Download Taxes - WTPS.org

Paying for Government Services
Textbook References- Chapter 7 pages 155-175




When founded in 1776, federal income tax
did not exist.
1st tax was created in 1862 in order to
finance the Civil War
Abolished in 1872 after the war ended
Tax was again proposed in 1895, but
declared unconstitutional

1913 Congress ratified the 16th
Amendment enabling the federal
government to levy a tax on
individuals based on personal
income.

Government uses its
taxing authority to
◦ generate revenue to
provide goods and
services for public’s
benefit
◦ stabilize the economy
◦ address social challenges
◦ influence behavior
All individual taxpayers are
responsible for filing their tax return.
 Must report taxable income
 Accurately calculate income tax owed
 File necessary forms on time

◦ Income taxes by:




Limited resources force governments to make
choices
A budget reflects priorities and goals of
government and its people
When government spends more than it
collects, it must borrow money
Deficit spending increases the national debt
continued
If taxable income is over--
The tax is:
Less than $25,000
%
From $25,001 up to $75,000
%
From $75,001 up to $250,000
%
From $250,001 up to $1,000,000
%
Any earnings over $1,000,000
%
If taxable income is over-Less than $25,000
The tax is:
5%
From $25,001 up to $75,000
15%
From $75,001 up to $250,000
25%
From $250,001 up to $1,000,000
40%
Any earnings over $1,000,000
50%



Payments that must be made, even if the
government must borrow money to do so
Make up more than 60 percent of federal
government’s budget
Include entitlement programs and interest on
the national debt
◦ Entitlement Programs include…
continued

An expense that can be adjusted
according to needs and revenues

Include national defense expenses

Include nondefense expenses:
◦ Costs of government operations and
programs
◦ Funds given to state and local
governments


Taxation and government spending vary
widely between states and between cities
Most state and local government
revenues come from
◦ personal and corporate income taxes
◦ sales tax
◦ real estate and personal property taxes
continued

Three Tax Bases
◦ Income (what people earn)
◦ Person’s Wealth (what is owned)
◦ Consumption (what one uses)

Tax on Consumption is the same rate for
everyone, no matter what a person’s income
is.

Three basic tax structures
1. Progressive
2. Regressive
3. Proportional

Structure 1: Progressive
◦ When tax takes a larger share of income from
people with a high income rather than from lowincome earners
 Progressive example - Federal government
2014 Tax Brackets (for taxes due April 15, 2015)
Single filers
Married filing jointly or
qualifying widow/widower
Married filing separately
Head of household
10%
Up to $9,075
Up to $18,150
Up to $9,075
Up to $12,950
15%
$9,076 to $36,900
$18,151 to $73,800
$9,076 to $36,900
$12,951 to $49,400
25%
$36,901 to $89,350
$73,801 to $148,850
$36,901 to $74,425
$49,401 to $127,550
28%
$89,351 to $186,350
$148,851 to $226,850
$74,426 to $113,425
$127,551 to $206,600
33%
$186,351 to $405,100
$226,851 to $405,100
$113,426 to $202,550
$206,601 to $405,100
35%
$405,101 to $406,750
$405,101 to $457,600
$202,551 to $228,800
$405,101 to $432,200
$406,751 or more
$457,601 or more
$228,801 or more
$432,201 or more
Tax rate
39.6%

Structure 2: Regressive
◦ When more money is taken from those with low
income rather than high income
◦ Regressive Example: City Sales Tax
 Because a consumer with a low income is paying a
larger share of income than a high-income buyer

Structure 3: Proportional
◦ When all individuals are taxed at the same rate
regardless of income
 Proportional Example: Flat Tax

Adjusted Gross Income (AGI)
◦ all the income you receive over the course of the year,
including wages, interest, dividends and capital gains, minus
things such as contributions to a qualified IRA, some business
expenses, moving costs and alimony payments. AGI is the first
step in calculating your final federal income tax bill.

Standard Deduction
◦ a fixed dollar amount that taxpayers can subtract from their
income
◦ is available to all filers and is determined by the taxpayer's
filing status.
◦ amounts change each year because of inflation adjustments.
◦ Most taxpayers use this deduction method, which eliminates
the need to itemize actual deductions such as medical
expenses, charitable contributions and state and local taxes.

