Tax UnitTax Unit(Chapter 5)(Chapter 5)

Consumer EconomicsConsumer Economics

2013 - 20142013 - 2014

Upon successful completion of this unit, students will be able to:Upon successful completion of this unit, students will be able to:

identify sources of and uses for personal taxes

define tax filing terms and guidelines

identify tax forms (W-2, W-4, 1099 INT) and their purposes

complete a 1040EZ tax form

Essential OutcomesEssential Outcomes

Unit OverviewUnit Overview

I.I. Tax StructuresTax Structures

II.II. Types of Taxes Types of Taxes

III.III. PaychecksPaychecks

IV.IV. Personal Income TaxPersonal Income Tax

I.I. Tax StructuresTax Structures

Purpose of TaxesPurpose of Taxes

To fund public goods and services To fund public goods and services (roads, military, post office, police force)(roads, military, post office, police force)

To influence behavior To influence behavior (alcohol, tobacco taxed to reduce consumption)(alcohol, tobacco taxed to reduce consumption) (tax breaks given for charitable giving to encourage giving)(tax breaks given for charitable giving to encourage giving)

To stabilize the economy To stabilize the economy (raise taxes during inflation, lower during recession)(raise taxes during inflation, lower during recession)

To redistribute income To redistribute income (Robin Hood effect – take from the rich, give to the poor)(Robin Hood effect – take from the rich, give to the poor)

Tax Structures (cont’d)Tax Structures (cont’d)

Progressive TaxProgressive Tax

The more you make, the The more you make, the higherhigher the % of your income you pay the % of your income you paySingle people making up to $8,925 are in the 10% tax bracketSingle people making up to $8,925 are in the 10% tax bracketSingle people making over $400,000 are in the 39.6% tax Single people making over $400,000 are in the 39.6% tax

bracketbracket

Regressive TaxRegressive Tax

The more you make, the The more you make, the lowerlower the % of income you pay the % of income you payGenerally viewed as unfair to poorer peopleGenerally viewed as unfair to poorer people

Flat TaxFlat Tax

Same tax rate for everyone, regardless of income levelSame tax rate for everyone, regardless of income level

II.II. Types of Taxes Types of Taxes

Federal, State, LocalFederal, State, Local

Taxes come in many varieties and are assessed at all levelsTaxes come in many varieties and are assessed at all levels

Federal taxesFederal taxes – military, roads, clean food, air, water, FDIC, – military, roads, clean food, air, water, FDIC, and other social programs such as Social Security / welfareand other social programs such as Social Security / welfare

State taxesState taxes – state roads, universities, state parks, police – state roads, universities, state parks, police

Local taxesLocal taxes – schools, parks, libraries, community services – schools, parks, libraries, community services

Excise TaxExcise Tax

Imposed on manufacture or sale of goods or servicesImposed on manufacture or sale of goods or servicesCan be used to encourage or discourage behaviorCan be used to encourage or discourage behaviorExamples include gasoline, firearms, alcohol, phone serviceExamples include gasoline, firearms, alcohol, phone service

Types of Taxes (cont’d)Types of Taxes (cont’d)

Sales TaxSales Tax

State tax imposed on sale of goodsState tax imposed on sale of goodsMain source of revenue for state governmentsMain source of revenue for state governmentsSome items are not taxed or taxed at a lower rateSome items are not taxed or taxed at a lower rate

Food and prescriptionsFood and prescriptionsSome states have no sales tax at all (New Hampshire, Oregon)Some states have no sales tax at all (New Hampshire, Oregon)

Property TaxProperty Tax

State and local tax based on value of land and buildingsState and local tax based on value of land and buildingsMain source of revenue for local governmentsMain source of revenue for local governments Illinois schools rely almost entirely on property taxes for fundsIllinois schools rely almost entirely on property taxes for funds

Types of Taxes (cont’d)Types of Taxes (cont’d)

EstateEstate

Based on the value of a person’s property after his/her deathBased on the value of a person’s property after his/her death

In 2011 the estate tax was reinstatedIn 2011 the estate tax was reinstated

Although this number can change yearly, currently the Although this number can change yearly, currently the exclusion is $5,250,000exclusion is $5,250,000

Gift TaxGift Tax (link)

Giver must pay federal tax for any gift over $14,000Giver must pay federal tax for any gift over $14,000

Includes money / items worth over $14,000Includes money / items worth over $14,000

Types of Taxes (cont’d)Types of Taxes (cont’d)

