PERSONAL FINANCEChapter 5

Taxes

How much income will you keep??

Payroll Taxes◦Largest part of government revenue◦Based on employee total earnings◦Paid by you and your employer◦Include income taxes and social insurance taxes

Taxes and Your PaycheckSection 5.1

Income Taxes◦NOT fixed percentage of income that all

Americans pay◦Varies on financial and family situation◦You are responsible for calculating tax you

owe◦Support social programs (ie: Social Security,

Medicare)◦Federal Insurance Contributions Act (FICA) –

requires workers to contribute to Social Security and Medicare

Taxes and Your PaycheckSection 5.1

Withholdings◦Deducting money from your wages◦PREPAYS your federal income tax and social insurance tax

◦Enables government to collect taxes at a steady rate the entire year

Taxes and Your PaycheckSection 5.1

Your Paycheck Stub◦Gross Income – amount BEFORE taxes are withheld

◦Net Income (“take home pay”) – amount you receive AFTER withholdings

Net Income = Gross Income - Withholdings

Taxes and Your PaycheckSection 5.1

Form W-4◦Amount of income tax you owe depends on: Your GROSS income Number of people you support (your

dependents) Other expenses you pay W-4 form – YOU provide your employer

with this information! YOU are responsible for the consequences

if your withholdings are too small.

Taxes and Your PaycheckSection 5.1

Allowances◦Number that reduces the amount of

money withheld◦LARGER # of allowances – SMALLER $

withheld◦Number of allowances will not change the

amount of tax you owe.◦You are responsible for calculating the

amount of tax you owe.

Taxes and Your PaycheckSection 5.1

Overwithholding◦A way to force yourself to save by reducing

your allowances.◦To be sure to receive a refund at the end of

year◦NOT the best way to save – a bank would pay

you interest….the government does not!

YOUR GOAL IN COMPLETING YOUR W-4 IS TO MAKE YOUR WITHHOLDINGS EQUAL

TO THE TAX YOU OWE!

Taxes and Your PaycheckSection 5.1

A tax return is a set of forms used to calculate tax obligation

If tax return shows withholdings weren’t enough – you owe!

If return shows you more than covered your tax obligation – you get a refund!

Income = wages, tips, interest

File a Tax ReturnSection 5.2

Sources of Information for your Tax Return:◦Form W-2 – summary of earnings for a year from a JOB

◦Form 1099-INT – statement of interest paid on a BANK account

File a Tax ReturnSection 5.2

Income Tax Forms:◦Form 1040 – used to itemize deductions

(expenses you can legally subtract from your income when figuring your taxes)

◦1040 EZ – the simplest of tax forms used by most young people Single Have no dependants (people you support

financially) Under 65 Earned no more than $400 in interest

File a Tax ReturnSection 5.2

How to Complete a 1040 EZ:◦Know your Social Security Number◦Adjusted Gross Income – the total of ALL

income from ALL sources◦Determine your deduction

If your parents or guardian claim you as a dependent, you may NOT claim yourself too!

◦Figure your Taxable Income Subtract exemptions and deductions from

your adjusted gross incomeTaxable Income = AGI – (exemptions + deductions)

File a Tax ReturnSection 5.2

Payments and Tax◦Federal Income Tax Withheld – tax already

taken out each pay period◦Earned Income Credit – some workers with low

income qualify for EIC. Treated as tax payment. Qualifications are found in instruction booklet.

◦Total Payments – All withholdings and EIC = total amount of your taxes that you have already paid.

◦Tax – the instruction booklet for Form 1040 EZ contains a table that tells total tax obligation.

File a Tax ReturnSection 5.2

W-2 reports your total wages were $33,739

W-2 reports $4,053 was withheld from your wages for Federal Income Tax

Form 1099-INT reports your interest income was $281

You are single and not claimed by any other person as a dependent

Math of Money p. 167

1) What is your adjusted gross income?

2) How much is your taxable income?

3) How much is your total tax for the year?

4) What is the amount of your payment of refund?

