TAXES

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TAXES

• By Stevie VanDeVelde

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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

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What is the purpose of taxes

• Support schools
• Support building
• Maintain roads
• Provide for the nations defense

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Tax

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

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Direct Tax

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

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Indirect Tax

• Shifts the tax burden
• Example buy gasoline, cigarettes then pay tax
  on them

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Direct Tax Can Become An Indirect Tax

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

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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

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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

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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

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Types of Taxes - Continued

• Estate, Inheritance and Gift Tax
• Estate tax assessed on the value of the
  deceaseds property before it is passed on
• Inheritance tax taken out of each persons
  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

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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-1970s almost all states have an income
  tax

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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.

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Federal Income Tax

• Who Doesnt Have to Pay?
• Low Income Families
• Nonprofit Organizations (churches, charities)
• Some hospitals

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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

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Graduated Income Tax
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State Income Tax

• Most have a graduated income tax
• Some use a flat rate
• Your income is 25,000 and your spouses income
  is 35,000, therefore, you would pay 6 on all
  income or 3,600

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Taxable Income

• Your total income
• -
• Adjustments to Income (paid alimony,
  contributions to IRA)
• Your adjusted gross income
• -
• Deductions and Exemptions
• Taxable Income

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Reduction of Income Tax

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

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Determining Your Deductions

• Mortgage Interest
• Property Taxes
• Contributions to Charities and Churches

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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

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Determining Your Exemptions

• Yourself (if not claimed by your parents)
• Any Dependents

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Taxable Income

• Your total income
• -
• Adjustments to Income (paid alimony,
  contributions to IRA)
• Your adjusted gross income
• -
• Deductions and Exemptions
• Taxable Income

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Taxable Income and Tax Table

• Use Taxable Income
• Determine the Amount of Tax you Owe

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Taxable Income and Tax Table

• Taxable income
• 15,235
• Tax (single)
• 1,919

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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?

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Tax Credits May Reduce Your Figure from the Tax
Table

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

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Compare

• Tax Owe to Tax Paid
• If too much withheld refund
• If too little withheld
• owe difference

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Tax Form

• Due April 15
• Sign
• Interest and Penalty if late

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Filing

• Process of completing and submitting an income
  tax return
• Can be simple or complex
• Not Filing Tax Evasion

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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

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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

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Filing a 1040EZ

• On paper
• Telephone
• Computer

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IRS Web Site

• www.irs.gov

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John Nye Class Activity

• Preparing a 1040EZ

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Introduction

• In 2005, John Nye worked after school and all day
  Saturday at Ruddens 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).

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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.

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Johns W2
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Johns 1040EZ
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Other Types of 1040s

• 1040A
• Dividend and Capital Gains from Stock
• Deductible Student Loan Interest
• 1040
• Itemize rather than taking the standard
  deductions
• Receive income from rental property

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Lets 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?

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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?

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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.

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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?

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Review Questions - Continued

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