The Federal Income Tax
• What are taxes for?
Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
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• Federal
government
spending
2010
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What kinds of taxes can you
name? (there are many)
http://whatistaxed.com/other_ta
xes.htm
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Most Important: the Federal Income Tax
• The personal income tax is the
federal government’s main
source of revenue.
–What is “income”?
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Gross (Total) Income
Any money that “comes in” to a household
 Earned income (job)
 Interest income (savings; CDs)
 Dividend income (investments)
Gross and Adjusted Gross Income
The IRS measures your “gross income” or
“total income” before making adjustments
based on need and your family situation:
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Who must file?
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The Income Tax Return
income tax
return
a form on which a
taxpayer reports
how much money
he or she
received from
working and other
sources, and the
exact taxes that
are owed
Understanding Income Taxes
You determine the amount of tax
you owe when filling out your
income tax returns. Some
examples of these forms include:
 1040
 1040EZ
If the income tax you paid through
your employer is greater than your
tax liability, you will receive a
refund.
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How much will I owe?
(Step 0 – Calculate your Gross Income)
Add up all your income, earned and unearned.
Jobs, tips, wages, investment income, interest, and
gambling wins all count here.
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How much will I owe?
adjusted gross
income
your gross
income after
calculating
certain
reductions
(Step 1 - figure out Adjusted Gross
Income)
You pay income tax on your adjusted
gross income, not on your gross
income.
Reduce your income (with reductions,
or adjustments) through such items as:
 Contributions to an IRA
 Student loan interest
Money used towards these does not
count towards your income taxes!
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How much will I owe?
(Step 2: Figure Out Your
taxable income Taxable Income)
your adjusted
After you have your adjusted
gross income less
any allowable tax gross income, you may further
reduce your taxable income by
deductions and
using deductions and exemptions!
exemptions
What are some ways I’ve already
shared that you can pay less in
taxes?
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Tax Deduction
•an expense that you can subtract from
your adjusted gross income to figure
your taxable income
Two types of deduction:
–Itemized
• Calculated from a list of items that
can be taken off your taxes
–Standard
•A set dollar amount: no calculation
required
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Tax Deductions
Every taxpayer receives at least the standard
deduction. If qualified for both – choose which is more
• Standard Deduction
– Single: $6,300
– Head of Household: $9,250
– Married Filing
Joint: $12,600
– Married Filing
Separately: $6,300
• Itemized Deduction
– Calculated by
receipts/spending in:
•
•
•
•
•
•
•
Medical expenses
Charity donations
State and local taxes
Real estate taxes
Mortgage spending
Some work expenses
Fees paid to tax preparers
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Exemptions
exemption
a deduction from
adjusted gross
income for the
taxpayer, the
spouse, and
qualified
dependents
A tax deduction (from your adjusted
gross income) for your dependents
 A dependent must not earn more
than a set amount unless he or
she is under age 19 or is a fulltime student under age 24.
 He or she must be a specified
relative or live in the home of the
taxpayer who claims him or her on
the tax return.
 More than half of a dependent’s
support must be provided by the
taxpayer who claims him or her on
the tax return.
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How Much Do I Owe?
(Part 3: Calculating Your Tax)
tax credit
an amount of
money that can
be subtracted
directly from taxes
you owe
Once you know your taxable income, you can
calculate how much income tax you owe by using a:
 Tax Table
 Tax Rate Schedule
Your income tax may be reduced by a tax credit. A
tax credit:
 Is an expense that you can subtract from your
adjusted gross income
 Results in a dollar-for-dollar reduction in the
amount of taxes you owe
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Review: How Much Do I Owe?
• How do I figure out how much I owe?
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How Much Do I Owe?
• Find Gross Income
• Find Adjusted Gross Income (take out
reductions)
• Find Taxable Income (take out
deductions and exceptions)
• Look at a table (and take out “tax
credits”)
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• Break for the “Income Tax
Worksheet”
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