Taxes "Taxes are what we pay for a civilized society." --Oliver Wendell Holmes (inscription at the entrance to the Internal Revenue Service, Washington D.C.) What you need to know and how it affects you… What are taxes? • Tax -A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. Purpose: The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Some Forms of Taxation – Income Taxes: Taxes on income, both earned income (salaries, wages, tips, commissions) and unearned income (interest from savings accounts, dividends if you hold stock). Both individuals and businesses are subject to income taxes. – Sales Tax: a tax on the gross receipts from the retail sale of tangible personal property (eg. clothes, automobiles, equipment) and certain services. – Real Property Tax: a tax on the value of realty (eg. land, buildings, etc.) owned by nonexempt individuals or organizations. • • Key Terms • Taxable Income: The taxpayer's total income less deductions, exclusions, and exemptions that might be available to a particular taxpayer. Tax is imposed on the taxable income. Exempt: A taxpayer can be exempt from paying a certain amount of federal income tax if he/she meets certain income, tax liability, and dependency requirements. No tax is imposed on the exemptions. Tax Rates: Some percentage applied to the taxable income to determine a taxpayer's liability. Tax Credit: The amount of the taxes a taxpayer has to pay can be reduced by tax credits. A taxpayer can get tax credits for purposes such as child care expenses and the earned income credit for low-income taxpayers. Excise Taxes: taxes imposed on certain privileges as well as the manufacturing, sale or consumption of specified commodities. The major types of excise taxes are: – • • • • – – Occupational Taxes: Some businesses, such as liquor dealers, must pay a fee before engaging in their business. Facilities and Services Taxes: the person who pays for services and facilities must pay the tax on these items. Luxury Taxes: the tax imposed by state governments on certain retail sales of products. Tax History • Taxation in the Ancient World – In Egypt, tax collectors are depicted in tomb paintings dated at 2000 B.C. – The ancient Egyptians taxed many aspects of daily life, including even the use of cooking oil in preparing family meals. – Ancient Rome had an elaborate tax system which included sales taxes, inheritance taxes, and taxes on imports and exports. – In 212 A.D., a 10-percent inheritance tax was imposed upon all Roman citizens. Tax Trivia • Interesting Things That Have Been Taxed – Bachelors (England in 1695 A.D., and Missouri in 1820 A.D.) – Beards (Russia, 1702 A.D.) – Cooking Oil (Ancient Egypt, approximately 2000 B.C.) – Souls (Russia, approximately 1682 A.D.) – Urine (Rome, 1 A.D.) – Besides taxing beards and souls, Peter the Great of Russia also taxed: hats, boots, beehives, basements, chimneys, food, clothing, birth, marriage, and burial. Tax Resistance • People have always hated paying taxes—see below… • English citizens forced King John to sign the Magna Carta in 1215 A.D., partly in reaction to his high-handed disregard for the tax laws of the land; the King had the power to spend, but only Parliament was supposed to have the power to tax. • In 1404, Parliament passed the world's first income tax. The tax was so unpopular that not only was it later rescinded, but all records of it were ordered burned by Parliament. • Taxes repeatedly sparked revolts in England, and in France during the French Revolution of 1789, all of the French tax collectors were judged guilty of treason and sent to the guillotine. • Taxes imposed on American colonists by the British helped to persuade Americans to seek independence. Taxation in America • In 1766, America's "Stamp Act Congress" protested British taxes on American newspapers, business licenses, diplomas and legal documents. • Americans so hated taxes that when the first Congress of the United States was created under the Articles of Confederation, it had no power to levy taxes. Not until 1789 was Congress given the power to tax American citizens. • In 1792, the American government imposed an excise tax on whiskey. This first American sin tax sparked a rebellion in Philadelphia, called the "Whiskey Rebellion." Taxation in America • In 1798, Congress levied the first direct tax on American property, including lands, houses and slaves. • Temporary income taxes were also imposed on citizens by both sides of the Civil War in order to raise wartime funds, and in 1862 the Office of the Commissioner of Internal Revenue was created to collect wartime income tax funds. • The first peacetime income tax was imposed in 1894, a 2-percent tax on earnings above $4000, which at that time only affected the very richest 2-percent of Americans. Taxation in America • Income taxes became a