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Unit 2 Income Taxes. Unit 2 Vocabulary. Adjusted Gross Income Audit Deductions Exemption FICA Form W-2 Gross Income Gross Pay Itemized Deductions Net Pay. Overtime Pay Progressive Taxes Proportional Taxes Regressive Taxes Revenue Standard Deduction Tax Deduction Tax Evasion

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unit 2 vocabulary
Unit 2 Vocabulary
  • Adjusted Gross Income
  • Audit
  • Deductions
  • Exemption
  • FICA
  • Form W-2
  • Gross Income
  • Gross Pay
  • Itemized Deductions
  • Net Pay
  • Overtime Pay
  • Progressive Taxes
  • Proportional Taxes
  • Regressive Taxes
  • Revenue
  • Standard Deduction
  • Tax Deduction
  • Tax Evasion
  • Taxable Income
  • Voluntary Compliance
unit 2 essential question

Unit 2 Essential Question

  • How do taxes affect you?
Essential Question 1Pay and Taxes
  • What is the purpose and types of taxes in the United States?
  • Our Tax System
    • In the United States, the government collects revenue:Money collected by the government from its citizens and businesses in the form of taxes.
    • There are three categories of taxes:
      • Progressive Taxes: Taxes that increase in proportion to income.
        • Tax rates increase as the level of taxable income increases.
        • An example is personal income taxes.
  • Regressive Taxes: Taxes that decrease in proportion to income.
    • People with a higher income pay a lower percentage of income in taxes than a low income person.
    • Examples include sales taxes, consumption taxes, and excise taxes.
  • Proportional Taxes: Taxes for which the rate remains constant even though the amount taxed may increase.
    • Also known as a flat tax.
    • An example would be personal property tax.
Essential Question 2Pay and Taxes
  • What are the various components of the income tax system?
  • Components of the Tax System
    • Both businesses and individuals pay income taxes.
    • The IRS
      • The Internal Revenue Service is an administrative agency of the Department of the Treasury.
      • The main functions of the IRS are to collect income taxes and to enforce tax laws.
  • Components of the Tax System
    • The Power to Tax
      • Constitution of the United States, Article I, Section 8The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States…
      • Constitution of the United States, Amendment XVI The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.
  • Components of the Tax System
    • Paying Your Fair Share
      • Our income tax is a graduated rate - the more income you receive, the more income tax you pay.
      • Our income tax system is based on voluntary compliance: all citizens are expected to prepare and file income tax returns.
      • Willful failure to pay taxes is called tax evasion,which is a felony punishable by a fine or imprisonment or both.
  • Components of the Tax System
    • An IRS Audit
      • Audit: The examination of your tax records by the Internal Revenue Service.
      • The most common audit is a correspondence audit.
        • The IRS mails the tax payer a list of specific questions and asks them to respond or produce evidence of deductions or other entries on the tax return.
  • Components of the Tax System
    • An IRS Audit
      • Other audits may include:
        • A field audit; where the IRS agent visits the tax payer.
        • A formal audit session which may involve the tax payer representing his or her self; the tax payer being represented by a designated person like a lawyer or CPA; or having close friends or advisors present for support during the session.
        • Most audits involve nothing more than confirming supporting documentation.
  • Components of the Tax System
    • Why Pay Taxes
      • Taxes give the federal government money to provide all citizens with services they could not provide individually or locally, such as:
        • National Defense
        • National Weather Service
        • National Parks and Recreation sites
        • Interstate highways
        • Regulations and agencies to enforce safety and health standards
        • Student loans and aid programs
        • Relief when disasters strike (hurricanes, earthquakes, and floods)
  • Components of the Tax System
    • Why Pay Taxes
      • Taxes collected on the state and local levels provide the following benefits to the state and local population:
        • Education
        • State Welfare Programs
        • Streets, roads, and state highways
        • Police, fire, and health departments
        • Local recreation, safety, and service programs
Essential Question 3Pay and Taxes
  • What is the basic terminology you need to understand before preparing your income taxes?
  • Filing Status
    • Single(not married)
