1.
Introduce ourselves to each other.
2.
Find out about online resources available to help us learn about income taxes.
3.
Find out about Internal Revenue Service publications for taxpayers.
4.
Learn about different types of tax systems – flat, progressive (or graduated), regressive, or even “negative.”
5.
Get an overview of the federal income tax system.
6.
Learn about the basic formula for determining income-tax liability.
7.
Find out which people MUST file income tax returns, and which people don’t have to file.
8.
Find out how the taxpayer’s “Filing Status” is determined.
9.
Look at the 2008 tax-rate schedules for different Filing Status taxpayers
10.
Prepare our first simple income tax return!

INTRODUCTIONS
Please go to the Discussions board (located in the Communication area) and using the
“Introductions of Class Members” thread, post a brief background about who you are and why you are taking this class, and provide a picture, so we can associate a face with your name! It’s always fun to hear about the kinds of extra-curricular activities
(hobbies, sports, etc) everyone is interested in. Often, our students make connections based on similar interests outside of the usual school activities.

 ONLINE RESOURCES
Please click on the link for “Online Resources” on the main website page for the class, and take a look at some of the materials that are easily available to us online.
 IRS PUBLICATIONS & LINKS
There are literally hundreds of IRS publications that are available for our use and study.
However, as a start, we will focus on Publication 17, Your Federal Income Tax. Go to the following link: http://www.irs.gov/formspubs/lists/0,,id=97819,00.html
You will “highlight” Publication 17 in the box that lists all the publications, then click on
“Retrieve Selected Files” just below the little box. Then you can click on the link to the
Publication 17 PDF file to open it. As you will see, this pdf file is about 300 pages long, and may take a little while to download to your computer. This file can also serve as a second “text” for you, to compare with the language in your textbook. (Or, if you do not have your textbook yet, you can use this as a temporary substitute for the textbook.)
This publication provides an overview of the income tax system, and provides instructions for the most common income tax forms that we will be using in this class.
The latest edition of Publication 17 on the IRS website is for the 2008 Tax Year – just available now!
 DIFFERENT TYPES OF TAX SYSTEMS
As indicated in your text, there are several different types of possible taxing systems
(flat tax, progressive tax, regressive tax) for a government to use to raise revenue to provide essential government services like police protection, education, retirement, healthcare, etc. The government can also utilize the tax system to accomplish social goals as well – to encourage business investment, to encourage people on welfare to work instead, to encourage people to save ahead for their own retirement, etc.


OVERVIEW OF THE US FEDERAL INCOME TAX SYSTEM
The US income tax system is a progressive tax system, where people making larger incomes are taxed at a higher rate than people with lower incomes. For people at the lowest levels of income, there is also a possibility for a “negative” income tax, or small subsidy.
 BASIC INCOME-TAX FORMULA
A most-basic income tax formula might look something like this:
Income Received
(Less Allowable Deductions)
= Taxable Income
$10,000
( $ 3,000 )
$ 7,000
X Tax Rate of 10%
= Income Tax
x .10
$ 700
As you will soon see, our income tax formula starts out fairly simple like this, but then can become quite complex as we get more complicated income and expenses!

STANDARD DEDUCTION BASICS:
Look at Pages 1-7 through 1-10 in your Johnson text (or pages 138-140 in the IRS
Publication 17 for 2008).
You will see that most taxpayers are allowed to deduct a “standard” amount from their income, that is not taxed at all ! This standard deduction varies in amount, depending on what “filing status” the taxpayer has. There are also some “additional” standard deduction amounts for special taxpayers – those who are elderly or blind.
But for now, let’s take at the Basic Standard Deduction amount for the following filing status types:
SINGLE
MARRIED FILING SEPARATELY
HEAD OF HOUSEHOLD
$ 5,450
$ 5,450
$ 8,000
MARRIED FILING JOINTLY $10,900
(Each year, these are adjusted for inflation.)

PERSONAL EXEMPTION BASICS:
In addition, most taxpayers are allowed to take a deduction for themselves and one for each dependent. (We will go over dependents soon.) For 2008, this amount is $3,500, regardless of “filing status.”

When we add the Standard Deduction to the Personal Exemption amount, we find out the total amount of ALLOWABLE DEDUCTIONS that the person can claim – in other words, how much can the person earn, and still not have any Taxable Income?

ADDITIONAL STANDARD DEDUCTION AMOUNTS??
Above, we indicated that in addition to the “Basic Standard Deduction” there are also some “Additional Standard Deduction amounts” that can be deducted by certain taxpayers – the elderly and the blind. So, how much? It depends on Filing Status!
Anyone who is 65 or older is entitled to an additional amount of either $1,050 (for
Married Filing Jointly, Married Filing Separately, or Surviving Spouse) or $1,350 (for
Single or Head-of-Household).
Anyone who meets the definition of “blind” can qualify for the same amount, for the same filing status.
So – a SINGLE taxpayer who is 66, and blind, would be entitled to a Total Standard
Deduction of $8,150 (5,450 + 1,350 + 1,350).
 WHICH PEOPLE MUST FILE A TAX RETURN? Based on the calculations above, we can see which taxpayers have to file – the ones who have Taxable Income - where their Income less (Basic Standard Deduction + Additional Standard Deduction for Elderly + Personal
Exemptions) leaves a balance!
So – a SINGLE taxpayer, age 66, could have a total of $10,300 in income, and not have any Taxable Income. (The IRS table on this appears to ignore the Additional Standard
Deduction for Blindness.)

