unit 2 income taxes. unit 2 vocabulary adjusted gross income audit deductions exemption fica ...

31
Unit 2 Unit 2 Income Taxes Income Taxes

Upload: moises-drake

Post on 15-Jan-2016

247 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

Unit 2Unit 2Income TaxesIncome Taxes

Page 2: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

Unit 2 VocabularyUnit 2 Vocabulary

Adjusted Gross IncomeAdjusted Gross Income AuditAudit DeductionsDeductions ExemptionExemption FICAFICA Form W-2Form W-2 Gross IncomeGross Income Gross PayGross Pay Itemized DeductionsItemized Deductions Net PayNet Pay

Overtime PayOvertime Pay Progressive TaxesProgressive Taxes Proportional TaxesProportional Taxes Regressive TaxesRegressive Taxes Revenue Revenue Standard DeductionStandard Deduction Tax DeductionTax Deduction Tax EvasionTax Evasion Taxable IncomeTaxable Income Voluntary ComplianceVoluntary Compliance

Page 3: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

Unit 2 Essential Unit 2 Essential QuestionQuestion

How do taxes affect you?How do taxes affect you?

Page 4: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

What is the purpose and types of What is the purpose and types of taxes in the United States?taxes in the United States?

Essential Question 1Essential Question 1Pay and TaxesPay and Taxes

Page 5: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Our Tax SystemOur Tax System In the United States, the government In the United States, the government

collects collects revenuerevenue:: Money collected by the Money collected by the government from its citizens and businesses government from its citizens and businesses in the form of taxes.in the form of taxes.

There are three categories of taxes:There are three categories of taxes: Progressive TaxesProgressive Taxes: : Taxes that increase in Taxes that increase in

proportion to income.proportion to income. Tax rates increase as the level of taxable income Tax rates increase as the level of taxable income

increases.increases. An example is personal income taxes.An example is personal income taxes.

Page 6: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Regressive TaxesRegressive Taxes: : Taxes that decrease in Taxes that decrease in proportion to income.proportion to income.

People with a higher income pay a lower percentage of People with a higher income pay a lower percentage of income in taxes than a low income person.income in taxes than a low income person.

Examples include sales taxes, consumption taxes, and Examples include sales taxes, consumption taxes, and excise taxes.excise taxes.

Proportional TaxesProportional Taxes: : Taxes for which the rate Taxes for which the rate remains constant even though the amount taxed remains constant even though the amount taxed may increase.may increase.

Also known as a flat tax.Also known as a flat tax. An example would be personal property tax.An example would be personal property tax.

Page 7: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

What are the various components What are the various components of the income tax system?of the income tax system?

Essential Question 2Essential Question 2Pay and TaxesPay and Taxes

Page 8: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Components of the Tax SystemComponents of the Tax System Both businesses and individuals pay income Both businesses and individuals pay income

taxes.taxes. The IRSThe IRS

The Internal Revenue Service is an The Internal Revenue Service is an administrative agency of the Department of the administrative agency of the Department of the Treasury.Treasury.

The main functions of the IRS are to collect The main functions of the IRS are to collect income taxes and to enforce tax laws.income taxes and to enforce tax laws.

Page 9: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

Components of the Tax SystemComponents of the Tax System The Power to TaxThe Power to Tax

Constitution of the United States, Article I, Constitution of the United States, Article I, Section 8Section 8 The Congress shall have power to lay and The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare and provide for the common defense and general welfare of the United States…of the United States…

Constitution of the United States, Amendment Constitution of the United States, Amendment XVI XVI The Congress shall have power to lay and collect The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without taxes on incomes, from whatever source derived, without apportionment among the several states, and without apportionment among the several states, and without regard to any census or enumeration.regard to any census or enumeration.

TaxesTaxes

Page 10: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Components of the Tax SystemComponents of the Tax System Paying Your Fair SharePaying Your Fair Share

Our income tax is a graduated rate - the more Our income tax is a graduated rate - the more income you receive, the more income tax you income you receive, the more income tax you pay.pay.

Our income tax system is based on Our income tax system is based on voluntary voluntary compliancecompliance: : all citizens are expected to prepare all citizens are expected to prepare and file income tax returns.and file income tax returns.

Willful failure to pay taxes is called Willful failure to pay taxes is called tax evasiontax evasion,, which is a felony punishable by a fine or which is a felony punishable by a fine or imprisonment or both.imprisonment or both.

Page 11: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Components of the Tax SystemComponents of the Tax System An IRS AuditAn IRS Audit

AuditAudit: : The examination of your tax records by The examination of your tax records by the Internal Revenue Service.the Internal Revenue Service.

The most common audit is a correspondence The most common audit is a correspondence audit.audit.

The IRS mails the tax payer a list of specific questions The IRS mails the tax payer a list of specific questions and asks them to respond or produce evidence of and asks them to respond or produce evidence of deductions or other entries on the tax return.deductions or other entries on the tax return.

