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Income Taxes and You

Income Taxes and You. Unit 1 “Income Taxes and Filing a Tax Return”. Why are taxes so important??. Everyday expense of life Allows local, state and federal governments to offer services Medicare Medicaid Military Police Fire protection Public schools Road maintenance Parks Libraries

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Income Taxes and You

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  1. Income Taxesand You Unit 1 “Income Taxes and Filing a Tax Return”

  2. Why are taxes so important?? • Everyday expense of life • Allows local, state and federal governments to offer services • Medicare • Medicaid • Military • Police • Fire protection • Public schools • Road maintenance • Parks • Libraries • Safety inspection of foods, drugs, and other products

  3. Types of Taxes • Sales tax • Property tax • Estate tax • Inheritance tax • Income tax

  4. Internal Revenue Service (IRS) Federal Agency, part of the Department of Treasury, that collects taxes Primary function = collect federal income taxes and to enforce the nation’s tax laws

  5. Understanding Income Taxes • Every year, millions of taxpayers prepare income tax returns and send to the IRS • Income tax return is a form such as a 1040 or 1040EZ on which a taxpayer reports how much money he or she received from work and other sources and the exact taxes owed • Tax owed is determined by filling out the returns and comparing the amount of tax your employer withheld from your paycheck

  6. Gross and Adjusted Gross Income • Most income is taxable • Earned income • Interest income • Dividend income (investments) • Some is not subject to taxes – aka “tax-exempt” • You pay tax on your ‘adjusted gross income’ – this is your gross income after calculating certain reductions

  7. Taxable IncomeTax Deductions and Exemptions • Taxable Income = your adjusted gross – tax deductions/exemptions • Tax Deductions • An expense that you can subtract from your adjusted gross • Every tax payer receives at least the ‘standard deduction’ = standard amount of money set by the IRS that is not taxed • Exemptions • A deduction from adjusted gross income for the taxpayer, the spouse, and qualified dependents • Once you know your taxable income, you calculate how much tax you owe using tables provided by the IRS

  8. Form W-2 • ‘Wage and Tax Statement’ • Lists your annual earnings for that job • Lists the amount of tax withheld from your paycheck • State • Federal • Social Security (FICA, Medicare) • By law, employers must send you this form by January 31st each year

  9. Who must file? • Citizens or a resident of the United States or a US Citizen who resides in Puerto Rico • Must file if income is above a certain amount specified by your filing status • Single – never married, divorced or legally separated with no dependents • Married, filing a joint return – married couple with combined income • Married, filing separate returns – each spouse paying for his or her own tax • Head of Household – unmarried individual or surviving spouse who maintains a household, paying more than ½ the costs • Qualifying widow/widower – spouse dies within the last 2 years and who has a dependent

  10. Deadlines and Penalties • File by April 15th, unless day falls on a weekend • May file for an extension • If you owe tax, you must pay when you send in the completed form(s) • Can set-up monthly payments if needed with penalty • Refunds are processed when you file your return • Not paying your taxes and not filing is called tax evasion – BAD!!!

  11. 1040EZ Choosing the Tax Form • Simplest form • Taxable income less than $100,000 • Single or married (jointly) • Under age 65 • No dependents • No more than $1500 taxable interest • No itemizing or claim any tax credits

  12. Choosing the Tax Form Continued… 1040A 1040 Expanded version of 1040A Taxable income is more than $100,000 Self-employment income Income from the sale of property • Taxable income less than $100,000 • Claim the standard deduction • Claim tax credit for child/dependent(s) • Deductions for retirement, student loan interest, educator expenses • Tax credit for child care expenses

  13. State Income Tax Return • Tax payers pay 1 to 10 percent of their adjusted gross income • Same deadlines as federal returns • New York State form – IT-201 • States that DO NOT have state income tax • Alaska • Florida • Nevada • South Dakota • Texas • Washington • Wyoming

  14. Filing your income tax return • Traditional paper forms and mailing • Filing electronically through the Internet • Use programs such as Turbo Tax • Use a professional tax preparer

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