Personal Finance Chapter 3
Name: Grace Davis
Topic/Objective:
Date: 9-13-18
Class: P.1.
Essential Question: What types of taxes does the government levy against individuals? What kinds of
income and deductions may be reported on a tax return?
Questions/Main Ideas
Notes
(2 per section)
What is the difference
between Progressive taxes
and regressive taxes?
3.1: Our Tax System
● Types of Taxes
Largest source of revenue is is individual income tax.
Taxes are taken from medicare taxes, unemployment
insurance, inheritance and estate taxes, gift taxes, import
duties, and payroll taxes.
V. Tax: A payment imposed on a taxpayer by a
government unit.
V. Revenue: Incoming taxes, which are treated as
income by the government.
o Progressive Taxes
The more you earn, the more you pay. Income tax
is one example.
V. Progressive Taxes: Takes a larger share of
one’s income as the amount of income grows.
o Regressive Taxes
Sales tax is one example. people with lower income
pay a higher percentage of their income on sales
tax.
V. Regressive Taxes: A smaller share of one’s
income as the amount of income grows.
o Proportional Taxes
All people who own a property worth $100,000 in
a community will pay the same regardless of one's
income.
V. Proportional Taxes: A tax for which the rate
stays the same regardless of one’s income.
o Other Taxes
The Capital gains taxes, value-added taxes, tariffs,
license and registration fees, user fees, and tolls.
Luxury taxes are on items like yachts and private
jets.
● How the Tax System Works
Both individuals and businesses pay income taxes
and must file tax returns every year.
o The IRS
What does it mean when they
say “pay your fair share”?
(INternal Revenue Service) is an agency of the U.S.
Treasury. They collect taxes and enforce tax laws.
Provides services to taxpayers.
o The Power to Tax
Power to levy goes to the U.S. Congress, constitution say
“all bills for raising revenue shall originate in the House
of Representatives” The president can raise or lower
taxes.
o Paying Your Fair Share
The tax system is progressive. Tax rate increases as
taxable income increases. Congress raises taxes
when more revenue is needed, for example if we
are in debt as a country.
V. Tax Bracket: A tax rate is applied to an income
range, or Tax Bracket.
V. Voluntary Compliance:
All citizens prepare and file tax returns on their
own.
V. Tax Evasion: Willful failure to pay taxes
o An IRS Audit
Checks the validity of information on a tax return and
requires a response from the taxpayer.
V. Audit: An Examination of income tax returns.
3.2: Filing a Tax Return
● Tax Terminology
US citizens are required to file tax returns every year and
pay their fair share of taxes.
How do you know what
taxpaying group your in?
o Filing Status
Your group is based on marital status as of the last
day of the tax year. Single tax payer pay higher
taxes than other.
V. Filing Status: Describes your tax-filing group
o Exemptions
as a taxpayer, your automatically allowed one
exemption for yourself unless someone else claims
you as a dependent on his or her return.
V. Exemption: An amount you may subtract from
your income for each person who depends on your
income to live
o Gross Income
Earned Income: money you earned from work
Unearned Income: money you received from
passive activity.
V. Gross Income: All of the taxable income you
receive during the year.
▪ Wages, Salaries, and Tips
Imputed income is added to earnings when
you receive a taxable benefit, such as use of
a company car. When you earn tips on your
job, you must report your tips to your
employer. Tips are counted as part of your
wage
▪ Interest Income
Includes all taxable interest from banks etc.
form 1099-INT is used for every investment
that earned interest during that year.
▪ Dividend Income
Dividends are money, stock, or other
property that corporations pay to
stockholders in return for their investment.
▪ Unemployment Compensation
You will receive a 1099-G from for any
unemployment compensation.
▪ Social Security Benefits
50-80% of social security payments are
taxable, only if as a single taxpayer you earn
$25,000 or if your a married taxpayer and
your total income is $32,000 you will get a
SSA-1099 form.
▪ Alimony and Child Support
Money paid to support a former spouse is
called alimony. Its taxable for whomever
receives it and deductible (from gross
income) for the person paying it. Money
paid to support dependent children is child
support, it is not taxable and it is not
deductible.
o Adjusted Gross Income
Law allows you to subtract some types of spending
money from gross income. “adjust” your account by
subtracting things like IRAs, Student Loans,
Alimony paid, and tuition fees.
V. Adjusted Gross Income: Adjustments are
subtracted from gross income to determine
Adjusted Gross Income
o Taxable Income
gross income or adjusted gross income (which is
minus any deductions or exemptions allowed in that
tax year).
V. Itemized Deductions:
Expenses you can subtract from adjustable income
to determine your taxable income.
V. Tax Liability: Amount of total tax you owe on a
years income.
V. Taxable Income: After the standard
deductions and exemptions are subtracted from
adjusted gross income.
V. Taxable Credit: A reduction of taxes owed
o Who Must File and When?
Taxpayer or accountant. End of tax year, before
April 15th
V. Exempt Status: Exempt positions are excluded
from minimum wage, overtime regulations, and other
rights and protections afforded nonexempt workers.
Employers must pay a salary rather than an hourly
wage for a position for it to be exempt.
o Estimated Tax
Received income for which taxes were not
withheld.
V. Estimated Tax: The amount of tax you
estimate you will owe on income received without
withholdings
o Which Form to Use?
The IRS Form 1040A is one of three forms you can use
to file your federal income tax return. Form 1040A is
a shorter version of the more detailed Form 1040, but
is more complex than the simple 1040EZ form.
o Where to Begin?
Save ALL receipts or proof of payments, they will
help with the accuracy of your tax return.
o Tax Preparation Software
A type of computer software designed to help
individuals or companies prepare for and file income,
corporate and similar tax returns.
o Form 1040EZ
▪ Step 1: Enter Name, address, and social
security number
How do I know which form to
fill out and how do I even
start preparing for the end of
my tax year?
▪ Step 2: Report Income
▪ Step 3: Compute Tax
▪ Step 4: Calculate refund or amount owed
▪ Step 5: Sign the return
Summary(2-3 complete sentences):
Taxpayers have Regressive taxes, progressive taxes, Proportional taxes, and other taxes. Some deductions
are exemptions, wages, salaries, tips, Dividend Income, Unemployment Compensation, Social Security,
Interest Income, and Alimony and Child Support.