Paying for Government Services Textbook References- Chapter 7 pages
When founded in 1776, federal income tax did not exist. 1 st tax was created in 1862 in order to finance the Civil War Abolished in 1872 after the war ended Tax was again proposed in 1895, but declared unconstitutional
1913 Congress ratified the 16 th Amendment enabling the federal government to levy a tax on individuals based on personal income.
GGovernment uses its taxing authority to ◦g◦generate revenue to provide goods and services for public’s benefit ◦s◦stabilize the economy ◦a◦address social challenges ◦i◦influence behavior
All individual taxpayers are responsible for filing their tax return. Must report taxable income Accurately calculate income tax owed File necessary forms on time ◦ Income taxes by:
LLimited resources force governments to make choices AA budget reflects priorities and goals of government and its people WWhen government spends more than it collects, it must borrow money DDeficit spending increases the national debt continued
If taxable income is over--The tax is: Less than $25,000 % From $25,001 up to $75,000 % From $75,001 up to $250,000 % From $250,001 up to $1,000,000 % Any earnings over $1,000,000 %
If taxable income is over--The tax is: Less than $25,000 5% From $25,001 up to $75,000 15% From $75,001 up to $250,000 25% From $250,001 up to $1,000,000 40% Any earnings over $1,000,000 50%
PPayments that must be made, even if the government must borrow money to do so MMake up more than 60 percent of federal government’s budget IInclude entitlement programs and interest on the national debt ◦E◦Entitlement Programs include… continued
AAn expense that can be adjusted according to needs and revenues IInclude national defense expenses IInclude nondefense expenses: ◦C◦Costs of government operations and programs ◦F◦Funds given to state and local governments
TTaxation and government spending vary widely between states and between cities MMost state and local government revenues come from ◦p◦personal and corporate income taxes ◦s◦sales tax ◦r◦real estate and personal property taxes
Three Tax Bases ◦ Income (what people earn) ◦ Person’s Wealth (what is owned) ◦ Consumption (what one uses) Tax on Consumption is the same rate for everyone, no matter what a person’s income is.
Three basic tax structures 1.Progressive 2.Regressive 3.Proportional Structure 1: Progressive ◦ When tax takes a larger share of income from people with a high income rather than from low- income earners Progressive example - Federal government
2014 Tax Brackets (for taxes due April 15, 2015) Tax rateSingle filers Married filing jointly or qualifying widow/widower Married filing separatelyHead of household 10%Up to $9,075Up to $18,150Up to $9,075Up to $12,950 15%$9,076 to $36,900$18,151 to $73,800$9,076 to $36,900$12,951 to $49,400 25%$36,901 to $89,350$73,801 to $148,850$36,901 to $74,425$49,401 to $127,550 28%$89,351 to $186,350$148,851 to $226,850$74,426 to $113,425$127,551 to $206,600 33%$186,351 to $405,100$226,851 to $405,100$113,426 to $202,550$206,601 to $405,100 35%$405,101 to $406,750$405,101 to $457,600$202,551 to $228,800$405,101 to $432, %$406,751 or more$457,601 or more$228,801 or more$432,201 or more
Structure 2: Regressive ◦ When more money is taken from those with low income rather than high income ◦ Regressive Example: City Sales Tax Because a consumer with a low income is paying a larger share of income than a high-income buyer Structure 3: Proportional ◦ When all individuals are taxed at the same rate regardless of income Proportional Example: Flat Tax
Adjusted Gross Income (AGI) ◦ all the income you receive over the course of the year, including wages, interest, dividends and capital gains, minus things such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. AGI is the first step in calculating your final federal income tax bill. Standard Deduction ◦ a fixed dollar amount that taxpayers can subtract from their income ◦ is available to all filers and is determined by the taxpayer's filing status. ◦ amounts change each year because of inflation adjustments. ◦ Most taxpayers use this deduction method, which eliminates the need to itemize actual deductions such as medical expenses, charitable contributions and state and local taxes.
