1. Paying Taxes
Chapter 6

2. Learning Objectives
Describe the basic principles of taxation and the major categories of taxes
Explain payroll taxes
Discuss the purpose and process of filing tax returns
Understand how taxes affect your financial plan

3. Objective 1:
Describe the basic principles of taxation and the major categories of taxes

4. Gross Pay vs. Net Pay Gross Pay Net Pay
Total amount of money a worker earns in a pay period
Hourly wages multiplied by the hours worked
Or salary if you have it
Total amount of money a worker takes home in a pay period
aka take-home pay
Money you get after paying taxes and other deductions

5. Purpose of Taxation (Four Rs)
Revenue – MAIN PURPOSE – raise money the government uses for roads, schools, hospitals, etc.
Redistribution – taking wealth from one part of society (the wealthy) and redistributing it to another part
Repricing – taxes can sometimes be used to make items more expensive resulting in people not wanting to use that item (cigarettes)
Representation – people expect government to serve their needs in return for their financial support

6. Tax Basics
TAX is money collected by government from its citizens for the purpose of operating the government
Income taxes
Property taxes
Gas, tobacco
Businesses also pay taxes
Government uses taxes to fund governmental services/programs
National defense, fire and police, road construction/maintenance, public schools, Social Security, welfare are all paid for through TAX REVENUE

7. Tax Basics Sales Tax Real Estate Tax Payroll Tax
Done when making a purchase at a store
The merchant collects the money and then sends it to the government
Done through STATE and not FEDERAL
Calculated by the government based on the value of the property
Primarily used to fund local schools
They increase property taxes to provide better school facilities
You pay every time you get paid
Federal and state taxes withheld from a person’s paycheck and sent to the government by his/her employer
FICA withheld as well
1. Social Security
2. Medicare

8. Pay Stub Shows: Employee’s gross pay for the period
Amount withheld from employee’s gross pay for FICA and other payroll taxes
Employee’s net earnings for the year

9. The Internal Revenue Service
The IRS is the government body that enforces federal tax laws and collects taxes
Branch of US Treasury Department
Congress makes law, IRS enforces law

10. Tax Returns
Each year you earn an income over a certain amount, you must file a federal tax return with the IRS
Generally you use a form called 1040 or 1040EZ
Purpose of a tax return – report to the IRS all the information relative to you income taxes
How much you earned from all income sources
How much you paid to IRS through withholding or estimated payments
You must figure exactly what tax you should paid for the tax year
If withholding > that number, you get a refund
If withholding < that number, you owe money

11. Example
1040EZ form

12. Filing Your Taxes
Taxes are based on earnings for that calendar year (January – December)
You have until APRIL 15TH to file your tax return

13. Objective 2:
Explain payroll taxes

14. Payroll Taxes Personal payroll taxes (Federal and State)
Also includes Social Security and Medicare (aka FICA – Federal Insurance Contribution Act)
In some cases, FICA (Medicare and social security) is known as OASDI (Old- Age, Survivors, and Disability Insurance)
Employers match employee’s contribution to FICA and sends that amount to the government

15. Social Security and Medicare
Provides payment to eligible retirees and disabled people
Typically equal to 4.20% of your salary
Provides health care coverage to most older Americans and some younger disabled people
Health insurance provided by government for those 65+

16. Personal Income Taxes Taxes imposed on the income you earn
The more money you earn, the higher the rate at which you pay taxes
You pay federal AND state (TEXAS does NOT have a state personal income tax)

17. Discuss the purpose and process of filing tax returns
Objective 3:
Discuss the purpose and process of filing tax returns

18. Filing Status
You must specify a filing status when you submit you income tax return – applicable tax rates and rules will differ depending on which you choose
Single
Married filing jointly
Married filing separately
Head of household – single person who has a child
Qualifying widow(er) with dependent child
You’re considered a dependent until 18 (means you are financially dependent upon someone else) which lowers what your parent/guardian owes in taxes
You still have to file a tax return

19. Gross Income/Total Income
The first step in calculating the federal tax you owe is determining your GROSS INCOME
Consists of the total amount of a person's income from any source
At the end of the year your employer will send you a document called a W-2 that summarizes all of your relevant income and tax withholding information from each employer you had
Capital gains – a taxable gain that occurs when you sell an asset for more than you paid for it (example: stocks)
Gross income also includes income from tips, rental properties, business income, game show winnings, scholarship amounts
NOT a part of gross income: insurance reimbursements, child support payments, moving expenses, veteran’s and welfare benefits

20. Adjusted Gross Income - AGI Game Show Winnings
Income calculated by taking total income and subtracting allowable amounts (contributions to certain retirement accounts, alimony payments, interest paid on student loans, and other expenditures that are identified by the IRS)
Considered income
You must pay taxes on them
Use form 1099-MISC
Rule of thumb: you’ll have to pay 50% of what you earn in taxes

21. Deductions and Exemptions
Standard Deduction
Itemized Deduction
Fixed amount ALL TAXPAYERS are allowed to deduct from their AGI to reduce their tax liability
Varies according to your filing status and whether you’re over the age of 65
Specific expenses that can be deducted from income to reduce the amount of income subject to income tax
Interest paid on mortgage
Real estate taxes
Charitable donations
Large medical expenses

22. Refund or Payment?
Accurate completion of your tax return will show you whether you need to pay additional income taxes that year
If you overpaid you get a refund
In some cases, low income families will receive more money back in the form of an Earned Income Credit than was withheld from their paychecks
In most cases, you will not receive an income tax return refund unless you pay taxes during that year

23. Objective 4:
Goal: Take steps to lower their tax liability (what they owe) to the lowest possible level for their income
You get to keep more of your own money rather than pay it to the government in taxes
Understand how taxes affect your financial plan