Chapter 7
Federal Income Tax
Lesson 7.1 Our Tax System
I. Types of Taxes
A. Revenue—money collected by the
government from citizens and businesses
the form of taxes
1. Income taxes is the largest source of
government revenue
2. Other taxes—social security,
unemployment, insurance, inheritance
and estate, excise, import duties,
personal property
B. Progressive taxes—taxes that
take a larger share of income as
the amount of income grows
1. Federal income taxes
2. Tax Rates (single)
Tax Rate
Taxable Income
10%
>0
15%
>$9,075
25%
>$36,900
28%
>$89,350
33%
>$186,350
35%
>$405,100
39.6%
>406,750
C.
Regressive Taxes—taxes that take a
smaller share of income as the
amount of income grows
1. Consumption taxes are
regressive—Sales tax
2. Excise tax—sales taxes
imposed on specific goods and
services (gasoline, cigarettes,
alcohol, air travel, TELEPHONE
SERVICE)
D.
Proportional taxes—(flat taxes) taxes for
which the rate stays the same,
regardless of income—property taxes
E.
Taxes provide services
1. Local level--taxes provide
education, parks and playgrounds,
roads, police, fire
2. National level—salaries for Congress,
funds for National Defense, highways,
welfare, foreign aid, wildlife refuges
II.Components of the Tax System
A. The IRS—Internal Revenue Service
1. Agency of the Department of
the Treasury
2. Main function is to collect
income taxes and enforce tax
laws
3. Also provides services to taxpayers
a.
Assist taxpayers in finding
information and forms
b.
Furnishes tax information and
instruction booklets free to schools
c.
Maintains a web site
www.irs.gov, where you can get tax
info, download tax forms, file
taxes electronically
d.
Also get tax forms from the public
library
B. The Power to Tax
1. The power to levy taxes rests with
Congress
2. Revenue bills must pass a vote in
both the House and the Senate and
then be signed by the president
before they become law
C. Paying Your Fair Share
1. Our income tax is graduated—tax
rates increase as taxable income
increases
2. Tax rates apply to income ranges, or
tax brackets
3. Congress increases the tax rates
when needed to bring in more $ to
balance the budget
4. Deficit—when government spends
more than it receives in revenue
5. Voluntary compliance—all citizens are
expected to prepare and file income tax
returns by April 15 of each year
6. Responsibility to file and pay taxes
rests with each individual
7. Failure to do so can result in a penalty:
interest charges on tax owed plus a fine
and/or imprisonment
8. Tax evasion—willful failure to pay taxes,
punishable by a fine, imprisonment, or
both
C. An IRS Audit
1. Audit—examination of tax return
2. Taxpayers may represent
themselves, give some the power to
take their place (lawyer, CPA,
family member, or licensed tax
agent) or can bring anyone for
support.
3. Audits usually involve confirming
supporting documentation
4. Correspondence audit—much more
common, IRS sends a letter asking
taxpayer to answer ?s or produce
evidence of deductions
5. May also have office audit or field
audit (agent visits the taxpayer)
Lesson 7.2 Filing Tax Returns
I. Definitions of Terms
A.
1.
2.
3.
4.
Filing Status
Single—not married
Married filing a joint return
Married filing a separate return
Head of Household—meet certain
conditions and provide a home for
dependents
5. Qualifying widow(er) with a
dependent child
B.
Exemption—an amount you may
subtract from your income per
dependent
1. Dependent—person who lives with
you and receives more than half
his/her living expenses from you
2. Dependents may include children,
spouse, elderly parents, disabled
relatives
C. Gross Income—all the
taxable income you
receive, including wages,
tips, salaries, interest,
dividends, unemployment
compensation, alimony,
workers’ comp
1. Not taxable—child support, gifts,
inheritances, life insurance benefits,
veterans’ benefits
2. Other taxable income—gambling
winnings, bartering, pensions,
annuities, social security benefits,
self-employment income, rental
income, royalties, estate and trust
income, income on sale of property
3. Wages Salaries, and Tips—W-2
includes all employment income
4. Interest Income—taxable interest from
banks, savings and loan associations,
credit unions, series HH savings bonds—
should receive a Form 1099-INT for each
investment earning interest
5. Dividend Income—money, stock, or other
property that corporations pay to
stockholders in return for their
investments—will receive a Form 1099DIV for each stock investment.
