Taxes

Tax Requires payment to local, state, or national government *** IRS (Internal Revenue Service )is in charge of Federal Taxes

Importance of taxes A) Primary way the government collects money B) Give the government the money it needs to operate

Milton Friedman Helped come up with a solution to people NOT paying their share of income tax Established tax withholding from employees’ paychecks

Revenue Income received by a government from taxes and non-tax sources

Without Revenue: The government would NOT be able to provide the goods and services, such as: National defense, highways, education, law enforcement

Where does the power to tax come from? Stated in the U.S. Constitution (Federal Government)

Constitution: Article 1, section 8, Clause 1 “To law and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States; but all duties, imposts, and excises shall be uniform throughout the United States.”

Where are the limits on the Power to Tax come from? Stated in U.S. Constitution (Federal Government)

What are FIVE (5) limits on the power to tax? A)NOT for individual interests B)Federal taxes must be the SAME in every state C)Can NOT violate the freedoms promised by the First Amendment D)Can collect taxes ONLY on Imports E)Taxes most be divided up among states according to population

Describe ways to tax according to… Value of the object taxed AND How the tax is structured

Tax Base Income, property, good, or service that is subject to tax

Four types of Tax Bases Individual Income Tax – tax on a person’s income Sales Tax – good or service being sold Property Tax – value on property Corporate Tax – value on company’s profits

Types of Tax Bases: Corporate Tax 1. Corporate Tax – tax on the value of the company’s profits

Property Tax 2. Property Tax – A tax on the value of the property

Sales Tax 3. Sales Tax – A tax on the dollar value of a good or service being sold Example:

Individual Income Tax 4. Individual Income Tax – A tax on a person’s income

Four (4) Characteristics of a Good Tax Simplicity – easy to understand Efficiency – collect taxes without spending too much time or money Certainty – Clear to taxpayer when tax is due, how much, and how to pay Equity – should be fair

Three Types of Tax Structures Proportional Tax Progressive Tax Regressive Tax

Proportional Tax The percentage of income paid in taxes remains the same for all income levels Example: “Flat Tax”

Progressive Tax The percentage of income paid in taxes increases as income levels increase Example: Income Tax

Regressive Tax The percentage of income paid in taxes decreases as income increases Example: Sales Tax

IncomeProportional Tax Progressive Tax Regressive Tax $30,000 % of income Amount 15% $4,500 10% $3,000 20% $6,000 $100,000 % of income Amount 15% $15,000 30% $30,000 5% $5,000

Examples of Tax Structures: $30,000$100,000 Proportional15% $4,500 15% $15,000 Progressive10% $3,000 30% $30,000 Regressive20% $6,000 5% $5,000

TWO (2) ways to determine “Fairness” Benefits-Received Principle Ability-to-pay Principle

Benefits-received Principle Pay taxes base on the level of benefits s/he expects to receive Example: Gasoline tax (maintains roads)

Ability-to-pay Principle Pay taxes based on their ability to pay Example: Progressive income tax (More income = more taxes paid)

Withholding Taking tax payments out of an employee’s pay before s/he receives it. Examples: Social Security, Medicare

Tax Return Form used to file income taxes Due every year by April 15 th

Taxable Income – income on which tax must be paid Gross Income – total income Net income – income after taxes are deducted Deductions – Variable amounts that you can subtract, or deduct from your gross income

Why is April 15 th important? This is the day –every year—that individual income taxes are due (with some exceptions) You must file 3 tax forms: Federal, State, and Local

Who has to file their income taxes? Normally, if you are SINGLE (not married), you do NOT have to file you taxes if you made less than $8,750 LAST YEAR (BEFORE taxes—your gross income)

How can you file your taxes? Mail Phone Internet (e-file)

Where do I get forms from? Post office Internet ( Phone IRS office Mail CD Rom

What items should you have ready when filing? Social Security numbers W-2 forms (from ALL employers for that year) Forms (ex: dividends) Receipts for itemized deductions Bank Account numbers (to have money automatically deposited)

What is the 1040? 1040: 1040: “Long form” 1040A: 1040A: Medium form 1040EZ: 1040EZ: “Easiest” form

Who can file a 1040? 1.Taxable income of $50,000 or more 1.Itemized deductions 2.Self-employment income 3.Income from sale of property

Who can file a 1040A? 1.Taxable income below $50,000 2.Capital gain distributions 3.Specific tax credits (child tax, education, earned income, child and dependent care expenses, adoption and retirement savings contributions 4.Only deductions for IRA contributions, student loan interest, educator expenses or higher education tuition and fees 5.No itemized deductions

Who can file a 1040EZ? 1.Taxable income below $50,000 2.Single or Married Filing Jointly 3.Under age 65 4.No dependents 5.Interest income of $1,500 or less

What if you can’t pay? 1. Direct Debit from your bank account 2. Payroll deduction from your employer 3. Routine installment