Taxes

Personal Taxes The government needs money to run This is called revenue Where do they get their revenue from?

There are basically 3 ways to tax Progressive Rates – The higher your income the higher your tax rate Income taxes use this system most often Flat/Proportional Rates – Pay the same rate regardless of income. The state of Illinois uses an income tax that is a flat tax of 4.95% Regressive Rates – Some taxes aren’t based on income and can have rates that actually fall as you make more money - Our State sales tax works this way – let’s use an example

Nearly Half the Government’s Revenue comes from Individuals like us The U.S. Federal tax system (more about the states later) takes a higher percentage of your income as your income grows. That is known as a Progressive Tax. See the tax tables on the next page

Federal Income Taxes Taxable Income Tax Rate $0 - $9,525 10% of taxable income $9,526 - $38,700 $952.50 plus 12% of the amount over $9,525 $38,701 - $82,500 $4,453.50 plus 22% of the amount over $38,700 $82,501 - $157,500 $14,089.50 plus 24% of the amount over $82,500 $157,501 - $200,000 $32,089.50 plus 32% of the amount over $157,500 $200,001 - $500,000 $45,689.50 plus 35% of the amount over $200,000 $500,001 or more $150,689.50 plus 37% of the amount over $500,000 Single This is the rate you apply to the taxable amount. Remember we get allowances to reduce our taxable income.

Here’s the Revenue sources for Illinois in 2016 Individual Income taxes $ 15.4 Corporate Taxes 1.6 Personal Property Taxes 1.7 Sales Tax 11.2 Gas Tax 1.4 Excise Taxes & Other (.2) 2.6 Total Illinois Revenue in 2016 $ 34.1

Illinois Tax System Illinois uses a Flat or Proportional Tax System That means that no matter how much you make the RATE you pay stays the same – 4.95% (for now) This is difficult to change - Based on the Illinois Constitution all citizens need to be taxed “uniformly”

State sales tax – A regressive tax example Individual #1 Individual #2 Income $ 30,000 per yr. $100,000 per yr. Consumable items Subject to sales tax $15,000 $15,000 Sales tax at 10% $1,500 $1,500 % of income paid in sales tax 5% 1.5% The rate of taxation is lower for the person who is wealthier. Many taxes and fees works this way. Some argue this disproportionately taxes the poor at a higher rate.

Federal Government Tax System How do these system seem to work? Fair or Unfair?

It is no just about Income taxes In addition to Income taxes there are many other taxes we pay, particularly to the state. Sales taxes Gas taxes/tolls – funds roads Excise taxes on cable, phone, electricity “Sin” taxes - liquor, cigarettes Entertainment taxes on hotels, sporting events, parking These are all regressive taxes Local Real Estate taxes – funds schools

There a lots of hidden taxes Gas may have taxes as high as 50 cents per gallon depending on the state. Illinois in the middle of the pack (~$.41/gallon). The tax rate might be 15 - 20% You pay fees and taxes on everyday common items – cable, phone, electric Look at your home cell phone or electric bill - you will find many miscellaneous fees that can add 10 to 30% to the bill What does the City of Chicago tax? https://www.cityofchicago.org/city/en/depts/fin/supp_info/revenue/tax_list.html Entertainment tax – A $22 parking charge had an actual cost of $17.19 and $4.81 in taxes to the city and county – A whopping 28% tax. And let’s not forget the cost for businesses to collect and account for the tax – this is basically a tax on businesses to do the work of government

Income Taxes – Important Vocabulary Taxable Income – The amount on which you will pay taxes Filing Status – How you will file your tax return (married, single, etc.). The tax rates vary based on this status. Dependents – A person who lives with you and for whom you provide at least 50% of their support Standard Deduction – A stated amount you can deduct to reduce your taxes

What is Taxable Income? Taxable income is the income that the government makes you pay tax on. It doesn’t necessarily match your gross income Gross Income (Generally Wages) Before-tax deductions (like healthcare) +/- Other Income or Losses (investment income – dividends and interest) Equals Adjusted Gross Income Deductions/exemptions (Standard deduction or itemized) Equals your Taxable Income

Standard Deduction for 2018 Filing Status Standard Deduction Single $12,000 Head of Household $18,000 Married Filing Separately Married Filing Jointly $24,000 Qualifying Widow(er) The government gives us a break by giving us Deductions before they start To make us pay taxes.

Income Taxes Tax Forms to remember: W-4 – recall what that was for? W-2 – a record of your earnings and taxes withheld, sent by the employer to employee and the IRS Form 1040 or 1040 EZ – Tax return form filed by a taxpayer. This allows you to report income to the IRS, pay additional taxes or request a refund

New Tax Law Summary If you are taxed on something are you likely to buy more of it or less of it?

Less taxes  Lower prices More Economic Activity New Tax Law Summary A tax on something works the same as raising the price. The higher the price (or tax) the less I am likely to buy. This fits with our understanding of supply and demand The most recent tax cuts are an across-the-board reduction of taxes for individuals and business. Less taxes  Lower prices More Economic Activity

New Tax Law Summary Pros Cons Tax Rates go down for everyone Certain deductions are eliminated, perhaps raising taxable income for some Business taxes are going down Unclear how businesses will use this tax reduction Economic Activity should be Government revenue will likely stimulated go down overall

Total Expenditures = $4.407T

W-2

1040EZ – Filing a tax return We will review the form together to get the layout There is an instruction page which tells you what numbers to use, depending on which scenario you have. Incredibly the IRS instructions for the EZ form run 45 pages, but if you need them google irs.gov (1040EZ instructions)

Diversification We heard a bit from our guest speaker on the topic of Diversification Betting on one stock can make you very rich (or very poor) Most advisors suggests spreading your investments around so you avoid too much risk. This concept is called diversification. One of the things I want you to look at for the SMG is whether you may not be diversified enough