Income and TaxesIncome and Taxes

So…So…

You graduated high school and college…You graduated high school and college… You achieved a degree…You achieved a degree… You have a solid resume…You have a solid resume… You rocked on your interview…You rocked on your interview… And now you have a job you LOVE!And now you have a job you LOVE! MONEY– MONEY – MONEY! MONEY– MONEY – MONEY!

Where Does My Money Go?Where Does My Money Go?

Almost 31% of an individual’s paycheck Almost 31% of an individual’s paycheck is deductedis deducted Taxes are the largest expense most Taxes are the largest expense most

individuals will haveindividuals will have

U.S. tax system operates on an ongoing U.S. tax system operates on an ongoing payment systempayment system

Purposes of TaxationPurposes of Taxation

TAX: TAX: a required payment to a local, a required payment to a local, state, or national government.state, or national government.

1.1. Fund public goods and services.Fund public goods and services.

2.2. Influence behavior.Influence behavior.

3.3. Stabilize the economy.Stabilize the economy.

4.4. Redistribute income.Redistribute income.

Kinds of TaxesKinds of Taxes Income tax:Income tax: incomeincome that you earn is that you earn is

subject to tax.subject to tax.

Social Security tax:Social Security tax: nation’s retirement nation’s retirement program; 6.2% of gross income.program; 6.2% of gross income.

Medicare tax: Medicare tax: nation’s health care nation’s health care program for elderly and disabled; 1.45% program for elderly and disabled; 1.45% of gross income.of gross income.

Kinds of TaxesKinds of Taxes

Sales tax:Sales tax: tax paid on the value of goods tax paid on the value of goods and services. (revenue for state govt.)and services. (revenue for state govt.)

Excise taxes:Excise taxes: included in the price paid included in the price paid by consumers. (ex: fuel)by consumers. (ex: fuel)

Kinds of TaxesKinds of Taxes

Progressive TaxesProgressive Taxes – Take a larger – Take a larger percentage of income from high income percentage of income from high income taxpayerstaxpayers Examples are State and Federal taxesExamples are State and Federal taxes

Regressive TaxesRegressive Taxes – As – As income rises, income rises, the taxes remain the same or decreasethe taxes remain the same or decrease Examples are Medicare, Social Security, Examples are Medicare, Social Security,

and state salesand state sales

Taxes continuedTaxes continued

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

Federal Revenue, 2002Federal Revenue, 2002

www.whitehouse.gov

Office of Management and Budget

2002

Income TaxesIncome Taxes

Your employer will Your employer will withholdwithhold, or take out, , or take out, income tax from every paycheck and income tax from every paycheck and send the money to the government.send the money to the government.

Who Pays Federal Income Who Pays Federal Income Tax?Tax?

Out of 127,000,000 filers in ’05Out of 127,000,000 filers in ’05 Top 1% ($285,424) = 33.71% Top 1% ($285,424) = 33.71% Top 5% ……………= 53.8%Top 5% ……………= 53.8% Top 10% …………..= 65.73%Top 10% …………..= 65.73%

Bottom 50% ($28,654) = 3.5%Bottom 50% ($28,654) = 3.5%

Info from Fall ’06 guest speaker Ken Patzius H & R BlockInfo from Fall ’06 guest speaker Ken Patzius H & R Block

WithholdingWithholding

The Government takes a portion out of The Government takes a portion out of each on of your paycheckseach on of your paychecks

Income TaxesIncome Taxes

But how much is withheld?But how much is withheld? Depends on:Depends on:

How much you earnHow much you earn Information you provide on Form W-4Information you provide on Form W-4

Form W-4Form W-4 YOU FILL IT OUT B-4 you start!YOU FILL IT OUT B-4 you start! Employees Withholding Allowance CertificateEmployees Withholding Allowance Certificate Personal InformationPersonal Information Exempt statusExempt status Allowances: factors that affect the amount of income Allowances: factors that affect the amount of income

tax withholding, the more allowances you claim, the tax withholding, the more allowances you claim, the less tax your employer will take out.less tax your employer will take out.

Who should pay more in taxes?Who should pay more in taxes? Single person making $50,000Single person making $50,000 Married couple with 4 kids $50,000Married couple with 4 kids $50,000

Form W-2Form W-2

““You get you W-2 when you are through”You get you W-2 when you are through” It is supposed to be sent out by Jan 31It is supposed to be sent out by Jan 31stst.. It is a final tally of what you made and It is a final tally of what you made and

what you paid.what you paid. Here’s what a W2 looks like.Here’s what a W2 looks like. You may have multiple W2s if you work You may have multiple W2s if you work

at different places.at different places.

It basically shows how much you made It basically shows how much you made and how much you paid!and how much you paid!

Form 1040 or 1040EZForm 1040 or 1040EZ

The end of the year tally.The end of the year tally. Did you pay too much or too little?Did you pay too much or too little? What happens if you paid too much?What happens if you paid too much?

REFUND!REFUND!

What happens if you didn’t pay enough?What happens if you didn’t pay enough? PAYMENT! PAYMENT!

Tax Time is Here!Tax Time is Here!

Must be filed by April 15Must be filed by April 15thth

What Do I Need?What Do I Need? Form W-2: Employer will send by Jan 31Form W-2: Employer will send by Jan 31stst. .

Shows total earnings for the year and amount Shows total earnings for the year and amount of taxes withheld.of taxes withheld.

Form 1099-INT: Bank will send. Shows the Form 1099-INT: Bank will send. Shows the earned interest on savings during the yearearned interest on savings during the year

IRS instruction booklets and forms.IRS instruction booklets and forms. Form 1040Form 1040 Form 1040AForm 1040A Form 1040EZForm 1040EZ At public libraries or onlineAt public libraries or online

Personal recordsPersonal records

What will I be asked?What will I be asked?

Status: single, married, divorced, separatedStatus: single, married, divorced, separated ExemptionsExemptions

DependentDependent: someone who is supported by a : someone who is supported by a taxpayer’s income.taxpayer’s income.

IncomeIncome Deductions: subtracted from incomeDeductions: subtracted from income

Itemized: amount actually spent (must use Form Itemized: amount actually spent (must use Form 1040)1040)

Standard: set amountStandard: set amount

What will I be asked?What will I be asked?

Taxable incomeTaxable income Tax owedTax owed Tax creditsTax credits

Subtracted directly from the amount of tax Subtracted directly from the amount of tax owed.owed.

Final calculationsFinal calculations Overpaid: refund!Overpaid: refund! Underpaid: send in $!Underpaid: send in $!

What happens if I What happens if I procrastinate?procrastinate?

You must submit your taxes by:You must submit your taxes by: Mailing them inMailing them in Filing them electronicallyFiling them electronically

IT MUST BE DONE BY: APRIL 15IT MUST BE DONE BY: APRIL 15THTH

If not, you must file for an If not, you must file for an extensionextension..