Chapter 4 Federal Income Tax

Tax Man Max Video

Government

Is made up of institutions, laws and customs through which a political unit is directed. Federal:

Nation as a whole State:

Communities; people who live or work in the state Local:

County, city, townships, villages and school districts.

Our Tax SystemMoney is collected by the government from

citizens and businesses in the form of taxes.

The money they collect is called revenue, and is redistributed (spent) according to the needs and priorities determined by Congress.

The largest source of revenue for the government is personal income taxes. Other forms of revenue include borrowing to cover the deficit, social security, corporate, excise, customs, estate, gift and other taxes.

On the local level, taxes provide services such as education, parks, recreation, streets and roads, police, fire and health departments.

On the national level they provide salaries for Congress and funds for national defense, highways, parks, welfare, foreign aid, and other services. Provide for the general welfare of all citizens, though as an individual, you may not benefit directly.

Taxes

Money that citizens are required to pay to maintain and finance the cost of their government.

Every wage earner, consumer, investor and saver in the U.S. has a legal obligation to pay taxes to his/her federal, state and local governments.

Approximately 1/3 of each dollar you earn goes to pay taxes!

“Tax Freedom Day” is usually late April… meaning that the average person works from January 1 until late April to pay their tax obligation for the year.

History of Taxes Taxes were imposed on and off during

history to finance wars. In 1913, Congress ratified the 16th

Amendment to the Constitution. Was instituted as a progressive tax rate and

has remained the same since. Congress has the power to raise/lower taxes.

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Federal Taxes Provide National defense National weather services National parks and recreation sites Interstate highways Regulations and agencies to enforce safety and

health standards Student loans and aid programs Relief when disasters strike (hurricanes,

earthquakes, floods, etc.)

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Why Pay State & Local Taxes?

Taxes collected on the state and local levels provide the following benefits to the state and local population:

• Education• State welfare programs• Streets, roads, and state highways• Police, fire, and health departments• Local recreation, safety, and service programs

Ohio.gov Dept. of Taxation

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Four Types of Taxes

Taxes on Purchases Sales tax & excise tax (Regressive)

Taxes on Property Real estate property tax (Proportional) Personal property tax

Taxes on Wealth Federal estate tax, state inheritance tax

(Progressive) Taxes on Earning

Income, Social Security taxes (Progressive)

Are taxes fair?

Ability to pay principle- Is a commonly accepted theory of tax fairness that individuals with different amounts of wealth or income should pay different amounts of taxes.

Higher Income = Higher Taxes

Regressive Tax

Regressive Taxes are those that decrease in proportion to income.

-The person with the higher income pays a lower percentage of income in taxes than a lower income person.

Almost all consumption taxes are regressive: Sales Tax- Is calculated as a percentage of the purchase price of a

wide variety of items that you buy. (It is added to the sale price). Excise Tax - Gasoline, Airline Tickets, Liquor, Tobacco, Hotel Rooms,

Amusement Parks. (Usually included in the price). Tariff - Tax paid by a foreign business on each product it sends to the

U.S.

Proportional Taxes (Flat Tax)

Proportional Taxes are those for which the rate stays the same even though the amount being taxed increases. Property Tax: Is based on property value

It is a major source of revenue for state and local govt’s Helps fund: schools, local services like police, fire, libraries,

parks, water & sanitation.

Estate & Inheritance Tax: Is based on value of property left at death

Gift Tax: Tax paid on property given away during one’s lifetime. (Includes money)

Internal Revenue Service (IRS)

An administrative agency of the Department of Treasury responsible for collecting taxes for the federal government and enforcing laws.

Progressive Tax

Tax that increases in proportion to income. -Tax rates increase as the level of taxable

income increases. -The person with the higher income not only pays more

taxes but pays them at a higher rate. Income Tax is progressive

- Income Tax is the largest source of revenue for the Federal Government. (pay as you go)

Tax Rates/Tax Brackets

Graduated System

Paying Your Fair Share

Voluntary Compliance - means all citizens are expected to prepare and file tax returns. Due on or before April 15 of each year.

Willful failure to pay taxes is called tax evasion and is punishable by a fine and/or imprisonment.

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What Is NOT Taxable? Accident and health insurance proceeds Gifts and inheritances Housing allowance for ministers Interest on state and local bonds Life insurance proceeds Military allowances Veteran’s benefits Welfare and public assistance benefits Worker’s compensation benefits for sickness and injury

Balanced BudgetThe budget is balanced when:

Revenue (money received)

Expenditures (money spent) = EQUAL

Example: If the government receives $1.9 trillion, they should only spend $1.9 trillion. When they spend more than they receive they are operating in a deficit. (They are borrowing money to pay for expenditures).

