Money Counts:
A Financial Literacy Series
Wage and Tax Fundamentals
Dr. Cathy F. Bowen
Dr. Daad Rizk
Professor and Consumer Issues
Specialist
Department of Agricultural Economics,
Sociology and Education
8B Ferguson Building
University Park, PA 16803
cbowen@psu.edu
1-814-863-7870
MoneyCounts: A Financial
Literacy Series
301 Outreach Building
University Park, PA 16802
dar39@psu.edu
1-(814)-863-0214
Learning Objectives
• Provide an overview of the federal taxing system
• Describe tax withholding and wage statements
• Review forms W4, W2
• Review a paycheck stub
•
Calculate taxes and net income
• Describe the completion of the Form 1040 using key documents
common for many adults.
Overview of the Federal Taxing System
• Pay as you earn or pay as you go system
• Progressive tax-the more you earn the higher your tax
bill (10% - 39.6% tax rates)
• Tax language—terms to know
Taxes
• Internal Revenue Service (IRS) – Collects federal taxes,
issues regulations, and enforces tax laws written by the
United States Congress
Taxes
• Taxes – Compulsory charges imposed on citizens by
local, state, and federal governments
• Used to provide public goods and services
– Largest amount of taxes a person pays is on his/her
income
2013 Federal Tax Rates-Single
If Taxable Income Is
Then the Gross Tax Payable Is:
Over
But Not Over
Amount
$0
$8,925
--------10% of taxable income----------
8,925
36,250
$892.50
15%
$8,925
36,250
87,850
4,991.25
25%
36,250
87,850
183,250
17,891.25
28%
87,850
183,250
398,350
44,603.25
33%
183,250
398,350
400,000
115,586.25
35%
398,350
400,000
-----------
116,163.75
39.6%
400,000
Plus
(percent)
Of the -Amount
Over
2013 Federal Tax Rates-Married
If Taxable Income Is
Then the Gross Tax Payable Is:
Over
But Not Over
Amount
$0
17,850
--------10% of taxable income----------
17,850
72,500
1,785.00
15%
17,850
72,500
146,400
9,982.50
25%
72,500
146,400
223,050
28,457.50
28%
146,400
223,050
398,350
49,919.50
33%
223,050
398,350
450,000
107,768.00
35%
398,350
450,000
-----------
125,846.00
39.6%
450,000
Plus
(percent)
Of the -Amount
Over
Key Tax Terms
• Income
–
–
–
–
–
Earned
Unearned
Tax exempt interest
Taxable interest
Dividends (ordinary and qualified)
• Adjusted Gross Income (AGI)
–
–
–
–
–
Adjustments (subtract from income)
Educator expenses
Self-employed tax
Student loan interest
Tuition and fees
Key Tax Terms
• Tax
Itemize Deductions
– Standard Deduction
– Exemptions
– Taxable Income
• Other Taxes
– Self-employment tax
• Payments
– Federal tax withheld
– Earned Income Credit
Credits
* Foreign Tax
* Child and Dependent Care
* Education
* Retirement Saver’s
* Taxable Income
W4 – Employee’s Withholding Allowance Certificate
W4 – Employee’s Withholding Allowance Certificate
• Employee completes the certificate and files with employer at the
beginning of employment (Human Resources) and after life events.
• Employer uses the information on w-4 form to determine how much tax to
withhold each pay period using the “pay-as-you-go” tax withholding
method
• Rules of Thumb: The higher the number of withholdings, the less tax
withheld from your paycheck.
More withholdings
on the w-4
equals
fewer taxes withheld
from paycheck
• Action Item: Review w-4 each year. Adjust withholdings as needed so
only the needed amount of tax is withheld.
