Unit 3
Money Management
Taxes and Your Paycheck
► Terms
•
•
•
•
•
to Examine
Income Tax
FICA
Gross income
Net income
IRS
Sample Paycheck Stub
W-4 Form
Proper Withholding
•
Paying Too Much
•
Withholding Too Little
1.
Common with students
who work only in summer
Forced Savings Program
1.
Sending extra payments to
the IRS
2.
Claiming fewer allowances
2.
3. Specifying extra money to
be withheld on W-4
Filing a Tax Return
► Income
– wages, tips, interest from savings
► Employers
will send a Form W-2 by January
31. The form summarizes earnings and
withholdings for the year for a specific job.
►A
copy of your W-2 Form is sent to the IRS
by your employer.
Form W-2
Form 1099-INT
Taxes the EZ Way
People who can use a Tax Form 1040EZ:
Single or married and filing jointly with your spouse
 Person who has no dependents
 You and spouse are under age 65
 Neither you or your spouse is blind
 Have a taxable income of less than $50,000
 Earned no more than $400 in interest
 No income other than wages, interest, tips, scholarships,
or unemployment compensation

Form 1040EZ
Form 1040 (“complicated”)
Completing the 1040 and 1040EZ Forms
► Information
to Understand/Remember:
Social security number
Total wages, salaries, and tips
Taxable Interest Income
Unemployment Compensation
Adjusted Gross Income
Deductions
Taxable Income
Taxes and Government
Sources of Federal Government Income
Compare The Following Internet Information to Textbook
(pg. 171)
Principles of Taxation
►
Benefit Principle
those who use a good or service
provided by the government should
pay for it
►
Ability-to-pay-principle
those who have larger incomes
should pay a larger share of what
they receive
(Federal Income Taxes=15%-39.6%)
How Taxes are Collected
► Direct
Taxes
Ex. Income taxes and property taxes
► Indirect
Taxes
Ex. Renting and paying property taxes
► Pay-as-you-earn
Taxes
Ex. Federal Withholding
Types of Taxes
►
Income Tax
►
Sales Tax
►
Property Tax
►
Excise Tax
►
Estate Tax
►
Gift Tax
►
Business or License Tax
U.S. Government Spending
1.
2.
3.
4.
5.
6.
Social Security, Medicare, and Other Retirement
(37%)
National Defense, Veterans and Foreign Affairs
(20%)
Social Programs (18%)
Net Interest on the Debt (15%)
Physical, Human and Community Development
Law Enforcement and General Government
Pg. 176 in textbook
State and Local Governments
Provide the Following:
Building and maintaining local roads
Operating police and fire protection services
Maintaining a criminal justice system
Building and staffing public schools
Building and operating state colleges and
universities
 Supporting hospitals and other medical facilities
 Constructing and operating sewage treatment
plants
 Operating unemployment compensation programs
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Budgeting
How will you Use Your Money?
Choosing Financial Goals

Short Term Goals – hope to achieve within a year or two, may lead to
long term goals also being met
Ex. Purchase a small item, plan a birthday party, receive an A on a test

Long Term Goals – most have a major impact on your life; hope to
achieve in more than a year or two
Ex. Own a home, start a business, raise a family, retirement planning,
Goals
Your own goals may affect the following:
1. Your current family
2. Your future family
3. Your community
4. Income
5. Colleagues
6. Friends
Tracking Your Income and Expenses
► Establish
► Keep
a Filing System
Effective Records/Save Receipts
► Choose
a Desired Time Frame to Analyze
Income and Expenses
There are differences between expenses
► Fixed
Expenses – same every month
► Flexible
Expenses – varies / depends
Steps in Preparing a Budget Worksheet
Create a Worksheet
2. Estimate your Income
*uneven income and realistic income
3. Estimate your Expenses and Savings
4. Record your Actual Income and Expenses
5. Calculate Differences between Estimated
Income and Actual Income
1.
3 Student’s Sample Budget Worksheets
Budget Pitfalls
► Too
much detail – keep it simple
► Keep
track of flexible expenses – be specific
► Keep
miscellaneous items to a minimum
► Keeping
a budget takes commitment and effort –
do not give up if you feel it is important
What is Credit
► The
ability to borrow money in return for a
promise of future repayment = credit
► Credit
comes with a cost - interest
Positive uses of Credit
•
•
•
•
Opportunity to Purchase a Home
Building Equity and Tax Advantages
College Education
Health Related Costs
Service Credit
bills – gas, electric, garbage, water, phone
When to Borrow
1.
2.
3.
4.
5.
Does the item or service need to be purchased
right now?
Do you have to borrow to purchase right now?
Can you afford to make the payments on the
loan?
Will you be able to borrow to buy items you may
need more in the future?
Does the loan exceed 20-25% of your takehome pay?
Qualifying for Credit
►
Credit worthiness – measure of your reliability to
repay a loan
1.
Character – measure of your sense of financial reliability
credit history or need for cosigner for the loan
2.
Capacity – financial ability to repay a loan
income, fixed expenses, financially overextended?
3.
Capital – value of what you own, including savings, investments, and
property
more capital = the safer it is for you to get a loan
Credit Reporting Agencies, or Credit Bureaus
► Equifax
www.equifax.com
► Experian
www.experian.com
► TransUnion
www.tuc.com
Sample Credit Application
Establishing a Positive Credit Rating
1.
2.
3.
4.
5.
Payment History – most important
Current Debt
Length of Credit History = Risk
New Accounts and Inquiries
Type of Credit Used – Too many credit cards?
Types of Consumer Borrowing
•
Secured Loan
collateral – property pledged to back a loan (home)
installment loan – certain number of payments with a
certain interest rate (cars)
•
Unsecured Loan
based on credit worthiness alone – no collateral
Where to Obtain Loans
 Banks
 Finance
Companies
 Life Insurance Companies
 Credit Card Cash Advances
 Pawnbrokers
 Rent-to-Own Companies
Credit Cards
Credit Card Costs
•
Annual Fees
•
Interest
•
Late Fees (grace period)
•
Charging over your personal Credit Limit
•
Advances, credit card company – checks
•
Minimum Payment Trap
Credit Rights and Responsibilities
Truth in Lending
Truth in Lending Act, 1968, required all banks to calculate
credit costs the same way
must also disclose the finance charge and the annual
percentage rate (APR)
Equality in Lending
Equal Credit Opportunity Act, passed in 1975 and amended in
1977, made it illegal to refuse credit on the basis of race,
color, religion, national origin, sex, marital status, or age.
Consumer Responsibilities Involving Credit
► Accept
Responsibility
► Know
your Debt
Capacity
► Practice
Self-Control
pay more than the minimum
avoid too many credit cards
pay cash for small purchases
keep accurate records
Maintaining a Good Credit Rating
► Start
small
► Save regularly (pay yourself first)
► If married, establish your own credit history
► Pay bills on time, never ignore bills
► Read what you sign
► Provide personal information only when
absolutely necessary – avoid ID theft