1. Chapter 5 TAXES

2. Government Spending

3. Power To Influence Government use tax to do 2 things Generate Revenue
Influence consumer buying decisions
Example: “Sin Tax”
The government taxes certain products to discourage their use because they are harmful to our bodies even though they are legal
Millions of Americans buy and use these products anyway
The government taxes these products higher because it is a choice to use them- not everyone uses them.

4. Government Spending
The federal government spends $2.65 trillion each year
Roughly $15,000 for every person who lives in the United States
Most of the government’s spending pays for goods and services that benefit all Americans.
Public Goods: Roads, schools, national defense, and services of various regulatory agencies.

5. Taxes Fund Public Goods and Services
Social Security, Medicare, and Retirement
36%
National Defense
23%
Foods Stamps and Unemployment
(Social Programs)
19%
Taxes are required payments of money to various levels of government.
Taxes provide revenue for public goods and services that benefit the
community and the nation as a whole.
Taxes help support goods and services such as our national defense, state and local police and protection agencies, health care, public education, financial aid for the disabled and unemployed, and social services for low-income families.
The amount of revenue raised by taxes determines the amount of
services the government can afford to provide.
State and Local Police
Net Interest on Debt
Public Education 2%
12% 8%

6. Goods and Services State and Local Government Provide…
Building and maintaining roads
Operating police and fire protection system
Maintaining a criminal justice system
Building and staffing schools
Building and operating state colleges and universities
Supporting medical facilities
Constructing and operating sewage treatment plants
Operating unemployment compensation programs

7. State and Local Gov’t Regulations
Rules are written into laws enforced by state and local government
Example:
In order to drive, you must have a drivers license
To build a house you must have a permit
These create order and safety in the state and local communities

8. Sources of Government Income

9. Individuals Contributions
Social Security
Wages are taxed at a rate of 6.2%
Collected on gross income
Medicare
Wages are taxes at a rate of 1.45%
The total most people pay for SS and Medicare is 7.65% of gross income

10. Employer Contribution
For each dollar you earn, your employer will pay 15.3 cents to the government for social security and Medicare taxes.

11. Principles Of Taxation
A law that states every taxpayer should be treated equally
This does NOT mean all taxpayers should pay the same amount.
This law states that some people should pay MORE than others.

12. Benefit Principle
States that those who use a good or service provided by the government should pay for it.
Example: Toll Roads
Those who drive on the road pays tolls.

13. Ability To Pay Principle
Those who have larger incomes should pay a larger share of what they receive.
Example: Federal Income Tax

14. Progressive Tax Regressive Tax Proportional Tax
Taxes and Income- 3 ways
Progressive Tax
Regressive Tax
Proportional Tax

15. Progressive Tax Takes a larger share of income as income grows
Federal income tax- The more you MAKE the more you PAY

16. Regressive Tax Takes a smaller portion of income as income grows
Sales tax
Lauren makes $16,000/ year
Sal makes $45,000/ year
They both buy a car for $10,000 and have to pay 8% ($800) in sales tax.
$800 It is 5% of Laurens income but only 1.8% of Sal’s income

17. Proportional Tax Takes the same share of ALL incomes.
This would occur if people were ALL taxed for example 10% of their income for something.
This does not exist in our economy.

18. How Taxes Are Collected
Direct Tax
Paid directly to government
Ex: Income and Property Tax
Indirect Tax
Included in cost of goods and services
Part of rent is used for landlord to pay property tax
Pay-As-You-Earn Taxes
Paid as you earn income
Federal Withholding Tax

19. Types of Taxes Income Taxes Sales Tax Property Tax Excise Tax
Estate and Gift Tax
Business and License Tax

20. Types Of Taxes Income taxes Sales Taxes Withheld from paycheck
Ex. Federal, state, local taxes
Illinois State - 5.0%
Local taxes ~ 1-2%
Sales Taxes
Taxes added to price of goods and services
Some states don’t have sales tax but they pay more money in property or income tax to off set what they lose in state tax.

