1. Paying for Government Services Textbook References- Chapter 3

2.  When founded in 1776, federal income tax did not exist.  1 st tax was created in 1862 in order to finance the Civil War  Abolished in 1872 after the war ended  Tax was again proposed in 1895, but declared unconstitutional

3.  1913 Congress ratified the 16 th Amendment enabling the federal government to levy a tax on individuals based on personal income.

4.  Taxes provide a way for federal, state, and local governments to collect revenue and provide public goods:  Public Goods library, fire department, local park, roads, monitor clean air, clean water ◦ All are paid by taxes that can be benefit to all regardless of income

5.  All individual taxpayers are responsible for filing their tax return.  Must report taxable income  Accurately calculate income tax owed  File necessary forms on time

6. IIncome received from employment is earned income ◦W◦Wages ◦T◦Tips ◦C◦Commission ◦B◦Bonuses ◦P◦Piecework jobs ◦S◦Salaries ◦B◦Business operations(profits/losses) continued Earned and unearned income is taxable

7. IIncome received from sources other than employment is UNEARNED INCOME ◦I◦Interest Income (1099-Int form) ◦S◦Social Security and retirement account payments ◦R◦Rent, inheritance, awards, gifts, alimony ◦U◦Unemployment compensation ◦I◦Investments & Stock Dividends ◦C◦Capital Gains RRental Properties RReal Estate Sales continued Earned and unearned income is taxable

8. IIncome earned by the self-employed DDisadvantages of self-employment: ◦M◦Must arrange and pay for own employee benefits; can be costly. ◦M◦Must pay entire Social Security and Medicare tax, rather than half the cost

9. GGovernment uses its taxing authority to ◦g◦generate revenue to provide goods and services for public’s benefit ◦s◦stabilize the economy ◦a◦address social challenges ◦i◦influence behavior

10. 1. Personal income tax—your income 2. Purchase (Sales) tax—goods and services 3. Property tax—real estate property tax and personal property tax 4. Wealth tax—assets (estate and gift taxes) 5. Excise tax—sale and transfer of certain items, including air travel, phone service, gasoline continued

11. CCommon payroll deductions: ◦F◦FICA (Federal Insurance Contributions Act): SSocial Security and Medicare ◦F◦Federal withholding tax ◦S◦State and city withholding taxes, if applicable ◦O◦Other benefits (insurance purchased through employers)

12. LLimited resources force governments to make choices AA budget reflects priorities and goals of government and its people WWhen government spends more than it collects, it must borrow money DDeficit spending increases the national debt

14. PPayments that must be made, even if the government must borrow money to do so MMake up more than 60 percent of federal government’s budget IInclude entitlement programs and interest on the national debt

15. EEntitlement programs: ◦S◦Social Security ◦M◦Medicare ◦M◦Medicaid (for older adults and people with disabilities) ◦V◦Veterans’ pensions and medical care ◦N◦Nutrition and housing assistance ◦U◦Unemployment compensation ◦F◦Federal employee retirement benefits

16. AAn expense that can be adjusted according to needs and revenues IInclude national defense expenses IInclude nondefense expenses: ◦C◦Costs of government operations and programs ◦F◦Funds given to state and local governments

17. TTaxation and government spending vary widely between states and between cities MMost state and local government revenues come from ◦p◦personal and corporate income taxes ◦s◦sales tax ◦r◦real estate and personal property taxes

19. DDirect—paid directly to government by taxpayers IIndirect—imposed on one party, but paid by another

20.  Three Tax Bases ◦ Income (what people earn) ◦ Person’s Wealth (what is owned) ◦ Consumption (what one uses)  Tax on Consumption is the same rate for everyone, no matter what a person’s income is.

