The “How” of Taxes Aim: How do we pay our taxes?

5 “W’s” of Taxes  WHO- consumers, business and gov’t  WHAT- get taxes collected/paid  WHEN- April 15 you file for taxes, you also pay for taxes through FICA on payday OR pay sales and excise tax  WHERE- paychecks, stores, markets, mail/internet  WHY- to finance the public goods and other functions of gov’t

Where do our taxes go?

What if we’ve paid too much?  Tax refund - money returned to taxpayer by gov’t who paid in excess of their amount due (yearly)

HOW is it done?  Accountant: a person who files financial/tax reports and keeps/audits/inspects financial records on business or concerns  Individuals can also file their own taxes through websites or online databases (TURBO TAX, H&R taxes)  Tax return : filed tax form (also the money that comes back after taxes are filed)

What “individuals” are important on a tax return?  Dependent: a person who is financially supported by another person (children,spouse)  Head of household: filing status by a married/unmarried person who maintains a household for a dependent and provides more than 50% of dependent’s financial support

What is to be filed?

Withholding Forms  Sent directly to gov’t for partial payment of taxes  W-4: Prepared by employee for employer indicating his/her allowances (exemptions) and SS#  W-2: tax form prepared by employer and given to employee to be filed with his/her tax forms  Lists wages earned during the year  Shows federal/state taxes withheld  Social Security Info

Income Tax Forms  1099-INT: reports interest income on savings account, you will receive from bank  1099-DIV: reports dividends on stocks and other financial products that receive interest  1040EZ: for single/married taxpayers filing jointly, without dependents, taxable income under $50,000 and no itemized deductions  1040A: similar to EZ but has deductions (IRA contributions, student loan interest, higher education tuition and fees)  1040: taxpayer forms for those that do not qualify for EZ or As

Where does one obtain tax forms?  Online!  Through tax databases (TurboTax)  Most communities locations (post office, library, senior centers, gov’t buildings)  Tax forms also mailed out to people each year or handed out by employer (by January 31 st !)

Filling out your forms  Deductions - expenses subtracted from adjusted gross income when calculating taxable income  Exemptions - reduction of taxable income for a specific reason (IRS determined)  Usually for dependents  Itemized deductions- incurred expense that reduces individual’s tax income  Mortgage interest, state/local taxes, charitable gifts,

When might someone claim 0 (zero) exemptions?  A high school student works part-time as claimed as a dependent by parent  A married man whose wife has claimed him as an exemption  A person who has other income sources taxed at lower rates (or not at all)

Simulation Station: Monica Lindo  es/index.jsp es/index.jsp  Filing Status (SINGLE)  Claimed as a dependent (YES, parents)  How much did she earn ($4,821)  How much tax is withheld ($47)

There are only two things certain in life:  Death  Taxes

Aim: How fair is taxation in the U.S.?

 Provide a way for federal, state and local gov’t to collect $ for public goods  Public goods- goods/services provided by the gov’t and not restricted by person’s ability/inability to pay for them  library, fire department, local parks, roads, etc

 Income (what is earned)  Salaries, wages, tips, commissions, interest  Wealth (what is owned)  Business, real estate, property, inheritance (upon a death of individual)  Consumption (what one uses)  Levied at the same rate for EVERYONE  Clothes, CD, cars, computers, etc

 Progressive- taxes where higher income individuals pay a higher percentage  Individual income tax  Regressive- tax that takes a larger percentage of income for lower income individuals  City tax  Proportional tax (flat tax)- all tax levels are paying the same rate

 Social Security  Many people argue today that Social Security is not being used for it’s TRUE purposes, and that’s why it’s running out!

 Excise tax- federal/state tax imposed on manufacture & distribution of some consumer goods  Tariffs- tax on imported goods/services  Revenue sharing- a share of tax funds, provided by federal to state gov’ts OR state gov’ts to local gov’ts

 The IRS- responsible for administering & enforcing revenue laws (like taxes, pension, etc) that are set by our U.S. Treasury department

 Itemization- listing deductible personal expenses during the year  Taxable income- amount of income subject to taxes by subtracting exemptions and deductions from adjusted gross income  EX: alimony, unreimbursed business expenses, capital losses, IRA contributions  Withholding- amt of employees’ income that employer sends directly to federal, state, local tax authorities as partial payment of individual’s yearly tax liability  You fill out a W-4 when you start a new job for this reason!

 Gross income: all income, before taxes and deductions  adjusted gross income equals your gross income minus your adjustments to income. (above-the- line deductions)  Example of adjustments: deductible traditional IRA contributions, alimony paid, health insurance if you're self-employed and student loan interest

 How would you define fairness/unfairness of a proportional tax (ex/ 16%) on taxable income?  $28,000?  $44,000?  $150,000?  $500,000?  Would you identify a tax on gasoline as “regressive”? Why/why not?  Can you think of any more regressive taxes?

 With a partner, create a chart that has FEDERAL, STATE and LOCAL as headers  Develop charts that list gov’t jobs/careers that fall into each category (and that your taxes pay for)  After, just write a sentence or two below chart to discuss what would happen in your community if the gov’t didn’t provide public goods/services