21. Types Of Taxes Property Tax Excise Tax
Taxes on the value of real property
Added to home or loan payments
Excise Tax
Collected on the sale of specific goods and services such as tobacco, gasoline, and alcoholic beverages
Unlike sales tax, excise tax is included in the price charged to customers.
Ex, when you pay for gas- the price includes both federal and state excise tax.

22. Types Of Taxes Estate Tax Gift Tax
Property tax given to someone legally entitled to an estate when a person dies.
Gift Tax
Taxes the giver of gifts may pay
Federal law allows people to make some gifts that are not taxes
Maximum value of gifts that were not taxed was $12,000 in 2008.

23. Types Of Taxes Business or license tax
Paid to receive licensing or a permit to operate a type of business
Ex. To be a teacher you have to take certification test which you pay for.

24. Customs Duties and Tariffs
Customs Duties or Tariffs
Controls the flow of products imported into the united states
This results in items from abroad being sold at higher prices than they otherwise would be.

25. Payroll Taxes A tax placed on income earned by individuals
Largest form of revenue received by government
Paid to the government by individual employees and their employers.
The money from these taxes fund Medicare and Social Security
Amount taken out of each check varies
based on a person’s annual earnings

26. Income Taxes Taxes you pay on most types of income you receive
The amount paid by each individual varies based on their income
The money from these taxes go into a general fund

27. Pay Stub Social Security Largest Deduction
FICA (federal insurancecontribution Act) includes social security and medicare (sometimes)
Largest Deduction

28. FICA Federal Insurance Contribution Act
A law that requires workers and their employers to contribute to Social Security and Medicare
Social Security is a program that helps provide benefits to those who have retired
Medicare provides health insurance for seniors over the age of 65 as well as certain people with disabilities

29. Withholdings Money that is withheld from your paycheck
Enables government to collect taxes at a steady rate (each pay period) instead of at the end of the year
You pay little tax with each paycheck, so you don’t face a huge tax bill at the end of the year

30. Gross Income/Gross Pay
Amount earned before taxes have been withheld

31. Net Income/ Net Pay
Amount you receive after withholdings are subtracted from your gross pay

32. Gross Income vs. Net Income
State taxes/withholdings
401K / Retirement account
Medical/Dental insurance
Social Security
Medicare
Net Income

33. Paystub Activity Pay Stub Activity Work on Paystub Activity 1 as class
Complete Paystub 2 individually

34. Forms, Forms, FORMS! W-4 W-2 1099 1040EZ
Determines how much to withhold from your paycheck.
Given by your employer. Summary of how much money you made at a particular company and how much tax was taken out of your paycheck.
Form you receive at the end of the year that shows if you made money (interest) on an savings accounts.
Also can be given if you were paid money (over $600) but not taxed.
Tax form filled out at the end of the year to determine if you get a refund or owe money.

35. W-4 Form
The form that is filled out when you are first hired at a company
Provides information your employer needs to determine how much to withhold from your paycheck

36. Allowances
A number that reduces the amount of income withheld from your paycheck
Claiming a lower number on your W-4 form will result in
MORE money being withheld from your paycheck
may mean you will get back more money at the end of the year.
The lowest number you can claim is 0
Highest you can go up to is 9
you need to show proof to the IRS for this

37. IRS Federal agency that collects income taxes
Agency in the department of treasury
Headquarters: Washington D.C.
Each year the IRS calls thousands of taxpayers for an audit
Examination of their tax return

38. Tax Return
Set of forms a taxpayer uses to calculate their obligations (what they owe/don’t owe)
This is the only way you can get money back. (Usually during Feb-April)
You are responsible for information on tax return, if it is incorrect you are liable!

39. Tax Refund
If your tax return shows you paid more money in withholdings than you owed, you will receive a refund

40. Taxes Owed
If your tax return shows that your withholdings were not enough to cover the taxes you owe, you must pay the remaining amount to the government.

