1. Theme 7: Taxing

2. Taxing
A tax (a payment imposed on a taxpayer by a governmental unit.) => Incoming tax is called revenue.
The greatest % of revenue comes from income tax.
16th Amendment: Allowed for income tax (a direct tax on an individual’s income).

3. Types of Taxes
Progressive tax: takes a larger share of income as the amount of income grows. (Ability-to-pay principle: the belief that taxes should be levied according to one’s ability to pay.)
What issues do you see with this principle? Good or bad?
Someone with a lower income may only pay 15% while someone with a higher income may pay 28%.
Regressive tax: takes a smaller share of one’s income as the amount of income grows.
Example: Sales tax- If one pays $500 for sales tax on a car purchase, an individual with $50,000 income pays X% while an individual with $20,000 income pays Y%.
Proportional tax (flat tax): a tax rate that stays the same regardless of one’s income.

4. Tax Brackets Which department is in charge of federal tax collecting?
IRS or Internal Revenue Service (Treasury Department)
What type of tax is income tax?
A tax is applied to an income range or tax bracket
Taxable income up to… Marginal Tax Rate
$9, %
$36, %
$89, %
$186, %
$405, %
$406, %
Over 406, %
1) What would you pay if you made $45,000? What is the overall rate?
2) What would you pay if you made $350,000? What is the overall rate?
3) What would you pay if you made $650,000? What is the overall rate?

5. IRS
Paying your taxes is based on voluntary compliance (all citizens prepare and file tax returns on their own).
Failure to do so can result in penalty.
Willful failure is tax evasion which is a crime punishable by fine and/or imprisonment.
Tax avoidance is taking all of the available deductions to reduce taxes.
The IRS can audit you to determine if you have paid correctly.
audit: an official inspection of one’s accounts (in this case, to determine if you have paid in-full)

6. Filing Taxes
Filing status: describes your tax-filing group (single, married, head of house, widow)
Exemptions are an amount you may subtract from your income for each person who depends on your income to live (each exemption reduces your taxable income and thus your total tax).
A dependent is someone who you pay for half of living expenses (children, elderly, spouse…)
Gross income is all of the taxable income you receive during a year.
Earned income: wages, salaries, tips, business income
Unearned income: interest, dividends, alimony, social security , scholarships/grants, prizes
Non-taxable income: child support, gifts, inheritances, life insurance benefits, veteran’s benefits

7. Tax Benefits Benefits:
Itemized deductions: expenses you can subtract from gross income to determine your taxable income
Standard deduction: certain deductions that are based off of filing status => children ~$3900/child, married v. head of household has a standard deduction
Tax credit: a deduction on taxes owed. If you have a tax credit of $100 and you owe $800, you now owe $700.

8. Tax Forms
Tax forms:
1040: If you make over $100,000 (required) or if your itemized reductions are more than your standard deductions, use the 1040.
1040A: If you have some deductions and credits, but a smaller salary use 1040A.
1040EZ: If you have no deductions or credit and make less than $100,000, use the 1040EZ.