© 2010 South-Western, Cengage Learning SLIDE 1 Chapter 7 Do Now9/26/13 & 9/27/13 Work with your neighbor and create a list of ways people accumulate earned income and unearned income.

© 2010 South-Western, Cengage Learning SLIDE 2 Chapter 7 Agenda9/26/13 & 9/27/13 Discuss the differences between earned and unearned income. Explain the purpose of taxes and how the U.S. tax system works, and describe the different types of taxes. Discuss payroll deductions and benefits, and demonstrate how to compute net pay. Review for Unit 1 Test

Chapter © 2010 South-Western, Cengage Learning Federal Income Tax Our Tax System Filing Tax Returns 7

© 2010 South-Western, Cengage Learning SLIDE 4 Chapter 7 Purpose of Taxes In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes. These incoming funds to the government are called revenue.

© 2010 South-Western, Cengage Learning SLIDE 5 Chapter 7 Types of Taxes Progressive taxes Regressive taxes Proportional taxes

© 2010 South-Western, Cengage Learning SLIDE 6 Chapter 7 Progressive Taxes Progressive taxes take a larger share of income as the amount of income grows. Federal income taxes are progressive.

© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 7 Regressive Taxes Regressive taxes take a smaller share of income as the amount of income grows. Sales taxes are regressive.

© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 7 Proportional Taxes Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of income. Property taxes are proportional.

© 2010 South-Western, Cengage Learning SLIDE 9 Chapter 7 Components of the Tax System The IRS The power to tax – Congress! Paying your fair share Tax rates apply to income ranges, or tax brackets. Our income tax system is based on voluntary compliance, which means that all citizens are expected to prepare and file tax returns of their own accord without force.

© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 7 Components of the Tax System Failure to pay taxes Failure to do so can result in a penalty: interest charges on the taxes owed plus a possible fine. Willful failure to pay taxes is called tax evasion, which is a serious crime punishable by a fine, imprisonment, or both. (continued)

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 7 An IRS Audit Every year, the IRS calls millions of taxpayers for an audit, which is an examination of their tax returns. Types of audits Office audit Correspondence audit Field audit

© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 7 Filing Status Filing status describes your tax-filing group.

© 2010 South-Western, Cengage Learning SLIDE 13 Chapter 7 Exemptions An exemption is an amount you may subtract from your income for each person who depends on your income to live.

© 2010 South-Western, Cengage Learning SLIDE 14 Chapter 7 Exemptions—Who Qualifies Yourself, unless someone else claims you on their return Your spouse, if you are filing jointly Your dependents A dependent is a person who lives with you and for whom you pay more than half his or her living expenses.

© 2010 South-Western, Cengage Learning SLIDE 15 Chapter 7 Gross Income Gross income is all the taxable income you receive.

© 2010 South-Western, Cengage Learning SLIDE 16 Chapter 7 Common Types of Income

© 2010 South-Western, Cengage Learning SLIDE 17 Chapter 7 The law allows you to subtract some types of spending from gross income. These adjustments are subtracted from gross income to determine adjusted gross income. Adjusted Gross Income

© 2010 South-Western, Cengage Learning SLIDE 18 Chapter 7 Adjusted Gross Income Gross income –Adjustments Adjusted gross income

© 2010 South-Western, Cengage Learning SLIDE 19 Chapter 7 Taxable Income Taxable income is the income on which you will pay tax.

© 2010 South-Western, Cengage Learning SLIDE 20 Chapter 7 Taxable Income Gross income –Adjustments Adjusted gross income –Deductions –Exemptions Taxable income (continued)

© 2010 South-Western, Cengage Learning SLIDE 21 Chapter 7 Deductions Itemize deductions Standard deduction

© 2010 South-Western, Cengage Learning SLIDE 22 Chapter 7 Itemize Deductions Itemize deductions are expenses you can subtract from adjusted gross income to determine your taxable income.

© 2010 South-Western, Cengage Learning SLIDE 23 Chapter 7 Standard Deduction The standard deduction is a stated amount that you may subtract from adjusted gross income instead of itemizing your deductions.

© 2010 South-Western, Cengage Learning SLIDE 24 Chapter 7 Tax Credits A tax credit is an amount subtracted directly from the tax owed.

© 2010 South-Western, Cengage Learning SLIDE 25 Chapter 7 Preparing Your Income Tax Return Who must file? Anyone with enough income to owe taxes When to file? No later than April 15th Which form to use? 1040, 1040A, 1040EZ

© 2010 South-Western, Cengage Learning SLIDE 26 Chapter 7 Preparing Your Income Tax Return Where to begin? Save all reciepts for your itemized deductions and tax forms from your employer Filing electronically IRS Website Tax preparation software

© 2010 South-Western, Cengage Learning SLIDE 27 Chapter 7 Form 1040EZ Step 1: Name, address, and Social Security number Step 2: Report income Step 3: Compute tax Step 4: Refund or amount owed Step 5: Sign the return

© 2010 South-Western, Cengage Learning SLIDE 28 Chapter 7 Form 1040A Step 1: Name and address Step 2: Filing status Step 3: Exemptions Step 4: Income Step 5: Adjusted gross income Step 6: Taxable income Step 7: Tax, credits, and payments Step 8: Refund or amount owed Step 9: Signature

© 2010 South-Western, Cengage Learning SLIDE 29 Chapter 7 Closure 9/26/13 & 9/27/13 What is included in gross pay? List optional and required deductions from gross pay. What are some employee benefits and incentives provided at many workplaces?

© 2010 South-Western, Cengage Learning SLIDE 30 Chapter 7 Agenda9/30/13 & 10/1/13 Do Now: Study for Unit 1 Test Unit 1 Test APFM Project Step 1 Assigned Begin Chapter 20