Unit 1: Income 1. Identify components and sources of income. 2. Analyze how career choice, education, skills, and economic conditions affect income and goal attainment. 3. Relate taxes, government transfer payments, and employee benefits to disposable income. Unit 1: Income

Careers

PLANNING YOUR CAREER Job – work that you do mainly to earn money Career – commitment to work in a field that you find interesting and fulfilling Must fulfill personal goals Must also fulfill financial goals

Career Decisions Will affect: Career should reflect: Money you make People you meet Spare time you have Career should reflect: Interests, values, goals (money and personal fulfillment)

Career Decisions Standard of Living – a measure of quality of life based on amounts and kinds of goods and services that you enjoy A career will involve opportunity costs Time vs Money

Career Decisions Potential Earning Power - Amount of money you may earn over time Education Field of Study Working well with others Creative Communication skills

Personal Factors Aptitudes – natural abilities that people possess Interest Inventories – tests that help you identify the activities you enjoy the most. Your personality

Stages of Career Planning Assess personal goals, abilities and interests - research careers Identify job opportunities in chosen field Develop resume and cover letter—apply Interview for positions—improve skills Consider job offers-accept a job Plan and implement a program for career development

Social Influences Demographic trends – tendencies of people that are grouped by age, gender, ethnicity, education or income Geographic trends – cost of living vs salaries earned in big cities or smaller towns

Economic Factors Interest rates Price increases Demand for certain goods and services

Trends in Industry and Technology Manufacturing industry: Increased competition by other countries Automation in the factories Service industry: Provide service for a fee Fastest growing area in our economy

Income and Taxes “Taxes are what we pay for civilized society.” - Oliver Wendell Holmes, Jr., 1904

Why are taxes so important?

Why are taxes so important? Fund public goods and services Medicare and Medicaid National Defense / Military Police & fire protection Public schools and libraries Road Maintenance Parks and recreation Health and food inspections for our safety

Effective Tax Planning Helps you have more money left over after paying taxes and living expenses Research how current laws and regulations affect you Maintain complete and accurate tax records Minimize your tax liability Tax Liability: total amount of taxes owed

Types of Taxes Taxes on Purchases Taxes on Property Sales tax: everyday consumer products Excise tax: collected on specific goods and services (gasoline, air travel, telephone service) Taxes on Property Real estate tax: based on value of land and buildings – primary source of income for local governments Personal property tax: based on the value of items such as cars and boats

Types of Taxes (cont.) Taxes on Wealth Estate tax: federal tax collected on the value of a person’s property at the time of his death Inheritance tax: state tax collected on the value of the property left by a person to his heirs in a will Gift tax: collected on any money or property valued at over $14,000 given from one person to another in one year

Types of Taxes (cont.) Taxes on Earnings (Income Taxes) Federal Income Tax: paid to federal government on any earned income (wages, salaries, commissions, tips, bonuses), interest income, dividend income, or capital gains Largest amount of taxes paid by an individual Collected by the Internal Revenue Service (IRS) Federal agency that collects income taxes and enforces nation’s tax laws “pay as you earn” basis – taxes taken out of your paycheck by your employer and sent to IRS each pay period

Types of Taxes (cont.) Income Taxes (continued) State Income Tax: paid to the individual state (laws governing what is taxed differ from state to state) City Income Tax: collected by about 2000 cities Social Security Tax: pays for retirement, disability and survivor benefits Also called FICA – Federal Insurance Contributions Act Medicare Tax: health insurance program for people 65 and older

Types of Income (cont’d) Gross Pay: total amount of money an employee earns in a pay period Net Pay: the amount of money an employee actually receives in a pay period after deductions Gross Income: includes earned income, interest income, and dividend income minus tax-exempt income

Income Types (cont’d) Adjusted Gross Income: gross income after adjustments (reductions such as student loan interest or contribution to 401K) used for tax calculations Taxable Income: adjusted gross income less any tax deductions and exemptions and used to determine income tax Tax-exempt income: income not subject to taxes (municipal bonds) Tax-deferred income: income taxed at a later date (401k contributions)

So…What has to come out of your paycheck?? Average person pays over 30% of paycheck to taxes Employers required by Federal Law to deduct: Social security (FICA) Medicare tax Federal income tax State and/or city tax (where required)

Taxes & Starting a New Job To receive a paycheck, an employee must complete: W-4 Form (Employee’s Withholding Allowance Certificate) Determines percentage of gross pay withheld for taxes I-9 Form (Employment Eligibility Verification) Confirms citizenship status

