Pick a celebrity. Describe profession. Describe tax problem. (amounts owed, years) Punishment for tax evasion. Others: ▫Sales tax worksheets ▫Types of taxes ▫International Studies or Government p.159

Our Tax System Chapter 7

Types of Taxes The government collects money from citizens and businesses in the form of taxes. These incoming funds to the government are called REVENUE.

Basics The government spends the revenues received according to the priorities set by Congress. The LARGEST sources of government revenue is income taxes. Other sources of taxes: ▫Social Security tax ▫Unemployment Insurance taxes ▫Inheritance and estate taxes ▫Property Taxes

Types of Taxes PROGRESSIVE: ▫Take a larger share of income as the amount of income grows. ▫(The higher your income, the more taxes you pay.) REGRESSIVE: ▫Take a smaller share of income as the amount of income grows. ▫Ex: Sales taxes

Sales Tax Example… Assume a state charges a 5% sales tax. If you buy an item worth $10, your tax would be 50 cents ($10 x.05 = $.50), so you would pay $10.50 for the item. For someone who earns $50/week, this 50 cents represents 1% of their income. ($.50/$50=1%) For someone who earns $100/week, this represents only ½% of their income ($.50/$100= 1/2 %) Because the price of the item is the same regardless of income, the sales tax is a bigger burden on the lower-income person.

Types of Taxes PROPORTIONAL: ▫Also called flat taxes. ▫The rate stays the same regardless of income. ▫Ex: Property Taxes ▫All people owning property in the same community pay the same tax rate, whether their property is worth $50,000 or $500,000. ▫Everyone owning a house that has the same assessed value would pay the same tax, regardless of income.

Where do our tax dollars go? Locally: ▫Education ▫Parks ▫Roads ▫Police, fire, and health departments Nationally: ▫Salaries for Congress ▫Funds for national defense ▫Highways ▫Wildlife refuses ▫Welfare ▫Foreign Aid

The Tax System Our tax system is complex. IRS (Internal Revenue Service) ▫The main functions are to collect income taxes AND enforce tax laws. ▫Also provides services to tax payers. ▫ (Find tax information, download tax forms, and even file taxes electronically.)

The Power to Tax The power to levy taxes rests with Congress. Proposals to increase or decrease taxes may come from… ▫President ▫The Department of Treasury ▫A member of Congress representing the interests of a geographic area. The House and Ways Committee studies the proposals and makes recommendations to the full House. Revenue bills must pass a vote in the House and the Senate and then be signed by the President before they become law.

Paying Your Fair Share Tax rates increase as taxable income increases. Tax rates apply to income ranges, or tax brackets. Our tax system is based on voluntary compliance, which means that all citizens are expected to prepare and file tax returns. Willful failure to pay taxes is called tax evasion, which a crime punishable by a fine, imprisonment, or both. Each year, the IRS calls millions of taxpayers for an audit, which an examination of their tax returns.

Celebrity Tax Evaders Martha Stewart Al Capone O.J. Simpson Pete Rose Wesley Snipes Marc Anthony Darryl Strawberry Tom Daschle Lindsay Lohan Ja Rule Mary J. Blige Kwame Kilpatrick Willie Nelson Nicolas Cage Lindsey Vonn Leonna Helmsley Jesse Jackson, Jr. Ty Warner Lauryn Hill Khloe Kardashian Judy Garland Ruben Studdard

FILING TAX RETURNS Filing Status Describes your tax-filing group, which is based on your marital status. You must mark one of the following... ▫Single person (not married) ▫Married person filing a joint return ▫Married person filing a separate return ▫Head of Household (can choose if married or single and meet certain conditions in providing a home for people dependent on you) ▫Qualifying widow (er)

FILING TAX RETURNS Exemptions The 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. You’re allowed one exemption for yourself unless someone (such as your parent) claims you. You’re allowed an exemption for your dependents. ▫A person who lives with you and for whom you pay more than half his or her living expenses.

FILING TAX RETURNS Gross Income: All the taxable income you receive. Earned IncomeUnearned IncomeNon Taxable Income WagesInterestChild Support SalariesDividendsGifts TipsAlimonyInheritances Unemployment compensation Life Insurance benefits Worker’s compensation benefits Veteran benefits

Gross Income Wages, salaries, and tips: includes all income you received through employment. Reported on your W-2 form. Interest income: all taxable income from banks, savings and loan associations, credit unions, savings bonds, etc. Dividend income: money, stock, or other property that corporations pay to stockholders in return for their investment. Unemployment compensation Social Security benefits Alimony and Child Support

Adjusted Gross Income You are allowed to subtract some types of spending from gross income. You can adjust your income by subtracting such things as… ▫Contributions to individual retirement accounts (IRAs) ▫Student Loan Interest ▫Tuition and fees

Taxable Income Itemized deductions: expenses you can subtract from adjusted gross income to determine taxable income. ▫Must fill out a separate form. ▫Common expenses:  state and local income taxes  property taxes,  home mortgage interest,  gifts to charity  losses from theft or property damage  moving expenses Standard deduction: stated amount that you may subtract from adjusted gross income instead of itemizing your deductions. You taxable income is amount you pay taxes on.

Tax Credits Tax Credit: amount subtracted directly from your taxes owed. ▫Reduces the tax. ▫Example: if the tax tale shows that your total tax is $1,000 and you claim a tax credit of $100, then your tax drops to $900.

Who must file? ▫If you earned enough income to owe taxes. ▫If you earned enough money to owe taxes but taxes were withheld from your paychecks. (You can claim a refund.) When to file? ▫No later than April 15 of the year after you earned income. Which form to use? ▫1040, 1040A, 1040EZ ▫Supporting forms may be needed. ▫Depends on the type and amount of income, # of deductions, and your tax situation. Where to begin? ▫Save all receipts and proofs of payments. You will get W-2 form(s) by Jan. 31