1. Paying for Government Services Textbook References- Chapter 7 pages 155-175

2.  When founded in 1776, federal income tax did not exist.  1 st tax was created in 1862 in order to finance the Civil War  Abolished in 1872 after the war ended  Tax was again proposed in 1895, but declared unconstitutional

3.  1913 Congress ratified the 16 th Amendment enabling the federal government to levy a tax on individuals based on personal income.

4. GGovernment uses its taxing authority to ◦g◦generate revenue to provide goods and services for public’s benefit ◦s◦stabilize the economy ◦a◦address social challenges ◦i◦influence behavior

5.  All individual taxpayers are responsible for filing their tax return.  Must report taxable income  Accurately calculate income tax owed  File necessary forms on time ◦ Income taxes by:

6. LLimited resources force governments to make choices AA budget reflects priorities and goals of government and its people WWhen government spends more than it collects, it must borrow money DDeficit spending increases the national debt continued

7. If taxable income is over--The tax is: Less than $25,000 % From $25,001 up to $75,000 % From $75,001 up to $250,000 % From $250,001 up to $1,000,000 % Any earnings over $1,000,000 %

8. If taxable income is over--The tax is: Less than $25,000 5% From $25,001 up to $75,000 15% From $75,001 up to $250,000 25% From $250,001 up to $1,000,000 40% Any earnings over $1,000,000 50%

10. PPayments that must be made, even if the government must borrow money to do so MMake up more than 60 percent of federal government’s budget IInclude entitlement programs and interest on the national debt ◦E◦Entitlement Programs include… continued

11. AAn expense that can be adjusted according to needs and revenues IInclude national defense expenses IInclude nondefense expenses: ◦C◦Costs of government operations and programs ◦F◦Funds given to state and local governments

12. TTaxation and government spending vary widely between states and between cities MMost state and local government revenues come from ◦p◦personal and corporate income taxes ◦s◦sales tax ◦r◦real estate and personal property taxes

15.  Three Tax Bases ◦ Income (what people earn) ◦ Person’s Wealth (what is owned) ◦ Consumption (what one uses)  Tax on Consumption is the same rate for everyone, no matter what a person’s income is.

16.  Three basic tax structures 1.Progressive 2.Regressive 3.Proportional  Structure 1: Progressive ◦ When tax takes a larger share of income from people with a high income rather than from low- income earners  Progressive example - Federal government

17. 2014 Tax Brackets (for taxes due April 15, 2015) Tax rateSingle filers Married filing jointly or qualifying widow/widower Married filing separatelyHead of household 10%Up to $9,075Up to $18,150Up to $9,075Up to $12,950 15%$9,076 to $36,900$18,151 to $73,800$9,076 to $36,900$12,951 to $49,400 25%$36,901 to $89,350$73,801 to $148,850$36,901 to $74,425$49,401 to $127,550 28%$89,351 to $186,350$148,851 to $226,850$74,426 to $113,425$127,551 to $206,600 33%$186,351 to $405,100$226,851 to $405,100$113,426 to $202,550$206,601 to $405,100 35%$405,101 to $406,750$405,101 to $457,600$202,551 to $228,800$405,101 to $432,200 39.6%$406,751 or more$457,601 or more$228,801 or more$432,201 or more

19.  Structure 2: Regressive ◦ When more money is taken from those with low income rather than high income ◦ Regressive Example: City Sales Tax  Because a consumer with a low income is paying a larger share of income than a high-income buyer  Structure 3: Proportional ◦ When all individuals are taxed at the same rate regardless of income  Proportional Example: Flat Tax

20.  Adjusted Gross Income (AGI) ◦ all the income you receive over the course of the year, including wages, interest, dividends and capital gains, minus things such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. AGI is the first step in calculating your final federal income tax bill.  Standard Deduction ◦ a fixed dollar amount that taxpayers can subtract from their income ◦ is available to all filers and is determined by the taxpayer's filing status. ◦ amounts change each year because of inflation adjustments. ◦ Most taxpayers use this deduction method, which eliminates the need to itemize actual deductions such as medical expenses, charitable contributions and state and local taxes.