Page 12: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Components of the Tax SystemComponents of the Tax System An IRS AuditAn IRS Audit

Other audits may include:Other audits may include: A field audit; where the IRS agent visits the tax payer.A field audit; where the IRS agent visits the tax payer. A formal audit session which may involve the tax payer A formal audit session which may involve the tax payer

representing his or her self; the tax payer being representing his or her self; the tax payer being represented by a designated person like a lawyer or represented by a designated person like a lawyer or CPA; or having close friends or advisors present for CPA; or having close friends or advisors present for support during the session.support during the session.

Most audits involve nothing more than confirming Most audits involve nothing more than confirming supporting documentation.supporting documentation.

Page 13: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes Components of the Tax SystemComponents of the Tax System

Why Pay TaxesWhy Pay Taxes Taxes give the federal government money to Taxes give the federal government money to

provide all citizens with services they could not provide all citizens with services they could not provide individually or locally, such as:provide individually or locally, such as:

National DefenseNational Defense National Weather ServiceNational Weather Service National Parks and Recreation sitesNational Parks and Recreation sites Interstate highwaysInterstate highways Regulations and agencies to enforce safety and health Regulations and agencies to enforce safety and health

standardsstandards Student loans and aid programsStudent loans and aid programs Relief when disasters strike (hurricanes, earthquakes, Relief when disasters strike (hurricanes, earthquakes,

and floods)and floods)

Page 14: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Components of the Tax SystemComponents of the Tax System Why Pay TaxesWhy Pay Taxes

Taxes collected on the state and local levels Taxes collected on the state and local levels provide the following benefits to the state and provide the following benefits to the state and local population:local population:

EducationEducation State Welfare ProgramsState Welfare Programs Streets, roads, and state highwaysStreets, roads, and state highways Police, fire, and health departmentsPolice, fire, and health departments Local recreation, safety, and service programsLocal recreation, safety, and service programs

Page 15: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

What is the basic terminology you need What is the basic terminology you need to understand before preparing your to understand before preparing your income taxesincome taxes??

Essential Question 3Essential Question 3Pay and TaxesPay and Taxes

Page 16: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Filing StatusFiling Status Single(not married)Single(not married) Married filing jointlyMarried filing jointly Married filing separatelyMarried filing separately Head of HouseholdHead of Household Widow(er) with dependent childWidow(er) with dependent child

Page 17: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

ExemptionsExemptions ExemptionExemption: : An allowance a taxpayer claims An allowance a taxpayer claims

for each person dependent on the taxpayer’s for each person dependent on the taxpayer’s income.income. You are automatically allowed one exemption for You are automatically allowed one exemption for

yourself unless someone else (such as your yourself unless someone else (such as your parents) claims you on their tax return.parents) claims you on their tax return.

If you are filing a joint return, you can take your If you are filing a joint return, you can take your spouses exemption.spouses exemption.

Page 18: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

ExemptionsExemptions If you are divorced, you cannot take the If you are divorced, you cannot take the

exemption of a former spouse.exemption of a former spouse. The more dependents you claim, the less tax The more dependents you claim, the less tax

you pay. you pay. All dependents must have social security All dependents must have social security

numbers after one year of age.numbers after one year of age.

Page 19: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

ExemptionsExemptions Dependent:Dependent: For a person to be considered a For a person to be considered a

dependent, they must pass all five of the dependent, they must pass all five of the dependency tests.dependency tests. Relationship Test:Relationship Test:

The person must be a relative (child, stepchild, adopted The person must be a relative (child, stepchild, adopted child, in-laws, blood relations, etc.).child, in-laws, blood relations, etc.).

Relationships created by marriage are not ended by Relationships created by marriage are not ended by divorce or death.divorce or death.

Page 20: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

ExemptionsExemptions Citizenship Test:Citizenship Test:

The person must be a citizen or resident of the United The person must be a citizen or resident of the United States orStates or

A resident of Canada or Mexico orA resident of Canada or Mexico or An adopted child who is not a U.S. citizen but has lived An adopted child who is not a U.S. citizen but has lived

with you all year in a foreign country.with you all year in a foreign country.

Filing Status Test:Filing Status Test: The person cannot file a joint return with his or her The person cannot file a joint return with his or her

spouse.spouse.

Page 21: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

ExemptionsExemptions Income Test:Income Test:

The persons income must be less than the amount of The persons income must be less than the amount of his or her exemption ($3,050 in 2003).his or her exemption ($3,050 in 2003).

Exceptions:Exceptions: Your child was under age 19 at the end of the year.Your child was under age 19 at the end of the year. Your child was under age 24 and a full-time Your child was under age 24 and a full-time

student.student.

Support Test:Support Test: You provided over half of the support for the person You provided over half of the support for the person

during the year.during the year.

Page 22: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Gross IncomeGross Income Gross IncomeGross Income: : All taxable income you All taxable income you

receive.receive. Wages, Salaries, and Tips:Wages, Salaries, and Tips: Monies received Monies received

through employment as shown on the Form W-2.through employment as shown on the Form W-2. Interest Income:Interest Income: Includes interest from banks, Includes interest from banks,

savings and loans, credit unions, series HH savings and loans, credit unions, series HH savings bonds, etc. as shown on savings bonds, etc. as shown on Form 1099-INTForm 1099-INT..

