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					Understanding Taxes

  2010 Personal Finance Institutes
         EPF Standard 16
   Building the Common Wealth
Course Instructional Materials
        Developed By:


    Virginia Department of Taxation
       School Outreach Program




      Building the Common Wealth
                     Introduction
• Taxes provide revenue for federal, state and local governments to
  fund essential services provided to its residents.
• As citizens want more services from government agencies, the
  amount of funds needed also increases.
• Funds are collected by the government through the taxation of its
  citizens.
• Each level of government makes its own decisions about how and
  what to tax, as well as how to spend the money. Although most
  federal revenue comes from income taxes, state and local revenues
  may come from income taxes, transaction taxes such as sales tax
  and property tax.
• Other sources of revenue, not categorized as taxes, include user
  fees, fines and borrowing.



               Building the Common Wealth
                      Objectives
After completing this lesson you will be able to:

• Identify types and purposes of taxes
• Identify three tax structures
• Identify how a budget is reached
• Differentiate between tax exemptions, deductions and
  credits
• Identify sources of federal, state and local revenue
• Identify some of the ways tax funds are used by
  different levels of government

           Building the Common Wealth
   Where Does Your Money Go?

Federal, State and Local governments use
 tax funds to provide services to the
 general populace.

Tax funds from all 3 branches of
 government are used to fund services for:


         Building the Common Wealth
               Schools




Building the Common Wealth
                  Parks




Building the Common Wealth
Roads and Highways




 Building the Common Wealth
 Law Enforcement




Building the Common Wealth
Where Does Your Money Go…




   There are some services that
    are provided by each
    branch of government
    separately.

    Building the Common Wealth
     Where Does Your Money Go...
Federal government also uses tax revenue to provide
  services such as:

•   National Defense
•   Monitoring and regulating trade and the economy
•   Healthcare
•   Social Services
•   Job Training
•   Unemployment Benefits
•   Welfare Programs

              Building the Common Wealth
     Where Does Your Money Go...
State government also uses revenue funds to provide
  services such as:

•   Healthcare
•   Transportation
•   Welfare programs
•   Unemployment benefits
•   Monitoring and regulating state government



              Building the Common Wealth
   Where Does Your Money Go...
Local governments also use tax revenue to provide
  services such as:

• Libraries
• Transportation




            Building the Common Wealth
    Where Does Your Money Go ...
Virginia has a biennial (two-year) budget system that is created
   through 5 phases:

                                 1. Agency Budget
                                     Preparation


                                                                 2. Budget
    5. Implementation
                                                                Development
                                 Virginia Budget



                 4. Governor                        3. Legislative
                    Review                              Action



                 Building the Common Wealth
   Where Does Your Money Go ...
For budgeting purposes, state revenues are divided into two broad
     types:




(1) General fund

(2) Nongeneral fund


               Building the Common Wealth
Where Does Your Money Go ...
                       Virginia
                       Budget
                      2008-2010


Operating Budget                     Capital Budget
   $73 billion                        $1.8 billion

        Building the Common Wealth
Where Does Your Money Go…
  2008-2010 (General Fund Operating) = $34.5 Billion*




                                           *Chart represents the state of Virginia
       Building the Common Wealth



                                        *2008 Virginia Acts of Assembly, Chapter 879
Where Does Your Money Go…
 Education funds for the operating general fund for 2008-2010*




         Building the Common Wealth                                         *Chart represents the state of Virginia


                  Created by the Virginia Department of Taxation, School Outreach Project
Where Does Your Money Go…
 Expenditures reported for the year of 2009 for the City of
    Richmond.




          Building the Common Wealth


                   Created by the Virginia Department of Taxation, School Outreach Project
         Tax Revenue Sources

While there are many types of taxes collected
 within Virginia, there are two types that bring in
 the majority of the revenue collected. Those are:


• Individual Income

• Sales and Use Tax


           Building the Common Wealth
     Tax Revenue Sources…
Virginia General fund in fiscal year 2009 revenue
                     collected




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                 Created by the Virginia Department of Taxation, School Outreach Project
        Taxes Fall Into 3 Tax
            Structures:
• Progressive Tax

• Proportional / Flat Tax

• Regressive Tax



          Building the Common Wealth
             Progressive Tax

Progressive Tax is a system in which the
  tax rate increases as the taxpayer’s
  income increases.

As a result, a larger percentage of income is
 taken from high-income groups than from
 low-income groups.

         Building the Common Wealth
               Proportional Tax
Proportional or flat tax is a tax rate that stays the
  same for everyone, regardless of their income
  level.

For example, low-, middle- and high-income
  taxpayers would all pay a fixed tax rate of 5% of
  their income.



            Building the Common Wealth
               Regressive Tax
A tax is considered regressive when taxpayers
  who earn lower incomes pay a higher
  percentage of their income than those who
  have a higher income.

Sales tax is a regressive tax. Although the
  same tax rate (5%) is paid regardless of
  income level, it causes lower-income
  taxpayers to pay a larger share of their
  income than wealthier people pay.

