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Taxes and Taxation

Take Charge. Taxes and Taxation. Taxation Principles. 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

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Taxes and Taxation

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  1. Take Charge Taxes and Taxation

  2. Taxation Principles • 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

  3. Taxation Principles • 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

  4. Types of Taxes • 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

  5. Types of Taxes • 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

  6. Types of Taxes • Payroll Taxes – taxes collected from employers and employees to finance specific programs; levied on earned income • Unemployment Insurance • Workers Compensation • Social Security • Medicare Insurance

  7. Categories of Tax Structure • 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

  8. Categories of Tax Structure • 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

  9. Categories of Tax Structure • 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

  10. Tax Forms • 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

  11. Tax Incomes • 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

  12. Unearned Income • Dividends – a corporation’s distributions to its shareholders from its earnings and profits

  13. Types of Accounts • 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 employer-sponsored qualified retirement plan (like a 401-k) • Withdrawals are taxed as income

  14. Tax 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 Incom

  15. Tax 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

  16. Tax Income • 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

  17. Tax Forms • Income Tax – Taxes on income, both earned and unearned income • Earned – salaries, wages, tips, commissions • Unearned – interest and dividends

  18. Tax Forms • 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

  19. Standard Deduction • 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 – $6,100 • Married Filing Jointly / Qualified Widower – $12,200 • Married Filing Separately – $6,100 • Head-Of-Household – $8,950

  20. Dependent • 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

  21. Exemption Status • 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

  22. Tax Credits • 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

  23. Liability • 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

  24. Compliance • 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)

  25. Withholding • 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

  26. Filing a Tax Form • 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)

  27. Filing a Tax Form • Filing Status –based on a taxpayer’s marital status and other factors • Rate taxpayer will be assessed • Tax bracket taxpayer will be assigned

  28. Filing a Tax Form • 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

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