Chapter
7
Federal Income Tax
7.1 Our Tax System
7.2 Filing Tax Returns
© 2010 South-Western, Cengage Learning
Purpose of Taxes
In a free enterprise system such as ours,
the government collects money from
citizens and businesses in the form of
taxes.
These incoming funds to the government
are called revenue.
The government spends the revenues
received according to priorities set by
Congress.
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As income
increases…
Progressive
taxes take
a larger
share
TAX RATE
INCOME
Progressive Taxes
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INCOME
Regressive Taxes
As income
increases…
Regressive
taxes take a
smaller
share
TAX RATE
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INCOME
Proportional Taxes
As income
increases…
Proportional
taxes
remain at a
constant
rate
TAX RATE FLAT
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Components of the Tax System
The power of The Internal Revenue
System (IRS) ---To collect taxes, and
enforce tax laws
Paying your fair share
Our income tax system is based on
voluntary compliance---meaning???
It is solely the individuals
responsibility to prepare, file,
and pay taxes.
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Components of the Tax System
Failure to pay taxes
Failure to do so can result in a penalty.
Penalties for not paying taxes could be interest
charges on the taxes owed plus a possible fine.
Willful failure to pay taxes is called tax
evasion.
Punishable by a fine, imprisonment, or both
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An IRS Audit
Every year, the IRS calls millions of
taxpayers for an audit, which is an
examination of their tax returns.
NEVER will they email or call and ask
you your name and social security
number!!! **Possible scam
Chapter 7
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Define basic tax terminology.
FILING TAX RETURNS
Chapter 7
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Filing Status
Filing status describes your tax-filing
group.
You must mark one of the following as
your filing status on your tax form:
Single person (not married)
Married person filing a joint return
Married person filing a separate return
“Head of household”
Qualifying widow(er)
© 2010 South-Western, Cengage Learning
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SLIDE 10
Exemptions
An exemption is an amount you may
subtract from your income for each
person who depends on your income to
live.
Each exemption reduces your taxable
income and thus your total tax.
Chapter 7
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Gross Income
Just like we have Gross Pay before
deductions(Fed. Income SS, and
Medicare taxes) we have Gross
Income, before adjustments,
deductions and exemptions.
Gross income is all the taxable income
you receive.
 Common Types of Income (some are not taxable)
 Wages, salaries, and tips
 Interest income
 Dividend income
 Unemployment compensation
 Social security benefits
 Child support
 Alimony
© 2010 South-Western, Cengage Learning
For details go to
page 142 &143 in
text book
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Adjusted Gross Income
 The law allows you to subtract some types of
spending from gross income.
These adjustments are subtracted from
gross income to determine adjusted gross
income.
Adjustments reduce income that is subject to
tax
You will be asked for your AGI whenever
you borrow money.
Chapter 7
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Adjusted Gross Income
Gross income
– Adjustments
Adjusted gross income
Chapter 7
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Taxable Income
Gross income
– Adjustments
Adjusted gross income
– Deductions
– Exemptions
Taxable income
Taxable income is the income on which you will pay tax.
Chapter 7
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Deductions
 Itemize deductions
 Examples include:
 Medical and dental expenses beyond a specified percentage of
your income
 State and local income taxes
 Property taxes
 Home mortgage interest
 Gifts to charity
 USUALLY “older “people
 Standard deduction
 If you do not have many deductions, your tax may
be less if you take the standard deduction.
 USUALLY “younger” less complicated finances.
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Tax Credits
 A tax credit is an amount subtracted directly
from the tax owed.
 The government allows tax credits for certain
education expenses, child-care expenses, and
other reasons from time to time.
 Usually special line on tax form (ex. Katrina)
 What others????
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Preparing Your Income Tax Return
Who must file?
When to file?
Which form to use?
Where to begin?
Filing electronically
Tax preparation software
Chapter 7
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SLIDE 18
Bring textbook to class
Monday to look at 1040EZ,
1040A, 1040
Chapter 7
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