21.  Three basic tax structures 1.Progressive 2.Regressive 3.Proportional  Structure 1: Progressive ◦ When tax takes a larger share of income from people with a high income rather than from low- income earners  Progressive example - Federal government

22. 2015 The more you make the higher tax amounts you pay

23.  Structure 2: Regressive ◦ When more money is taken from those with low income rather than high income ◦ Regressive Example: City Sales Tax  Because a consumer with a low income is paying a larger share of income than a high-income buyer  Structure 3: Proportional ◦ When all individuals are taxed at the same rate regardless of income  Proportional Example: Flat Tax

24.  Excise Tax ◦ A federal or state tax imposed on the manufacture and distribution of certain consumer goods  Example – environmental taxes, communications taxes, fuel taxes  Internal Revenue Service (IRS) ◦ The federal agency responsible for administering and enforcing the Treasury Department’s revenue laws through:  Assessment and collection of taxes  Determination of pension plan qualifications  Related activities

25.  Short Form (tax) ◦ Any shorter version of a standard tax form, most commonly the 1040A or 1040-EZ tax return forms ◦ Require fewer or no supplementary forms (schedules) to be attached  Tariff ◦ A tax imposed on a product when it is imported into a country  Taxable Income ◦ The amount of income subject to income taxes found by subtracting exemptions and appropriate deductions from adjusted gross income

26.  Deductions Include ◦ IRA Contributions ◦ Alimony Payments ◦ Unreimbursed Business Expenses ◦ Some Capital Gain Losses  Withholdings ◦ An amount of an employee’s income that an employer sends directly to the federal, state, or local tax authority as partial payment of that individual’s tax liability for the year ◦ When a person starts a new job, they fill out a W-4 indicating his/her filing status and number of allowances (exemptions) claimed

27.  How would you defend the fairness or unfairness of proportional tax (such as 16%) on taxable income?  Calculate taxes for families with total incomes of: ◦ A. $28,000 ◦ B. $44,000 ◦ C. $150,000 ◦ D. $500,000

28.  Taxes provide the revenue for government to fund services to benefit the society as a whole  Public Goods are goods and services provided by government  People pay taxes on income, consumption and wealth  Tax structure can be categorized as regressive, progressive, and proportional

29.  Income is reduced by taxes – leaving less for personal goods, services, savings and investments  There are trade-offs – people in a society can decide if benefits of government programs are worth a reduction in income

30.  Earning period: ◦ January 1 through December 31 of previous year  Employers have until January 31to send you your tax forms (W-2)  Due April 15 to file and pay (18 th this year since it’s a weekend)

31.  The amount of taxes withheld is an estimate of the amount the employee will owe at the end of the year.  Enacted in the early 1940’s  Fill out a W-4 indicating your withholding status for the upcoming year.

33.  Receive a W-2 (Wage and Tax Statement) by January 31 st for prior year. 1. Lists reported gross wages 2. Lists amount withheld from wages for federal income tax 3. Lists amount withheld for social security & Medicare 4. Lists amount withheld for state income tax

35.  Form sent by your bank/financial institution showing how much INTEREST your account earned. This needs to be included in your income on your taxes.

36.  These deductions directly lower one’s AGI- Adjusted Gross Income ◦ Classroom expenses for teachers and educators- 250$ ◦ Traditional IRA deduction ◦ Student loan interest deduction ◦ Tuition and fees deduction ◦ Health savings account deduction ◦ Moving expenses ◦ Self-employment tax deduction AND health Insurance ◦ Alimony paid

37.  The standard deduction for single individuals is $6300 for 2015.  Reasons to Itemize (list proof of major expenses.) ◦ Mortgage Interest…. ◦ Real Estate Taxes….. ◦ Charity……………………. ◦ Medical Expenses (7.5% of your AGI) ◦ State & Local Taxes

38.  Personal Exemption- $4000 ◦ A tax payer can deduct a personal exemption for himself, spouse, and all dependent children.  Example: Married man with wife and 2-year old can deduct 3 exemptions (12,000) from Gross income before Taxes  Example: High School student may NOT claim a personal exemption because his exemption is already claimed on his parents tax returns

39.  For a qualifying dependent child, if a dependent has any one of which requires a federal income tax return to be filed for a given year: ◦ The child has unearned income above $1,000 (from investment interest, gains, and so on)unearned income ◦ The child has earned income above $6300.earned income ◦ Net earnings from self-employment are $400 or more.

