Personal Finance Chapter 3 Name: Grace Davis Topic/Objective: Date: 9-13-18 Class: P.1. Essential Question: What types of taxes does the government levy against individuals? What kinds of income and deductions may be reported on a tax return? Questions/Main Ideas Notes (2 per section) What is the difference between Progressive taxes and regressive taxes? 3.1: Our Tax System ● Types of Taxes Largest source of revenue is is individual income tax. Taxes are taken from medicare taxes, unemployment insurance, inheritance and estate taxes, gift taxes, import duties, and payroll taxes. V. Tax: A payment imposed on a taxpayer by a government unit. V. Revenue: Incoming taxes, which are treated as income by the government. o Progressive Taxes The more you earn, the more you pay. Income tax is one example. V. Progressive Taxes: Takes a larger share of one’s income as the amount of income grows. o Regressive Taxes Sales tax is one example. people with lower income pay a higher percentage of their income on sales tax. V. Regressive Taxes: A smaller share of one’s income as the amount of income grows. o Proportional Taxes All people who own a property worth $100,000 in a community will pay the same regardless of one's income. V. Proportional Taxes: A tax for which the rate stays the same regardless of one’s income. o Other Taxes The Capital gains taxes, value-added taxes, tariffs, license and registration fees, user fees, and tolls. Luxury taxes are on items like yachts and private jets. ● How the Tax System Works Both individuals and businesses pay income taxes and must file tax returns every year. o The IRS What does it mean when they say “pay your fair share”? (INternal Revenue Service) is an agency of the U.S. Treasury. They collect taxes and enforce tax laws. Provides services to taxpayers. o The Power to Tax Power to levy goes to the U.S. Congress, constitution say “all bills for raising revenue shall originate in the House of Representatives” The president can raise or lower taxes. o Paying Your Fair Share The tax system is progressive. Tax rate increases as taxable income increases. Congress raises taxes when more revenue is needed, for example if we are in debt as a country. V. Tax Bracket: A tax rate is applied to an income range, or Tax Bracket. V. Voluntary Compliance: All citizens prepare and file tax returns on their own. V. Tax Evasion: Willful failure to pay taxes o An IRS Audit Checks the validity of information on a tax return and requires a response from the taxpayer. V. Audit: An Examination of income tax returns. 3.2: Filing a Tax Return ● Tax Terminology US citizens are required to file tax returns every year and pay their fair share of taxes. How do you know what taxpaying group your in? o Filing Status Your group is based on marital status as of the last day of the tax year. Single tax payer pay higher taxes than other. V. Filing Status: Describes your tax-filing group o Exemptions as a taxpayer, your automatically allowed one exemption for yourself unless someone else claims you as a dependent on his or her return. V. Exemption: An amount you may subtract from your income for each person who depends on your income to live o Gross Income Earned Income: money you earned from work Unearned Income: money you received from passive activity. V. Gross Income: All of the taxable income you receive during the year. ▪ Wages, Salaries, and Tips Imputed income is added to earnings when you receive a taxable benefit, such as use of a company car. When you earn tips on your job, you must report your tips to your employer. Tips are counted as part of your wage ▪ Interest Income Includes all taxable interest from banks etc. form 1099-INT is used for every investment that earned interest during that year. ▪ Dividend Income Dividends are money, stock, or other property that corporations pay to stockholders in return for their investment. ▪ Unemployment Compensation You will receive a 1099-G from for any unemployment compensation. ▪ Social Security Benefits 50-80% of social security payments are taxable, only if as a single taxpayer you earn $25,000 or if your a married taxpayer and your total income is $32,000 you will get a SSA-1099 form. ▪ Alimony and Child Support Money paid to support a former spouse is called alimony. Its taxable for whomever receives it and deductible (from gross income) for the person paying it. Money paid to support dependent children is child support, it is not taxable and it is not deductible. o Adjusted Gross Income Law allows you to subtract some types of spending money from gross income. “adjust” your account by subtracting things like IRAs, Student Loans, Alimony paid, and tuition fees. V. Adjusted Gross Income: Adjustments are subtracted from gross income to determine Adjusted Gross Income o Taxable Income gross income or adjusted gross income (which is minus any deductions or exemptions allowed in that tax year). V. Itemized Deductions: Expenses you can subtract from adjustable income to determine your taxable income. V. Tax Liability: Amount of total tax you owe on a years income. V. Taxable Income: After the standard deductions and exemptions are subtracted from adjusted gross income. V. Taxable Credit: A reduction of taxes owed o Who Must File and When? Taxpayer or accountant. End of tax year, before April 15th V. Exempt Status: Exempt positions are excluded from minimum wage, overtime regulations, and other rights and protections afforded nonexempt workers. Employers must pay a salary rather than an hourly wage for a position for it to be exempt. o Estimated Tax Received income for which taxes were not withheld. V. Estimated Tax: The amount of tax you estimate you will owe on income received without withholdings o Which Form to Use? The IRS Form 1040A is one of three forms you can use to file your federal income tax return. Form 1040A is a shorter version of the more detailed Form 1040, but is more complex than the simple 1040EZ form. o Where to Begin? Save ALL receipts or proof of payments, they will help with the accuracy of your tax return. o Tax Preparation Software A type of computer software designed to help individuals or companies prepare for and file income, corporate and similar tax returns. o Form 1040EZ ▪ Step 1: Enter Name, address, and social security number How do I know which form to fill out and how do I even start preparing for the end of my tax year? ▪ Step 2: Report Income ▪ Step 3: Compute Tax ▪ Step 4: Calculate refund or amount owed ▪ Step 5: Sign the return Summary(2-3 complete sentences): Taxpayers have Regressive taxes, progressive taxes, Proportional taxes, and other taxes. Some deductions are exemptions, wages, salaries, tips, Dividend Income, Unemployment Compensation, Social Security, Interest Income, and Alimony and Child Support.