Our nation’s debt currently exceeds 17 trillion dollars!y As of January 2014

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What is a trillion dollars?$1,000,000,000,000

If you laid a $100 bill end to end it would make a chain that would go from the earth to the sun 200 times.

What does a trillion dollars look like?http://www.youtube.com/watch?v=GNFb6qe7Tmg&feature=related

Taxes 2012

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2012 Income in $$$$

$2,450,000,000,000 (Trillion) $784 (Billion) Personal Income Tax 32% $735 (Billion) Borrowing to cover Deficit 30% $588 (Billion) Social Security & Medicare 23% $171.5 (Billion) Excise Tax, Customs, Estates, Gifts 6%

$171.5 (Billion) Corporate Income Taxes 5%

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2012 Outlays in $$$

$3,537,000,000,000 Trillion $1,344,060,000,000 (Trillion) Social Security & Medicare 38% $ 849 (Billion) National Defense 24% $ 742.8 (Billion) Social Programs 21% $ 31.8 (Billion) Physical, Human & Community Development 9%

$ 21.2 (Billion) Net Interest on the Debt 6% $ 70.7 (Billion) Law Enforcement/General Govt’ 2%

= Additional Deficit in 2012 of $1.087 Trillion 20

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History of National Debthttp://www.usdebtclock.org

The U.S. has had debt since our inception... Revolutionary War debt of 74 million (1791)

Went to ZERO in 1835 - Under President Andrew Jackson... Then grew again...

After the Civil War $2.7 Billion After WWI $22 Billion After WWII $260 Billion Debt more than tripled between 1980-1990 The debt ceiling acts as a check on that overall debt: When Treasury

needs to issue debt above the ceiling, Congress raises the ceiling. The US has been in debt ever year except for 1835! http://money.cnn.com/2011/01/03/news/economy/debt_ceiling_faqs/index.htm http://www.guardian.co.uk/news/datablog/2011/jul/15/us-debt-ceiling-historic

Form W-4A form that helps the employer determine how much to withhold from an employees paycheck for federal income tax purposes.

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3 Types of Tax Return Forms

o Form 1040EZ - Most students complete 1040EZ Single or Married with No dependents claimed Taxable income $100,000 or less Less than $1,500 of taxable interest No itemized deductions

o Form 1040A Taxable income $100,000 or less Adjustments to income are allowed Tax credits for child care & dependent care are allowed

o Form 1040 Taxable income over $50,000 Itemized deductions

Exemptions An exemption is an allowance a

taxpayer claims for each person dependent on the taxpayer’s income. You automatically get one exemption for

yourself unless someone else claims you on their return (parents).

Deductions Are expenses the law allows taxpayers to

subtract from adjusted gross income. Some people itemize deductions where they

list certain expenses which help to reduce their tax liability.

Instead of itemizing most people choose to use the standard deduction which is a base amount that will reduce a person’s tax liability.

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Tax Credit vs Tax Deduction

CREDIT$100 Tax Credit reduces your taxes by $100

DEDUCTION

$100 Tax Deduction reduces taxes by $28 if you are in the 28% bracket

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Calculate Taxable Income

Gross Income All taxable income received Wages, salaries, tips interest, dividends, unemployment,

alimony, workers’ compensation, etc. Gambling winnings, bartering, pensions, annuities, social

security, self-employment income, rental income, royalties, etc. Adjusted Gross Income

Gross income less allowable adjustments Taxable Income

Adjusted gross income less deductions and exemptions Amount of income used to determine tax

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How Federal Taxes Are Determined

GROSS INCOME

-Adjustments (IRA’s Alimony, Business Deductions)

ADJUSTED GROSS INCOME

-Itemized Deductions or the Standard Deduction

-Exemptions

TAXABLE INCOMETax is based on the tax tables or schedules

W-2

Statement of income earned and taxes deducted during the preceding year.

Sent to you by each employer you worked for that year.

Must be mailed out by January 31.

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Completing Your Federal Income Tax Return

Summary of tax calculation: Filing status and exemptions Income Adjustments to income Tax computation Tax credits Other taxes (such as from self-employment) Payments (total withholdings, estimated payments) Determine if you are due a refund or owe Sign your return

DUE DATE to be mailed of April 15th

April 15th

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Tax Assistance Tax Information Sources

IRS, Tax Publications, the Internet Electronic Filing Tax Preparation Software Tax Preparation Services

Computerized Software, H&R Block, Accountants, and Attorneys If your professional tax preparer

makes a mistake, you are still responsible for paying the correct amount, plus any interest & penalties.

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Tax Audit Process

About 1% of all returns are audited If you claim large or unusual deductions you

are more likely to be audited 3 Types of Audits

o Correspondence for minor questionso Office audit-takes place at IRS officeo IRS agent visits your home,

business or accountant’s office Amended Return 1040X

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