Chapter 5 PowerPoint "Taxes - How Much Income Will You Keep?"

Chapter 5
Payroll Taxes
◦ Largest part of government revenue
◦ Based on employee total earnings
◦ Paid by you and your employer
◦ Include income taxes and social
insurance taxes
Income Taxes
◦ NOT fixed percentage of income that all
Americans pay
◦ Varies on financial and family situation
◦ You are responsible for calculating tax you owe
◦ Support social programs (ie: Social Security,
◦ Federal Insurance Contributions Act (FICA) –
requires workers to contribute to Social Security
and Medicare
◦ Deducting money from your wages
◦ PREPAYS your federal income tax and
social insurance tax
◦ Enables government to collect taxes at
a steady rate the entire year
Your Paycheck Stub
◦ Gross Income – amount BEFORE taxes
are withheld
◦ Net Income (“take home pay”) – amount
you receive AFTER withholdings
Net Income = Gross Income Withholdings
Form W-4
◦ Amount of income tax you owe depends on:
 Your GROSS income
 Number of people you support (your
 Other expenses you pay
 W-4 form – YOU provide your employer with
this information!
 YOU are responsible for the consequences if
your withholdings are too small.
◦ Number that reduces the amount of money
◦ LARGER # of allowances – SMALLER $
◦ Number of allowances will not change the
amount of tax you owe.
◦ You are responsible for calculating the
amount of tax you owe.
◦ A way to force yourself to save by reducing
your allowances.
◦ To be sure to receive a refund at the end of
◦ NOT the best way to save – a bank would pay
you interest….the government does not!
A tax return is a set of forms used to
calculate tax obligation
If tax return shows withholdings weren’t
enough – you owe!
If return shows you more than covered
your tax obligation – you get a refund!
Income = wages, tips, interest
Sources of Information for your Tax
◦ Form W-2 – summary of earnings for a
year from a JOB
◦ Form 1099-INT – statement of interest
paid on a BANK account
Income Tax Forms:
◦ Form 1040 – used to itemize deductions
(expenses you can legally subtract from your
income when figuring your taxes)
◦ 1040 EZ – the simplest of tax forms used by
most young people
 Single
 Have no dependants (people you support
 Under 65
 Earned no more than $400 in interest
How to Complete a 1040 EZ:
◦ Know your Social Security Number
◦ Adjusted Gross Income – the total of ALL
income from ALL sources
◦ Determine your deduction
 If your parents or guardian claim you as a
dependent, you may NOT claim yourself
◦ Figure your Taxable Income
 Subtract exemptions and deductions from
your adjusted gross income
Taxable Income = AGI – (exemptions +
Payments and Tax
◦ Federal Income Tax Withheld – tax already
taken out each pay period
◦ Earned Income Credit – some workers with low
income qualify for EIC. Treated as tax payment.
Qualifications are found in instruction booklet.
◦ Total Payments – All withholdings and EIC =
total amount of your taxes that you have
already paid.
◦ Tax – the instruction booklet for Form 1040 EZ
contains a table that tells total tax obligation.
W-2 reports your total wages were
W-2 reports $4,053 was withheld from
your wages for Federal Income Tax
Form 1099-INT reports your interest
income was $281
You are single and not claimed by any
other person as a dependent
What is your adjusted gross income?
How much is your taxable income?
How much is your total tax for the year?
What is the amount of your payment of
Add total wages (W-2) to Taxable Interest
$33,739 + $281 = $34,020
Subtract your exemptions & deductions from your
adjusted gross income.
In this case, we use the STANDARD DEDCUCTION
for a single person.
$34,020 - $6,950 = $27,070
Look at the tax table on p. 167. Find where
your taxable income falls in the
corresponding column for single people.
Subtract your total tax payments from your tax.
$4,286 - $4,053 = $233
You owe $233!
Government Income
◦ Taxes and Borrowing (Bonds)
◦ Largest part of federal government income =
Income taxes!
◦ Employee:
 Social Security – 6.2%
 Medicare – 1.45%
 TOTAL FICA = 7.65%
◦ Employer:
 Match payments for Social Security and
If you are SELF-EMPLOYED you must pay the
entire 15.3% to Federal Government!
Classifying Taxes
◦ Every taxpayer should be treated equally under the
◦ Does not mean that all taxpayers should pay the
same amount of tax
◦ Principles of Taxation
 Benefit Principle – those who use a good or service
should pay for it.
 Ability to Pay Principle – those who have larger
incomes should pay more of what they receive.
Taxes and Income
◦ Progressive Tax – larger share (percentage) of
income as the amount of income grows.
(most federal taxes are progressive)
◦ Regressive Tax – smaller share (percentage) of
income as the amount of income grows.
(most state and local taxes are regressive)
How Taxes are Collected
◦ Direct Taxes – paid directly to government
(income and property taxes)
◦ Indirect Taxes – included in cost of goods &
services (sales tax)
◦ Pay-as-you-earn Tax – Federal
Withholdings taken each pay period
Types of Tax
◦ Income Tax – Federal, State and Local
◦ Sales Tax – added to the price of goods or
services upon purchase
◦ Property Tax – based on the value of real estate
◦ Excise Tax – collected on specific goods and
services and included in the price.
◦ Estate Tax – property received from someone
who dies
◦ Gift Tax – paid on cash or property worth more
than $14,000
◦ Business or License Tax – paid for certification
and accompanied by a test
◦ Customs duties or Tariffs – imposed on some
Government uses taxes to bring in revenue and
 Sin Taxes – try to deter consumers from buying
certain products. (tobacco most common)
 Tax Cuts – lower taxes encourages consumers to
make beneficial choices.
Examples: Lower sales tax = encourages
Lower property tax = people move
certain area
Charity tax breaks = encourages
Federal government spends nearly
$3,500,000,000,000 each year (Three
Roughly $13,000 per American
Most pays for PUBLIC GOODS – benefit all
Six major areas where your federal tax dollars
are used:
◦ Social Security, Medicare, Retirement
◦ National Defense, Veterans & Foreign Affairs
◦ Social Programs (Medicaid, food stamps,
◦ Net Interest on Debt
◦ Physical, Human & Community Development
◦ Law Enforcement & General Government
State & Local Governments Provide:
Police & Fire
Criminal Justice System
Public Schools
State Colleges & Universities
Sewage Treatment Plants
Unemployment Programs