TAXES

By Stevie VanDeVelde

Topics

Purpose of taxes Different types of taxes What taxes you can expect to pay How to calculate the amount of federal

income tax you owe Complete a 1040EZ

What is the purpose of taxes

Support schools Support building Maintain roads Provide for the nation’s defense

Tax

Required contribution of money Ultimately paid to the government Raise revenue to pay the cost of government

Direct Tax

Paid directly to the government Examples: income tax and property tax

Indirect Tax

Shifts the tax burden Example buy gasoline, cigarettes – then pay

tax on them

Direct Tax Can Become An Indirect Tax

Landlords property taxes increase (direct tax) Your rent increases due to it (indirect tax)

Types of Taxes

Income Tax – Paid based on the money you earn and

profits a business makes– Paid to Federal, State and sometimes Local

Government– Paid on salary, wages, tips and savings and

investment income– Pay for the overall costs of governments

Types of Taxes - Continued

Payroll Tax – Paid to support Soc. Security taxes– Both you and your employer make a contribution– Help provide you with retirement income/benefits– Some occupations (teachers and government

workers) pay into a state retirement program rather than Soc. Security

Types of Taxes - Continued

Sales Tax – State and Local Governments– Tax is added to the cost of the items– Sales tax in Illinois is 6.25%

Types of Taxes - Continued

Estate, Inheritance and Gift Tax – Estate tax – assessed on the value of the

deceased’s property before it is passed on – Inheritance tax – taken out of each person’s share

of the will– Federal – Estate Tax– State (some) – both Inheritance and estate tax– Gifts up to a certain amount are tax free. Over

that amount a gift tax is imposed

Income Tax

History – 1913 – Federal Income tax imposed– The 16th amendment gave the government the

right to tax– Wisconsin – 1st state to administer an income tax– By mid-1970’s – almost all states have an income

tax

Federal Income Tax

Who Must Pay?– Individuals– Corporations– Trusts– Estates– Business owners (pay

through their individual income taxes)

– Citizens of other countries who earn income in the U.S.

Federal Income Tax

Who Doesn’t Have to Pay?

– Low Income Families– Nonprofit Organizations

(churches, charities)– Some hospitals

Federal Income Tax

Part of being a good citizen Graduated income tax

– Seen as fairest type of tax– Those who earn more – pay a higher percentage

Graduated Income Tax

State Income Tax

Most have a graduated income tax Some use a flat rate

– Your income is $25,000 and your spouse’s income is $35,000, therefore, you would pay 6% on all income or $3,600

Taxable Income

Your total income-

Adjustments to Income (paid alimony, contributions to IRA)

=Your adjusted gross income

-Deductions and Exemptions

= Taxable Income

Reduction of Income Tax

Tax laws: Those who meet certain requirements can reduce the amount of income which is taxed

Determining Your Deductions

Mortgage Interest Property Taxes Contributions to Charities and Churches

Tax-Free Income

Allows a certain level of tax-free income– Marital status– Number of dependents

Thus, – Larger families generally pay less tax– Married couples generally pay less tax

Determining Your Exemptions

Yourself (if not claimed by your parents) Any Dependents

Taxable Income

Your total income-

Adjustments to Income (paid alimony, contributions to IRA)

=Your adjusted gross income

-Deductions and Exemptions

= Taxable Income

Taxable Income and Tax Table

Use Taxable Income Determine the Amount of Tax you Owe

Taxable Income and Tax Table

Taxable income

$15,235

Tax (single)

$1,919

Your Turn

Based on the table, how much tax does a married couple filing jointly owe on an income of $15,742?

How much does a single person owe on the same amount?

Tax Credits May Reduce Your Figure from the Tax Table

Amount of tax due may reduce by any tax credits– Child Care

Compare

Tax Owe to Tax Paid If too much withheld –

refund If too little withheld –

owe difference

Tax Form

Due April 15 Sign Interest and Penalty if

late

“Filing”

Process of completing and submitting an income tax return

Can be simple or complex

Not Filing = Tax Evasion

Eligibility for filing a 1040EZ

Filing status – single or married filing jointly

No dependents No student loan interest

deduction or an education credit

Not age 65 or over (you or your spouse)

Taxable Income less than $100,000

Eligibility for filing a 1040EZ – Cont.

Only had wages, salaries, tips and taxable scholarships, unemployment compensation, qualified state tuition program earnings or Alaska Permanent Fund dividends

AND your taxable interest income was not more than $1,500.

Did not receive any Advance earned income credit payments

Did not owe any household employment taxes on wages you paid to a household employee

Filing a 1040EZ

On paper Telephone Computer

IRS Web Site

www.irs.gov

John Nye – Class Activity

Preparing a 1040EZ

Introduction

In 2005, John Nye worked after school and all day Saturday at Rudden’s Ice Cream Parlor.

In late January 2006, John received a W-2 Wage and Tax Statement from his employer.

John went to the post office and picked up a Form 1040EZ and the instructions for completing this form. (You can also download them from the web site).

Introduction - Continued

John also received a 1099-int – Interest income earned from from his local bank. He had earned $63.00 in interest income.

With this information he was able to complete his 1040EZ.

John’s W2

John’s 1040EZ

Other Types of 1040’s

1040A – Dividend and Capital Gains from Stock– Deductible Student Loan Interest

1040 – Itemize rather than taking the standard

deductions– Receive income from rental property

Let’s Do Some Calculations!

Suppose you make $370 a week. Each year you pay $2,884 in federal income tax, $578 in state income tax, $262 in sales tax, $88 in property tax, $1,472 in FICA tax, and $158 for other taxes. How much do you pay for taxes during the year? How many weeks must you work just to pay taxes?

Calculation #2

Suppose you earned an annual salary of $27,000 and your spouse earned $32,000. If there were a flat tax on income of 5%, how much income tax would your family have to pay?

Calculation #3

Using the tax table, determine the amount of tax you owe, if your wages were $15,178.00, tips were $1,132.00 and interest income was $220.00. The amount of tax withheld from your employer was $1,596.00.

Review Questions

What do taxes pay for? Name some types of taxes What is it called if you have earned income

and fail to file an income tax return? If you are married, can you use form 1040EZ

to file your federal income tax return? What is a Graduated Income Tax?

Review Questions - Continued

What is a flat rate tax? What are deductions? What are exemptions? What date must you file your taxes by?