The “How” of Taxes

Aim: How do we pay our taxes?

5 “W’s” of Taxes WHO- consumers, business and gov’t WHAT- get taxes collected/paid WHEN- April 15 you file for taxes, you also

pay for taxes through FICA on payday OR pay sales and excise tax

WHERE- paychecks, stores, markets, mail/internet

WHY- to finance the public goods and other functions of gov’t

Where do our taxes go?

What if we’ve paid too much?

Tax refund- money returned to taxpayer by gov’t who paid in excess of their amount due (yearly)

HOW is it done? Accountant: a person who

files financial/tax reports and keeps/audits/inspects financial records on business or concerns

Individuals can also file their own taxes through websites or online databases (TURBO TAX, H&R taxes)

Tax return: filed tax form (also the money that comes back after taxes are filed)

What “individuals” are important on a tax return?

Dependent: a person who is financially supported by another person (children ,spouse)

Head of household: filing status by a married/unmarried person who maintains a household for a dependent and provides more than 50% of dependent’s financial support

What is to be filed?

Withholding Forms

Sent directly to gov’t for partial payment of taxes

W-4: Prepared by employee for employer indicating his/her allowances (exemptions) and SS#

W-2: tax form prepared by employer and given to employee to be filed with his/her tax forms Lists wages earned during the year Shows federal/state taxes withheld Social Security Info

Income Tax Forms

1099-INT: reports interest income on savings account, you will receive from bank

1099-DIV: reports dividends on stocks and other financial products that receive interest

1040EZ: for single/married taxpayers filing jointly, without dependents, taxable income under $50,000 and no itemized deductions

1040A: similar to EZ but has deductions (IRA contributions, student loan interest, higher education tuition and fees)

1040: taxpayer forms for those that do not qualify for EZ or As

Where does one obtain tax forms?

Online! www.irs.gov

Through tax databases (TurboTax)

Most communities locations (post office, library, senior centers, gov’t buildings)

Tax forms also mailed out to people each year or handed out by employer (by January 31st!)

Filling out your forms

Deductions- expenses subtracted from adjusted gross income when calculating taxable income

Exemptions- reduction of taxable income for a specific reason (IRS determined) Usually for dependents

Itemized deductions- incurred expense that reduces individual’s tax income Mortgage interest, state/local taxes, charitable

gifts,

When might someone claim 0 (zero) exemptions?

A high school student works part-time as claimed as a dependent by parent

A married man whose wife has claimed him as an exemption

A person who has other income sources taxed at lower rates (or not at all)

Simulation Station: Monica Lindo

http://apps.irs.gov/app/understandingTaxes/index.jsp

Filing Status (SINGLE) Claimed as a dependent (YES, parents) How much did she earn ($4,821) How much tax is withheld ($47)

There are only two things certain in life:

Death

Taxes

TAXES, TAXES

Aim: How fair is taxation in the U.S.?

WHY TAX?

Provide a way for federal, state and local gov’t to collect $ for public goods

Public goods- goods/services provided by the gov’t and not restricted by person’s ability/inability to pay for them

library, fire department, local parks, roads, etc

TAX BASES (3 TYPES)

Income (what is earned)Salaries, wages, tips, commissions, interest

Wealth (what is owned)Business, real estate, property, inheritance

(upon a death of individual)

Consumption (what one uses)Levied at the same rate for EVERYONEClothes, CD, cars, computers, etc

TAX STRUCTURES (3 TYPES)

Progressive- taxes where higher income individuals pay a higher percentage Individual income tax

Regressive- tax that takes a larger percentage of income for lower income individuals City tax

Proportional tax (flat tax)- all tax levels are paying the same rate

WHERE DOES THE FEDERAL GOV’T GET MOST OF ITS REVENUE?

Social Security

Many people argue today that Social Security is not being used for it’s TRUE purposes, and that’s why it’s running out!

WHAT ARE OTHER TYPES OF TAXES

Excise tax- federal/state tax imposed on manufacture & distribution of some consumer goods

Tariffs- tax on imported goods/services

Revenue sharing- a share of tax funds, provided by federal to state gov’ts OR state gov’ts to local gov’ts

WHO OVERSEES OUR TAXES?

The IRS- responsible for administering & enforcing revenue laws (like taxes, pension, etc) that are set by our U.S. Treasury department

WHAT TYPES OF THINGS ARE IMPORTANT WHEN FILING TAXES?

Itemization- listing deductible personal expenses during the year

Taxable income- amount of income subject to taxes by subtracting exemptions and deductions from adjusted gross income EX: alimony, unreimbursed business expenses,

capital losses, IRA contributions

Withholding- amt of employees’ income that employer sends directly to federal, state, local tax authorities as partial payment of individual’s yearly tax liability You fill out a W-4 when you start a new job for

this reason!

WHAT IS THE DIFFERENCE BETWEEN GROSS INCOME AND ADJUSTED GROSS INCOME?

Gross income: all income, before taxes and deductions

adjusted gross income equals your gross income minus your adjustments to income. (above-the-line deductions)

Example of adjustments: deductible traditional IRA contributions, alimony paid, health insurance if you're self-employed and student loan interest

QUESTIONS TO CONSIDER

How would you define fairness/unfairness of a proportional tax (ex/ 16%) on taxable income?$28,000?$44,000?$150,000?$500,000?

Would you identify a tax on gasoline as “regressive”? Why/why not?

Can you think of any more regressive taxes?

WHAT DO YOUR TAXES PAY FOR?

With a partner, create a chart that has FEDERAL, STATE and LOCAL as headers

Develop charts that list gov’t jobs/careers that fall into each category (and that your taxes pay for)

After, just write a sentence or two below chart to discuss what would happen in your community if the gov’t didn’t provide public goods/services