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The Basics of TaxesAdvanced Level

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Our Tax System

GOALS• Explain the purpose of taxes and describe the

different types of taxes.• Describe the U.S. tax system and explain how

it works

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Purpose of Taxes

• In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes.

• These incoming funds to the government are called revenue.

• The government spends the revenues received according to priorities set by Congress.

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 4Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

What are taxes?

Are you a taxpayer?

Taxes – A sum of money demanded by a government to support the government itself as well as specific facilities or services

Paid by taxpayers – A person who pays a tax to national, state, county or municipal (city/town) governments

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 5Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Community

Community – a group of people with common

interests and concern for the common good

United States

State County City/ town

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 6Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

What are benefits of being a part of these communities?

Roads Libraries

Military for

national security

Public schools

Police and fire

departments

Recreation (parks, trails)

?

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 7Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

“You are better off being in a community than by yourself”

As a community member you receive many benefits you

could not pay for individually

Taxes are a way members of a community provide for one

another

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 8Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

How do you benefit from taxes?

1. Make a list of things you use or benefit from that were funded, at least in part, by taxes

2. How do these items contribute to your well-being?

3. What would you do if you didn’t have these items?

Physical

Intellectual

EmotionalSocial

Financial

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 9Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

How do taxpayers pay taxes?

Income Tax

Payroll Tax

Property Tax

Sales Tax

Excise Tax

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 10Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Income tax

Income tax - tax on earned and

unearned income

Earned income -money earned from

working for pay

Unearned income - income received from

sources other than employment

Example: Wages and salaries earned from employment

Example: Interest earned from a

savings account

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 11Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Components of income tax

Federal income

tax

State income

tax

Income tax

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 12Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Federal Income Tax

Tax is determined by? Paid by? Helps fund?

• Earned and unearned income

• Higher income = more tax paid

• Majority of people living in the U.S.

• Operations of federal government

• Government programs• education• defense of

the nation• disaster

relief

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Progressive Taxes

• Federal income taxes are progressive.• Progressive taxes take a larger share of

income as the amount of income grows.

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Progressive Taxes

• How it works / example:– Federal income tax in America is considered a

progressive tax. There are income tax-brackets to assure this.

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 15Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

State Income Tax

Tax is determined by? Paid by? Helps fund?

Does your state have state income tax?

• Earned and unearned income

• Higher income = More tax paid

• Those living in states with a state income tax

• Not all states have a state income tax

• Varies by state

• Examples:• State

highways• Operations

of state government

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 16Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Payroll TaxPayroll tax – A tax on earned income that supports

the Social Security and Medicare programs (also known as FICA)

Tax is determined by? Paid by? Helps fund?

• A set percentage of earned income

• Deducted out of paycheck (except for self-employed)

• Individuals who earn income from working for pay

• Employers

• Social Security program

• Medicare program

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 17Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

What is Social Security?

Purpose Tax charged• Income for:• Retirees • People with

profound disability• Children who have

lost a parent• A person with

children who has experienced the death of a spouse

• 6.2% of earned income (decreased to 4.2% for 2011-12)

• Up to an annual maximum

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 18Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

What is Medicare?

Purpose Tax charged• Helps pay for health

care for senior citizens

• 1.45% of earned income

• No limit

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 19Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Employers also pay Social Security and Medicare

Match their employees tax contributions

Self-employed people pay both the employee and employer contributions

Employee contribution:

$100

Employer contribution:

$100

Employer pays $200 in payroll taxes

to the federal

government

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 20Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

What is the difference between income tax and payroll tax?

Income Tax Payroll Tax

Paid on both earned and unearned income

Paid on only earned income

Amount paid depends on many different factors but increases as income increases

A set percentage of earned income is paid

Funds many different operations and programs of the federal government

Funds the Social Security and Medicare programs

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 21Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Property Tax

Property tax - a tax on property, such as land, buildings (including homes), and motor vehicles

Tax is determined by? Paid by whom? Helps fund?

• Percentage of property value

• Amount paid varies depending upon where you live

• Property ownerso Fee to

license car is a property tax

• Schools• Expenses of

state and local governments

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Proportional Taxes

• Property taxes are proportional.• Proportional taxes, or flat taxes, are taxes for

which the rate stays the same, regardless of income.

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 23Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Sales Tax

Sales tax – tax on purchased goods and services

Tax is determined by? Paid by? Helps fund?

Does your state have sales tax?

• A percentage added to the original price of an item

• $1.00 item charged 6% sales tax = $1.06

• Anyone who purchases an item charged with sales tax

• Some states don’t have sales tax

• Expenses of state and local governments

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Regressive Taxes

• Sales tax is an example of a REGRESSIVE TAX• Regressive taxes take a smaller share of

income as the amount of income grows.

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 25Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Excise Tax

Excise taxes – taxes collected from the seller or retailer and as such often remain hidden in the price of a produce or service

Tax is determined by? Paid by? Helps fund?

• Purchase of certain items:• Gas• Hotel rooms• Airline tickets• Cigarettes• Alcohol

• Often included within the price of these items

• Anyone who purchases certain items

• Varies by location

• Expenses of state and local governments

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 26Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

How are tax rates determined?

Determined by public representatives (city councils, county commissions, state legislatures, Congress)

Elected by voters

Taxpayers = voters

Work as a voting group to elect representatives who will represent the majority

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 27Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Taxes and Money Management

Why do you think understanding taxes is an important part of money management?

Taxes play a role in both earning and

spending

One of the largest expenses for many

people

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© Take Charge Today – August 2013 – The Basics of Taxes – Slide 28Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona

Summary

Without taxes it would be hard to pay for

many of the benefits of being a member of a

community

Taxes are charged in many different forms

The amount of taxes you pay and what you pay those taxes on will vary depending upon

where you live and your income

Understanding taxes is an important part of money management