Income TaxIncome Tax

Personal Income TaxPersonal Income TaxTax occurring at federal and state levelTax occurring at federal and state levelSeven states have no state income tax Seven states have no state income tax (link)Taxable amount includes income, interest from investmentsTaxable amount includes income, interest from investmentsMain source of revenue for federal governmentMain source of revenue for federal governmentDon’t have to file federal tax return if you made less than Don’t have to file federal tax return if you made less than $10,000$10,000 in in 2013 and are single2013 and are single

FICA (Federal Insurance Contributions Act)FICA (Federal Insurance Contributions Act) FICA tax supports both Medicare and Social Security programsFICA tax supports both Medicare and Social Security programs FICA tax is paid by both employer and employeeFICA tax is paid by both employer and employee

Social Security – each person pays 6.2% of first $117,000 you Social Security – each person pays 6.2% of first $117,000 you earn (for year 2014)earn (for year 2014)

Medicare – each person pays 1.45% of all earningsMedicare – each person pays 1.45% of all earnings Social Security used to pay retirement, disability and survivors Social Security used to pay retirement, disability and survivors

benefits to workers and their familiesbenefits to workers and their families Medicare is used to pay medical costs and prescription drug costs for Medicare is used to pay medical costs and prescription drug costs for

people over 65 and people under 65 with certain disabilitiespeople over 65 and people under 65 with certain disabilities

Income TaxIncome Tax (cont’d) (cont’d)

Unemployment Compensation (4.5)Unemployment Compensation (4.5) Federal and state plan providing income to people who have lost Federal and state plan providing income to people who have lost

their jobstheir jobs Employers pay 6% of the first $7,000 each employee earnsEmployers pay 6% of the first $7,000 each employee earns Employees pay 0%Employees pay 0% If a company has 30 employees making over $7,000, they owe the If a company has 30 employees making over $7,000, they owe the

government 30 * $7,000 * 6% = $12,600government 30 * $7,000 * 6% = $12,600 Requirements to receive “unemployment:”Requirements to receive “unemployment:”

Unemployed through no fault of their ownUnemployed through no fault of their own Able to work and actively seeking employment (Able to work and actively seeking employment (video))

Tax LiabilityTax Liability The total amount of tax you are legally obligated to payThe total amount of tax you are legally obligated to pay

Types of Taxes (cont)Types of Taxes (cont)

III. PaychecksIII. Paychecks

Types of PayTypes of Pay Salary-set amount earned each year Salary-set amount earned each year

regardless of hours workedregardless of hours worked Wages-pay based on a pay rate ($8.25 for IL)Wages-pay based on a pay rate ($8.25 for IL) Piece-rate-pay based on quantityPiece-rate-pay based on quantity Commission-pay based on a percentage of Commission-pay based on a percentage of

the total salethe total sale Bonus-extra pay based on going above your Bonus-extra pay based on going above your

sales goalsales goal

IV. Personal Income Tax (cont’d)IV. Personal Income Tax (cont’d)

FormsForms

W-4W-4 Completed first day(s) on a job and submitted to your employerCompleted first day(s) on a job and submitted to your employer Required so your employer can withhold the correct federal Required so your employer can withhold the correct federal

income tax from your paychecksincome tax from your paychecks If income status changes, you can submit a revised formIf income status changes, you can submit a revised form

W-2W-2 Completed by employer and sent to you by January 31Completed by employer and sent to you by January 31 Indicates wages, tips, and other income you’ve receivedIndicates wages, tips, and other income you’ve received Must be submitted with other tax forms when dueMust be submitted with other tax forms when due Must receive and submit a W-2 for each job you held that yearMust receive and submit a W-2 for each job you held that year

Personal Income Tax (cont’d)Personal Income Tax (cont’d)

FormsForms (cont’d) (cont’d)

1040, 1040A, 1040EZ1040, 1040A, 1040EZ One of these forms must be completed by each person or coupleOne of these forms must be completed by each person or couple Forms mailed out to everyone in January or available at libraries, post Forms mailed out to everyone in January or available at libraries, post

offices, or on the IRS web site (offices, or on the IRS web site (www.irs.gov)) Which form do you use? Click Which form do you use? Click here

1099 INT1099 INT Form sent by a bank indicating interest you earned on an accountForm sent by a bank indicating interest you earned on an account You must pay taxes on interest earned, as this is considered incomeYou must pay taxes on interest earned, as this is considered income

1099 DIV1099 DIV Form indicating dividend earnings you obtained (i.e., stocks)Form indicating dividend earnings you obtained (i.e., stocks) You must also pay taxes on this, as it is considered incomeYou must also pay taxes on this, as it is considered income 1099 INT and DIV forms should be attached to 1040 when mailed in1099 INT and DIV forms should be attached to 1040 when mailed in

Personal Income Tax (cont’d)Personal Income Tax (cont’d)

Filing DeadlineFiling Deadline

April 15 of each year (video)April 15 of each year (video)If this occurs on a weekend, the deadline is extended(April 15, If this occurs on a weekend, the deadline is extended(April 15, 2011 occurs on a Sunday, and Emancipation Day is April 16 in 2011 occurs on a Sunday, and Emancipation Day is April 16 in Washington DC, so the deadline is the 17th)Washington DC, so the deadline is the 17th)You may file for an extension if this is impossible (out of the You may file for an extension if this is impossible (out of the country, ill, etc.)country, ill, etc.)

