Introduction to Economics Johnstown High School Mr. Cox Investments and Personal Finance

Why invest? Now vs Later Jim invests $100 a month ($1,200/year) at age 25 for 10 years at 10.00% compounded monthly (compounding continues after age 35) Sam invests $100 a month ($1,200) at age 35 for 30 years at 10.00% compounded monthly Who has more money at age 65?

Time Is Money

Where Can You Put Your Money? Under your mattress Little risk, no room for capital gain Savings bank holds your money CDs (Certificate of Deposit) bank holds your money, time specified Money Market short term Bonds “loan”, lower risk (usually)

Where Can You Put your Money? Stocks “ownership”, risk varies Mutual Funds “pool”, risk varies ETF’s “index”, risk varies

What Programs are Available for Retirement Savings? What are they, how do they work, and what are the underlying investments Traditional IRA Roth IRA 403 (b) 401 (k)

IRA (Individual Retirement Account) After-Tax Maximum annual contribution cannot be more than gross income Account grows tax deferred Taxes paid once distributions are taken

Roth IRA Maximum annual contribution cannot be more than gross income Taxes are applied before investment How to choose? Why one or the other? traditional-ira

403(b) Section of IRS tax code for public employees Schools, colleges, state agencies Immediate vesting 2009 max contribution $15500 Portable/Movable to other accounts

401(k) Section of IRS tax code for private employees Corporations, LLC’s, self-employed Employer sponsored Matching/vesting schedules 2008 max contribution $15500 Portable? Maybe..

How To Manage Risk Consult an investment professional Match your investments with your time frame Pick funds managed by experienced professionals Invest regularly - in good times and bad Diversify! Large, mid, small companies Aggressive when young, conservative when older

How To Get Started. Talk to an advisor Start doing research Tips to help get started Begin planning 401(k) - go to employer IRA - Bank/ mutual funds/ETFs do own investments T. Rowe Price, Vanguard, Fidelity, etc use a financial advisor Be sure to think about taxes……….

Completing Your Taxes For you as teenagers, you will more than likely be completing the 1040EZ form 1040 is basic income allowance sheet 1040ez is filing for low income/minors/dependents/single Reports income and other financial information to federal government Separate forms used for state/local governments Use W-2 form to fill out

14 I’ve Got A Job! What’s an I-9 and a W-4?

Form I-9 – Employment Eligibility Verification Proves you aren’t an illegal alien Penalty if not one on file for each employee Keep 3 years after employee is gone Acceptable documents used to prove citizenship: Passport Voter’s registration School or military ID Driver’s license Social security card 15

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So What Is A W-4? New employees fill out this form Tells employers how much federal income tax to withhold from paycheck 17

Filling Out the W-4 Correctly If don’t fill out correctly: Owe money when taxes are due April 15 Could be taking out too much tax from paycheck Lose potential interest 18

A Few Key Terms You Need To Know WITHHOLDING: Represents money that an employer deducts from paycheck to pay all or part of employee’s taxes However, depending how much make for the year, you may not have to pay federal income tax. If this is you, you would be EXEMPT from paying 19

Can you put Exempt on your W4? You can put “Exempt” if: 1. Weren’t required to pay federal income tax last year 2. Don’t expect to this year either (made less than $6100 { std deduction - base amount of income that is not taxed }) 3. If under 19 or a full-time student (or until 24 yr/full time) 4. CAN parent(s) claim you as a dependent? DEPENDENT: A person who relies on another taxpayer for at least half of his or her support (food, shelter, clothing, education, etc.) If divorced oCustodial parent (has child 1 more day than other) oOne makes more money 20

Examples: If you live with parents and under 19, you can be claimed as a dependent regardless of how much you make. While your parents may not choose to claim you, test is whether they CAN. If they can claim you and you are under 19, and expect to make under $6100 in the calendar year, you will likely NOT have to pay federal income tax. Note: If you are at least 19 but under 24, parents can still claim you as a dependent as long as you are a FULL-TIME Student! 21