40.  Children can be claimed as dependents provided that they meet one of the following categories: ◦ Under age 19 at the end of the year ◦ Under age 24 at the end of the year and a full-time student ◦ Permanently disabled at any age

41.  Johnny is 17 years old and is claimed as a dependent on his parents' tax return. He earned $100 in interest income from a bank account in his name (unearned), $1,500 working part-time in a gas station (earned), and $200 mowing lawns (self-employment).  He does not have to file because he doesn't meet any of the four tests.

42. IInternal Revenue Service (IRS) collects federal income taxes SState tax returns are filed with departments of revenue in states that collect taxes

43. EEmployees fill out Form W-4 EEmployers withhold taxes from employees’ paychecks AAt start of year, employers mail Form W-2 to employees continued

44. FForm W-4 —t axes withheld depend on earnings and number of allowances claimed

45. FForm W-2 Wage and Tax Statement — previous year’s pay and tax deductions are given

46. EEach year taxpayers must file a tax report with the government showing the taxes owed CChoose one of three common forms: 1040EZ, 1040A, or 1040

47. UUse Form 1040, long form, ◦i◦if income is over a certain amount ◦w◦when adjustments to income, itemized tax deductions, and tax credits can reduce taxes

48. UUse short forms, 1040A or 1040EZ, if ◦i◦income falls into certain limits ◦d◦deductions aren’t itemized

49. CCalculate gross income based on Forms W-2 and 1099s CCalculate adjusted gross income by subtracting adjustments from total income SSubtract allowable exemptions and deductions

50. IIRS tax tables show taxes owed based on taxable income RReduce the amount owed with tax credits

51. FFiling deadline for federal taxes and most state taxes is April 15 TTax avoidance—Legal methods of minimizing the amount of taxes you pay. TTax evasion—illegally failing to declare all income or falsifying documents or not filing taxes at all.

52. 443 states collect income taxes TTaxpayers in states that collect personal income taxes must submit state tax forms

53. AAdvantages of filing tax returns online: ◦I◦It’s simple and quick ◦I◦If refund is due, it arrives sooner wwww.Njwebfile.com TTeleFile allows taxpayers to file simple tax returns with touch-tone phones

54.  If You OWE MONEY to the Government ◦ Pay with Check ◦ Pay through direct debit out of your account ◦ Pay with Credit Card ◦ Request to make installment payments  If You are receiving a REFUND ◦ Provide your bank info and request direct deposit ◦ They will send you an actual CHECK ◦ You can apply it to next years taxes

55. TThe IRS answers tax questions through free booklets, recorded messages, and a Web site TTax preparation services fill out tax forms for a fee MMany taxpayers use tax preparation guides and software

56. AA detailed examination of taxpayer’s tax returns by the IRS DDuring audit, taxpayers must answer IRS’s questions and provide documentation when asked TTaxpayers have legal protections in their dealings with the IRS

57. LLegislators make laws that ◦r◦raise or lower taxes ◦m◦make the tax burden fairer ◦s◦simplify the system ◦a◦achieve other desired outcomes

58. MMany citizens are concerned about rising taxes QQuestions asked when tax policy changes: ◦W◦Will revenues generated by the new tax exceed administration costs? ◦W◦Will it be fair to all taxpayers? ◦W◦Will it impact the economy negatively?

59. FFICA taxes calculated as a percentage of income; deducted from gross pay EEmployers and workers split FICA taxes ◦E◦Employees pay 6.2 percent for Social Security and 1.45 percent for Medicare ◦E◦Employers contribute an additional 7.65 percent continued

60. TThe self-employed pay all FICA taxes themselves FFederal government receives FICA contributions and credits them to employees’ accounts

61. SSocial Security Administration uses SSNs to keep records of earnings; records determine benefit amounts IIRS uses SSN as taxpayer ID number EEach SSN is unique SSafeguard your SSN

62. IIf you work, your Social Security taxes pay for benefits others receive WWhen you no longer work (retire, become disabled, or die), you and your dependents will get benefits provided by other workers’ Social Security taxes

63. TTypes of benefits: ◦R◦Retirement ◦D◦Disability ◦S◦Survivors’ ◦B◦Benefits for divorced people

64. BBenefits paid out will soon exceed tax collection SSocial Security fund will be depleted; no money to pay benefits of workers paying into the system now TTaxes may have to be raised, benefits decreased, or both