1. Chapter © 2010 South-Western, Cengage Learning Federal Income Tax 7.1 7.1Our Tax System 7.2 7.2Filing Tax Returns 7

2. © 2010 South-Western, Cengage Learning SLIDE 2 Chapter 7 Lesson 7.1 Our Tax System GOALS Explain the purpose of taxes and describe the different types of taxes. Describe the U.S. tax system and explain how it works.

3. © 2010 South-Western, Cengage Learning SLIDE 3 Chapter 7 Purpose of Taxes In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes. These incoming funds to the government are called revenue. The government spends the revenues received according to priorities set by Congress.

4. © 2010 South-Western, Cengage Learning SLIDE 4 Chapter 7 Types of Taxes Progressive taxes Regressive taxes Proportional taxes

5. © 2010 South-Western, Cengage Learning SLIDE 5 Chapter 7 Progressive Taxes Progressive taxes take a larger share of income as the amount of income grows. Federal income taxes are progressive.

6. © 2010 South-Western, Cengage Learning SLIDE 6 Chapter 7 Regressive Taxes Regressive taxes take a smaller share of income as the amount of income grows. Sales taxes are regressive.

7. © 2010 South-Western, Cengage Learning SLIDE 7 Chapter 7 Proportional Taxes Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of income. Property taxes are proportional.

8. © 2010 South-Western, Cengage Learning SLIDE 8 Chapter 7 Components of the Tax System The IRS The power to tax Paying your fair share Tax rates apply to income ranges, or tax brackets. 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 without force.

9. © 2010 South-Western, Cengage Learning SLIDE 9 Chapter 7 Components of the Tax System Failure to pay taxes Failure to do so can result in a penalty: 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. (continued)

10. © 2010 South-Western, Cengage Learning SLIDE 10 Chapter 7 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 Office audit Correspondence audit Field audit

11. © 2010 South-Western, Cengage Learning SLIDE 11 Chapter 7 Lesson 7.2 Filing Tax Returns GOALS Define basic tax terminology. Prepare tax forms 1040EZ and 1040A.

12. © 2010 South-Western, Cengage Learning SLIDE 12 Chapter 7 Filing Status Filing status describes your tax-filing group. You must mark one of the following as your filing status on your tax form: Single person (not married) Married person filing a joint return Married person filing a separate return “Head of household” Qualifying widow(er)

13. © 2010 South-Western, Cengage Learning SLIDE 13 Chapter 7 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.

14. © 2010 South-Western, Cengage Learning SLIDE 14 Chapter 7 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 his or her living expenses.

15. © 2010 South-Western, Cengage Learning SLIDE 15 Chapter 7 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).

16. © 2010 South-Western, Cengage Learning SLIDE 16 Chapter 7 Common Types of Income Wages, salaries, and tips Interest income Dividend income Unemployment compensation Social security benefits Child support Alimony

17. © 2010 South-Western, Cengage Learning SLIDE 17 Chapter 7 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. Adjusted Gross Income

18. © 2010 South-Western, Cengage Learning SLIDE 18 Chapter 7 Adjusted Gross Income Gross income –Adjustments Adjusted gross income

19. © 2010 South-Western, Cengage Learning SLIDE 19 Chapter 7 Taxable Income Taxable income is the income on which you will pay tax.

20. © 2010 South-Western, Cengage Learning SLIDE 20 Chapter 7 Taxable Income Gross income –Adjustments Adjusted gross income –Deductions –Exemptions Taxable income (continued)

21. © 2010 South-Western, Cengage Learning SLIDE 21 Chapter 7 Deductions Itemize deductions Standard deduction

22. © 2010 South-Western, Cengage Learning SLIDE 22 Chapter 7 Itemize Deductions Itemize deductions are expenses you can subtract from adjusted gross income to determine your taxable income. Examples include: Medical and dental expenses beyond a specified percentage of your income State and local income taxes Property taxes Home mortgage interest Gifts to charity Losses from theft or property damage Moving expenses

23. © 2010 South-Western, Cengage Learning SLIDE 23 Chapter 7 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.

24. © 2010 South-Western, Cengage Learning SLIDE 24 Chapter 7 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. It 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 reasons from time to time.

25. © 2010 South-Western, Cengage Learning SLIDE 25 Chapter 7 Preparing Your Income Tax Return Who must file? When to file? Which form to use? Where to begin? Filing electronically Tax preparation software

26. © 2010 South-Western, Cengage Learning SLIDE 26 Chapter 7 Form 1040EZ Step 1: Name, address, and Social Security number Step 2: Report income Step 3: Compute tax Step 4: Refund or amount owed Step 5: Sign the return

27. © 2010 South-Western, Cengage Learning SLIDE 27 Chapter 7 Form 1040A Step 1: Name and address Step 2: Filing status Step 3: Exemptions Step 4: Income Step 5: Adjusted gross income Step 6: Taxable income Step 7: Tax, credits, and payments Step 8: Refund or amount owed Step 9: Signature