Income and Taxes

So…  You graduated high school and college…  You achieved a degree…  You have a solid resume…  You rocked on your interview…  And now you have a job you LOVE!  MONEY– MONEY – MONEY!

Where Does My Money Go?  Almost 31% of an individual’s paycheck is deducted  Taxes are the largest expense most individuals will have  U.S. tax system operates on an ongoing payment system

Purposes of Taxation  TAX: a required payment to a local, state, or national government. 1.Fund public goods and services. 2.Influence behavior. 3.Stabilize the economy. 4.Redistribute income.

Kinds of Taxes  Income tax: income that you earn is subject to tax.  Social Security tax: nation’s retirement program; 6.2% of gross income.  Medicare tax: nation’s health care program for elderly and disabled; 1.45% of gross income.

Kinds of Taxes  Sales tax: tax paid on the value of goods and services. (revenue for state govt.)  Excise taxes: included in the price paid by consumers. (ex: fuel)

Kinds of Taxes  Progressive Taxes – Take a larger percentage of income from high income taxpayers  Examples are State and Federal taxes  Regressive Taxes – As income rises, the taxes remain the same or decrease  Examples are Medicare, Social Security, and state sales

Taxes continued  Internal Revenue Service (IRS) – Collects federal taxes, issues regulations, and enforces tax laws written by the United States Congress

Federal Revenue, Office of Management and Budget 2002

Income Taxes  Your employer will withhold, or take out, income tax from every paycheck and send the money to the government.

Who Pays Federal Income Tax?  Out of 127,000,000 filers in ’05  Top 1% ($285,424) = 33.71%  Top 5% ……………= 53.8%  Top 10% …………..= 65.73%  Bottom 50% ($28,654) = 3.5% Info from Fall ’06 guest speaker Ken Patzius H & R Block

Withholding  The Government takes a portion out of each on of your paychecks

Income Taxes  But how much is withheld?  Depends on:  How much you earn  Information you provide on Form W-4

Form W-4  YOU FILL IT OUT B-4 you start!  Employees Withholding Allowance Certificate  Personal Information  Exempt status  Allowances: factors that affect the amount of income tax withholding, the more allowances you claim, the less tax your employer will take out.  Who should pay more in taxes?  Single person making $50,000  Married couple with 4 kids $50,000

Form W-2  “You get you W-2 when you are through”  It is supposed to be sent out by Jan 31 st.  It is a final tally of what you made and what you paid.  Here’s what a W2 looks like.  You may have multiple W2s if you work at different places.

 It basically shows how much you made and how much you paid!

Form 1040 or 1040EZ  The end of the year tally.  Did you pay too much or too little?  What happens if you paid too much?  REFUND!  What happens if you didn’t pay enough?  PAYMENT!

Tax Time is Here!  Must be filed by April 15 th

What Do I Need?  Form W-2: Employer will send by Jan 31 st. Shows total earnings for the year and amount of taxes withheld.  Form 1099-INT: Bank will send. Shows the earned interest on savings during the year  IRS instruction booklets and forms.  Form 1040  Form 1040A  Form 1040EZ  At public libraries or online  Personal records

What will I be asked?  Status: single, married, divorced, separated  Exemptions  Dependent: someone who is supported by a taxpayer’s income.  Income  Deductions: subtracted from income  Itemized: amount actually spent (must use Form 1040)  Standard: set amount

What will I be asked?  Taxable income  Tax owed  Tax credits  Subtracted directly from the amount of tax owed.  Final calculations  Overpaid: refund!  Underpaid: send in $!

What happens if I procrastinate?  You must submit your taxes by:  Mailing them in  Filing them electronically  IT MUST BE DONE BY: APRIL 15 TH  If not, you must file for an extension.