Chapter 5 Taxes

 Payroll Taxes ◦ Largest part of government revenue ◦ Based on employee total earnings ◦ Paid by you and your employer ◦ Include income taxes and social insurance taxes

 Income Taxes ◦ NOT fixed percentage of income that all Americans pay ◦ Varies on financial and family situation ◦ You are responsible for calculating tax you owe ◦ Support social programs (ie: Social Security, Medicare) ◦ Federal Insurance Contributions Act (FICA) – requires workers to contribute to Social Security and Medicare

 Withholdings ◦ Deducting money from your wages ◦ PREPAYS your federal income tax and social insurance tax ◦ Enables government to collect taxes at a steady rate the entire year

 Your Paycheck Stub ◦ Gross Income – amount BEFORE taxes are withheld ◦ Net Income (“take home pay”) – amount you receive AFTER withholdings Net Income = Gross Income - Withholdings

 Form W-4 ◦ Amount of income tax you owe depends on:  Your GROSS income  Number of people you support (your dependents)  Other expenses you pay  W-4 form – YOU provide your employer with this information!  YOU are responsible for the consequences if your withholdings are too small.

 Allowances ◦ Number that reduces the amount of money withheld ◦ LARGER # of allowances – SMALLER $ withheld ◦ Number of allowances will not change the amount of tax you owe. ◦ You are responsible for calculating the amount of tax you owe.

 A tax return is a set of forms used to calculate tax obligation  If tax return shows withholdings weren’t enough – you owe!  If return shows you more than covered your tax obligation – you get a refund!  Income = wages, tips, interest

 Sources of Information for your Tax Return: ◦ Form W-2 – summary of earnings for a year from a JOB ◦ Form 1099-INT – statement of interest paid on a BANK account

 Income Tax Forms: ◦ Form 1040 – used to itemize deductions (expenses you can legally subtract from your income when figuring your taxes) ◦ 1040 EZ – the simplest of tax forms used by most young people  Single  Have no dependants (people you support financially)  Under 65  Earned no more than $400 in interest

 How to Complete a 1040 EZ: ◦ Know your Social Security Number ◦ Adjusted Gross Income – the total of ALL income from ALL sources ◦ Determine your deduction  If your parents or guardian claim you as a dependent, you may NOT claim yourself too! ◦ Figure your Taxable Income  Subtract exemptions and deductions from your adjusted gross income Taxable Income = AGI – (exemptions + deductions)

 Payments and Tax ◦ Federal Income Tax Withheld – tax already taken out each pay period ◦ Earned Income Credit – some workers with low income qualify for EIC. Treated as tax payment. Qualifications are found in instruction booklet. ◦ Total Payments – All withholdings and EIC = total amount of your taxes that you have already paid. ◦ Tax – the instruction booklet for Form 1040 EZ contains a table that tells total tax obligation.

 W-2 reports your total wages were $33,739  W-2 reports $4,053 was withheld from your wages for Federal Income Tax  Form 1099-INT reports your interest income was $281  You are single and not claimed by any other person as a dependent

1) What is your adjusted gross income? What is your adjusted gross income? 2) How much is your taxable income? How much is your taxable income? 3) How much is your total tax for the year? How much is your total tax for the year? 4) What is the amount of your payment of refund? What is the amount of your payment of refund?

Add total wages (W-2) to Taxable Interest (1099-INT) $33,739 + $281 = $34,020 Back

Subtract your exemptions & deductions from your adjusted gross income. In this case, we use the STANDARD DEDCUCTION for a single person. $34,020 - $6,950 = $27,070 Back

Look at the tax table on p Find where your taxable income falls in the corresponding column for single people. $4,286 Back

Subtract your total tax payments from your tax. $4,286 - $4,053 = $233 You owe $233!

 Government Income ◦ Taxes and Borrowing (Bonds) ◦ Largest part of federal government income = Income taxes!

 Contributions ◦ Employee:  Social Security – 6.2%  Medicare – 1.45%  TOTAL FICA = 7.65% ◦ Employer:  Match payments for Social Security and Medicare If you are SELF-EMPLOYED you must pay the entire 15.3% to Federal Government!

 Classifying Taxes ◦ Every taxpayer should be treated equally under the law ◦ Does not mean that all taxpayers should pay the same amount of tax ◦ Principles of Taxation  Benefit Principle – those who use a good or service should pay for it.  Ability to Pay Principle – those who have larger incomes should pay more of what they receive.

 Taxes and Income ◦ Progressive Tax – larger share (percentage) of income as the amount of income grows. (most federal taxes are progressive) ◦ Regressive Tax – smaller share (percentage) of income as the amount of income grows. (most state and local taxes are regressive)

 How Taxes are Collected ◦ Direct Taxes – paid directly to government (income and property taxes) ◦ Indirect Taxes – included in cost of goods & services (sales tax) ◦ Pay-as-you-earn Tax – Federal Withholdings taken each pay period

 Types of Tax ◦ Income Tax – Federal, State and Local ◦ Sales Tax – added to the price of goods or services upon purchase ◦ Property Tax – based on the value of real estate ◦ Excise Tax – collected on specific goods and services and included in the price.

◦ Estate Tax – property received from someone who dies ◦ Gift Tax – paid on cash or property worth more than $14,000 ◦ Business or License Tax – paid for certification and accompanied by a test ◦ Customs duties or Tariffs – imposed on some imports

 Government uses taxes to bring in revenue and INFLUENCE CONSUMERS.  Sin Taxes – try to deter consumers from buying certain products. (tobacco most common)  Tax Cuts – lower taxes encourages consumers to make beneficial choices. Examples: Lower sales tax = encourages spending Lower property tax = people move to certain area Charity tax breaks = encourages giving

 Federal government spends nearly $3,500,000,000,000 each year (Three Trillion!)  Roughly $13,000 per American  Most pays for PUBLIC GOODS – benefit all Americans

 Six major areas where your federal tax dollars are used: ◦ Social Security, Medicare, Retirement ◦ National Defense, Veterans & Foreign Affairs ◦ Social Programs (Medicaid, food stamps, unemployment) ◦ Net Interest on Debt ◦ Physical, Human & Community Development ◦ Law Enforcement & General Government

 State & Local Governments Provide: ◦ Roads ◦ Police & Fire ◦ Criminal Justice System ◦ Public Schools ◦ State Colleges & Universities ◦ Hospitals ◦ Sewage Treatment Plants ◦ Unemployment Programs