TAXES!!!

Introduction

• It has been proven that 18-25 year olds are historically the most likely age group to forfeit their tax refund by not filing a tax return.

• What does this mean?• They paid MORE taxes than they needed to

and didn’t file to get their money back.• Many teens do not understand taxes.

Introduction

• In this tax unit, you will understand…• All different types of taxes• When and why you must file a tax return• The different forms and what they are used

for.

Understanding Taxes

• There are three levels of government:– Federal- Runs the country as a whole.– State- Manages the 50 states– Local- Governs counties, cities, and towns.

All of these levels need money to operate, so you must pay taxes to all three.

The More Common Types of Taxes

• Income Tax– You pay taxes on your income (Money you make)

• Sales Tax– Taxed on items you buy– This tax goes to the state or local government

• Property Tax– Based on the value of your property

• Payroll Tax– Social Security and Medicare

Types of Taxes: Sales Taxes

• Sales tax is calculated as a percentage of the price of the item.

• The tax rate varies from state to state– Colorado sales tax is at least 2% but less than 4%

• As of 2008 it is 2.9%• Craig’s sales tax is 2.25%

– About 75% of the other states have a higher sales tax percentage than Colorado (at least 5%)

Types of Taxes: Property Taxes

• One of the main source of money for local government is property taxes.

• These taxes are based on the value of property-generally land and buildings.

• Property taxes have been raised in Craig in order to pay for the new Middle School and to build a new hospital

Your Role As a Taxpayer

• Why do we pay taxes?• To pay the government’s bills• Government provides public goods and

services for the community• This is why we have TAXES!• Taxes shift resources from private individuals,

(you and everyone else who works) and businesses to the government.

Understanding Taxes

• The Internal Revenue Service (IRS): is the agency that collects federal taxes and oversees the federal system

• Taxes paid to the IRS go into the U.S. Treasury.

Your Role As a Taxpayer

Your Role as a Taxpayer

Where the Money comes from

Where the Money Goes

Different Tax Systems

• Regressive• Progressive• Proportional

Regressive Tax

• Regressive Tax: Everyone, regardless of income, pays the same $ dollar $ amount.

• What is the problem with this?• Lower-income people pay a larger share of

their income than wealthier people.

Regressive Tax

• Example:• John makes $10,000• Susan makes $50,000• They both have to pay the same dollar amount in

taxes. • Let’s say they have to pay $1,000 in taxes this

year• That’s 10% of John’s total income• It’s only 2% of Susan’s total income

Regressive Tax

• What are some examples of Regressive Tax?• Tobacco, alcohol, gasoline, jewelry, perfume,

travel, licenses, parking, admission to museums and parks, tolls for roads and bridges.

Progressive Tax

• Progressive Tax: takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of ability to pay.

• Our federal tax system today is based on the Progressive Tax.

Progressive Tax

Progressive Tax

• Example:• Low-income pays 10%• Middle-income pays 15%• High-income pays 30%

Proportional Tax

• Proportional Tax: Each individual pays a fixed rate.

• Example:– Low-income taxpayers would pay 10%– Middle-income taxpayers would pay 10%– High-income taxpayers would pay 10%

• What is an example of Proportional Tax?• Sales Tax

The Beginning…

• You all have or will soon have a job.• This is the beginning of paying Federal Income

Taxes

You’ve Got a Job!

• What was one of the first things your employer made you fill out when you got your job?

• W-4 (Employee’s Withholding Allowance Certificate)

• What is a W-4 used for?

W-4

• Used for your employer– 4-em-ploy-ER

• W-4 – is a form you fill out as a new employee so that your employer will withhold (keep) the correct amount of federal income tax from your paycheck.

• Employee’s Withholding Allowance Certificate

W-4

• The W-4 tells your employer how much he/she should withhold (keep) from your paycheck.

• Employers withhold payroll taxes and income taxes

• Employers then send the amounts withheld to the federal government

W-4

• If you fill out a W-4 incorrectly, you may have to PAY taxes at the end of the year.– You owe IRS– Too little was taken out of your checks– This could happen if you filed for exemption and you ended up

making more than the Standard Deduction ($5,450)• OR, a mistake could mean too much tax is being taken out of

your paycheck– IRS owes you– Too much was taken out of your checks

• The closer you are to 0 for a return, the better.• Why?

