TAXES
By Stevie VanDeVelde
Topics
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Purpose of taxes
Different types of taxes
What taxes you can expect to pay
How to calculate the amount of federal
income tax you owe
Complete a 1040EZ
What is the purpose of taxes
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Support schools
Support building
Maintain roads
Provide for the nation’s defense
Tax
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Required contribution of money
Ultimately paid to the government
Raise revenue to pay the cost of government
Direct Tax
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Paid directly to the government
Examples: income tax and property tax
Indirect Tax
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Shifts the tax burden
Example buy gasoline, cigarettes – then pay
tax on them
Direct Tax Can Become An Indirect Tax
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Landlords property taxes increase (direct tax)
Your rent increases due to it (indirect tax)
Types of Taxes
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Income Tax
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Paid based on the money you earn and profits a
business makes
Paid to Federal, State and sometimes Local
Government
Paid on salary, wages, tips and savings and
investment income
Pay for the overall costs of governments
Types of Taxes - Continued
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Payroll Tax
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Paid to support Soc. Security taxes
Both you and your employer make a contribution
Help provide you with retirement income/benefits
Some occupations (teachers and government
workers) pay into a state retirement program
rather than Soc. Security
Types of Taxes - Continued
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Sales Tax
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State and Local Governments
Tax is added to the cost of the items
Sales tax in Illinois is 6.25%
Types of Taxes - Continued
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Estate, Inheritance and Gift Tax
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Estate tax – assessed on the value of the
deceased’s property before it is passed on
Inheritance tax – taken out of each person’s share
of the will
Federal – Estate Tax
State (some) – both Inheritance and estate tax
Gifts up to a certain amount are tax free. Over
that amount a gift tax is imposed
Income Tax
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History
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1913 – Federal Income tax imposed
The 16th amendment gave the government the
right to tax
Wisconsin – 1st state to administer an income tax
By mid-1970’s – almost all states have an income
tax
Federal Income Tax
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Who Must Pay?
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Individuals
Corporations
Trusts
Estates
Business owners (pay
through their individual
income taxes)
Citizens of other
countries who earn
income in the U.S.
Federal Income Tax
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Who Doesn’t Have to
Pay?
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Low Income Families
Nonprofit Organizations
(churches, charities)
Some hospitals
Federal Income Tax
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Part of being a good citizen
Graduated income tax
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Seen as fairest type of tax
Those who earn more – pay a higher percentage
Graduated Income Tax
State Income Tax
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Most have a graduated income tax
Some use a flat rate
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Your income is $25,000 and your spouse’s
income is $35,000, therefore, you would pay 6%
on all income or $3,600
Taxable Income
Your total income
Adjustments to Income (paid alimony, contributions to
IRA)
=
Your adjusted gross income
Deductions and Exemptions
=
Taxable Income
Reduction of Income Tax
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Tax laws: Those who meet certain
requirements can reduce the amount of
income which is taxed
Determining Your Deductions
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Mortgage Interest
Property Taxes
Contributions to Charities and Churches
Tax-Free Income
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Allows a certain level of tax-free income
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Marital status
Number of dependents
Thus,
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Larger families generally pay less tax
Married couples generally pay less tax
Determining Your Exemptions
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Yourself (if not claimed by your parents)
Any Dependents
Taxable Income
Your total income
Adjustments to Income (paid alimony, contributions to
IRA)
=
Your adjusted gross income
Deductions and Exemptions
=
Taxable Income
Taxable Income and Tax Table
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Use Taxable Income
Determine the Amount of Tax you Owe
Taxable Income and Tax Table
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Taxable income
$15,235
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Tax (single)
$1,919
Your Turn
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Based on the table,
how much tax does a
married couple filing
jointly owe on an
income of $15,742?
How much does a
single person owe on
the same amount?
Tax Credits May Reduce Your Figure
from the Tax Table
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Amount of tax due may reduce by any tax
credits
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Child Care
Compare
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Tax Owe to Tax Paid
If too much withheld –
refund
If too little withheld –
owe difference
Tax Form
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Due April 15
Sign
Interest and Penalty if
late
“Filing”
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Process of completing
and submitting an
income tax return
Can be simple or
complex
Not Filing = Tax
Evasion
Eligibility for filing a 1040EZ
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Filing status – single or
married filing jointly
No dependents
No student loan interest
deduction or an
education credit
Not age 65 or over (you
or your spouse)
Taxable Income less
than $100,000
Eligibility for filing a 1040EZ – Cont.
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Only had wages, salaries, tips and taxable
scholarships, unemployment compensation, qualified
state tuition program earnings or Alaska Permanent
Fund dividends
AND your taxable interest income was not more than
$1,500.
Did not receive any Advance earned income credit
payments
Did not owe any household employment taxes on
wages you paid to a household employee
Filing a 1040EZ
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On paper
Telephone
Computer
IRS Web Site
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www.irs.gov
John Nye – Class Activity
Preparing a 1040EZ
Introduction
In 2005, John Nye worked after school and all day
Saturday at Rudden’s Ice Cream Parlor.
In late January 2006, John received a W-2 Wage and
Tax Statement from his employer.
John went to the post office and picked up a Form
1040EZ and the instructions for completing this form.
(You can also download them from the web site).
Introduction - Continued
John also received a 1099-int – Interest income
earned from from his local bank. He had
earned $63.00 in interest income.
With this information he was able to complete
his 1040EZ.
John’s W2
John’s 1040EZ
Other Types of 1040’s
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1040A
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Dividend and Capital Gains from Stock
Deductible Student Loan Interest
1040
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Itemize rather than taking the standard
deductions
Receive income from rental property
Let’s Do Some Calculations!
Suppose you make $370 a week. Each year
you pay $2,884 in federal income tax, $578
in state income tax, $262 in sales tax, $88
in property tax, $1,472 in FICA tax, and
$158 for other taxes. How much do you
pay for taxes during the year? How many
weeks must you work just to pay taxes?
Calculation #2
Suppose you earned an annual salary of
$27,000 and your spouse earned $32,000.
If there were a flat tax on income of 5%,
how much income tax would your family
have to pay?
Calculation #3
Using the tax table, determine the amount of
tax you owe, if your wages were
$15,178.00, tips were $1,132.00 and
interest income was $220.00. The amount
of tax withheld from your employer was
$1,596.00.
Review Questions
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What do taxes pay for?
Name some types of taxes
What is it called if you have earned income
and fail to file an income tax return?
If you are married, can you use form 1040EZ
to file your federal income tax return?
What is a Graduated Income Tax?
Review Questions - Continued
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What is a flat rate tax?
What are deductions?
What are exemptions?
What date must you file your taxes by?