Here is a table from page 5 of the IRS Publication 17 for 2008, which illustrates the most common situations where taxpayers have to file in the 2008 Tax Year:
NOTE: There are some special rules for people in certain circumstances that require them to file, even if they don’t have the above levels of income:
1.
There is a special rule for Married Filing Separate filing status! (see table above)
2.
There is a special rule for someone has Self-Employment net income of $400 or more.
3.
There is a special rule for people who received something called “Advanced Earned
Income Credit” payments from their employees.
4.
There is a special rule for people who received tips, and Social Security tax was not withheld from these tips.


LET’S FIGURE OUT WHAT FILING STATUS OPTIONS WE HAVE:
There are five choices for “Filing Status”
Single
Married Filing Jointly
Married Filing Separately
Head of Household
Qualifying Widow(er) with Dependent Child
The definitions of these five Filing Status choices are not necessarily simple, or what you would expect – it takes five pages of small print in Pub 17 (pages 20-24), or in your
Johnson text (pages 1-22 to 1-26) to describe the differences in these status choices!

LOOKING AT TAX-RATE SCHEDULES FOR 2008 TAX RETURNS. (These are shown on Page
271 of IRS Pub 17 – the Johnson text does not have these printed.)
Let’s take a look at the rates for a SINGLE taxpayer:
Range:
Taxable Income from $1 to $8,025:
Taxable Income from $8,026 to $32,550:
Tax Rate:
10%
15%
Taxable Income from $32,551 to $78,850:
Taxable Income from $78,851 to $164,550:
Taxable Income from $164,551 to $357,700:
Taxable Income over $357,700:
25%
28%
33%
35%
Size of Bracket:
$ 8,025
$ 24,525
$ 46,300
$ 86,700
$193,150
So, if we have a Single taxpayer who has $7,000 in Taxable Income, her income tax would be calculated like this:
Total Taxable Income: $7,000
All taxed at 10% rate: x 10% = $700 Tax
A Single taxpayer who has $18,025 in Taxable Income would pay the following tax:
Total Taxable Income: $18,025
First $ 8,025 x 10% = $ 802.50
Next $10,000 x 15% = $ 1,500.00
Total Tax = $ 2,302.50

A Single taxpayer who has $35,000 in Taxable Income would pay the following tax:
Total Taxable Income: $18,025
First $ 8,025 x 10% = $ 802.50
Next $24,525 x 15% = $ 3,678.75
Next $ 2,450 x 25% = $ 612.50
Total Tax = $ 5,093.75
In your Johnson text, just after Page 15-66, you will see several pages of “Tax Tables” for
2008 that are prepared by the IRS (this is on pages 258-269 of IRS Pub 17), so that taxpayers don’t have to do all of the calculations that we just did above. The IRS has calculated a tax amount, for income increments of $50, so it is not likely that our calculations will be exactly the same as the IRS has calculated. As long as the taxpayer’s
Taxable Income is under $100,000, we are supposed to use the IRS Tax Tables to calculate the tax owed.

DEPENDENTS – WHO QUALIFIES ???
This is covered on pages 1-13 through 1-21 in the Johnson text, and also on pages 25-35 of IRS Pub 17. At first glance, you would think it is quite easy to figure out who a dependent is – someone who depends on the taxpayer, right? That’s a little too simple for the government!! You will see that there are FIVE TESTS that must EACH be passed for someone to qualify as a Dependent for income-tax purposes:
Gross Income Test
Support Test
Citizenship/Residency Test
Joint-Return Test
Relationship Test
 LET’S PREPARE OUR FIRST BASIC INCOME-TAX RETURN.
We will start with the Form 1040 EZ for 2008
This is supposed to be the “simplest” income tax form.
Basic Name and Address goes into the top section, along with Social Security Numbers.
Line 1 – Here put the Wages from Box 1 of Form W-2 for wages income.
Line 2 – Here put the total interest income (from banks, brokers, savings & loan associations, etc.)
Line 3 – Here put any Unemployment Compensation the taxpayer may have received.
Line 4 – total it up

Line 5 – ASSUMING the taxpayer is not a dependent of another, put in a deduction of
$8,950 for a Single taxpayer with No Dependents, or $17,900 for Married Filing Jointly with No Dependents. (For Singles, this is the total of the Single Standard Deduction
$5,450, plus one Exemption of $3,500. For MFJ, this is the total of the MFJ Standard
Deduction of $10,900, plus two Exemptions of $3,500 each.)

Example:
SINGLE taxpayer has $20,000 in Wages on Form W-2. No Interest Income, and No
Unemployment Compensation.
So, Line 1 is $20,000
Line 2 is blank
Line 3 is blank
Line 4 is $20,000
Line 5 is $8,950 – these are the Deductions
Line 6 should be $11,050 – this is the Taxable Income
Line 11 Tax from the Tax Tables should be $ 1,260
Will the taxpayer get a refund? Owe Taxes? That will depend on how much he/she has paid in, or has credit for – which we will deal with shortly.