6. Unemployment Compensation—Form
1099-G shows the total received
7. Social Security Benefits—85% is
taxable if total income > $25,000
single or $32,000 married filing
jointly. Form SSA-1099
8. Child support—money paid for
support of dependent children, not
taxable for person receiving it nor
deductible for person paying it
9. Alimony—money paid to support a
former spouse. Taxable for the
person receiving it and deductible
for the person paying it.
D. Adjusted Gross Income
1. “Adjust” your income by subtracting
certain things (IRA, student loan
interest, tuition, educator expenses)
2. Adjustments reduce your income
subject to tax
E.Taxable Income
1. Deductions—expense the law allows you
to subtract from your adjusted gross
income to determine your taxable income
2. Itemize—list the allowable expenses on
your tax return using Schedule A and
Form 1040 (Medical, dental; state, local,
property taxes; mortgage interest; gifts to
charity; moving expenses; work
expenses)
3. Standard deduction—stated amount that
you may deduct from AGI instead of
itemizing; based on filing status
4. Your choice to itemize or take standard
deduction (take the higher)
5. Taxable income—income on which you
pay tax
6. Gross Income—Adjustments=Adjusted
Gross Income (AGI)
AGI—Deduction (Std or Item)—
Exemptions=Taxable Income
Look up taxable income in tax table
Tax—Credits—Withholding=Tax owed or
Refund due
F.Tax Credits—an amount subtracted
directly from the tax owed
1. Every dollar off a credit comes off
the tax owed
2. College tuition, childcare, children,
earned income
II. Preparing to File
A. Who Must File?
1.
2.
Single, under age 65, earning
>$10,150
If <$10,150, file to claim refund
of taxes withheld
B. When to File
April 15
C. Which Form to Use?
1. Three basic forms—1040EZ,
1040A-- (short forms)
2. 1040—(long form), itemize,
>$100,000 taxable income
D. Where to Begin?
1. Save all receipts and proofs of
payment for itemized deductions
2. Compare paycheck stubs to W-2
(receive by Jan 31)
3. Use last year’s return as a guide
4. File ASAP to get refund ASAP
5. Check amount of itemized
deductions (over $6,200, single)
6. Sign form to verify accuracy
7. Amended return (1040X) to
make corrections
8. Save copies of tax returns,
receipts, Forms W-2, Forms
1099, for six years
E. Filing Electronically
www.irs.gov/efile
Free if your AGI < $60,000
III. Preparing Your Income Tax
Return
A. Complete in ink or typed with no
errors or omissions
B. Tax Preparation Software
(TurboTax)
C. Form 1040EZ
1. Single or Married and claim no dependents,
taxable income <$100,000
a. Name, address, social security number
b. Report income, indicate if you are a
dependent on someone else’s tax return
c. Compute tax—use tax table, subtract
amount
withheld
d. Refund or Amount Owed, can have refund
deposited electronically into bank
account—takes only 2—3 weeks
e. Sign and date the return, attach W-2, mail
to regional IRS office—Fresno, CA—
refund, Cincinnati, OH--Pay
D. Form 1040A—can take deductions
for IRA (Individual Retirement
Accounts) contributions, tax credit
for child-care expenses
a.
b.
c.
d.
Name, address, social
security number
Filing status
Exemptions
Total income
Adjusted gross income
f. Subtract standard deduction and
exemptions to calculate taxable
income
g. Compute tax—use tax table, subtract
credit for childcare expenses, child
tax credit, subtract amount withheld
h. Refund or Amount Owed
i. Sign and date return
e.
Aren’t Taxes FUN??!!??