Excise Tax
◦ A federal or state tax imposed on the manufacture
and distribution of certain consumer goods
 Example – environmental taxes, communications
taxes, fuel taxes

Internal Revenue Service (IRS)
◦ The federal agency responsible for administering
and enforcing the Treasury Department’s revenue
laws through:
 Assessment and collection of taxes
 Determination of pension plan qualifications
 Related activities

Tax Credit
◦ An amount that can be subtracted from the taxes a
worker owes
◦ Ex. Child tax credit

Tax Deduction
◦ An expense that can be subtracted from a worker’s
taxable income
◦ Ex. Medical expenses

Itemization
◦ The process of listing deductible personal expenses
paid during the year






Medical and Dental Care
State and Local Income Taxes
Real Estate Taxes
Home Mortgage Interest
Gifts to Charity
Revenue Sharing
◦ A share of tax funds provided by the federal
government to state governments, or by state
governments to local municipals

Short Form (tax)
◦ Any shorter version of a standard tax form , most
commonly the 1040A or 1040-EZ tax return forms
◦ Require fewer or no supplementary forms
(schedules) to be attached

Tariff
◦ A tax imposed on a product when it is imported
into a country

Taxable Income
◦ The amount of income subject to income taxes
found by subtracting exemptions and appropriate
deductions from adjusted gross income

Deductions Include
◦
◦
◦
◦

IRA Contributions
Alimony Payments
Unreimbursed Business Expenses
Some Capital Gain Losses
Withholdings
◦ An amount of an employee’s income that an
employer sends directly to the federal, state, or
local tax authority as partial payment of that
individual’s tax liability for the year
◦ When a person starts a new job, they fill out a W-4
indicating his/her filing status and number of
allowances (exemptions) claimed

W-4
◦ Filled out by employee
◦ Used by employer to determine amount of money
withheld from each paycheck for taxes

W-2
◦ Form sent by your employer summarizing how
much money was earned and how much was taken
out for taxes.


Income is reduced by taxes – leaving less for
personal goods, services, savings and
investments
There are trade-offs – people in a society can
decide if benefits of government programs
are worth a reduction in income



Earning period: January 1 through December
31, 2012
Employers have until January 31, 2013 to
send you your tax forms (W-2)
Due April 15th of 2013 to file and pay



The amount of taxes withheld is an estimate
of the amount the employee will owe at the
end of the year.
Enacted in the early 1940’s
Fill out a W-4 indicating your withholding
status for the upcoming year.

1.
2.
3.
4.
Receive a W-2 by January 31st for prior year.
Lists reported gross wages
Lists amount withheld from wages for
federal income tax
Lists amount withheld for social security &
Medicare
Lists amount withheld for state income tax

These deductions directly lower one’s AGIAdjusted Gross Income
◦ Traditional IRA deduction
◦ Student loan interest deduction
◦ Tuition and fees deduction
◦ Health savings account deduction
◦ Moving expenses
◦ Self-employment tax deduction AND health
Insurance
◦ Alimony paid


The standard deduction for single individuals
is $5,950 for 2012.
Reasons to Itemize
◦
◦
◦
◦
◦
Mortgage Interest….
Real Estate Taxes…..
Charity…………………….
Medical Expenses (must be at least 7.5% of your AGI)
State & Local Taxes

For a qualifying dependent child, there are four basic tests,
any one of which requires a federal income tax return to be
filed for a given year:
◦ The child has unearned income above $950
(from investment interest, gains, and so on)
◦ The child has earned income above $5,950.
◦ Gross income is greater than the larger of $950 or earned
income (up to $5,500) plus $300.
◦ Net earnings from self-employment are $400 or more.

Children can be claimed as dependents
provided that they meet one of the following
categories:
◦ Under age 19 at the end of the year
◦ Under age 24 at the end of the year and a full-time
student
◦ Permanently disabled at any age


Johnny is 17 years old and is claimed as a
dependent on his parents' tax return. He
earned $100 in interest income from a bank
account in his name (unearned), $1,500
working part-time in a gas station (earned),
and $200 mowing lawns (self-employment).
He does not have to file because he doesn't
meet any of the four tests.



Employees fill out Form W-4
Employers withhold taxes from employees’
paychecks
At start of year, employers mail Form W-2 to
employees
continued

Form W-4—taxes withheld depend on
earnings and number of allowances
claimed
continued

Form W-2—previous year’s pay and tax
deductions are given


Each year taxpayers must file a tax report
with the government showing the taxes owed
Choose one of three common forms: 1040EZ,
1040A, or 1040

Use Form 1040, long form,
◦ if income is over a certain amount
◦ when adjustments to income, itemized tax
deductions, and tax credits can reduce taxes
continued

Use short forms,
1040A or 1040EZ,
if
◦ income falls into
certain limits
◦ deductions aren’t
itemized



Calculate gross income based on Forms W-2
and 1099s
Calculate adjusted gross income by
subtracting adjustments from total income
Subtract allowable exemptions and
deductions


IRS tax tables show taxes owed based on
taxable income
Reduce the amount owed with tax
credits

Advantages of filing tax returns online:
◦ It’s simple and quick
◦ If refund is due, it arrives sooner

TeleFile allows taxpayers to file simple tax
returns with touch-tone phones