          Building the Common Wealth
               Regressive Tax…
Social security is collected at the same percentage
  from all, up to a certain income limit; above that
  no social security tax is collected. Thus, up to
  that limit, the tax is proportional; above the limit it
  is regressive because people earning more than
  the limit are paying a smaller percentage of their
  income in taxes than people below the limit.



            Building the Common Wealth
                      Tax Types
      There are three types of taxes:

• Federal

• State

• Local


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       Federal Taxes Include:

• Individual Income Tax

• Social Security / FICA

• Corporate Income Tax



          Building the Common Wealth
      Virginia Taxes Include:

• Individual Income Tax

• Sales Tax

• Corporate Income Tax



         Building the Common Wealth
           Local Taxes Include:
In Virginia, localities can only tax what the state
   government allows them to tax. Some common
   local taxes include:

•   Real Estate Tax
•   Personal Property Tax
•   Meals Tax
•   Hotel Tax
•   Business License Tax
            Building the Common Wealth
         Activity
                   and
            Lesson
Building the Common Wealth
           Individual Income Tax
• Individual income tax is a progressive tax.

• Individual income taxes are levied by federal
  government and, in some cases, state and local
  government.

• In Virginia, state government levies an income tax,
  but local governments are not authorized to do so.

• Much of the information needed for income taxes is
  provided on a W-2 form.

            Building the Common Wealth
       Individual Income Tax…
What is a W-2?

• A W-2 form is an end-of-the year
  summary of a taxpayer’s gross income
  and withholdings.

  – Withholdings are paid by the
    taxpayer/employee and collected by the
    employer.

           Building the Common Wealth
    Individual Income Tax…

Where and when can I get a W-2?

• A W-2 is issued by employers and should be
  received by the employee/taxpayer by the
  beginning of February the following year.
   – For example, if you worked in 2009, your
     2009 W-2 should have been received by
     February 1, 2010.
           Building the Common Wealth
         Individual Income Tax…
                                   Total Wages
                                     Earned
                                                     Federal Taxes
                                                         Paid




                                                               Social
                                                              Security/
                                                                FICA




Taxing
State
                                       State Taxes
                                          Paid



          Building the Common Wealth
         Individual Income Tax…
Why do I need a W-2?
• A W-2 form is required by the federal and state tax
  agencies when individuals file their income tax
  returns.
• The federal income tax return is due, every year, by
  April 15th.
• The income tax return for Virginia is due every year,
  by May 1st.

   – Virginia is one of the few states where the state return is
     not due on the same date as the federal return.


               Building the Common Wealth
         Sales and Use Tax…
• Sales tax is a proportional and regressive
  tax.

• In Virginia, sales taxes are paid to both the
  state and local governments.
  – The general sales tax rate in Virginia is 5%.
    The rate is comprised of a 4% state tax and a
    1% local tax.


          Building the Common Wealth
              Sales and Use Tax…
• Sales taxes are paid by the consumer of the goods
  purchased, but they are collected by the seller who
  makes the sale. The seller is responsible for remitting
  the sales tax collected to the state.
• The state sends the local tax collected from the
  businesses within that locality to the local government.
   – For example, if you purchase a shirt from a retailer in the City of
     Richmond for $20.00, the total sales tax amount would be $1.00
     (5% of $20.00). Of that $0.80 would be due to the state (Virginia)
     and $0.20 would be due to the locality (City of Richmond).




               Building the Common Wealth
                     Estate Tax

• Estate tax planning is an important part of
  financial planning as it involves decisions
  regarding wills, trusts and joint tenancy.




          Building the Common Wealth
                       Estate Tax…
• When planning an estate, current federal and state taxes
  should be considered, as well as any deductions and
  exemptions that apply to those taxes.
• Only estates exceeding the exempt amount
  ($3,500,000.00 after January 1, 2009) are taxed by the
  federal government.
   – This tax applies to the gross worth of the decedent’s
     estate at the time of death (not time of purchase), with
     a large portion of the estate exempted by a tax credit.
     (Reminder: A tax credit is a reduction of the tax itself)


              Building the Common Wealth
                    Estate Tax…

• Estate planning answers the following questions:
  – How does a person want his or her estate
    distributed after death?
  – Who will be appointed to distribute the estate?
  – What are the decedent’s wishes regarding the
    care of those left behind (ex: Minor children,
    legal guardians)?


           Building the Common Wealth
                       Estate Tax…
• Inheritances (a title to property or estate that passes by
  law to the heir on the death of the owner) are generally
  not taxed by the federal government, but several states
  have inheritance taxes.

• Virginia does not have an inheritance tax.




              Building the Common Wealth
              Activity
                       and
                Lesson
Building the Common Wealth
      Exemptions, Deductions
           and Credits

When a taxpayer files a federal return,
 he/she should take the time to become
 familiar with exemptions, tax deductions
 and tax credits which can reduce the
 possible amount of tax owed to the
 government.

         Building the Common Wealth
      Exemptions, Deductions
          and Credits…
Exemptions

Personal tax exemptions reduce your
 taxable income. Each personal tax
 exemption you claim is the equivalent of a
 tax deduction.



