capone, for example)  IRS (Internal Revenue Service)  Federal government agency that collects taxes and enforces tax law

Personal Income Tax (cont’d) Non-compliance (cont’d)  Tax Audit  IRS may call you in to go over your taxes with you (video) video  May be done up to seven years after you pay a year’s taxes  If you disagree with their findings, you may appeal the decision  You have less than a 2% chance of being audited (link) (link)