21.  Excise Tax ◦ A federal or state tax imposed on the manufacture and distribution of certain consumer goods  Example – environmental taxes, communications taxes, fuel taxes  Internal Revenue Service (IRS) ◦ The federal agency responsible for administering and enforcing the Treasury Department’s revenue laws through:  Assessment and collection of taxes  Determination of pension plan qualifications  Related activities

22.  Tax Credit ◦ An amount that can be subtracted from the taxes a worker owes ◦ Ex. Child tax credit  Tax Deduction ◦ An expense that can be subtracted from a worker’s taxable income ◦ Ex. Medical expenses

23.  Itemization ◦ The process of listing deductible personal expenses paid during the year  Medical and Dental Care  State and Local Income Taxes  Real Estate Taxes  Home Mortgage Interest  Gifts to Charity  Revenue Sharing ◦ A share of tax funds provided by the federal government to state governments, or by state governments to local municipals

24.  Short Form (tax) ◦ Any shorter version of a standard tax form, most commonly the 1040A or 1040-EZ tax return forms ◦ Require fewer or no supplementary forms (schedules) to be attached  Tariff ◦ A tax imposed on a product when it is imported into a country  Taxable Income ◦ The amount of income subject to income taxes found by subtracting exemptions and appropriate deductions from adjusted gross income

25.  Deductions Include ◦ IRA Contributions ◦ Alimony Payments ◦ Unreimbursed Business Expenses ◦ Some Capital Gain Losses  Withholdings ◦ An amount of an employee’s income that an employer sends directly to the federal, state, or local tax authority as partial payment of that individual’s tax liability for the year ◦ When a person starts a new job, they fill out a W-4 indicating his/her filing status and number of allowances (exemptions) claimed

26.  W-4 ◦ Filled out by employee ◦ Used by employer to determine amount of money withheld from each paycheck for taxes  W-2 ◦ Form sent by your employer summarizing how much money was earned and how much was taken out for taxes.

27.  Income is reduced by taxes – leaving less for personal goods, services, savings and investments  There are trade-offs – people in a society can decide if benefits of government programs are worth a reduction in income

30.  Earning period: January 1 through December 31, 2012  Employers have until January 31, 2013 to send you your tax forms (W-2)  Due April 15 th of 2013 to file and pay

31.  The amount of taxes withheld is an estimate of the amount the employee will owe at the end of the year.  Enacted in the early 1940’s  Fill out a W-4 indicating your withholding status for the upcoming year.

33.  Receive a W-2 by January 31 st for prior year. 1. Lists reported gross wages 2. Lists amount withheld from wages for federal income tax 3. Lists amount withheld for social security & Medicare 4. Lists amount withheld for state income tax

35.  These deductions directly lower one’s AGI- Adjusted Gross Income ◦ Traditional IRA deduction ◦ Student loan interest deduction ◦ Tuition and fees deduction ◦ Health savings account deduction ◦ Moving expenses ◦ Self-employment tax deduction AND health Insurance ◦ Alimony paid

36.  The standard deduction for single individuals is $5,950 for 2012.  Reasons to Itemize ◦ Mortgage Interest…. ◦ Real Estate Taxes….. ◦ Charity……………………. ◦ Medical Expenses (must be at least 7.5% of your AGI) ◦ State & Local Taxes

37.  For a qualifying dependent child, there are four basic tests, any one of which requires a federal income tax return to be filed for a given year: ◦ The child has unearned income above $950 (from investment interest, gains, and so on)unearned income ◦ The child has earned income above $5,950.earned income ◦ Gross income is greater than the larger of $950 or earned income (up to $5,500) plus $300. Gross income ◦ Net earnings from self-employment are $400 or more.

38.  Children can be claimed as dependents provided that they meet one of the following categories: ◦ Under age 19 at the end of the year ◦ Under age 24 at the end of the year and a full-time student ◦ Permanently disabled at any age

39.  Johnny is 17 years old and is claimed as a dependent on his parents' tax return. He earned $100 in interest income from a bank account in his name (unearned), $1,500 working part-time in a gas station (earned), and $200 mowing lawns (self-employment).  He does not have to file because he doesn't meet any of the four tests.

40. EEmployees fill out Form W-4 EEmployers withhold taxes from employees’ paychecks AAt start of year, employers mail Form W-2 to employees continued

41. FForm W-4 —t axes withheld depend on earnings and number of allowances claimed

42. FForm W-2 — previous year’s pay and tax deductions are given

43. EEach year taxpayers must file a tax report with the government showing the taxes owed CChoose one of three common forms: 1040EZ, 1040A, or 1040

44. UUse Form 1040, long form, ◦i◦if income is over a certain amount ◦w◦when adjustments to income, itemized tax deductions, and tax credits can reduce taxes

45. UUse short forms, 1040A or 1040EZ, if ◦i◦income falls into certain limits ◦d◦deductions aren’t itemized

46. CCalculate gross income based on Forms W-2 and 1099s CCalculate adjusted gross income by subtracting adjustments from total income SSubtract allowable exemptions and deductions

47. IIRS tax tables show taxes owed based on taxable income RReduce the amount owed with tax credits

48. AAdvantages of filing tax returns online: ◦I◦It’s simple and quick ◦I◦If refund is due, it arrives sooner TTeleFile allows taxpayers to file simple tax returns with touch-tone phones