Chapter 7Chapter 7

FederalTaxes

What is this picture depicting?

What is tax revenue?Money the government collects from its

citizens and businesses.

What is the largest source of government revenue?

Income Taxes

Can you list other types of Government taxes that provides revenue?

Social security taxesUnemployment insurance taxesInheritance and estate taxesExcise taxesImport dutiesPersonal property taxes

What is the “ability-to-pay” principle? Individuals with high incomes should paymore taxes than people with low incomes.

Label these definitions as Progressive, Regressive, or Proportional (flat taxes)

1 – Taxes for which the rate stays the same regardless of the income.

2 – Taxes that take a larger share of income as the amount of income grows.

3 – Taxes that take a smaller share of income as the amount of income grows.

Federal income taxes are an example of what type of tax?

Progressive (someone with a low income may only pay 15% while someone with a high income pay 28%)

Sales taxes are an example of what type of tax?

Regressive. (people with lower incomes pay a larger % for sales tax)

What is an excise tax? Sales taxes imposed on specific goods and

services such as gasoline, cigarettes, alcoholic beverage, air travel, and telephone service.

What type of tax is an excise tax? Regressive

IRS stands for what?Internal Revenue Service

How many regional offices does the IRS have?

7

What is property tax?Is this a progressive, regressive, or

proportional tax?

Proportional, all people owning property in the same community pay relatively close to the same rate.

What are some provisions we experience on a local level as a result of taxes?

EducationParksplaygrounds’RoadsPolice,fire, and health depts

What are some provisions on the national level?

Salaries for Congress, funds for national defense, highways, wildlife refuges, welfare, foreign aid, and other services.

Tax FormsTax Forms

Although there are nearly 400 Federal Tax Forms, all taxpayers must use one of three basic forms when filing their return.

What are these three forms?

Three Basic Tax FormsThree Basic Tax Forms

1040 EZ

1040A

1040

If you have no deductions or credits, less than $1500 in interest income, and no dependents…

What tax form should you use?

You should use form 1040 EZ

If you qualify for deductions or credits, you can use one of 2 basic tax forms. What are these 2 different forms?

1040A

1040

What is a deduction?

On a tax return these are expenses the law allows you to subtract from your Income.

What is a tax credit?

An amount subtracted directly form tax owed.

What amount do you plug into a tax table to determine you tax owed?

Gross Income?Adjusted Gross Income?Taxable Income?

3 basic components of our tax system:The IRSCongress and the Power to Levy TaxesEach taxpayer

What does IRS stand for (Internal Revenue Service)

What are the main functions of the IRS?1 – Collect income taxes2 – Enforce tax laws

What are some of the services it provides to taxpayers?

- Assist in finding information and forms- Prints pamphlets to aid taxpayers- furnishes tax information and instruction

booklets free to schools and colleges-maintains a website where people can

download tax forms, and file their taxes electronically.

How many regional offices does the IRS have?

7Each regional office oversees at least how

many district offices?10

The power to levy taxes rests with who?Congress

Proposals to increase or decrease taxes may come from who and what bodies?

The President, Dept of Treasury, or a member of Congress.

Revenue bills must pass a vote in both the House and the Senate and be signed by the President before becoming a Law.

Our Tax System is graduated. What does this mean?

Tax rates increase as taxable income increases.

Tax rates apply to income ranges (brackets)

Congress may increase tax rates to bring in more money to balance its budget.

When the Government spends more moneythan it receives in revenue, it creates a

what?Deficit (shortage) It must then borrow

money to pay its expenses.

Our tax system in based on Voluntary compliance. What does this mean?

All citizens are expected to prepare and file income tax returns.

Taxes are due by when of each year?April 15

What are some consequences for not paying your taxes?

Interest charges on taxes owedA fine and/or imprisonment

Willful failure to pay taxes is called what?Tax evasion

What is an audit?An examination of tax returns.What are the three types of audits?.

OFFICE AUDIT

CORRESPONDENCE AUDIT

FIELD AUDIT

Office Audit – Taxpayer sits down with Auditor to answer questions.

Correspondence Audit – IRS sends a letter, asking the taxpayer to respond to specific questions or produce evidence

Field Audit – IRS Agent visits the taxpayer

AGI stands for?

IRS stands for?

Filing Status OptionsFiling Status Options

Single Person (not married)Married Person filing a joint return(even

though only one spouse has earned income)

Married person filing separatelyHead of HouseholdQualifying Widow (er) with dependent

child

What is an exemption?The amount you may subtract from your

income for each person who depends on your income to live.

As a taxpayer you are automatically allowed 1 exemption for yourself unless someone else (like a parent) claims you as his/her dependent.

Who qualifies as a dependent?A person who lives with you and receives

more than half of his or her living expenses from you. Dependents can include children, spouse, elderly parents, or disabled relatives living with you.

On tax returns, deductions, are expenses the law allows you to subtract from your AGI(Adjusted Gross Income) to determine your taxable income.

Remember, Deductions are subtracted from your AGI

To attain the best tax benefit, a tax payer may need to itemize(to list) their deductions as the total of their itemized deductions is greater than the standard deduction.

What is the standard deduction?

Standard Deduction: A stated amount that you may subtract from your AGI instead of itemizing your deductions.

Since your tax is based on your taxable income, anything that reduces taxable income, also reduces your tax.

To itemize deductions, you must use a Schedule A and a Form 1040

Some common expenses you may deduct:◦Medical and dental expenses◦State and local income taxes◦Property taxes◦Home mortgage interest paid◦Charitable contributions◦Moving expenses

However, if you don’t have many deductions to list, it will likely be more advantageous to claim the Standard Deduction rather than itemizing.

DeductionsSubtracted from

your Adjusted Gross INcome

CreditsSubtracted directly

from taxes owed

You must file a tax return if you earned more than a certain amount specified by the Government. (this threshold amount may change from year to year).

If you did not earn enough to owe taxes but had money withheld from your paycheck, you will have to file to get your refund