Take Charge

Ability To Pay – a concept of tax fairness that
people with different amounts of wealth or
different amounts of income should pay
taxes at different rates
 Personal Assets include houses, cars, stocks,
bonds, and savings accounts
 Income includes wages, interest and dividends

Benefits Received – a concept of tax fairness
that people should pay taxes in proportion to
the benefits they receive from government
goods and services
 Social Security
 National Defense
 Highways

Direct Tax – a tax that cannot be shifted to
others
 Federal Income Tax – 1040 EZ
 State Income Tax
 Indirect Tax – a tax that can be shifted to others
 Business Property Tax

Excise Tax – a tax collected on the sale of
particular goods and services, also called sin
tax (certain percentage of the price)
 Alcohol
 Tobacco
 Firearms

Payroll Taxes – taxes collected from
employers and employees to finance specific
programs; levied on earned income
 Unemployment Insurance
 Workers Compensation
 Social Security
 Medicare Insurance

Progressive Tax – one that imposes a higher
percentage rate of taxation on persons with
high incomes that on those with low incomes
 $18,000 income is taxed 15% compared to
$45,000 income is taxed 23%
 Federal Income Tax is an example

Proportional Tax – tax imposing the same
percentage rate of taxation on everyone,
regardless of income
 $18,000 income AND $45,000 income taxed 6%
 Local Property Tax is an example

Regressive Tax – tax imposing a higher
percentage rate of taxation on low incomes
than on high incomes
 $18,000 income purchases $9,000 on necessities
$9,000 X 6.5% = $585 / $18,000 = 3.25%
 $45,000 income purchases $9,000 on necessities
$9,000 X 6.5% = $585 / $45,000 = 1.3%
 State and Local Sales Tax is an example

W-4 Form (Employee’s Withholding
Allowance Certificate)– a form that helps the
employer determine how much to withhold
from an employee’s paycheck

W-2 Form – the form your employer sends to
you and the IRS (Internal Revenue Service) at
the end of the year that reports your annual
wages, taxes withheld, and other information

Earned Income – includes wages, salaries, tips,
and net earnings from self-employment
 Tips from a restaurant
 Owning your own business
 Unearned Income – income a person receives from
certain bank accounts or from lending money to
someone else
 Interest earned of Savings Accounts
 Dividends received off of stocks

Dividends – a corporation’s distributions to
its shareholders from its earnings and profits

Individual Retirement Account – a special
retirement planning account for individuals,
all or part of the contribution in a tax deferred
savings account may be deductible from
current taxes, depending on the individual’s
income and coverage by an employersponsored qualified retirement plan (like a
401-k)
 Withdrawals are taxed as income

Gross Income – money, goods, and property
you received that must be reported on a tax
return and may be included in taxable income

Adjusted Gross Income (AGI) – total income
reduced by certain deductions such as for an
IRA or student loan interest
 Earned Income
 Unearned Income

Taxable Income – the income on which tax is
figured
 Wages
 Dividends
 Assets sold (real-estate or car)
 Required by law to pay Capital Gains Tax
▪ Contractor builds a house and lives in it for 2 years
instead of selling the house after completion will not
have to pay Capital Gains Tax

Tax Credits – a direct reduction of tax owed
 Child Tax Credit ($1,000 for each child under age 15
 Higher Education Credit (full time status)
 Mortgage Interest Credit
 Renewable Energy Credit
 Retirement Income Credit

Income Tax – Taxes on income, both earned
and unearned income
 Earned – salaries, wages, tips, commissions
 Unearned – interest and dividends

1040 EZ – the easiest federal income tax form
that will be used to file your annual tax return
 May be used if unmarried / married
 Have no dependents
 Maximum of $50,000 Earned and Unearned Income
 Unearned Income maximum of $1,500
▪ $50-100 Attorney Fee for simple form 1040EZ
▪ $350-$500 Attorney Fee for complex form 1040A / 1040

Standard Deduction – an amount provided by
law and based on filing status, age, blindness,
and dependency that taxpayers can deduct
from their adjusted gross income (AGI) before
tax is determined
 Single – $6,200
 Married Filing Jointly / Qualified Widower – $12,400
 Married Filing Separately – $6,200
 Head-Of-Household – $8,950

Dependent – a person who relies on someone
else for support, a taxpayer may claim an
exemption for a dependent if certain conditions
are met (dependency tests), taxpayers cannot
claim themselves or their spouses as
dependents
 Any child under age 19 living at home

Exemption (Personal or Dependency) –
amount that taxpayers can claim for
themselves, their spouses, and eligible
dependents, the total is subtracted from
Adjusted Gross Income (AGI) before tax is
figured on the remaining income
 Federal Exemption – $3,900

Earned Income Credit – a credit that can be
paid to low-income workers, even if no income
tax was withheld from the worker’s pay, to
receive the credit a taxpayer must file a tax
return

Tax Liability – the amount of tax that must be
paid, taxpayers pay their federal income tax
liability through withholding and any payments
beyond estimated income
 $4,000 Income / $403 Federal Tax
 $14,000 Income / 1,669 Federal Tax
 $32,000 Income / 4,369 Federal Tax

Voluntary Compliance – a system of
compliance that relies on individual citizens
 Report income freely and voluntarily
 Calculate tax liability correctly
 File a tax return on time (April 15th)

Withholding (Pay-As-You-Go) – money that
employers withhold from an employee’s
paychecks that goes to pay federal and state
income taxes
 Employers use W-4 form to figure this
 Employers issue W-2 at the end of the year

File A Return – to mail or otherwise transmit to
an IRS service center the taxpayer’s
information on returns
 Filed on paper form
 Filed electronically (e-file)
 Filed by telephone (tele-file)

Filing Status – based on a taxpayer’s marital
status and other factors
 Rate taxpayer will be assessed
 Tax bracket taxpayer will be assigned

Exempt (From Withholding) – free from
withholding of federal or state income tax,
must meet certain income, tax liability, and
dependency criteria
 Taxpayer must still pay Social Security