1. Paying for Government Services Textbook References- Chapter 3
Taxes tax year
Paying for Government Services
Textbook References- Chapter 3

2. History When founded in 1776, federal income tax did not exist.
1st 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. History
1913 Congress ratified the 16th Amendment enabling the federal government to levy a tax on individuals based on personal income.

4. Why Taxes?
Taxes provide a way for federal, state, and local governments to collect revenue and provide public goods:
Public Goods library, fire department, local park, roads, monitor clean air, clean water
All are paid by taxes that can be benefit to all regardless of income

5. Voluntary Compliance
All individual taxpayers are responsible for filing their tax return.
Must report taxable income
Accurately calculate income tax owed
File necessary forms on time

6. Earned Income: $ Earned from Work
Foundations of Personal Finance Ch. 7
Earned Income: $ Earned from Work
Income received from employment is earned income
Wages
Tips
Commission
Bonuses
Piecework jobs
Salaries
Business operations(profits/losses)
Earned and unearned income is taxable
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7. Foundations of Personal Finance Ch. 7
Earned and unearned income is taxable
Unearned Income
Income received from sources other than employment is UNEARNED INCOME
Interest Income (1099-Int form)
Social Security and retirement account payments
Rent, inheritance, awards, gifts, alimony
Unemployment compensation
Investments & Stock Dividends
Capital Gains
Rental Properties
Real Estate Sales
continued

8. Business Profit Income
Income earned by the self-employed
Disadvantages of self-employment:
Must arrange and pay for own employee benefits; can be costly.
Must pay entire Social Security and Medicare tax, rather than half the cost

9. The Importance of Taxes
Foundations of Personal Finance Ch. 7
The Importance of Taxes
Government uses its taxing authority to
generate revenue to provide goods and services for public’s benefit
stabilize the economy
address social challenges
influence behavior

10. What Is Taxed? Personal income tax—your income
Purchase (Sales) tax—goods and services
Property tax—real estate property tax and personal property tax
Wealth tax—assets (estate and gift taxes)
Excise tax—sale and transfer of certain items, including air travel, phone service, gasoline
continued

11. Payroll Deductions Common payroll deductions:
FICA (Federal Insurance Contributions Act):
Social Security and Medicare
Federal withholding tax
State and city withholding taxes, if applicable
Other benefits (insurance purchased through employers)

12. Federal Government Spending
Limited resources force governments to make choices
A budget reflects priorities and goals of government and its people
When government spends more than it collects, it must borrow money
Deficit spending increases the national debt
continued

13. Federal Government Spending
Foundations of Personal Finance Ch. 7
Federal Government Spending

14. Mandatory Expenses
Payments that must be made, even if the government must borrow money to do so
Make up more than 60 percent of federal government’s budget
Include entitlement programs and interest on the national debt
continued

15. Mandatory Expenses Entitlement programs: Social Security Medicare
Medicaid (for older adults and people with disabilities)
Veterans’ pensions and medical care
Nutrition and housing assistance
Unemployment compensation
Federal employee retirement benefits

16. Discretionary Expenses
An expense that can be adjusted according to needs and revenues
Include national defense expenses
Include nondefense expenses:
Costs of government operations and programs
Funds given to state and local governments

17. State and Local Government Spending
Foundations of Personal Finance Ch. 7
State and Local Government Spending
Taxation and government spending vary widely between states and between cities
Most state and local government revenues come from
personal and corporate income taxes
sales tax
real estate and personal property taxes
continued

18. State and Local Government Spending
Foundations of Personal Finance Ch. 7
State and Local Government Spending

19. Types of Taxes Direct—paid directly to government by taxpayers
Indirect—imposed on one party, but paid by another
continued

20. Tax Base and Structure 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.

21. Tax Base and Structure Progressive Regressive Proportional
Three basic tax structures
Progressive
Regressive
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

22. Our Tax System: Progressive
The more you make the higher tax amounts you pay

23. Tax Base and Structures
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

24. Tale of taxes

25. Terms Excise Tax Internal Revenue Service (IRS)
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

26. Terms Short Form (tax) Tariff Taxable Income
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

27. Terms Deductions Include Withholdings 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

28. Discuss this Question
How would you defend the fairness or unfairness of proportional tax (such as 16%) on taxable income?
Calculate taxes for families with total incomes of:
A. $28,000
B. $44,000
C. $150,000
D. $500,000

29. Summary
Taxes provide the revenue for government to fund services to benefit the society as a whole
Public Goods are goods and services provided by government
People pay taxes on income, consumption and wealth
Tax structure can be categorized as regressive, progressive, and proportional

30. Summary
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

31. Tax Forms & Procedures Earning period:
January 1 through December 31 of previous year
Employers have until January 31to send you your tax forms (W-2)
Due April 15 to file and pay (18th this year since it’s a weekend)

32. Federal Withholding Tax
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. W4: Completed by Employee when Hired

34. Reporting Earned Income
Receive a W-2 (Wage and Tax Statement) by January 31st for prior year.
Lists reported gross wages
Lists amount withheld from wages for federal income tax
Lists amount withheld for social security & Medicare
Lists amount withheld for state income tax

35. W2: Wage and Tax Statement Purpose- To show income/taxes for whole year Completed by Employer at end of year

36. 1099-INT form (Interest Income)
Form sent by your bank/financial institution showing how much INTEREST your account earned. This needs to be included in your income on your taxes.

