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Income and Taxes

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									Income and Taxes
Why are taxes so important?
• Allows governments to provide services
  to citizens
  – Medicare and Medicaid
  – Military and police & fire protection
  – National debt
  – Public schools and libraries
  – Road Maintenance
  – Parks and recreation
  – Health and food inspections for our safety
Effective Tax Planning
• Helps you have more money left over
  after paying for taxes and living expenses
  – You can find out how current laws and
    regulations affect you
  – You will be able to maintain complete and
    accurate tax records
  – You will be able to minimize your tax liability
     • Tax Liability: total amount of taxes owed
Types of Taxes
• Taxes on Purchases
  – Sales tax on everyday consumer products
  – Excise tax is collected on specific goods and
    services (gasoline, air travel, telephone
    service)
• Taxes on Property
  – Real estate tax is a major source of income
    for local governments and is based on value
    of land and buildings
  – Property tax is based on the value of items
    such as cars and boats
Types of Taxes (cont.)
• Taxes on Wealth
  – Estate tax is a federal tax collected on the
    value of a person’s property at the time of his
    death
  – Inheritance tax is a state tax collected on the
    value of the property left by a person to his
    heirs in a will
  – Gift tax is collected on any money or property
    valued at over $11,000 given from one
    person to another in one year
Types of Taxes (cont.)
• Taxes on Earnings (Income Taxes)
  – Federal Income Tax – paid to the federal
    government on any earned income (wages,
    salaries, commissions, tips, bonuses),
    interest income, dividend income, or capital
    gains
    • Collected by the Internal Revenue Service (IRS)
  – State Income Tax – paid to the individual
    state, laws governing what is taxed differ
    from state to state
Types of Taxes (cont.)
• Income Taxes (continued)
  – City Income Tax – about 2000 cities collect
    city income tax
  – Tax-exempt income – income not subjected
    to taxes (municipal bonds)
  – Tax-deferred income – income that will be
    taxed at a later date (401k contributions)
Types of Taxes (cont.)
• Income Taxes (cont.)
  – Social Security Tax – pays for retirement
    benefits—or disability or survivor benefits
     • Also called FICA – Federal Insurance
       Contributions Act
  – Medicare Tax – A health insurance program
    for people 65 and older
So…What has to come out of your
paycheck??

• Required by Federal Law to deduct:
  – Social security (FICA)
  – Medicare tax
  – Federal income tax

  – Many times state or city tax is required too.
Information to Calculate Taxes
• W-4 Form (Employee’s Withholding
  Allowance Certificate)
  – Name, SS#, marital status, allowances
  – Signature and date
  – Employer must have on file
Income Types
• Gross Pay – total amount of money an
  employee earns in a pay period

• Net Pay – the amount of money you
  actually receive after deductions are
  made
Other…
• Employers must also pay social security
  and Medicare taxes equal to the amount
  the employee pays.
• Self-employed people must pay at a
  higher rate
Good for YOU!
• Deductions – expense that you can
  subtract from gross income
  – Medical or dental expenses
  – Interest on mortgages
  – Charitable contributions
• Exemptions – deductions for a dependent
  or someone that you support financially
  (spouse or child)
Payroll withholding
• Employer withholds or deducts money to
  send to the Internal Revenue Service
• Amount withheld is based on your
  completion of a W-4 form
  – Allowances adjust withholding based on
    • Marital status
    • Number of dependents
Completing a W-4 Form
•   Name and address
•   Social Security number
•   Single or married
•   Different last name than on Social
    Security card
•   Allowances that you are claiming
•   Any additional money you want withheld
•   If you are exempt from income tax
•   Sign and date form
W-4
• http://www.irs.gov/pub/irs-pdf/fw4.pdf
Preparing an income tax return
• Who must file?
  – Citizens of the US
• Deadlines and Penalties
  – April 15
  – Extensions
• Tax Forms
  – 1040EZ
  – 1040A
  – 1040
W-2 Form
• Employer sends you a W-2
  – Annual earnings
  – Amount withheld for
    • Federal income taxes
    • Social Security
    • State or local income taxes


• Must be sent to you by January 31 each
  year
1040EZ
•   Taxable income less than $100,000
•   Single or married
•   Under age 65
•   No dependents
•   Wages, tips, salaries
•   No itemized deductions
1040EZ
• http://www.irs.gov/pub/irs-pdf/f1040ez.pdf

• File by mail or electronically
Tax Assistance
•   IRS Web Site
•   Books
•   Software
•   Professionals

								
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