         Building the Common Wealth
Building the Common Wealth
    Exemptions, Deductions
        and Credits…
Generally, you are allowed one tax
 exemption for yourself. If you are married
 you are allowed one tax exemption for
 your spouse. If you have dependents,
 you are allowed one tax exemption for
 each dependent on your tax return.



         Building the Common Wealth
   Exemptions, Deductions
       and Credits…
Deductions

Deductions reduce the taxes a taxpayer
 must pay by reducing a person’s taxable
 income.



         Building the Common Wealth
      Exemptions, Deductions
          and Credits…
Some possible deductions are:
  – Student loans
  – State and local taxes paid
  – Age deduction
  – Charitable contributions
  – Interest paid on home mortgage
  – Child care expenses

          Building the Common Wealth
      Exemptions, Deductions
          and Credits…

Tax Credits

A tax credit reduces the tax you owe by
  subtracting the amount of the credit from
  the tax due.


          Building the Common Wealth
      Exemptions, Deductions
          and Credits…
Some possible tax credits for tax year 2009
 were:

  – Energy star tax credit
  – Federal housing tax credit
  – Earned income tax credit

  *Available tax credits can change from one year
                      to another.*
          Building the Common Wealth
Why Should You File and Pay
      Your Taxes?


  You may be entitled to a refund!




     Building the Common Wealth
  Why Should You File and Pay
        Your Taxes...

You may be able to take advantage of
 exemptions, deductions and credits, which
 can reduce the amount of taxes owed to
 the federal and state governments.




         Building the Common Wealth
    Why Should You File and Pay
          Your Taxes...
You will avoid paying penalties and interest.

   – Filing your tax return and paying, if applicable, the
     total tax due on time, for both the federal (April 15 th)
     and the state (May 1st for Virginia) governments will
     prevent you from having to pay any penalties and
     interest on the amount of tax you owe.




              Building the Common Wealth
   Why Should You File and Pay
         Your Taxes...
Not filing and paying your taxes can result in
 penalties for you as well as others.

  – Tax evasion is illegal, and if you chose not to
    pay and file your taxes, it affects the broader
    population.



           Building the Common Wealth
   Why Should You File and Pay
         Your Taxes...


When citizens do not pay taxes, governments
 have fewer resources at their disposal to provide
 essential services to their citizens.




           Building the Common Wealth
    How Tax Policies Influence
            Behavior

Some tax policies are put in place in attempt
 to influence the behaviors of citizens in the
 United States.




          Building the Common Wealth
    How Tax Policies Influence
           Behavior…
Why does the government offer a deduction
 for charitable giving?

  – To encourage people to donate to charities.




          Building the Common Wealth
    How Tax Policies Influence
           Behavior…
Why does the government offer a tax credit
 on the installation of energy efficient
 windows?

  – To encourage behavior that results in the
    conservation of energy and environmental
    protection.


          Building the Common Wealth
    How Tax Policies Influence
           Behavior…
Why does the government offer business
 investment tax credits?

  – To encourage businesses to open in specific
    locations (states, localities, etc.) and stimulate
    the economy.




           Building the Common Wealth
    How Tax Policies Influence
           Behavior…
Why does the government allow mortgage
 interest as a tax deduction?

  – To encourage homeownership.




         Building the Common Wealth
    Things You May Not Know…

Apples are taxed!!!!

  – An excise tax is levied on apples grown in Virginia for
    sale by a producer. In tax year 2008, $123,000 was
    collected from the apple excise tax.




            Building the Common Wealth
     Things you may not know…
Sheep are taxed!!!

  – A sheep assessment is levied on sheep and lambs
    sold in Virginia. The handler is responsible for
    payment of tax on all sheep and lambs. In tax year
    2008, $12,000 was collected in the state of Virginia
    from the sheep assessment.




            Building the Common Wealth
   Things you may not know…
Soybeans are taxed!!!

  – The “first-buyer” of soybeans (whoever purchases the
    seeds for the purpose of sale) is responsible for
    collecting a soybean assessment from the producer,
    regardless of the state in which the beans are grown.
    In tax year 2008, $353,000 was collected in the state
    of Virginia from the soybean assessment.



           Building the Common Wealth
To find more interesting facts about
  taxes, please visit:
             www.tax.virginia.gov
           www.vataxconnections.com
                                  OR
www.irs.gov/app/understandingTaxes/index.jsp




     Building the Common Wealth
                          Summary
This concludes your lesson on Understanding Taxes.
You should now be able to:
   – Identify the types and purposes of taxes
   – Identify three tax structures
   – Identify how a budget is reached
   – Identify some common tax deductions and credits
   – Identify specific types of federal, state and local taxes
   – Identify how tax funds are used by different levels of
      government


              Building the Common Wealth
           Helpful Links
                Loudoun County:
                www.loudoun.gov
                City of Richmond:
               www.richmond.gov
                County of Fairfax:
             www.fairfaxcounty.gov
     City of Richmond Budget Department:
          www.richmondgov.com/Budget
 Virginia Department of Planning and Budget:
                www.dpb.virginia.gov
White House Office of Management and Budget:
       www.whitehouse.gov/omb/budget

     Building the Common Wealth

				
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