Money Counts: A Financial Literacy Series

1. Money Counts:A Financial Literacy Series Wage and Tax Fundamentals 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 1-814-863-7870 Dr. Daad Rizk MoneyCounts: A Financial Literacy Series 301 Outreach Building University Park, PA 16802 dar39@psu.edu 1-(814)-863-0214

2. 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.

3. 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

4. Taxes • Internal Revenue Service (IRS) – Collects federal taxes, issues regulations, and enforces tax laws written by the United States Congress

5. 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

6. 2013 Federal Tax Rates-Single

7. 2013 Federal Tax Rates-Married

8. 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

9. Key Tax Terms • TaxCredits Itemize Deductions * Foreign Tax • Standard Deduction * Child and Dependent Care • Exemptions * Education • Taxable Income * Retirement Saver’s * Taxable Income • Other Taxes • Self-employment tax • Payments • Federal tax withheld • Earned Income Credit

11. W4 – Employee’s Withholding Allowance Certificate

12. 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 equals fewer taxes withheld on the w-4 from paycheck • Action Item: Review w-4 each year. Adjust withholdings as needed so only the needed amount of tax is withheld.

13. irs.gov Withholding Calculator • http://www.irs.gov/Individuals/IRS-Withholding-Calculator

14. Paycheck – Stub Sample

15. Gross to Net Income

16. Wage and Tax Statement

17. 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

18. 1099-Miscellaneous Income

19. 1099-Interest Income

20. 1099 Dividends & Distributions

21. 1098 Mortgage Interest Statement

22. 1098-T Tuition Statement

23. 1098-E Student Loan Interest

24. Poll #5Which statement best describes how you get taxes prepared? I…. • Use VITA-volunteer income tax assistance or a similar free service • Prepare my own federal/state tax returns using a computer program (i.e., Turbo tax ) • Prepare my own federal/state tax returns by hand (paper forms or printable pdfs from irs.gov) • Hire a professional to prepare my federal and state taxes each year

25. 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

26. Completing a Tax Return

27. Think! • Basic addition and subtraction problem! • Income (+) • Adjusted Gross Income (-) • Taxes and Credits (+ and -) • Other Taxes (+) • Payments (+) • Overpayment=refund • Underpayment=Amount you Owe

28. Step 1—List Personal Information

29. Step 2—Add income

30. Step 3- Subtract Adjustments

31. Step 4-Subtract deductions, exemptions. Figure tax on taxable income and subtract credits.

32. Step 5-Add/Total other taxes Step 6- Add payments made and refundable tax credits

33. Step 7- Finishing Details

34. Schedule A

35. Schedule A

36. Schedule A-continued

37. 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

38. Tax Tips for College Students • If you have earned income, file even if not required to get taxes withheld back and/or Earned Income Tax Credit. • Create a tax folder at the beginning of each year. Store tax related documents in the folder. • Practice doing your current return using a paper form. • Understand your family situation. Can your parents claim you on their return? Confirm this before filing. • Generally, state taxes are paid in the state earned. • Use the Form 1040 exclusively. Line number stays the same.

39. Tax Tips for College Students • Understand the education credits that apply to you. • If your grants and scholarships covered your tuition and fees, you cannot take the education credits. Why? You had no out of pocket costs. • Self-employed or have taxable fellowships—send in estimated quarterly payments (see Form 1040-ES). • 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. • See IRS apps and topical videos. • Lesson—Understanding Taxes

40. Additional Resources

41. Questions and Comments? Thank you for participating! Dr. Daad Rizk MoneyCounts: A Financial Literacy Series 301 Outreach Building University Park, PA 16802 dar39@psu.edu 1-(814)-863-0214 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)