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Lesson 12

Lesson 12. Paying Your Taxes. Key Terms. 1040EZ 1099INT 1099MISC FICA Gross Income Income Tax Standard Deduction. Tax Audit Tax Deduction Tax Exemption Tax Refund Tax Table W-2 W-4. Taxes. Money taken from your paycheck by the government to pay for government services

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Lesson 12

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  1. Lesson 12 Paying Your Taxes

  2. Key Terms • 1040EZ • 1099INT • 1099MISC • FICA • Gross Income • Income Tax • Standard Deduction • Tax Audit • Tax Deduction • Tax Exemption • Tax Refund • Tax Table • W-2 • W-4

  3. Taxes • Money taken from your paycheck by the government to pay for government services • Military • Roads • Other • Entitlements • Unemployment • Welfare • Other • Types of taxes • Payroll Taxes • Income Tax

  4. What Does the Federal Government Use Taxes For?

  5. What Are Payroll Taxes? • Money taken from your paycheck to pay for services you may directly receive (now or in the future) • CalledFederal Insurance Contributions Act (FICA) Taxes • Since you may receive direct benefit from these services, it is a form of insurance • FICA taxes • Social Security (FICA-SS) • Money you will receive when you reach retirement (currently age 65) • Amount of benefit you will receive is capped, so you only pay FICA-SS on a maximum of $110,100 (in 2012) of earnings • Current rate: 6.2% of all earnings below $110,100

  6. Medicare • Pays for health care for those individuals who qualify for it • Intended primarily for retirees over age 65 • Current tax rate: 1.45% of all earnings • Your employer is required to match your FICA contributions • You pay 7.65% of your income in FICA contributions • Your employer has to provide an identical amount from its earnings to the government • The cost of your labor to an employer is more than just the wage you earn!

  7. What Is Income Tax? • Tax the government collects on each income earner to use for government services • Taxes withheld from each of your paychecks and sent by your employer to the Internal Revenue Service (IRS) • Government agency in charge of collecting taxes • Amount withheld varies based on tax allowances claimed on W-4

  8. A Note on Tax Allowances • When you get a job, you will fill out a W-4 form claiming how many allowances you want on your income tax withholding • Can get 1 allowance for each member of your household • Additional allowance possible • The number of allowances will determine how much is withheld from each paycheck • The more allowances, the less withheld from your paycheck • IRS publishes withholding tables telling employers how much to withhold from your paycheck based on your earnings & number of allowances • Intent is to minimize the amount you may have to pay in taxes at the end of the year when you file your tax return

  9. US Federal Tax System • Progressive income tax • The more you make, the larger percentage of your income you pay in income tax • Tax rate determined by tax brackets • Different parts of your taxable income are taxed at different rates

  10. Taxable Income • Gross Income (total of all income earned through work, investments, etc.) minus allowed tax deductions • Tax deduction – something the IRS allows you to deduct off of your income • Tax deductions reduce your taxable income

  11. Types of Tax Deductions • Standard Deduction – flat amount set annually by the IRS • $9,750 for tax year 2012 • Itemized deductions – sum total of all allowed tax deductions (charitable contributions, property taxes, mortgage interest, etc.) • Can only use one or the other, not both • Usually use larger amount of the two • Cannot itemize deductions if using 1040EZ

  12. Example of Taxable Income

  13. Tax Brackets2012 Single Adult Source: www.moneychimp.com

  14. Example

  15. When Do I Pay My Taxes? • Employer pays your taxes to the IRS throughout year • After end of the calendar year, you must determine if you have paid enough, too little, or too much • Too little: must pay more • Too much: you will get a refund

  16. You must file a tax return every year with the IRS showing • How much you earned • How much you paid in income tax • How much you should have paid in income tax and • Whether you still owe more or should get a refund • Deadline: April 15 (or April 16 or 17 if April 15 is on a weekend) • Do tax return as early as possible to determine if getting refund or owe money • If you owe money, this gives you more time to come up with the money you owe • File as early as possible if getting refund

  17. What Do I Need To File My Tax Return? • Appropriate 1040 form (1040, 1040A, 1040EZ) • W-2s from all employers from previous year • 1099-INTs from all interest-earning accounts • 1099-DIVs from all investments for which you were paid dividends • 1099-MISC for all other sources of income not covered by previous forms • You should receive all forms by the end of January each year • Receipts/documentation for deductions (if itemizing) • Not needed if using 1040EZ

  18. 1040, 1040A, 1040EZ: Which One To Use? • 1040EZ • Taxable income below $100,000 • Filing status Single or Married Filing Jointly • Under age 65 and not blind • Not claiming any dependents • Interest income $1,500 or less • Not claiming any additional deductions for real estate taxes, taxes on purchase of new motor vehicle, or disaster losses • Most appropriate form for teenagers and young adults • 1040A & 1040 • For more complicated tax situations • Check with IRS or accountant to see which form you need to use

  19. Steps To Filling Out 1040EZ • Step 1: Determine Gross Income • Add up income on all W-2s and 1099s • There are separate lines on 1040EZ for this • Step 2: Determine Taxable Income • Figure out Standard Deduction (will be less than normal if you are claimed on someone else’s tax return) • Subtract Standard Deduction from Gross Income • Step 3: Determine How Much You Paid in Taxes • Add up all taxes paid shown on W-2s and 1099s

  20. Step 4: Determine How Much You Should Have Paid in Taxes • Based on your Taxable Income (the smaller amount), look up your tax liability in the tax tables in the 1040EZ Instructions • Step 5: Determine Your Refund or Amount You Owe • If the amount you paid is more than the amount you should have paid, you will get a refund • If the amount you paid is less than the amount you should have paid, you will owe the IRS money

  21. How Do I File My Taxes • Mail in Paper Copy of All Tax Documents • Takes longer for IRS to process • Delays getting your refund if you are due one • Online • May be able to file directly from IRS Web site • Can use tax software (TurboTax, TaxCut, etc.) to file electronically • Normally pay fee to do this

  22. How Can I Receive My Refund? • Paper Check Mailed to You • Takes longer to receive refund • Direct Deposit • Quickest way to receive refund

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