    • Married filing jointly
    • Married filing separately
    • Head of Household
    • Widow(er) with dependent child
  • Exemptions
    • Exemption: An allowance a taxpayer claims for each person dependent on the taxpayer’s income.
      • You are automatically allowed one exemption for yourself unless someone else (such as your parents) claims you on their tax return.
      • If you are filing a joint return, you can take your spouses exemption.
  • Exemptions
      • If you are divorced, you cannot take the exemption of a former spouse.
      • The more dependents you claim, the less tax you pay.
      • All dependents must have social security numbers after one year of age.
  • Exemptions
    • Dependent:For a person to be considered a dependent, they must pass all five of the dependency tests.
      • Relationship Test:
        • The person must be a relative (child, stepchild, adopted child, in-laws, blood relations, etc.).
        • Relationships created by marriage are not ended by divorce or death.
  • Exemptions
      • Citizenship Test:
        • The person must be a citizen or resident of the United States or
        • A resident of Canada or Mexico or
        • An adopted child who is not a U.S. citizen but has lived with you all year in a foreign country.
      • Filing Status Test:
        • The person cannot file a joint return with his or her spouse.
  • Exemptions
      • Income Test:
        • The persons income must be less than the amount of his or her exemption ($3,050 in 2003).
        • Exceptions:
          • Your child was under age 19 at the end of the year.
          • Your child was under age 24 and a full-time student.
      • Support Test:
        • You provided over half of the support for the person during the year.
  • Gross Income
    • Gross Income: All taxable income you receive.
      • Wages, Salaries, and Tips: Monies received through employment as shown on the Form W-2.
      • Interest Income:Includes interest from banks, savings and loans, credit unions, series HH savings bonds, etc. as shown on Form 1099-INT.
      • Dividend Income:Distributions from stocks or other property that corporations pay to stockholders as shown on Form 1099-DIV.
  • Gross Income
      • Unemployment Compensation: Unemployment benefits received will be shown on Form 1099-G.
      • Social Security Benefits:85% of most social security benefits are taxable and will be shown on Form SSA-1099.
      • Retirement and Pension: Income received from retirement and pension plans and shown on Form 1099-R.
  • Gross Income
      • Child Support: Money paid to a former spouse for support of dependent children.
      • Alimony:Money paid to support a former spouse.
      • Other income would include winnings from gambling, bartering, IRA distributions, rental property, royalties, estate and trust income, and sale of property.
  • Adjusted Gross Income (AGI)
    • Adjusted Gross Income (AGI): Income after adjustments are subtracted from gross income.
    • Adjustments include: Educator expenses, IRA contributions, student loan interest, tuition and fees, alimony paid, certain self employment expenses.
  • Taxable Income
    • Taxable Income:Income after deductions are subtracted from AGI and is used to determine tax liability from the tax tables.
      • Tax Deductions: Expenses the law allows the taxpayer to subtract from adjusted gross income.
      • Itemized Deductions: Certain expenses that are listed on Form Schedule A that include medical and dental expenses, state and local income and property taxes, mortgage interest, gifts to charity, and other miscellaneous expenses.
      • Standard Deduction: Deduction taken if itemizing doesn’t exceed the standard deduction.
  • Taxable Income
    • Taxable income is calculated by:

Gross Income

– Adjustments .

Adjusted Gross Income

– Standard Deduction or Itemized Deductions

– Exemptions .

Taxable Income

Essential Question 4Pay and Taxes
  • How do you prepare federal income tax forms 1040EZ and 1040A with Schedules 1 and 2?
  • Form W-2
    • Form W-2: Wage and Tax Statement. Lists income earned and taxes withheld by the employer.
      • You receive one W-2 from each employer.
      • Federal Law requires that you receive a copy of your W-2 no later than January 31st.
      • It is your responsibility to get a copy of your W-2 even if one is not sent by your employer.
  • Form W-2
      • A copy of your W-2 is required to be submitted with your federal, state, and local tax returns.
      • Not having a W-2 is NOT a valid excuse for not filing a tax return or including the income on your tax return. This information can be reconstructed from pay stubs.
      • You should maintain a copy of all tax returns and W-2s for a minimum of five years.