permanent feature of American life in 1913, with ratification of the 16th Amendment. • Taxes were expanded during World War I with revenue acts which created federal estate taxes as well as greater taxes on earnings by individuals and businesses. • The rise in taxes in American life has led to increasing searches for loopholes and other means of escape. In the 1960's, the tax-free Cayman Islands began to be used as a haven from the IRS. • In 1996, the flight of wealthy Americans abroad caused Congress to pass a law prohibiting reentry to the U.S. for former American citizens who abandoned their U.S. citizenship to avoid paying taxes. Federal Tax Administration • Three branches: legislative, executive and judicial, are involved in the enactment and administration of tax law. • The Joint Committee on Internal Revenue Taxation and the House Ways and Means and Senate Finance Committees are responsible for gathering information and holding hearings which may eventually be reported to Congress and culminate in the passing of new or amended tax legislation. • Federal tax laws are referred to collectively as the Internal Revenue Code, or Tax Code. • The Treasury Department is responsible for administering the Tax Code. It issues interpretations of the Tax Code, called Treasury Regulations. • The Internal Revenue Service (IRS), in addition to collecting taxes, enforcing tax law, and issuing rulings in response to requests for guidance, interprets Treasury Regulations and negotiates disputes with taxpayers. (Founded in 1862) Tax Firsts • World's first documented use of imprisonment for tax evasion: 306 A.D. by Emperor Constantine of the Holy Roman Empire. • World's first excise tax: 5-percent tax in Spain, under the Moslems (approximately 8th-11th centuries) • World's first income tax: 1404 A.D. in England (it was so hated that Parliament later had all records of it burned) • First U.S. federal tax office created: Office of the Commissioner of Internal Revenue, in 1862 (to raise funds for the Civil War.) • First U.S. peacetime income tax: 2-percent tax on the rich (top 2-percent of Americans) • First U.S direct property tax: Tax on lands, houses and slaves, in 1798. • First U.S. permanent income tax: 1913 A.D., with ratification of the 16th Amendment. How do I get taxed? • As a new employee, you will be asked to fill out a W-4 form. • This form will determine how much income tax is withheld from your paycheck. • You will receive a paycheck statement along with your check that shows the tax withheld and any other deductions. • The amount of income tax your employer withholds from your regular pay depends on two things: – The amount you earn – The information you give your employer on Form W-4 How do I get taxed? • Form W-4 includes three types of information that your employer will use to figure your withholding. – Whether to withhold at the single rate or married rate. – How many withholding allowances you claim (each allowance reduces the amount withheld). – Whether you want an additional amount withheld. • If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. Taxes Withheld • Federal Income Tax – Federal income taxes pay for things like national defense, social programs, law enforcement and interest on the national debt. – State and local income tax revenues are used for public education, police and fire protection, schools and roads. – FICA (also known as Social Security tax) provides benefits for retired workers, people with disabilities and their dependents. – Medicare helps workers, retired workers and their spouses to pay for medical care when they are 65 years of age and older. • State Income Tax • FICA • Medicare Taxes Withheld • California (SDI) State Disability Insurance – Provides affordable, short-term benefits to eligible workers who suffer a loss of wages when they are unable to work due to a NON WORK-RELATED illness or injury, or a medically disabling condition from pregnancy or childbirth. – The majority of California employees, approximately 12 million workers, are covered by the SDI program. – Some employees are exempt from SDI; for example, railroad employees, some employees of non-profit agencies, employees who claim religious exemptions, and most government employees. Filing Your Taxes • Federal Tax Forms – Form 1040 (US Individual Income Tax Return) – Form 1040EZ (Income Tax Return for Single and Joint Filers with No Dependents) – Form 1040NR (US Nonresident Alien Income Tax Return) – Form 1040NR-EZ (US Income Tax Return for Certain Nonresident Aliens With No Dependents) – Form 1040X (Amended US Individual Income Tax Return) – Form 3903 (Moving Expenses) Filing Your Taxes • State Tax Forms – Depends on your state – CA 540, 540A, 540 2EZ • Filing Deadline April 15th – Unless you have requested extension • Not filing = Tax Evasion = JAIL! • Any Questions?