I don’t qualify for Exempt status – now what? Need to fill out the personal allowances worksheet on the W- 4 form! The more exemptions (allowances) you claim, the _____ tax withheld from paycheck Claim “____” will result in the largest amount of tax to be withheld 22

What if I Make a Mistake? Claim exempt and make more than $6100? More than likely have to owe taxes! If you don’t claim exempt (0 allowances) More than likely break even or receive a refund! 23

The Paycheck Stub Miscellaneous Information Gross Income Deductions May get refund on Fed and State No refund on SS or Medicare Net Income 24

The W-2 Must receive these by January 31 st from your employer Summarizes How much you made during the year (Earned Income) How much you paid in for taxes Use to help fill out tax return If error, see employer to fix 25

W-2 continued W-2 – will have 3 copies Your records Attach to state tax return Attach to federal tax return 26

Fill out w wb

1099-INT Receive this form from your bank Shows interest earned for year Remember: Interest is considered “unearned income” and may have to pay tax on it! 28

Fill out w wb

30 Am I Required to File a Tax Return?

Am I Required to File a Tax Return (as a dependent)? Due April 15! Required? Depends… *Your income for the year *If parents can claim you, you must file if: 1.Your unearned income was over $ Your earned income was over $6100 Filing Requirement Worksheet for Most Dependents 1. Enter dependent's earned income plus $ Minimum amount$ Compare lines 1 and 2. Enter larger amt (Adjusted Earned Income) 4. Maximum Amount$ Compare lines 3 and 4. Enter the smaller amount 6. Enter the dependent’s gross total income. If line 6 is more than line 5, the dependent MUST FILE an income tax return. 3. OR if… 25

Am I Required to File a Tax Return? Jill Williams, 18, had two jobs during the past year. She worked as a waitress at La Fogata, where she earned $6800 and as a summer counselor, where she earned $2400. Jill also made $375 in interest. Do I have to file return WS 27 Filing Requirement Worksheet for Most Dependents 1. Enter dependent's earned income plus $ Minimum amount$ Compare lines 1 and 2. Enter larger amt (Adjusted Earned Income) 4. Maximum Amount$ Compare lines 3 and 4. Enter the smaller amount 6. Enter the dependent’s gross total income. If line 6 is more than line 5, the dependent MUST FILE an income tax return.

Forms? 1040EZ – simplest to file 1040 – most lengthy to file 33

How Do I File the 1040EZ? 34

How Do I File the 1040EZ? Must meet requirements to use EZ: Single Claim no dependents Taxable income < $100,000 No income other than wages, salaries, and tips (shown on W-2) Up to $1500 taxable interest (shown on 1099INT) 35

Filling out the 1040EZ Terminology: Adjusted Gross Income (AGI) Sum of wages and taxable interest Deduction Amount tax payers may subtract from their AGI before tax is determined (reduction in income) Taxable Income Part of income you must pay taxes on Credit Direct reduction of taxed owed 36 Fill out 1040EZ wb

Now it is your turn to try! Print your name, address and Social Security Number. Using the sample W-2 form, complete the Income section and calculate your taxable income. Complete the payments and tax section and then go to the booklet (sheet) provided in the handouts to calculate your tax.

Continued Find out whether you will get a refund (Line 11a) or you owe money to IRS (Line 12). If you are getting a refund, you can have your refund mailed to you or directly deposited into your bank account. If you owe money, you have to write a check. Be sure to sign your return and add in additional information as required. Good Luck!!

Sending in the Return Photocopy the EZ form for record Mail in W-2 & 1099 INT with return If owe payable to “United States Treasury” 39

Don’t Want to Pay? What could you have done differently? If you don’t choose to pay, IRS will add 5% to what you owe for each month you don’t pay! W-2 Claimed “0” rather than exempt so take taxes out Watch out for scam artists! 40