Excise Tax ◦ A federal or state tax imposed on the manufacture and distribution of certain consumer goods Example – environmental taxes, communications taxes, fuel taxes Internal Revenue Service (IRS) ◦ The federal agency responsible for administering and enforcing the Treasury Department’s revenue laws through: Assessment and collection of taxes Determination of pension plan qualifications Related activities
Tax Credit ◦ An amount that can be subtracted from the taxes a worker owes ◦ Ex. Child tax credit Tax Deduction ◦ An expense that can be subtracted from a worker’s taxable income ◦ Ex. Medical expenses
Itemization ◦ The process of listing deductible personal expenses paid during the year Medical and Dental Care State and Local Income Taxes Real Estate Taxes Home Mortgage Interest Gifts to Charity Revenue Sharing ◦ A share of tax funds provided by the federal government to state governments, or by state governments to local municipals
Short Form (tax) ◦ Any shorter version of a standard tax form, most commonly the 1040A or 1040-EZ tax return forms ◦ Require fewer or no supplementary forms (schedules) to be attached Tariff ◦ A tax imposed on a product when it is imported into a country Taxable Income ◦ The amount of income subject to income taxes found by subtracting exemptions and appropriate deductions from adjusted gross income
Deductions Include ◦ IRA Contributions ◦ Alimony Payments ◦ Unreimbursed Business Expenses ◦ Some Capital Gain Losses Withholdings ◦ An amount of an employee’s income that an employer sends directly to the federal, state, or local tax authority as partial payment of that individual’s tax liability for the year ◦ When a person starts a new job, they fill out a W-4 indicating his/her filing status and number of allowances (exemptions) claimed
W-4 ◦ Filled out by employee ◦ Used by employer to determine amount of money withheld from each paycheck for taxes W-2 ◦ Form sent by your employer summarizing how much money was earned and how much was taken out for taxes.
Income is reduced by taxes – leaving less for personal goods, services, savings and investments There are trade-offs – people in a society can decide if benefits of government programs are worth a reduction in income
Earning period: January 1 through December 31, 2012 Employers have until January 31, 2013 to send you your tax forms (W-2) Due April 15 th of 2013 to file and pay
The amount of taxes withheld is an estimate of the amount the employee will owe at the end of the year. Enacted in the early 1940’s Fill out a W-4 indicating your withholding status for the upcoming year.
Receive a W-2 by January 31 st for prior year. 1. Lists reported gross wages 2. Lists amount withheld from wages for federal income tax 3. Lists amount withheld for social security & Medicare 4. Lists amount withheld for state income tax
These deductions directly lower one’s AGI- Adjusted Gross Income ◦ Traditional IRA deduction ◦ Student loan interest deduction ◦ Tuition and fees deduction ◦ Health savings account deduction ◦ Moving expenses ◦ Self-employment tax deduction AND health Insurance ◦ Alimony paid
The standard deduction for single individuals is $5,950 for Reasons to Itemize ◦ Mortgage Interest…. ◦ Real Estate Taxes….. ◦ Charity……………………. ◦ Medical Expenses (must be at least 7.5% of your AGI) ◦ State & Local Taxes
For a qualifying dependent child, there are four basic tests, any one of which requires a federal income tax return to be filed for a given year: ◦ The child has unearned income above $950 (from investment interest, gains, and so on)unearned income ◦ The child has earned income above $5,950.earned income ◦ Gross income is greater than the larger of $950 or earned income (up to $5,500) plus $300. Gross income ◦ Net earnings from self-employment are $400 or more.
Children can be claimed as dependents provided that they meet one of the following categories: ◦ Under age 19 at the end of the year ◦ Under age 24 at the end of the year and a full-time student ◦ Permanently disabled at any age
Johnny is 17 years old and is claimed as a dependent on his parents' tax return. He earned $100 in interest income from a bank account in his name (unearned), $1,500 working part-time in a gas station (earned), and $200 mowing lawns (self-employment). He does not have to file because he doesn't meet any of the four tests.
EEmployees fill out Form W-4 EEmployers withhold taxes from employees’ paychecks AAt start of year, employers mail Form W-2 to employees continued
FForm W-4 —t axes withheld depend on earnings and number of allowances claimed
FForm W-2 — previous year’s pay and tax deductions are given
EEach year taxpayers must file a tax report with the government showing the taxes owed CChoose one of three common forms: 1040EZ, 1040A, or 1040
UUse Form 1040, long form, ◦i◦if income is over a certain amount ◦w◦when adjustments to income, itemized tax deductions, and tax credits can reduce taxes
UUse short forms, 1040A or 1040EZ, if ◦i◦income falls into certain limits ◦d◦deductions aren’t itemized
CCalculate gross income based on Forms W-2 and 1099s CCalculate adjusted gross income by subtracting adjustments from total income SSubtract allowable exemptions and deductions
IIRS tax tables show taxes owed based on taxable income RReduce the amount owed with tax credits
AAdvantages of filing tax returns online: ◦I◦It’s simple and quick ◦I◦If refund is due, it arrives sooner TTeleFile allows taxpayers to file simple tax returns with touch-tone phones