1. Unearned Income and Payments
Personal financial Literacy – Chapter 2 Section 2

2. Goals Name private and governmental sources of unearned income
List the types of taxes levied against individuals and businesses
Discuss the benefits of paying taxes, both direct and indirect

3. Key Terms Unearned income Interest Dividends Transfer payments
In-cash payments
In-kind payments
Use taxes
Excise taxes
Sales taxes
Property taxes
Public goods

4. Unearned Income Unearned Income Can come from
Money received from sources other than working
Can come from
Private sources
Government Transfer Payments

5. Private Sources Interest
Money earned on savings accounts and other funds
You earn interest on:
Savings account deposits
Bank will use deposited money to make loans and investments and will pay you interest to use your money
Certificates of Deposit (CD)
U.S. Savings bonds
You loan money to the government by purchasing bonds and receive interest

6. Private Sources Dividends Types of Dividends
A portion of a corporations profits distributed to stockholders
Stockholders are the people who buy stocks in a corporation
Types of Dividends
Cash dividend
Payment is money shared with the stockholders when the company makes a profit
Stock dividend
Payment made in the form of additional stock in the company
You do not receive cash, but the added stock increases your wealth.

7. Private Sources Other private sources of unearned income
Pension payments or other forms of retirement benefits from employer pension funds or individual retirement accounts
Winnings or prizes from the lottery or other contests

8. Private Sources Variable income
Defined by the Internal Revenue Service (IRS)
Refers to money received from some type of activity other than from working under the direct control of another person or company
May be earned or unearned, depending on the situation in which it is received.
Royalties – payments for the use of copyrighted material, such as books of songs
Rent
Variable income is often unpredictable from year to year

9. Private sources
Most forms of unearned income and variable income are fully taxable
Tax rates may be lower than income tax rates on earned income
Chart on next slide shows types of income

10. Types of Income Earned Income Unearned Income Variable Income
Salaries and wages
Interest
Business profits
Tips
Dividends
Rents
Commissions
Capital gains
Royalties
Bonuses
Gambling winnings
Farm income
Professional fees
Alimony
Social security benefits
Pensions
Annuities
Unemployment compensation

11. Government Transfer Payments
Money and benefits received from local, state, or federal governments
Made from many different programs
Increase disposable income of those who receive them
In the United States, many of these benefits are intended as temporary help until people can get back on their feet again
In the event of job loss, injury, natural disaster, etc.

12. Government Transfer Payments
In the case of social security and Medicare, these programs are intended for retirees because they have paid into them over their working years through payroll tax deductions.
Not meant as temporary help, these programs last from retirement to death.

13. Government Transfer Payments
In-cash payments
Money in the form of check, debit card, or other direct payment given to a person needing assistance
Some examples: Social security payments, unemployment benefits, workers’ compensation
In-kind payments
Payments made indirectly on a person’s behalf or in a form other than money
Examples include: food stamps, rent subsidies, Medicaid

14. Transfer Payments Type of Benefit: Paid to:
Temporary assistance for needy families (TANF)
Needy families with children; varies by state
Medicaid
Low-income families
Veterans’ benefits
Veterans and their families
Supplemental Security Income (SSI)
Low-income elderly and disabled
State-provided medical plans
Low-income residents
Social Security
Retirees, disabled workers, dependents
Medicare
Retired people with social security
Unemployment compensation
Laid-off workers; varies by state
Workers’ compensation
Workers injured on the job

15. What Types of Taxes Do You Pay?
Direct tax
Consumers pay the taxes directly to the government
Indirect tax
Taxes charged on goods or services bought by the consumer

16. Taxes Based on Consumption
Based on what consumers use or buy
Indirect tax – you pay the tax when you make a purchase and the business sends it later
Use taxes
Taxes based on the use of goods and services provided by the government
Tolls on bridges
Tolls on roads
Entrance fee for a national park

17. Taxes Based on Consumption
Excise tax
Taxes charged on the purchase of specific goods and services
Gasoline tax
Cigarette tax
Utilities
Phone service
Luxury tax
An excise tax on a product that is not considered essential for a normal standard of living

18. Taxes Based on Consumption
Sales tax
Taxes levied on consumer purchases of goods and services
A percentage of the cost of the purchase price
Items not taxed in PA:
Food that you prepare at home
Candy and gum
Most clothing
Textbooks
Computer services
Pharmaceutical drugs
Residential heating fuels (oil, electricity, gas, coal, firewood)

19. Taxes Based on Consumption
Sales tax is charged on most other purchases, including prepared foods or restaurant foods
Regressive taxes
Take a larger percentage of income from lower-income people than from higher-income people.

20. Taxes Based on Income Income tax
A direct tax paid directly to the government
Taxes must be paid on earned and unearned income
Called a progressive tax
The more you earn, the more you pay in tax
Income tax is levied by:
Federal government
State governments
Many cities or counties

21. Taxes Based on Wealth Direct tax
Levied against the value of the property and assets that you own
Property taxes:
Wealth taxes based on the assessed value of owned real estate
Assessed value
Determined by the county or other taxing authority
May or may not be the same as market value
Market value: the highest price for which the property would sell to a willing buyer

22. Taxes Based on Wealth Business personal property tax
A tax on property other than real estate that is used by the business to generate income
Example: equipment
Federal estate tax or State inheritance tax
Taxes levied against the estate of a person who has died or the person who inherits the deceased’s money or property
In many cases, the estate must be worth more than $3 million to be subject to this tax
Gift tax
Tax paid by those who give more than $13,000 to any person within a tax year

23. Direct Benefits of Paying Taxes
Provide Public Goods
Government provided goods and services paid for by taxes
National defense
Public education
Police protection
National parks
Roads and highways

24. Unique Qualities of Public Goods
Everyone benefits from them (they raise the overall standard of living in the country)
No one can be excluded from the benefits
People do not benefit in direct proportion to taxes paid; those who benefit the most often pay less

25. Indirect Benefits of Paying Taxes
Government transfer payments
Free vaccinations – protect others from the spread of illness
Public education – produces a higher-quality workforce, giving you better products and services
Taxes paid benefit society as a whole.
Without the benefit of the goods and services that taxes provide, citizens would be worse off