Federal Income Tax Forms by npq16003


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									Chapter 7
Federal Income Tax
   Understand the purpose of taxes,
    different types of taxes, and the history of
    taxes in the United States.
   Describe components of the tax system,
    including the IRS, the power to tax, and
    paying your fair share
   Define and show a working knowledge of
    exemptions, dependents, and taxable and
    nontaxable income when preparing tax
   Prepare forms 1040EZ and 1040A
    (Individual Federal Income Tax Returns).
           Our Tax System
   Money is collected by the government
    from citizens and businesses in the form
    of taxes
   This money, which is called revenue, is
    redistributed according to needs and
    priorities determined by Congress
   Ability-to-pay principle: individuals with
    different amounts of wealth or income
    should pay different amounts of taxes
                  Our Tax System

   Types of taxes
       Progressive
            Increase in proportion to income
            People/Businesses with higher income pay not only
             higher taxes, but at a higher rate
       Regressive
            Decrease in proportion to income
            People/Businesses with higher income pay taxes at
             a decreased percentage
            Ex. Sales Tax
       Proportional
            Rate remains constant even if though the amount
             being taxed increases
            Ex. Property Tax
               Our Tax System

   Local Taxes
       Pay for education, parks and recreation,
        streets and roads, police, fire, and health
   National Taxes
       Pay salaries for Congress
       Pay for national defense, highways, parks,
        welfare, foreign aid, etc.
   Most services (local and national) are
    provided for the general welfare of all
    citizens, although as an individual, you
    may not benefit directly
              History of Taxes
   Constitution (1787) included the option to tax,
    but not to tax individuals directly
       Excise taxes and customs duties produced enough
        revenue at the time
       No income taxes against citizens, but also no services
        for them either
   Revolutionary War financed by other countries
   War of 1812 was first temporary income tax
       When war debts were paid, income tax was dropped
   Civil War
       1862-President Lincoln signed a law providing for
        progressive income tax on wages
       When the war ended the tax expired
   16th Amendment (introduced 1909, ratified 1913)
       1st permanent income tax
                History of Taxes

   WWI (1917) was paid for by income taxes
   After WWI government was not providing many
    services for citizens
   Great Depression (1929)
       President Roosevelt’s “New Deal” provided for
        government services for citizens through tax revenue
   Social Security Act (1935)
       Internal Revenue Service (IRS) created
       Money withheld from wages deposited with the Dept.
        of Treasury
   During WWII taxes were increased to finance the
       This increase set precedent for changing tax rates of
       Rates are increased to pay for growing services and
        needs of the government
        Components of the Tax
   IRS
     Administrative agency of the Dept. of
     Headquarters in DC, 7 regional offices
     Main functions are to collect income
      taxes and enforce tax laws
     Other functions include:
         Assist   taxpayers in finding information and
         Assist taxpayers in preparing tax returns
        Components of the Tax
            System (cont’d)
   Power to Tax
     Rests with Congress
     Bills originate in the House per the
     House Ways and Means Committee
      makes recommendations to the full
     After being passed by the House, bills
      must be passed by Senate, then signed
      by the President to become law
         Components of the Tax
             System (cont’d)
   Paying Your Fair Share
       US income tax is set at a graduated rate
            More income received = more income tax
       Rates increased as Congress seeks ways to
        balance budget and reduce national debt
       US system based on voluntary compliance
            All citizens are expected to file income tax returns
             by April 15, no tax collectors
            Late filing can result in penalty, interest charges,
             fine, and/or imprisonment
            Willful failure to pay taxes is called tax evasion, a
             felony punishable by fine and/or imprisonment
         Components of the Tax
             System (cont’d)
   IRS Audit
       When the IRS reviews tax returns of an
        individual or business
       Three choices if called for an audit
            Self-representation
            Give power of attorney to a lawyer, CPA, immediate
             family member, enrolled agent (someone formerly
             employed by the IRS at the audit level for >= 5
            Take anyone at all with them for support (tax
             preparer, therapist, etc) during the audit session
       Most audits involve nothing more than
        confirming supporting documentation
        (receipts, bank statements, etc) so it can be
        done by the taxpayer w/out outside help
          Tax Form Terms
   Filing Status
     Single (not married)
     Married filing jointly
     Married filing separately
     Head of Household (must meet certain
     Qualifying widow(er) w/ dependent
          Tax Form Terms cont’d
   Exemption(s)
       An allowance(s) a taxpayer claims for each
        person dependent on taxpayer’s income
       Automatically allowed 1 for yourself
   Dependent
       A person who lives w/ you and receives > ½
        of living expenses from you (including baby
        born at any time during the tax year)
       Each exemption claimed excludes a certain
        amount of gross income ($3,100 in 2004)
        Tax Form Terms cont’d
   Qualifications for being a dependent
     Must be a relative
     Citizen or resident of the United States
     If married, cannot file a joint return w/
     Person’s income must be less than the
      amount of exemption (does not include
      child <19 or student <24)
     Must provide > ½ of the person’s
      support during the year
          Tax Form Terms cont’d
   Gross Income
       All the taxable income received, including wages, tips,
        salaries, interest, dividends, unemployment
        compensation, alimony, workers’ compensation, etc
   Adjusted Gross Income
       Income after allowed adjustments are made (i.e. IRA
   Taxable Income
       Income used for determining tax amount
       AGI less legal expenses that are allowed to be
        deducted (state and local taxes, mortgage interest,
        child care expenses, casualty and theft losses, job and
        miscellaneous expenses)
                Preparing to File
   Who must file?
       You must file if your filing status, age, and gross
        income are shown in Fig 7-3 on page 162
   When to file?
       April 15th
       The earlier you file, the sooner you get your refund
   Short Form or Long Form
       17% use 1040EZ
            requirements
       19% use 1040A
            requirements
       64% use 1040
            Must use if you cannot file one of the others
   Income taxes are the US government’s largest source of
   Income taxes did not always exist, but evolved to finance
   3 types of taxes: progressive, regressive, proportional
   IRS collects taxes
   Citizens voluntarily comply with tax laws
   Gross income – adjustments = AGI
   AGI – itemized deductions/standard deduction –
    exemptions = taxable income
   If your standard deduction is less than your itemized
    deduction, you must use form 1040
   Willful failure to prepare and file tax returns is a federal
               Important Dates
   1787 – US Constitution
       Included option to tax but not tax individuals directly
   1812 – War of 1812
       1st temporary income tax
   1862 – Pres. Lincoln signed bill into law
    providing for temporary progressive tax
   1913 – 16th Amendment
       1st permanent income tax (progressive)
   1917 – WWI paid for by income taxes
   1929 – Great Depression/FDR’s New Deal
       Prosperity through taxation and redistribution of
   1935 – Social Security Act
       Created the Internal Revenue Service
1040A requirements

1040EZ requirements


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