1. MYPF 7.1 Our Tax System 7.2 Filing Tax Returns
5/13/2019
Federal Income Tax
7.1 Our Tax System
7.2 Filing Tax Returns
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2. Describe the U.S. tax system and explain how it works.
Lesson 7.1 Our Tax System
GOALS
Explain the purpose of taxes and describe the different types of taxes.
Describe the U.S. tax system and explain how it works.
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3. 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.
The government spends the revenues received according to priorities set by Congress.
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4. Types of Taxes Progressive taxes Regressive taxes Proportional taxes
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5. Progressive Taxes
Progressive taxes take a larger share of income as the amount of income grows.
Federal income taxes are progressive.
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6. Regressive Taxes
Regressive taxes take a smaller share of income as the amount of income grows.
Sales taxes are regressive.
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7. Proportional Taxes
Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of income.
Property taxes are proportional.
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8. Components of the Tax System
The IRS
The power to tax
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.
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9. Components of the Tax System
(continued)
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.
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10. 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
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11. Lesson 7.2 Filing Tax Returns
GOALS
Define basic tax terminology.
Prepare tax forms 1040EZ and 1040A.
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12. Filing Status Filing status describes your tax-filing group.
You must mark one of the following as your filing status on your tax form:
Single person (not married)
Married person filing a joint return
Married person filing a separate return
“Head of household”
Qualifying widow(er)
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13. Exemptions
An exemption is 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.
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14. 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.
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15. Gross Income Gross income is all the taxable income you receive.
Earned income refers to money you earned from working.
Unearned income refers to money you received from passive activity (other than working).
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16. Common Types of Income Wages, salaries, and tips Interest income
Dividend income
Unemployment compensation
Social security benefits
Child support
Alimony
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17. Adjusted Gross Income
The law allows you to subtract some types of spending from gross income.
You can “adjust” your income by subtracting such things as contributions to individual retirement accounts, student loan interest, and tuition and fees.
These adjustments are subtracted from gross income to determine adjusted gross income.
Adjustments reduce income that is subject to tax.
Note that these adjustments are not available on Form 1040EZ.
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18. Adjusted Gross Income Gross income – Adjustments Adjusted gross income
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19. Taxable Income Taxable income is the income on which you will pay tax.
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20. Taxable Income Gross income – Adjustments Adjusted gross income
(continued)
Gross income
– Adjustments
Adjusted gross income
– Deductions
– Exemptions
Taxable income
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21. Deductions
Itemize deductions
Standard deduction
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22. Itemize Deductions
Itemize deductions are expenses you can subtract from adjusted gross income to determine your taxable income.
Examples include:
Medical and dental expenses beyond a specified percentage of your income
State and local income taxes
Property taxes
Home mortgage interest
Gifts to charity
Losses from theft or property damage
Moving expenses
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23. Standard Deduction
If you do not have many deductions, your tax may be less if you take the standard deduction.
The standard deduction is a stated amount that you may subtract from adjusted gross income instead of itemizing your deductions.
This amount changes each year.
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24. Tax Credits
A tax credit is an amount subtracted directly from the tax owed.
It is different from a deduction.
A deduction is subtracted from adjusted gross income.
It reduces your tax by reducing the amount of income on which the tax is figured.
A tax credit reduces the tax itself.
The government allows tax credits for certain education expenses, child-care expenses, and other reasons from time to time.
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25. Preparing Your Income Tax Return
Who must file?
When to file?
Which form to use?
Where to begin?
Filing electronically
Tax preparation software
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26. 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
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27. 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
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