1. MYPF 3.1 Our Tax System 3.2 Filing a Tax Return
9/4/2019 3
Income Tax
3.1 Our Tax System
3.2 Filing a Tax Return
© 2016 South-Western, Cengage Learning
Chapter 1

2. Lesson 3.1 Our Tax System
Learning Objectives
LO 1-1 List the types of taxes and explain the purpose of each.
LO 1-2 Describe the U.S. tax system and explain how it works.
Chapter 3
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3. *Types of Taxes
In a free enterprise system, the government collects money from citizens and businesses in the form of taxes.
These incoming taxes called revenue.
The government spends the revenue received according to priorities set by Congress.
Chapter 3
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4. *Types of Taxes *Progressive taxes *Regressive taxes
(continued)
*Progressive taxes
*Regressive taxes
*Proportional taxes
Other taxes
Chapter 3
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5. Progressive Taxes
Progressive taxes take a larger share of income as the amount of income grows.
Federal income tax rates are progressive.
Chapter 3
© 2016 South-Western, Cengage Learning

6. Regressive Taxes
Regressive taxes take a smaller share of income as the amount of income grows.
Sales taxes are regressive.
Chapter 3
© 2016 South-Western, Cengage Learning

7. Proportional Taxes
Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of one’s income.
Property taxes are proportional.
Chapter 3
© 2016 South-Western, Cengage Learning

8. *Other Taxes
A luxury tax is imposed on certain items, such as yachts and private planes.
Capital gains taxes, value-added taxes, tariffs, license and registration fees, user fees, and tolls are also collected for purposes of funding government spending.
Chapter 3
© 2016 South-Western, Cengage Learning

9. *How the Tax System Works
The IRS
The power to tax
Paying your fair share
Tax rates apply to income ranges, or tax brackets. (Fig 3.1)
Our income tax system is based on voluntary compliance, which means that all citizens are expected to prepare and file tax returns of their own accord.
Chapter 3
© 2016 South-Western, Cengage Learning

10. *How the Tax System Works
(continued)
Failure to pay taxes
Failure to pay taxes can result in interest charges on the taxes owed, plus a possible fine.
Willful failure to pay taxes is called tax evasion, which is a serious crime punishable by a fine, imprisonment, or both.
Chapter 3
© 2016 South-Western, Cengage Learning

11. An IRS Audit
Every year, the IRS calls millions of taxpayers for an audit, which is an examination of their tax returns.
Types of audits
Correspondence audit
Office audit
Field audit
Chapter 3
© 2016 South-Western, Cengage Learning

12. Lesson 3.2 Filing a Tax Return
Learning Objectives
LO 2-1 List and define basic tax terminology.
LO 2-2 Prepare tax form 1040EZ.
Chapter 3
© 2016 South-Western, Cengage Learning

13. Filing Status Filing status describes your tax-filing group.
You must choose one of the following as your filing status:
Single person (not married)
Married person filing a joint return
Married person filing a separate return
Head of household
Qualifying widow(er)
Chapter 3
© 2016 South-Western, Cengage Learning

14. Exemptions
An exemption is an 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.
Chapter 3
© 2016 South-Western, Cengage Learning

15. Exemptions—Who Qualifies
Yourself, unless someone else claims you on their return
Your spouse, if you are filing jointly
Your dependents
A dependent is a person who lives with you and for whom you pay more than half of the living expenses.
Chapter 3
© 2016 South-Western, Cengage Learning

16. Gross Income Gross income is all the taxable income you receive.
Earned income refers to money you earned from working.
Unearned income refers to money you received from passive activity (other than working).
Chapter 3
© 2016 South-Western, Cengage Learning

17. *Forms of Income Wages, salaries, and tips Interest income
Dividend income
Unemployment compensation
Social security benefits
Alimony and child support
Chapter 3
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18. Adjusted Gross Income
The law allows you to subtract some types of spending from gross income.
You can “adjust” your income by subtracting such things as contributions to individual retirement accounts, student loan interest, and tuition and fees.
These adjustments are subtracted from gross income to determine *adjusted gross income.
Adjustments reduce income that is subject to tax.
Note that these adjustments are not available on Form 1040EZ.
Chapter 3
© 2016 South-Western, Cengage Learning

19. *Adjusted Gross Income
– Adjustments
Adjusted gross income
Chapter 3
© 2016 South-Western, Cengage Learning

20. Taxable Income Taxable income is the income on which you will pay tax.
Your taxable income determines your tax liability, which is the amount of total tax you owe on a year’s income.
Chapter 3
© 2016 South-Western, Cengage Learning

21. *Taxable Income Gross income – Adjustments Adjusted gross income
(continued)
Gross income
– Adjustments
Adjusted gross income
– Deductions
– Exemptions
Taxable income
Chapter 3
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22. Deductions Itemized deductions Standard deductions Chapter 3
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23. *Itemized Deductions
Itemized deductions are expenses subtracted from adjusted gross income to determine taxable income.
Examples include:
Medical and dental expenses beyond a specified percentage of income
State and local income taxes
Property taxes
Home mortgage interest
Gifts to charity
Losses from theft or property damage
Some moving expenses
Chapter 3
© 2016 South-Western, Cengage Learning

24. *Standard Deduction
If you do not have many deductions, your tax may be less if you take the standard deduction.
The standard deduction is a stated amount that you may subtract from adjusted gross income instead of itemizing your deductions.
This amount changes each year.
Chapter 3
© 2016 South-Western, Cengage Learning

25. Tax Credits
A *tax credit is an amount subtracted directly from the tax owed.
It is different from a deduction.
A deduction is subtracted from adjusted gross income.
A deduction reduces your tax by reducing the amount of income on which the tax is figured.
A tax credit reduces the tax itself.
The government allows tax credits for certain education expenses, child-care expenses, and other special reasons.
Chapter 3
© 2016 South-Western, Cengage Learning

26. Preparing a Tax Return Who must file? Estimated tax Which form to use?
Where to begin?
Filing electronically: Tax preparation software
Chapter 3
© 2016 South-Western, Cengage Learning

27. Form 1040EZ Step 1: Enter name, address, and Social Security number
Step 2: Report income
Step 3: Compute tax
Step 4: Calculate refund or amount owed
Step 5: Sign the return
Chapter 3
© 2016 South-Western, Cengage Learning