Income Tax

1
Income Tax

• Applied Business Practice

2
Fact or Myth?

• A good way to save is to have more money than
  necessary withheld from your paychecks, so you
  will receive a big tax refund at the end of the
  year.
• The tax system is too complicated for ordinary
  taxpayers to understand

3

• Kelly found a part-time job after school that
  pays 7.50 per hour. E wants to take home at
  least 50 per week, so she agreed to work seven
  hours each Saturday. She expected her first
  paycheck to be 52.50. She was surprised to find
  it was only 40.39. Why wasnt Kellys check
  larger?

4
Taxes and Your Paycheck

• FICA
• Federal Insurance Contributions Act
• Social Security and Medicare
• Gross Income
• Amount you earn before taxes are withheld
• Net Income
• Amount you receive after withholdings are
  deducted from your gross pay.

5
Taxes and Your Paycheck

• Withholding
• Deducting money from your wages to collect
  payroll taxes
• How does withholding benefit you?
• It spreads tax payment over time, to avoid one
  huge payment

6
PAYCHECK STUB
ABC Company 144 E. Central Ave. Hometown, ST 32122
Check No 0556789
Employee Social Security Number 433-211-1234
Employee Name Jane Smith Employee Address
986 Park St. Hometown, ST 32122
Check Date 07/22/05 Pay Period Ending07/22/05
Earnings Deductions Hours 20 Federal
Income Tax 18.75 Rate 6.25 Social
Security Tax 7.75 Medicare Tax
1.81 Gross Pay 125.00 State Tax
.50 Total Withholding 28.81
Gross Pay 125.00 Total Deductions
28.82 Net Pay 96.19
7
Warm-Up

• Should you reduce your allowances (on your W-4)
  to force yourself to save? Why or why not?

8
Warm-up

1. How do you and other taxpayers benefit from the
   taxes you pay?
2. What is the purpose of Form W-4?
3. What is an allowance on form W-4?
4. What is your main goal in determining how many
   allowances to claim?

9
Taxes and Your Paycheck

• Form W-4
• Provides the information of the amount to
  withhold from your paycheck.
• Completed by the Employee
• IRS
• Internal Revenue Service
• Federal agency that collects income taxes

10
Taxes and Your Paycheck

• Allowances
• Number that reduces the amount of money withheld
  from your pay
• Larger number of allowances, smaller amount
  withheld

11
A Bit of History

• What amendment established the current income tax
  system?
• 16
• When was this amendment ratified?
• Feb 3, 1913
• Why was it necessary to make this part of the
  constitution?

12
Taxes and Your Paycheck

• Withholding too much
• Students who work part-time during school, but
  full time during summer may have more withheld
• Results in a refund
• Withholding too little
• Results in a tax bill
• May need to lower your allowances

13
Taxes and Your Paycheck

• Overwithholding as a way to save
• Force a savings plan
• Claiming too few allowanced guarantees a refund
• Is this a good savings plan?
• It is not a good savings plan because the
  government does not pay interest

14
Warm-Up

• How do you think taxes influence consumers
  decisions?

15
File a Tax Return

• Tax Return
• Set of forms used by taxpayers to calculate tax
  obligation
• Minimum Income to file a return
• If you worked and had Federal income taxes taken
  out file
• If you are self employed and earned 400 - file
• Filing must be in by
• April 15th every year!

16
File a Tax Return

• Income
• Wages
• Tips
• Earned Interest
• Cash earned for jobs

17
File a Tax Return

• Form W-2
• Summary of your earnings and withholdings for the
  year for a job
• Must send in a copy with your W-2
• Employer sends a copy to IRS

18
a Control Number 2233 void For office use
only ? OMB No.
1234-0001
b Employer Identification number 1.
Wages, Tips, other 2. Federal Income Tax
Withheld
compensation
78-65412
5,001.88 975.00
c Employers name,
address and zip code 3. Social security
4. Social Security Tax Withheld

wages and tips ABC Company
5,001.88 403.00
144 E. Central Ave. Hometown, ST 32122 5.
Medicare wages 6. Medicare Tax
Withheld
and tips

5,001.88
94.12
d Employees
Social Security Number 7. Social
Security Tips 8. Allocated Tips
433-211-1234 9.
Advanced EIC payment 10. Dependent Care
Benefits e Employees Name (first, middle
initial, last) 11 Non-Qualified Plans
12. Benefits included in box 1 Jane Smith 986
Park St. 13. See instrs. for box 13 14.
Other Hometown, ST 32122 15 statutory
deceased pension legal deferred

employee
plan rep. compensation F Employee
address and ZIP code
16 State Employers State ID no.
17 State Wages, tips, etc 18 State income
tax ST 78-65412
5001.88 26.00