37. Above the Line Deductions
These deductions directly lower one’s AGI- Adjusted Gross Income
Classroom expenses for teachers and educators- 250$
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

38. Standard vs. Itemizing Deductions
The standard deduction for single individuals is $6,300 for 2016.
Reasons to Itemize (list proof of major expenses.)
Mortgage Interest….
Real Estate Taxes…..
Charity…………………….
Medical Expenses (7.5% of your AGI)
State & Local Taxes

39. Personal Exemptions Personal Exemption- $$4,050
A tax payer can deduct a personal exemption for himself, spouse, and all dependent children.
Example: Married man with wife and 2-year old can deduct 3 exemptions ($12,150) from Gross income before Taxes
Example: High School student may NOT claim a personal exemption because his exemption is already claimed on his parents tax returns

40. When Children MUST File Taxes
For a qualifying dependent child, if a dependent has any one of which requires a federal income tax return to be filed for a given year:  
The child has unearned income above $1,000 (from investment interest, gains, and so on)
The child has earned income above $6300.
Net earnings from self-employment are $400 or more.

41. Children Claimed as dependents
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

42. Example - When to File
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.

43. Foundations of Personal Finance Ch. 7
Paying Income Taxes
Internal Revenue Service (IRS) collects federal income taxes
State tax returns are filed with departments of revenue in states that collect taxes

44. Your Employer’s Role Employees fill out Form W-4
Employers withhold taxes from employees’ paychecks
At start of year, employers mail Form W-2 to employees
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45. Foundations of Personal Finance Ch. 7
Your Employer’s Role
Form W-4—taxes withheld depend on earnings and number of allowances claimed
continued

46. Foundations of Personal Finance Ch. 7
Your Employer’s Role
Form W-2 Wage and Tax Statement— previous year’s pay and tax deductions are given

47. Preparing Your Return
Each year taxpayers must file a tax report with the government showing the taxes owed
Choose one of three common forms: 1040EZ, 1040A, or 1040

48. Choosing a Tax Form Use Form 1040, long form, continued
if income is over a certain amount
when adjustments to income, itemized tax deductions, and tax credits can reduce taxes
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49. Foundations of Personal Finance Ch. 7
Choosing a Tax Form
Use short forms, 1040A or 1040EZ, if
income falls into certain limits
deductions aren’t itemized

50. Figuring Taxable Income
Calculate gross income based on Forms W-2 and 1099s
Calculate adjusted gross income by subtracting adjustments from total income
Subtract allowable exemptions and deductions

51. Foundations of Personal Finance Ch. 7
Figuring Taxes Owed
IRS tax tables show taxes owed based on taxable income
Reduce the amount owed with tax credits

52. Filing on Time
Filing deadline for federal taxes and most state taxes is April 15
Tax avoidance—Legal methods of minimizing the amount of taxes you pay.
Tax evasion—illegally failing to declare all income or falsifying documents or not filing taxes at all.

53. State and Local Tax Forms
Foundations of Personal Finance Ch. 7
State and Local Tax Forms
43 states collect income taxes
Taxpayers in states that collect personal income taxes must submit state tax forms

54. Electronic Filing Advantages of filing tax returns online:
It’s simple and quick
If refund is due, it arrives sooner
TeleFile allows taxpayers to file simple tax returns with touch-tone phones

55. Once you complete your Taxes
If You OWE MONEY to the Government
Pay with Check
Pay through direct debit out of your account
Pay with Credit Card
Request to make installment payments
If You are receiving a REFUND
Provide your bank info and request direct deposit
They will send you an actual CHECK
You can apply it to next years taxes

56. Sources of Tax Information and Assistance
The IRS answers tax questions through free booklets, recorded messages, and a Web site
Tax preparation services fill out tax forms for a fee
Many taxpayers use tax preparation guides and software

57. IRS Audits A detailed examination of taxpayer’s tax returns by the IRS
During audit, taxpayers must answer IRS’s questions and provide documentation when asked
Taxpayers have legal protections in their dealings with the IRS

58. Foundations of Personal Finance Ch. 7
Tax System Reform
Legislators make laws that
raise or lower taxes
make the tax burden fairer
simplify the system
achieve other desired outcomes

59. Tax Legislation Many citizens are concerned about rising taxes
Questions asked when tax policy changes:
Will revenues generated by the new tax exceed administration costs?
Will it be fair to all taxpayers?
Will it impact the economy negatively?

60. Paying Social Security Taxes
FICA taxes calculated as a percentage of income; deducted from gross pay
Employers and workers split FICA taxes
Employees pay 6.2 percent for Social Security and percent for Medicare
Employers contribute an additional 7.65 percent
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61. Paying Social Security Taxes
Foundations of Personal Finance Ch. 7
Paying Social Security Taxes
The self-employed pay all FICA taxes themselves
Federal government receives FICA contributions and credits them to employees’ accounts

62. Your Social Security Number
Social Security Administration uses SSNs to keep records of earnings; records determine benefit amounts
IRS uses SSN as taxpayer ID number
Each SSN is unique
Safeguard your SSN

63. Social Security Benefits
If you work, your Social Security taxes pay for benefits others receive
When you no longer work (retire, become disabled, or die), you and your dependents will get benefits provided by other workers’ Social Security taxes
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64. Social Security Benefits
Types of benefits:
Retirement
Disability
Survivors’
Benefits for divorced people

65. Social Security System Reform
Benefits paid out will soon exceed tax collection
Social Security fund will be depleted; no money to pay benefits of workers paying into the system now
Taxes may have to be raised, benefits decreased, or both