Chapter 14 Section 2: Federal Taxes

Objectives: o Objectives: Describe the

process of paying individual income taxes

o Identify: the basic characteristics of corporate income taxes.

o Explain: the purpose of Social Security, Medicare, and unemployment taxes.

o Identify other types of taxes.

• Luk_20:25 And he said unto

them, Render therefore unto

Caesar the things which be

Caesar's, and unto God the

things which be God's.

o The governments main source

of revenue comes from the

federal tax on individuals’

taxable income.

o 43 percent of the governments

revenue comes from this

source.

Pay as You Earn Taxation: o The amount of federal income tax

a person owes is determined on an annual basis.

o In theory, the federal government could wait until the end of the tax year to collect individual income taxes.

o In reality that would be a problem for both taxpayers and the government.

Pay as You Earn Taxation:

o Like other employers, the

government has to pay regularly

for rent, supplies, services, and

employers salaries.

o A single annual payment from

all the nations taxpayers at

once make meeting these

expenses difficult.

Pay as You Earn Taxation: o Similarly, many people might have

trouble paying their taxes in one large sum.

o For these reasons, federal income tax is collected in a “pay-as-you-earn” system.

o This means that individuals usually pay most of their income tax throughout the calendar year as they earn income.

o They have until mid-April of the following year to pay any additional income taxes they owe.

Tax Brackets:

o The federal income tax is

progressive tax.

o In other words the tax rate raises

with the amount of taxable

income.

Tax Withholding: o Employers are responsible in part for

carrying out the system of collecting federal income taxes.

o They do so by withholding or taking payments out of your pay before you receive it.

o The amount they withhold is based on an estimate of how much you will owe in federal income taxes for the entire year.

Tax Withholding:

o After withholding the money, the

employer forwards it to the federal

government as an installment

payment on your upcoming annual

income tax bill.

Filing A Tax Return o After the calendar year ends, employers

give their employees a report stating how much income tax has already been withheld and sent to the government.

o The employee uses the information to complete a tax return.

o A tax return is a form used to file income taxes.

o On it, you declare your income to the government and figure out how much of that income is taxable.

Filing A Tax Return o Taxable Income is a person’s gross or

total income minus exemptions and deductions.

o Gross income includes earned income, salaries, wages, tips, and commissions.

o It also includes income from investment such as interest on savings account and dividends from stock.

Filing A Tax Return o Personal exemptions are set amounts

that you subtract from the gross income for yourself, your spouse, and any dependents.

o Tax deductions are variable amounts that you can subtract or deduct from your gross income.

o Deductions include such items as interest on a mortgage, donations to charity, significant medical expenses, and state and local tax payments.

Filing A Tax Return o Once you determined how much

tax you owe, you can apply any tax credits that you may be allowed.

o A tax credit is an amount that you can subtract from the total amount of your income tax.

o You can claim a credit for such things as a portion of the cost of child-care and higher education.

Filing A Tax Return o Completing a tax return allows you to

determine whether the amount of income taxes you have already paid was higher or lower than the actual amount of tax you owe.

o If you have paid more than you owe the government sends you a refund.

o If you pay less than you owe, you must pay the balance to the government.

Filing A Tax Return

o All federal income tax returns must

be sent to the Internal Revenue

Service or IRS by midnight on April

15 or the next business day if April

15 falls in a weekend.

Corporate Income Taxes: o Like individuals, corporations must

pay federal income taxes made up just over 10 percent of federal revenues in recent years.

o It can be difficult to determine corporate taxable income because they can make a lot of deductions.

o They can subtract many expenses from their income before they reach the amount of income subject to taxation.

Corporate Income Taxes:

o This includes cost of employers’

health insurance.

o Social Security

o Medicare

o Unemployment Taxes.

Corporate Income Taxes: o In addition to withholding money for

income taxes, employers withhold money for taxes authorized under the Federal Insurance Contributions Act (FICA).

o Employees and employers of FICA share payments.

o FICA taxes fund two large government social-insurance programs.

o Social Security and Medicare.

Corporate Income Taxes: o In addition to withholding money for

income taxes, employers withhold money for taxes authorized under the Federal Insurance Contributions Act (FICA).

o Employees and employers of FICA share payments.

o FICA taxes fund two large government social-insurance programs.

o Social Security and Medicare.

Social Security Taxes: o Most FICA taxes you pay go to the

social security administration to fund old-age, survivors, and disability insurance (OSADI), or social security.

o Social Security provides benefits to surviving family members of wage earners and to people whose disabilities keep them from working.

Social Security Taxes:

o Each year the government

establishes an income cap for

social security taxes.

o No social security taxes could be

withheld from a taxpayer’s

wages and salaries above that

amount.

Medicare Taxes: o FICA taxes also fund Medicare.

o The Medicare program is a national health insurance program that helps pay for the healthcare for people over age 65.

o It also covers people with certain disabilities.

o Both employees and self employed people pay the Medicare tax on all their earnings.

o There is no ceiling as there is for social security.

Unemployment Taxes: o The federal government also collects

an unemployment tax, which is paid by employers.

o In effect the tax pays for an insurance policy for workers.

o If workers are laid off from their jobs through no fault on their own, they can file an “unemployment compensation” claim and collect benefits for a fixed number of weeks.

Unemployment Taxes:

o In order to receive the benefits,

one most show that they are

actively looking for another job.

o The unemployment program is

financed by both state and federal

unemployment taxes.

Other Types of Taxes:

o Federal Excise Tax: a general

revenue tax for sale or

manufacture of a good such as

gasoline, cigarettes, alcohol,

telephone services, cable TV, etc.

Other Types of Taxes: o Estate Tax: is a tax on the estate or total

value of the money and property, of a person who has died.

o It is paid out of the person’s estate before the heirs receive their share.

o A person’s estate includes real estate, car, furniture, investments, painting, insurance, and money.

o It is a progressive tax.

o As of 2008, if the total value of an estate is $2 million or less, there is no federal estate tax.

Other Types of Taxes: o Gift Tax: is a tax on the money or

property that one person living gives to another.

o Under current law, a person can give up to $12,000 a year tax-free to each of several different people.

o This is meant to avoid estate taxes by giving away their money before they died.

Other Types of Taxes: o Import Taxes: taxes on imported

goods (foreign goods brought into the country) are called tariffs.

o Today most tariffs are intended to protect American farmers and industries from foreign competitors rather than to generate revenue.

o Tariffs raise the price of foreign items which help keep American products competitive.

Taxes That Affect Behavior: o The basic goal of taxation is to create

revenue.

o However, governments sometimes use tax policy to discourage the public from buying harmful products.

o They also use taxes to encourage constructive or helpful behavior.

o The use of taxation to discourage or encourage certain types of behavior is called a tax incentive.

Taxes That Affect Behavior:

o Federal taxes on tobacco

products and alcoholic beverages

are examples of the so called sin

taxes.

o The main purpose is to

discourage people from buying

and using these products.

Incentives:

o Incentives also come in the form

of tax credits.

o Congress has tried to encourage

energy conservation by offering a

variety of credits to consumers

and the industry.

o Such as solar panels, hybrid cars,

etc.

Discussion Questions

• Where do you think the government should

spend more tax dollars the most?

• Do you think sin taxes is a effective means

to prevent people from purchasing harmful

substances rather than banning them?

• (Write on the blank portion of your handout)