41. W-2 Form Summary of your earnings and withholdings for the year.
You will receive a W-2 for each job you held during the year.
When you file a tax return, you must include your W-2!

42. W-2 Form
Wages/Tips
Fed. Income Tax
Employer
Employee

43. 1099 Form
If you have a savings account or any other investments where you earn money- you will receive a 1099 Form at the end of the year.
Statement of the interest your bank paid on your savings that year

44. Tax Return Forms Forms to file your individual federal taxes 1040
1040EZ

45. 1040EZ Simplest Tax Return Form To qualify the following must be true:
You are single or married filing jointly with spouse
You have no dependents
You and your spouse are under 65 yrs
Neither you nor your spouse is blind
Your taxable income is less than $100,000
You have earned no more than $1,500 in interest
You have no other income besides wages, tips, scholarships, or unemployment

46. Dependent Dependent Independent People who are supported financially
Someone who is not supported by anyone else financially

47. Deductions
Expenses the law allows you to subtract from your adjusted gross income to determine you taxable income
4 kinds of deductions:
Business Deductions
Traveling, meals, gifts, use of car, health insurance, use of home, education, employee pay, etc.
Adjustments
IRS or Alimony payments
Itemized/ Standard
Exemptions
You, your spouse, children

48. Examples Of Itemized Deductions
Medical/dental expenses
State and local taxes
Property tax
Mortgage interest
Gifts to charity
Losses from theft or property damage
Moving expenses
Investment expenses
You cannot use the 1040EZ form if you are choosing to itemize your deductions!

49. Standard Deduction
Specific dollar amount that you are allowed to subtract from your taxable income

50. Standard Vs. Itemized Deduction
Set dollar amount- $9,500 (2012)
Itemized
Allows you to list expenses
If your expenses add up to MORE than what the standard deduction would be, then you should choose to Itemize your deductions
You have to choose one OR the other
YOU CANNOT DO BOTH!

51. Social Security Number
Unique number assigned to you by the federal government
No one else has the same number
The government uses this number throughout your life to:
Identify you as a taxpayer
Keep track of your earnings and tax records
Pay you social security benefit when you reach retirement
Social Security

52. Taxable Income
Income figure used to determine your taxes

53. How to fill out a 1040EZ!

54. Things you will need…. 1040 EZ Form W-2 Form 1099 Form Tax Table
This is REQUIRED in order to fill out your 1040EZ
1099 Form
If you have one!
Tax Table

55. 1040 EZ Scenario Jonathan Jackson
What items do you need to complete his 1040EZ?
Determine whether he is an independent or a dependent
Complete the 1040EZ and determine if he is going to receive a refund!

56. Step # 1: Fill In Your Basic Info!
Name (first and last)
Address
Social Security Number

57. Step #1-4 1. Fill in Total Wages, Salaries, Tips
2. Fill in Taxable Interest Income
From 1099 form (interest from bank account)
3. Fill in Unemployment Compensations
Add them all up and you will get… -Adjusted Gross Income

58. Step # 5
If you are an independent and single you will put $9,500 on line 5
If you are an independent, you will flip your sheet over to the back and fill in worksheet 5!

59. Step # 6
Subtract like 5 FROM line 4
This is your taxable Income!

60. Step # 7 -Federal Income Tax Withheld
This will be found on your W-2

61. Step #8 Earned Income Credit
Workers with low incomes will qualify
**We will not be spending time on this…
Leave it blank!

62. Step # 9- Total Payments & Credit
Add up the following:
Federal Income Tax Withheld (#7)
Earned Income Credit (#8)
This will result in the total amount of your taxes that you have ALREADY PAID!

63. Step # 10- Tax Table http://www.irs.gov/pub/irs-pdf/i1040tt.pdf
Use the tax table to determine how much tax you can subtract from your total payments and credits

64. Step # 10 Continued…

65. Step # 11– Refund?
If line 9 is larger than line 10, subtract line 10 from line 9.
This is the refund! $648.00!!