Business Math 2.3 Federal Income Taxes

Goals Calculate adjusted gross income and taxable income Calculate the income tax due Calculate the income tax refund for a single dependent

Start up Sven Tole is a high school student who worked during summer vacation. He noticed that federal income taxes were withheld from his paycheck. He didn’t think it was fair for him to pay taxes when he made so little this year. Is he right? Math builder page 53

Adjusted gross income and taxable income The money deducted for federal taxes is called a withholding tax The amount withheld is an estimation of the tax owed ate the end of the year. Tax year for individuals ends December 31. You must calculate and pay any federal tax due by April 15

Gross income Gross income is the total income for the year including wages, salaries, commissions, bonuses, tips, interest, dividends, prizes, pensions, the sale of stock and profits from a business Adjusted gross income is gross income minus and adjustments to the income Adjustments can be business loss, payments to a retirement plan, alimony, and certain penalties

From the adjusted gross income you subtract deductions and exemptions The remaining amount is the taxable income. Deductions- interest on a home mortgage, property taxes, state and local taxes medical and dental expenses, casualty and theft loss, contributions to charities. To claim any of these you must file an itemized deduction. You can also claim a standard deduction which is a set fixed amount

Check for understanding page 55 Exemptions – is an amount of income per person that is free from tax. You can claim one for yourself, one for your spouse and one for each child. The standard deduction and exemptions change over time but for this book we will use: Standard deduction $4700 per person for a person filing single, $7800 for married people filing jointly. Each exemption is $3000 Check for understanding page 55

Income Tax due See table on page 55 Example 2 Check for understanding c and d

Income tax refund for single dependents To claim a refund you must file a tax return Rules for dependent filing are different from other people A dependents income is grouped into two categories Earned and unearned income Earned income is wages salaries and tips everything else is unearned

Check for understanding E and F pg 57 Wrap up A single dependent that is not blind and under 65 can claim a standard deduction for the higher of the two amounts $800 The amount of earned income, plus $250 up to $4700 (This is the standard deduction used in the book) Example 3 Check for understanding E and F pg 57 Wrap up