Dividend Income:Dividend Income: Distributions from stocks or Distributions from stocks or other property that corporations pay to other property that corporations pay to stockholders as shown on stockholders as shown on Form 1099-DIVForm 1099-DIV..

Page 23: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Gross IncomeGross Income Unemployment Compensation:Unemployment Compensation: Unemployment Unemployment

benefits received will be shown on benefits received will be shown on Form 1099-GForm 1099-G.. Social Security Benefits:Social Security Benefits: 85% of most social 85% of most social

security benefits are taxable and will be shown security benefits are taxable and will be shown on on Form SSA-1099Form SSA-1099..

Retirement and Pension: Retirement and Pension: Income received from Income received from retirement and pension plans and shown on retirement and pension plans and shown on Form 1099-RForm 1099-R..

Page 24: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Gross IncomeGross Income Child Support:Child Support: Money paid to a former spouse Money paid to a former spouse

for support of dependent children.for support of dependent children. Alimony:Alimony: Money paid to support a former Money paid to support a former

spouse.spouse. Other income would include winnings from Other income would include winnings from

gambling, bartering, IRA distributions, rental gambling, bartering, IRA distributions, rental property, royalties, estate and trust income, and property, royalties, estate and trust income, and sale of property.sale of property.

Page 25: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Adjusted Gross Income (AGI)Adjusted Gross Income (AGI) Adjusted Gross Income (AGI)Adjusted Gross Income (AGI): : Income Income

after adjustments are subtracted from gross after adjustments are subtracted from gross income.income.

AdjustmentsAdjustments include: Educator expenses, include: Educator expenses, IRA contributions, student loan interest, IRA contributions, student loan interest, tuition and fees, alimony paid, certain self tuition and fees, alimony paid, certain self employment expenses.employment expenses.

Page 26: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Taxable IncomeTaxable Income Taxable IncomeTaxable Income:: Income after deductions Income after deductions

are subtracted from AGI and is used to are subtracted from AGI and is used to determine tax liability from the tax tables.determine tax liability from the tax tables. Tax DeductionsTax Deductions: : Expenses the law allows the taxpayer to Expenses the law allows the taxpayer to

subtract from adjusted gross income.subtract from adjusted gross income. Itemized DeductionsItemized Deductions: : Certain expenses that are listed on Certain expenses that are listed on

Form Schedule A that include medical and dental expenses, Form Schedule A that include medical and dental expenses, state and local income and property taxes, mortgage state and local income and property taxes, mortgage interest, gifts to charity, and other miscellaneous expenses.interest, gifts to charity, and other miscellaneous expenses.

Standard DeductionStandard Deduction: : Deduction taken if itemizing doesn’t Deduction taken if itemizing doesn’t

exceed the standard deductionexceed the standard deduction..

Page 27: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Taxable IncomeTaxable Income Taxable income is calculated by:Taxable income is calculated by:

Gross IncomeGross Income

– – Adjustments .Adjustments .

Adjusted Gross IncomeAdjusted Gross Income

– – Standard Deduction or Itemized DeductionsStandard Deduction or Itemized Deductions

– – Exemptions .Exemptions .

Taxable IncomeTaxable Income

Page 28: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

How do you prepare federal income How do you prepare federal income tax forms 1040EZ and 1040A with tax forms 1040EZ and 1040A with Schedules 1 and 2?Schedules 1 and 2?

Essential Question 4Essential Question 4Pay and TaxesPay and Taxes

Page 29: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Form W-2Form W-2 Form W-2Form W-2: : Wage and Tax Statement. Lists Wage and Tax Statement. Lists

income earned and taxes withheld by the income earned and taxes withheld by the employer.employer. You receive one W-2 from each employer.You receive one W-2 from each employer. Federal Law requires that you receive a copy of Federal Law requires that you receive a copy of

your W-2 no later than January 31your W-2 no later than January 31stst. . It is your responsibility to get a copy of your W-2 It is your responsibility to get a copy of your W-2

even if one is not sent by your employer.even if one is not sent by your employer.

Page 30: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes

Form W-2Form W-2 A copy of your W-2 is required to be submitted A copy of your W-2 is required to be submitted

with your federal, state, and local tax returns.with your federal, state, and local tax returns. Not having a W-2 is Not having a W-2 is NOTNOT a valid excuse for not a valid excuse for not

filing a tax return or including the income on your filing a tax return or including the income on your tax return. This information can be reconstructed tax return. This information can be reconstructed from pay stubs.from pay stubs.

You should maintain a copy of all tax returns and You should maintain a copy of all tax returns and W-2s for a minimum of five years.W-2s for a minimum of five years.

Page 31: Unit 2 Income Taxes. Unit 2 Vocabulary  Adjusted Gross Income  Audit  Deductions  Exemption  FICA  Form W-2  Gross Income  Gross Pay  Itemized

TaxesTaxes