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Income and Taxes

7. Income and Taxes. Objectives. Identify different types of income and employee benefits. Relate taxation to government spending. List goods and services government provides. Identify different types of taxes. Identify common tax forms. continued. Objectives.

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Income and Taxes

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  1. 7 Income and Taxes

  2. Objectives • Identify different types of income and employee benefits. • Relate taxation to government spending. • List goods and services government provides. • Identify different types of taxes. • Identify common tax forms. continued

  3. Objectives • Describe basic procedures for filing a tax return. • Explain the purposes and function of the Social Security system.

  4. The Many Forms of Income • Income is money earned from employment and investments • Governments tax income and assets to create revenue that is used to provide public goods and services

  5. Money Earned from Work • Income received from employment is earned income continued

  6. Money Earned from Work • Earned income includes • wage (minimum wage for many unskilled and beginning workers) • piecework income • salary • commission • tip • bonus

  7. Employee Benefits • Some of the most valuable forms ofemployee compensation are not monetary • Employee benefits often include • paid vacation, holiday, and sick leave • life and health insurance • employer-sponsored retirement savings plan

  8. Business Profit Income • Income earned by the self-employed • Disadvantages of self-employment: • Must arrange and pay for own employee benefits; can be costly • Must pay entire Social Security and Medicare tax, rather than half the cost

  9. Payroll Deductions • Net income (take-home pay) is gross income minus payroll deductions continued

  10. Payroll Deductions • Deduction can lower a paycheck by 20 percent or more • Bonuses increase gross income continued

  11. Payroll Deductions • Common payroll deductions: • FICA (Federal Insurance Contributions Act): Social Security and Medicare • Federal withholding tax • State and city withholding taxes, if applicable • Other benefits (insurance purchased through employers)

  12. Money Earned Outside Work • Unearned income—income received from sources other than employment • earnings from investments, sale of assets, and interest paid on savings and bonds • Social Security and retirement account payments • rent, inheritance, awards, gifts, alimony • unemployment compensation

  13. The Importance of Taxes • 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

  14. Federal Government Spending • 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

  15. Federal Government Spending

  16. In Your Opinion • What changes should be made to the way the government spends taxpayers’ money?

  17. Mandatory Expenses • 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 continued

  18. Mandatory Expenses • Entitlement programs: • Social Security • Medicare • Medicaid (for older adults and people with disabilities) • Veterans’ pensions and medical care • Nutrition and housing assistance • Unemployment compensation • Federal employee retirement benefits

  19. Discretionary Expenses • 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

  20. State and Local Government Spending • 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

  21. State and Local Government Spending

  22. Types of Taxes • Direct—paid directly to government by taxpayers • Indirect—imposed on one party, but paid by another • Progressive—imposes a higher tax rate on those with higher incomes continued

  23. Types of Taxes • Regressive—has effect of imposing a higher tax rate on those with lower incomes • Proportional—imposes same tax rate on all regardless of income differences

  24. What Is Taxed? • Personal income tax—your income • Purchase tax—goods and services • Excise tax—sale and transfer of certain items, including air travel, phone service, gasoline continued

  25. What Is Taxed? • Property tax—real estate property tax and personal property tax • Wealth tax—assets (estate and gift taxes)

  26. Paying Income Taxes • Internal Revenue Service (IRS) collects federal income taxes • State tax returns are filed with departments of revenue in states that collect taxes

  27. Your Employer’s Role • Employees fill out Form W-4 • Employers withhold taxes from employees’ paychecks • At start of year, employers mail Form W-2 to employees continued

  28. Your Employer’s Role • Form W-4—taxes withheld depend on earnings and number of allowances claimed continued

  29. Your Employer’s Role • Form W-2—previous year’s pay and tax deductions are given

  30. Preparing Your Return • 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

  31. Choosing a Tax Form • 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

  32. Choosing a Tax Form • Use short forms, 1040A or 1040EZ, if • income falls into certain limits • deductions aren’t itemized

  33. Figuring Taxable Income • 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

  34. Figuring Taxes Owed • IRS tax tables show taxes owed based on taxable income • Reduce the amount owed with tax credits

  35. Filing on Time • Filing deadline for federal taxes and most state taxes is April 15 • Tax avoidance—falsely reducing taxes • Tax evasion—failing to declare all income or falsifying documents

  36. State and Local Tax Forms • 43 states collect income taxes • Taxpayers in states that collect personal income taxes must submit state tax forms

  37. Electronic Filing • 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

  38. Sources of Tax Information and Assistance • The IRS answers tax questions through free booklets, recorded messages, and a Web site • Tax preparation services fill out tax forms for a fee • Many taxpayers use tax preparation guides and software

  39. IRS Audits • A detailed examination of taxpayer’s tax returns by the IRS • During audit, taxpayers must answer IRS’s questions and provide documentation when asked • Taxpayers have legal protections in their dealings with the IRS

  40. Tax System Reform • Legislators make laws that • raise or lower taxes • make the tax burden fairer • simplify the system • achieve other desired outcomes

  41. Tax Legislation • Many citizens are concerned about rising taxes • Questions asked when tax policy changes: • Will revenues generated by the new tax exceed administration costs? • Will it be fair to all taxpayers? • Will it impact the economy negatively?

  42. Paying Social Security Taxes • FICA taxes calculated as a percentage of income; deducted from gross pay • Employers and workers split FICA taxes • Employees pay 6.2 percent for Social Security and 1.45 percent for Medicare • Employers contribute an additional 7.65 percent continued

  43. Paying Social Security Taxes • The self-employed pay all FICA taxes themselves • Federal government receives FICA contributions and credits them to employees’ accounts

  44. Your Social Security Number • Social Security Administration uses SSNs to keep records of earnings; records determine benefit amounts • IRS uses SSN as taxpayer ID number • Each SSN is unique • Safeguard your SSN

  45. Social Security Benefits • If you work, your Social Security taxes pay for benefits others receive • When you no longer work (retire, become disabled, or die), you and your dependents will get benefits provided by other workers’ Social Security taxes continued

  46. Social Security Benefits • Types of benefits: • Retirement • Disability • Survivors’ • Benefits for divorced people

  47. Social Security System Reform • Benefits paid out will soon exceed tax collection • Social Security fund will be depleted; no money to pay benefits of workers paying into the system now • Taxes may have to be raised, benefits decreased, or both

  48. Central Ideas of the Chapter • Taxes reduce each individual’s income and wealth. • The taxes of many make it possible for government to provide public goods and services that benefit all.

  49. Glossary of Key Terms Back • bonus. Money added to an employee’s base pay. It is usually a reward for performance or a share of business profits. • commission. Income paid as a percentage of sales made by a salesperson. • compensation. Payment and benefits received for work. • disability. A limitation that affects a person’s ability to function in major life activities.

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