WithholdingWithholding

Amount taken out of each paycheck to predict tax liabilityAmount taken out of each paycheck to predict tax liability If withholding was calculated perfectly, you will owe no taxesIf withholding was calculated perfectly, you will owe no taxes IRS provides a calculator to determine each person’s amount IRS provides a calculator to determine each person’s amount

(link)(link)

Personal Income Tax (cont’d)Personal Income Tax (cont’d)

ExemptionsExemptions

People living in your household whom you support financiallyPeople living in your household whom you support financiallyTax liability is reduced because you must support themTax liability is reduced because you must support themCan be you, your spouse, and/or a dependentCan be you, your spouse, and/or a dependent

DependentsDependents

People who live with you and depend on you as a source of incomePeople who live with you and depend on you as a source of incomeCan be children, grandparents, friends of the family, …Can be children, grandparents, friends of the family, …

DeductionsDeductions

Amount of money that reduces your total taxable incomeAmount of money that reduces your total taxable incomeExample: you give $100 to a church and make $45,800. You can Example: you give $100 to a church and make $45,800. You can

“deduct” the $100 and are now only taxed on $45,700.“deduct” the $100 and are now only taxed on $45,700.

Personal Income Tax (cont’d)Personal Income Tax (cont’d)

ItemizingItemizing

Keeping track of specific deductions (need to keep receipts)Keeping track of specific deductions (need to keep receipts)If not itemizing, you may take the standard deduction (what the If not itemizing, you may take the standard deduction (what the government allows you to take without a receipt)government allows you to take without a receipt)

Keeping RecordsKeeping Records

Keep previous year’s records handy as you work on current yearKeep previous year’s records handy as you work on current yearKeep records for at least 7 years in case you are audited by IRSKeep records for at least 7 years in case you are audited by IRS

Tax PreparersTax Preparers

Paid individuals or companies that do your taxes for youPaid individuals or companies that do your taxes for youMake sure they guarantee their work (go with you if audited)Make sure they guarantee their work (go with you if audited)Can be expensive if your taxes are complicatedCan be expensive if your taxes are complicated

Personal Income Tax (cont’d)Personal Income Tax (cont’d)

E-filingE-filing

Can file through a bank, preparer such as H&R Block, or Can file through a bank, preparer such as H&R Block, or software such as TurboTaxsoftware such as TurboTaxIf expecting a refund, it will arrive much fasterIf expecting a refund, it will arrive much faster

Personal Income Tax (cont’d)Personal Income Tax (cont’d)

Non-complianceNon-compliance (not in book) (not in book)

Tax AvoidanceTax Avoidance Legal means of reducing your tax liability through deductions, Legal means of reducing your tax liability through deductions,

exemptions, etc.exemptions, etc.

Tax EvasionTax Evasion Illegal means of reducing your tax liability through lying, not Illegal means of reducing your tax liability through lying, not

completing forms, etc. (video)completing forms, etc. (video) Criminals are required to report illegal forms of income on their taxes Criminals are required to report illegal forms of income on their taxes

(gambling, theft, drug trafficking), but rarely do so and are thereby (gambling, theft, drug trafficking), but rarely do so and are thereby guilty of this crime (Al Capone, for example)guilty of this crime (Al Capone, for example)

IRS (Internal Revenue Service)IRS (Internal Revenue Service) Federal government agency that collects taxes and enforces tax lawFederal government agency that collects taxes and enforces tax law

Personal Income Tax (cont’d)Personal Income Tax (cont’d)

Non-complianceNon-compliance (cont’d) (cont’d)

Tax AuditTax Audit IRS may call you in to go over your taxes with you (video)IRS may call you in to go over your taxes with you (video) May be done up to seven years after you pay a year’s taxesMay be done up to seven years after you pay a year’s taxes If you disagree with their findings, you may appeal the decisionIf you disagree with their findings, you may appeal the decision You have less than a 2% chance of being audited (link)You have less than a 2% chance of being audited (link)

Any Questions?Any Questions?