W-4 Form Employer uses to withhold (deduct) money to send to the Internal Revenue Service Amount withheld is based on number of allowances Allowance: adjustment to the tax withheld from paycheck based marital status and number of dependents A person may claim a personal allowance if no one else claims the person as a dependent Dependent: a person who relies on the taxpayer for financial support Reduces amount of income taxes an employer withholds and sends to IRS Puts more money in your pocket now but may mean you owe taxes when filing tax return

Completing a W-4 Form Legal Name and address Social Security number Marital status Number of Allowances (yourself, spouse, dependents) Any additional money you want withheld If you are exempt from income tax Sign and date form http://www.stlouisfed.org/education_resources/personal-finance-101-chats/personal-finance-101-chat-w-4/

I-9 Form Used to verify the eligibility of individuals to avoid hiring undocumented workers or others who are not eligible to work in the United States Must provide documentation which establishes identity and employment eligibility driver’s license, passport, Social Security card, or birth certificate

Reading a Paycheck Stub On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 A document included with paycheck each pay period which outlines paycheck deductions

Reading a Paycheck– Personal Information On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 States the employee’s full name, address, and Social Security or Employee Identification number Always check to ensure this information is correct

Reading a Paycheck – Pay Period On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 Length of time for which an employee’s wages are calculated; most are weekly, bi-weekly, twice a month, or monthly Last day of the pay period is not always payday to allow a business to accurately compute wages

Reading a Paycheck – Gross Pay On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 Total amount of money earned during a pay period before deductions Calculated by multiplying number of hours worked by hourly rate If employee is on salary - total salary amount divided by the specified number of pay periods

Reading a Paycheck – Net Pay On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 Amount of money left after all deductions have been withheld from the gross pay earned in the pay period.

Reading a Paycheck – Deductions On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 Amount of money subtracted from the gross pay for mandatory taxes, employee-sponsored medical benefits, and/or retirement benefits

Reading a Paycheck– Federal Withholding Tax On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 Amount required by law for employers to withhold from earned wages to pay taxes Amount of money deducted depends on amount earned and information provided on Form W-4 Largest deduction withheld from an employee’s gross income

Reading a Paycheck– State Withholding Tax On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 Percentage deducted from an individual’s paycheck to assist in funding government agencies within the state Amount deducted depends on amount of gross pay earned

Reading a Paycheck – FICA On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 Federal Insurance Contribution Act Includes two separate taxes: Social Security and Medicare These two taxes can be combined as one line item or itemized separately on a paycheck stub

Reading a Paycheck – Year to Date On-The-Go Employee Beakens, Joe Employee Identification 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102   Pay Type- Gross Pay Deductions Current Year-to-date  $1,353.33 Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals $250.35 $1,502.10 Pay Period 6/11/2004-7/11/2004 Total of all of the deductions which have been withheld from an employees paycheck from January 1 to the last day of the pay period indicated on the paycheck stub.

Taxes Paid by Employer Employers must pay social security and Medicare taxes equal to the amount the employee pays Self-employed individuals pay taxes at a higher rate

Tax Evasion vs Tax Avoidance Tax Evasion: Failure to pay legally due taxes Tax Avoidance: Legal means of decreasing your tax bill

Tax Avoidance Tax Deduction: expense that can be subtracted from adjusted gross income to reduce taxable income Standard deduction (changes every year) Itemized deductions Medical or dental expenses (7.5% AGI) Interest on mortgages Real estate taxes paid Charitable contributions Unreimbursed employment expenses Exemption: deduction for a dependent or someone that you support financially (spouse or child)

Preparing an Income Tax Return Income Tax Return: form on which a taxpayer reports how much money he/she has received from working and other sources and the exact taxes owed US citizens required to file (voluntary compliance) Deadlines and Penalties April 15 Extension to October 15 Standard Tax Forms 1040EZ 1040A 1040

W-2 Form Employer sends each employee and the IRS a W-2 Form Annual earnings Amount withheld Federal income taxes Social Security State and/or local income taxes Must be sent to employees by January 31 each year

Taxpayer Rights Information on taxpayer’s return is private Taxpayers have the right to appeal an IRS decision “The income tax law is a lot of bunk. The government can’t collect legal taxes from illegal money.” - Al Capone

Filing a 1040EZ Return Taxable income less than $100,000 Single or married Under age 65 No dependents Wages, tips, salaries No itemized deductions Can be filed by mail or electronically http://www.stlouisfed.org/education_resources/personal-finance-101-chats/pf-101-chat-1040ez/

Tax Assistance IRS Web Site (www.irs.gov) Software (Quicken, TurboTax) Professionals (H & R Block) Books