Math of Money p. 167

Add total wages (W-2) to Taxable Interest (1099-INT)

$33,739 + $281 = $34,020

Back

How much is your Adjusted Gross Income?

Subtract your exemptions & deductions from your adjusted gross income.

In this case, we use the STANDARD DEDCUCTION for a single person.

$34,020 - $6,950 = $27,070

Back

How much is your taxable income?

Look at the tax table on p. 167. Find where your taxable income falls in the corresponding column for single people.

$4,286

Back

What is your total tax for the year?

Subtract your total tax payments from your tax.

$4,286 - $4,053 = $233

You owe $233!

What is the amount of your payment or refund?

Government Income◦ Taxes and Borrowing (Bonds)◦ Largest part of federal government income =

Income taxes!

Taxes and GovernmentSection 5.3

Contributions◦Employee:

Social Security – 6.2% Medicare – 1.45% TOTAL FICA = 7.65%

◦Employer: Match payments for Social Security and

Medicare

If you are SELF-EMPLOYED you must pay the entire 15.3% to Federal Government!

Taxes and GovernmentSection 5.3

Listed in BILLIONS $$ (2014)

Individual Income tax 1,383 Social Security and other payroll tax 1,031

Corporate income tax 333 Excise tax 105 Customs duties (tariffs) 39 Estate and gift taxes 13

Taxes and GovernmentSection 5.3

Classifying Taxes◦ Every taxpayer should be treated equally under

the law◦ Does not mean that all taxpayers should pay the

same amount of tax

◦ Principles of Taxation Benefit Principle – those who use a good or service

should pay for it. Ability to Pay Principle – those who have larger

incomes should pay more of what they receive.

Taxes and GovernmentSection 5.3

Taxes and Income

◦Progressive Tax – larger share (percentage) of income as the amount of income grows.

(most federal taxes are progressive)

◦Regressive Tax – smaller share (percentage) of income as the amount of income grows.

(most state and local taxes are regressive)

Taxes and GovernmentSection 5.3

How Taxes are Collected◦Direct Taxes – paid directly to

government (income and property taxes)

◦Indirect Taxes – included in cost of goods & services (sales tax)

◦Pay-as-you-earn Tax – Federal Withholdings taken each pay period

Taxes and GovernmentSection 5.3

Types of Tax◦Income Tax – Federal, State and Local

◦Sales Tax – added to the price of goods or services upon purchase

◦Property Tax – based on the value of real estate

◦Excise Tax – collected on specific goods and services and included in the price.

Taxes and GovernmentSection 5.3

◦Estate Tax – property received from someone who dies

◦Gift Tax – paid on cash or property worth more than $14,000

◦Business or License Tax – paid for certification and accompanied by a test

◦Customs duties or Tariffs – imposed on some imports

Taxes and GovernmentSection 5.3

Government uses taxes to bring in revenue and INFLUENCE CONSUMERS.

Sin Taxes – try to deter consumers from buying certain products. (tobacco most common)

Tax Cuts – lower taxes encourages consumers to make beneficial choices.Examples: Lower sales tax = encourages spending

Lower property tax = people move to certain areaCharity tax breaks = encourages giving

Taxes and GovernmentSection 5.3

Federal government spends nearly $3,500,000,000,000 each year (Three Trillion!)

Roughly $13,000 per American

Most pays for PUBLIC GOODS – benefit all Americans

Government SpendingSection 5.4

Six major areas where your federal tax dollars are used:◦ Social Security, Medicare, Retirement◦ National Defense, Veterans & Foreign Affairs◦ Social Programs (Medicaid, food stamps,

unemployment)◦ Net Interest on Debt◦ Physical, Human & Community Development◦ Law Enforcement & General Government

Government SpendingSection 5.4

State & Local Governments Provide:◦ Roads◦ Police & Fire◦ Criminal Justice System◦ Public Schools◦ State Colleges & Universities◦ Hospitals ◦ Sewage Treatment Plants◦ Unemployment Programs

Government SpendingSection 5.4