Taxes

5.1 – Taxes and Your Paycheck

Payroll taxes Based on earnings Paid to government by you and employer

Income taxes You pay on income you receive Varies on financial and family situation You are responsible for calculating!

5.1 – Taxes and Your Paycheck

FICA – Federal Insurance Contributions Act Social Security

4.2% of gross income Medicare

1.45% Withholding

Money taken from paycheck and paid to the state or federal government

Avoids having to pay government all at once State of Illinois Tax Rate

5.0%

Your Paycheck Stub

Gross income Withholdings Net income

Withholding

•Withholding too much•Payroll calculated on ANTICIPATED annual salary•Results in a refund

•Withholding too little•Funds paid to government when taxes are filed•Reduce allowances•Specify extra $$ withheld on W-4•The lower the number of allowances the more money that is taken out of your take home paychecks

Terms

Allowance Number that reduces the amount of money withheld from your

pay The larger the allowances the less amount withheld Examples

Kids, Wife, Husband, Family Member

W-4 Form that the employer uses to know what the withholding

allowance will be for each employee You are responsible for proper withholdings

IRS Agency that collects income tax

5.2 – File a Tax Return

Must make at least $9,350 Tax return – set of forms that taxpayers use

to calculate their tax obligation If you owe – you pay If you overpaid – you receive By April 15!!

Documents W-2

Amount of your tax withheld from the previous year Employer must send you the form by Jan 31st

Form 1099-INT Form 1040 - Deductions Form 1040-EZ

You are single or married filing jointly You have no dependents (people you support financially) You and your spouse are under 65 Neither you nor your spouse is blind Your taxable income is less than $100,000 You earned no more than $1,500 in interest You had no income other than wages, interest, tips,

scholarships, or unemployment compensation

1040EZ

Adjusted Gross Income Deduction

Standard deduction – amount you may subtract from your adjusted gross income

Taxable Income Federal Income Tax Withheld Earned Income Credit Exemptions

The number of people the taxpayer are supporting.

1040EZ

Total Payments Tax Refund/Owe?

Electronic funds transfer Sign Check for errors *If someone else can claim you then the back

needs to be filled out*

5.3 – Taxes and Government

Benefit Principle Those who use a good or service provided by the

government should pay for it. Example: Roads

Ability to Pay Principle Make more, pay more Example: Federal Income Taxes Taxes can increase from 15 % to 39.6 %

$8,925* to $36,250: 15%$36,250 to $87,850: 25%$87,850 to $183,250: 28%$183,250 to $398,350: 33%$398,350 to $400,000: 35%$400,000+: 39.6%

Taxes and Income

Progressive taxes Have a higher tax, the more you earn Higher tax brackets, for example (15 to 39 %) Federal income tax

Regressive taxes Less taxes (in %) the more you earn Claims the greatest percentage of money from people of

lower incomes than those with higher incomes Sales Tax

Proportional taxes Same share of all people’s income

Collection of Taxes

Direct taxes Federal Income taxes Property taxes You pay

Indirect taxes Someone else pays Businesses – sales taxes

Types of Taxes

Income taxes Federal, state, and local

Sales taxes Property taxes Excise tax

On sale of specific goods and services - tobacco, gas, alcohol

Estate (death) and gift taxes ($10,000) Business and license taxes

5.4 – Government Spending

The Power to influence “Sin” tax Tax Cuts Charities

Public goods Roads, schools, national defense, various

regulatory agencies Social Security and Medicare (37% of

spending)

Government Spending

National Defense, Veterans, and Foreign Affairs

Social Programs Net Interest on the Debt Physical, Human, and Community

Development Law Enforcement and General Government