The “How” of Taxes

1. The “How” of Taxes Aim: How do we pay our taxes?

2. 5 “W’s” of Taxes • WHO- consumers, business and gov’t • WHAT- get taxes collected/paid • WHEN- April 15 you file for taxes, you also pay for taxes through FICA on payday OR pay sales and excise tax • WHERE- paychecks, stores, markets, mail/internet • WHY- to finance the public goods and other functions of gov’t

3. Where do our taxes go?

4. What if we’ve paid too much? • Tax refund- money returned to taxpayer by gov’t who paid in excess of their amount due (yearly)

5. HOW is it done? • Accountant: a person who files financial/tax reports and keeps/audits/inspects financial records on business or concerns • Individuals can also file their own taxes through websites or online databases (TURBO TAX, H&R taxes) • Tax return: filed tax form (also the money that comes back after taxes are filed)

6. What “individuals” are important on a tax return? • Dependent: a person who is financially supported by another person (children ,spouse) • Head of household: filing status by a married/unmarried person who maintains a household for a dependent and provides more than 50% of dependent’s financial support

7. What is to be filed?

8. Withholding Forms • Sent directly to gov’t for partial payment of taxes • W-4: Prepared by employee for employer indicating his/her allowances (exemptions) and SS# • W-2: tax form prepared by employer and given to employee to be filed with his/her tax forms • Lists wages earned during the year • Shows federal/state taxes withheld • Social Security Info

9. Income Tax Forms • 1099-INT: reports interest income on savings account, you will receive from bank • 1099-DIV: reports dividends on stocks and other financial products that receive interest • 1040EZ: for single/married taxpayers filing jointly, without dependents, taxable income under $50,000 and no itemized deductions • 1040A: similar to EZ but has deductions (IRA contributions, student loan interest, higher education tuition and fees) • 1040: taxpayer forms for those that do not qualify for EZ or As

10. Where does one obtain tax forms? • Online! www.irs.gov • Through tax databases (TurboTax) • Most communities locations (post office, library, senior centers, gov’t buildings) • Tax forms also mailed out to people each year or handed out by employer (by January 31st!)

11. Filling out your forms • Deductions- expenses subtracted from adjusted gross income when calculating taxable income • Exemptions- reduction of taxable income for a specific reason (IRS determined) • Usually for dependents • Itemized deductions- incurred expense that reduces individual’s tax income • Mortgage interest, state/local taxes, charitable gifts,

12. When might someone claim 0 (zero) exemptions? • A high school student works part-time as claimed as a dependent by parent • A married man whose wife has claimed him as an exemption • A person who has other income sources taxed at lower rates (or not at all)

13. Simulation Station: Monica Lindo • http://apps.irs.gov/app/understandingTaxes/index.jsp • Filing Status (SINGLE) • Claimed as a dependent (YES, parents) • How much did she earn ($4,821) • How much tax is withheld ($47)

14. There are only two things certain in life: • Death • Taxes

15. Taxes, Taxes Aim: How fair is taxation in the U.S.?

16. Why tax? • Provide a way for federal, state and local gov’t to collect $ for public goods • Public goods- goods/services provided by the gov’t and not restricted by person’s ability/inability to pay for them • library, fire department, local parks, roads, etc

17. Tax bases (3 types) • Income (what is earned) • Salaries, wages, tips, commissions, interest • Wealth (what is owned) • Business, real estate, property, inheritance (upon a death of individual) • Consumption (what one uses) • Levied at the same rate for EVERYONE • Clothes, CD, cars, computers, etc

18. Tax Structures (3 types) • Progressive- taxes where higher income individuals pay a higher percentage • Individual income tax • Regressive- tax that takes a larger percentage of income for lower income individuals • City tax • Proportional tax (flat tax)- all tax levels are paying the same rate

19. Where does the federal gov’t get most of its revenue? • Social Security • Many people argue today that Social Security is not being used for it’s TRUE purposes, and that’s why it’s running out!

20. What are OTHER Types of taxes • Excise tax- federal/state tax imposed on manufacture & distribution of some consumer goods • Tariffs- tax on imported goods/services • Revenue sharing- a share of tax funds, provided by federal to state gov’ts OR state gov’ts to local gov’ts

21. Who oversees our taxes? • The IRS- responsible for administering & enforcing revenue laws (like taxes, pension, etc) that are set by our U.S. Treasury department

22. What types of things are important when filing taxes? • Itemization- listing deductible personal expenses during the year • Taxable income- amount of income subject to taxes by subtracting exemptions and deductions from adjusted gross income • EX: alimony, unreimbursed business expenses, capital losses, IRA contributions • Withholding- amt of employees’ income that employer sends directly to federal, state, local tax authorities as partial payment of individual’s yearly tax liability • You fill out a W-4 when you start a new job for this reason!

23. What is the difference between gross income and adjusted gross income? • Gross income: all income, before taxes and deductions • adjusted gross income equals your gross income minus your adjustments to income. (above-the-line deductions) • Example of adjustments: deductible traditional IRA contributions, alimony paid, health insurance if you're self-employed and student loan interest

24. Questions to consider • How would you define fairness/unfairness of a proportional tax (ex/ 16%) on taxable income? • $28,000? • $44,000? • $150,000? • $500,000? • Would you identify a tax on gasoline as “regressive”? Why/why not? • Can you think of any more regressive taxes?

25. What do your taxes pay for? • With a partner, create a chart that has FEDERAL, STATE and LOCAL as headers • Develop charts that list gov’t jobs/careers that fall into each category (and that your taxes pay for) • After, just write a sentence or two below chart to discuss what would happen in your community if the gov’t didn’t provide public goods/services