19
File a Tax Return

• Form 1099-INT
• Statement of interest your bank paid on your
  savings that year
• Banks send this information to the IRS

20
Income Tax Forms

• 1040 EZ
• Simplest of the tax forms
• To Qualify to use the EZ form
• No dependents
• You and spouse under age 65
• No blindness
• Income less than 50,000
• Earned no more than 400 in interest
• No income other than wages, interest, tips,
  scholarships, or unemployment compensation

21
Filling Out the 1040 EZ

• Identifying yourself
• Social Security Number
• Unique number used to identify you throughout
  your entire life

22
Income Tax Forms

• Form 1040
• More complex form
• Deductions
• Expenses you can legally subtract from your
  income when figuring your taxes.
• Own a home
• Children
• Run a small business
• Stocks
• Dependent
• Someone you financially support

23
File a Return

• Refund
• When your withholding is more than the taxes owed
  (Government pays you the overage amount paid)
• Amount You Owe
• When your withholding is less than the taxes owed
  (you pay the remaining amount due)

24
Taxes and Government

• Sources of Federal Government Income
• Personal Income Tax
• Social Security, Medicare, Unemployment, Other
  Retirement Tax
• Borrowing
• Corporate Income Tax
• Excise, Custom, Estate, Gift, Misc. Tax

25
Sources of Fed. Govt. Income
Borrowing
Corporate Income Tax
7
Social Sec., Medicare, Unemployment, other
retirement tax
11
Excise, Estate, Gift, misc. tax
33
7
42
Personal Income Tax
26
Taxes and The Government

• Where does the government get its money?
• 42 Personal Income Taxes
• 33 Social Security Taxes, Medicare, and
  unemployment taxes
• Who contributes to pay Medicare and Social
  Security?
• Employees (pays a max of 7.65)
• Employers (pays a max of 7.65)

27
Warm-Up

• Why should you check your work before filing your
  tax return?

28
Principles of Taxation

• Benefit Principle
• Those who use a good or service provided by the
  government should pay for it
• Example toll roads
• Ability to Pay Principle
• Those who have larger incomes should pay a larger
  share of what they receive
• As your income increases your rate of tax
  increases from 15 39.9

29
How Taxes Are Collected

• Direct Taxes
• Paid directly to the government
• Examples income, property
• Indirect Taxes
• Taxes you pay that are included in the cost of a
  good/service
• Examples Hair care services

30
How Taxes Are Collected

• Pay-As-You-Earn Tax
• Taxes paid as you earn income
• Example withholdings on your paycheck

31
Types of Taxes

• Sales Tax
• Taxes added to the price of goods and services
• Property Tax
• Taxes on the value of real estate property

32
Types of Taxes

• Excise Tax
• Collected on sale of specific goods or services
• Tobacco
• Gas
• Alcohol
• Oil
• Firearms
• Air travel

33
Types of Taxes

• Estate Taxes
• Taxes on property received when someone dies
• Gift Tax
• Paid for by the giver of gifts that exceed 12,000
  (for 2006)

34
Types of Taxes

• Business (License) Tax
• Tax paid for certification
• May be accompanied by a test

35
Warm-up

• Gross Pay 800
• Federal Tax 14
• State Tax 4.5
• Social Sec. 6.2
• Medicare 1.6
• What is the total Withholdings?
• What is the Net Pay?

36
Government Spending

• Sin Taxes
• Taxes on items that can be harmful to your health
• Tobacco
• Alcohol

37
Warm-Up

• Gross Pay 685
• Federal tax 14
• State tax 2
• Social Security 6.2
• Medicare 1.5
• What is the total (dollar amount) withholdings?
• What is net pay?

38
How you can reduce tax obligation

• 1 way to lower taxes
• Give to charities

39
Government Spending

• Federal Government Spends on
• Social Security, Medicare, other retirement
• National Defense, veterans, foreign affairs
• Social Programs
• Interest on Debt
• Community Development

40
Government Spending

• State and Local government spends on
• Buildings and roads
• Police, Fire protection services
• Criminal Justice system
• Schools
• Colleges, University
• Sewage treatment plants
• Unemployment compensation plans