irs.gov Withholding Calculator
• http://www.irs.gov/Individuals/IRS-Withholding-Calculator
Paycheck – Stub Sample
PAY DATE
GROSS PAY
NET PAY
TAXING AUTHORITY
_______________________________________________________________________________________________________
07/31/2013
$5,000.00
$3,357.52
PATTON TWP
PAY PERIOD DATES
MARITAL STATUS
WITHHOLDING ALLOWANCE
FEDERAL ADD ON
_________________________________________________________________________________________________________
07/01/2013 TO 07/31/2013
Single
2
$0.00
BUDGET
RATE
SHIFT/OC
REG HRS
OT HRS HOL HRS
HOL OT
AMOUNT
___________________________________________________________________________________________
0504503 UP $0.00
0.0
0.0
0.0
0.0
0.0
$5,000.00
TAXABLE SALARY
TAX WITHHELD
_________________________________________________________________________________________________________
FEDERAL
FICA
MEDICARE
STATE
LOCAL
Current
YTD
$4,560.40
$4,872.90
$4,872.90
$4,872.90
$4,872.90
$27,128.03
$28,987.40
$28,987.40
$28,987.40
$28,987.40
Current
FEDERAL
$592.55
FICA
$302.12
MEDICARE
$70.66
STATE
$149.60
LOCAL
$70.66
UNEMPLOYMENT $3.50
LST
$4.33
YTD
$3,659.21
$1,797.22
$420.33
$889.92
$420.33
$26.00
EMPLOYEE DEDUCTIONS / REDUCTIONS
_________________________________________________________________________________
Current
YTD
Current
YTD
RETIREMENT
MEDICAL
VISION
$312.50
$84.62
$0.78
$1,859.37
LTD
DENTAL
PARKING
$9.46
$5.70
$36.00
Gross to Net Income
GROSS SALARY
MEDICAL
VISION
DENTAL
PARKING
5,000.00
(84.62)
(0.78)
(5.70)
(36.00)
TAXABLE INCOME
FICA
MEDICARE
STATE
LOCAL
UNEMPLOYMENT
LST
4,872.90
RETIREMENT
TAXABLE INCOME
FEDERAL TAX
(312.50)
4,560.40
LTD
NET INCOME
GROSS
5,000.00
100.00%
(84.62)
(0.78)
(5.70)
(36.00)
(302.12)
(70.66)
(149.60)
(70.66)
(3.50)
(4.33)
-6.20%
-1.45%
-3.07%
-1.45%
-0.07%
-0.09%
(312.50)
(592.55)
-12.99%
(9.46)
3,357.52
NET
-32.85%
Wage and Tax Statement
1099 and 1098
• 1099 Misc – Non-employee independent contractor
services, rental income, etc.,
• 1099 INT – Interest income on investment accounts,
saving bank account, etc.,
• 1098 – Mortgage Interest Statement, mortgage points,
mortgage insurance premiums
• 1098 T – Tuition Statement
• 1098 E – Student Loan Interest Statement
1099-Miscellaneous Income
1099-Interest Income
1099 Dividends & Distributions
1098 Mortgage Interest Statement
1098-T Tuition Statement
1098-E Student Loan Interest
Poll #5
Which statement best describes how you get taxes prepared?
I….
1. Use VITA-volunteer income tax assistance or a similar free
service
2. Prepare my own federal/state tax returns using a computer
program (i.e., Turbo tax )
3. Prepare my own federal/state tax returns by hand (paper
forms or printable pdfs from irs.gov)
4. Hire a professional to prepare my federal and state taxes each
year
Rule of Thumb
Use only Form 1040
• Changes are minimal from year to year.
• Used for most complicated returns.
• Decreases chance you will overlook a tax benefit.
• You learn the form
Completing a Tax Return
Think!
• Basic addition and subtraction problem!
•
•
•
•
•
•
•
Income (+)
Adjusted Gross Income (-)
Taxes and Credits (+ and -)
Other Taxes (+)
Payments (+)
Overpayment=refund
Underpayment=Amount you Owe
Step 1—List Personal Information
Step 2—Add income
Step 3- Subtract Adjustments
Step 4-Subtract deductions, exemptions. Figure tax
on taxable income and subtract credits.
Step 5-Add/Total other taxes
Step 6- Add payments made and refundable tax credits
Step 7- Finishing Details
Schedule A
Schedule A
Schedule A-continued
Schedule A (itemized deductions)
• Allowable deductions for taxpayers
– Medical and dental expenses
–
–
–
–
–
–
Taxes you paid
Interest you paid
Gifts to charity
Casualty and theft losses
Job expenses
Other miscellaneous deductions
Tax Tips for College Students
1. If you have earned income, file even if not required to get
taxes withheld back and/or Earned Income Tax Credit.
2. Create a tax folder at the beginning of each year. Store tax
related documents in the folder.
3. Practice doing your current return using a paper form.
4. Understand your family situation. Can your parents claim
you on their return? Confirm this before filing.
5. Generally, state taxes are paid in the state earned.
6. Use the Form 1040 exclusively. Line number stays the same.
Tax Tips for College Students
7. Understand the education credits that apply to you.
8. If your grants and scholarships covered your tuition and fees,
you cannot take the education credits. Why? You had no out
of pocket costs.
9. Self-employed or have taxable fellowships—send in
estimated quarterly payments (see Form 1040-ES).
10. Avoid underpayment penalty. Pay 90% of current filing year
tax bill, 100% of tax shown on prior year bill. Less than
$1000 owed = no penalty.
11. See IRS apps and topical videos.
12. Lesson—Understanding Taxes
Additional Resources
To learn more about federal taxes
Explore IRS developed videos, videos with sign language, multilanguage videos, podcasts on taxes
Understanding Taxes
To Get Help Completing your 2013 Tax Return @ University Park
Penn State VITA—University Park
VITA is available for U. S. Citizen or resident alien with a household income of $51,500 or less for the
2013 Tax Year.
To Find VITA sites nationwide (Check irs.gov site)
(Income limitations for most sites in 2013 is $51,500.
Pennsylvania—Resources for Individual Taxpayers
PA Department http://apps.irs.gov/app/understandingTaxes/of Revenue
Commonly asked questions about Pennsylvania Tax Returns
Questions and Comments?
Thank you for participating!
Dr. Cathy F. Bowen
Professor and Consumer Issues Specialist
Department of Agricultural Economics,
Sociology and Education
8B Ferguson Building
University Park, PA 16803
cbowen@psu.edu
814-863-7870 (o)
Dr. Daad Rizk
MoneyCounts: A Financial
Literacy Series
301 Outreach Building
University Park, PA 16802
dar39@psu.edu
1-(814)-863-0214