Exempt from withholding?

• Depending on how much you expect to make for the year, you may not have to pay FEDERAL income taxes.– In other words, you would be “EXEMPT” from

paying federal income taxes

Exempt from Withholding?

• You are exempt from withholding if…• 1) You weren’t required to pay federal income

tax last year • AND…• 2) You don’t expect to this year either.

Exempt form withholding?

• Whether you have to pay or not also relies on whether your parents or guardians CAN claim you as a dependent on THEIR tax return.

• What is a dependent?• Dependent: a person who relies on another

taxpayer for at least half of his or her support• Support includes food, shelter, clothing,

medical, dental care, and education.

Exempt from withholding?

• Most high school students can be claimed.• If you live with your parents/guardians, AND• You’re under 19 years of age, • You CAN be claimed• It’s NOT whether your parents/guardians

claim you, it’s whether they CAN if they want to.

• MOST CASES THEY CAN

Exempt from withholding?

• So…• If your parents CAN claim you• You are UNDER 19 years old– Or 19-24 and FULL-time student

• You EXPECT to make LESS than $5,450• You can file for exemption!!!• $5,450 is a standard deduction– The government allows you to deduct (subtract)

$5,450 from your income.

STANDARD DEDUCTION

• Example:• You made $4,000 this year• Standard Deduction says you don’t have to

pay taxes on $5,450 of your income (TAX FREE)• Since $5,450 is LARGER than what you made,

you won’t have to pay taxes• (This doesn’t mean you will get a refund of

$1,450 either)

No Way Around All Tax

• No matter if you filed and qualified for exemption (free from federal income tax) or not, you STILL have to pay some taxes from your paycheck.

• These taxes are called PAYROLL TAXES

Payroll Taxes

• They include Social Security (FICA) tax and Medicare Tax

• THESE TAXES ARE NON-REFUNDABLE• You will not see any of this money until you

start receiving the benefits of them at age 65• (You may also not have social security when

you’re that old)

Payroll Taxes

• Payroll taxes include…• 1) Social Security tax (FICA tax)• Social security provides the following:– Retirement benefits– Benefits for people dependent on retired workers– Benefits for the disabled and their dependents

Payroll Tax

• Payroll tax also includes…• 2) Medicare Tax• Used to provide medical benefits for certain

individuals when they reach the age of 65

Your Pay-Stub

• If you work 5 hours for $10/hour you would make $50• This is called your __________ income• GROSS (Before Taxes)• On payday you realize you get a check for less than

$50• The money you received is called your _______

income.• NET (After Taxes)• We have a “pay-as-you-go” tax system

? ?

NEXT SECTION…more forms!!!

• So far we have covered one form for taxes…• W-4• Review…What is the W-4 for?

W-2 and 1099-INTs

• If you had a job in 2008, you WILL receive a W-2• W-2 – is a form from employer explaining how

much you made in the year.• YOU RECEIVE A W-2 FROM EVERY EMPLOYER

YOU HAD THIS YEAR.• Remember: • W-4 = 4 employer• W-2 = For you

1099-INTs

• 1099-INTs – Form explaining how much money you made with interest this year

• Example: You put $1,000 in a savings account last year.

• You notice that you now have $1,020 in the account

• You made $20 of unearned income• You will get a 1099-INT form this month

explaining you made $20 of unearned income.

January 31st

• You should have all your forms by January 31st

– W-2, 1099INTs, 1099DIV, Student loan interest, etc…

Which Form Do You Use?

• There are 3 possible forms to use.• 1040EZ• 1040A• 1040

1040EZ

• The simplest IRS form (EASY)• You can use this form if…• 1) Your filing status is single or married filing

jointly• 2) You’re younger than 65• 3) You or your spouse are not legally blind• 4) You have no dependents• 5) Your interest income is less than $1,500• 6) Your income is less than $100,000

1040EZ (Good and Bad)

• Good – Very easy and it’s only one page• Bad – Limits the number of ways to save on

your tax bill

Next one…1040A

• Has more options to reduce your taxable income than the 1040EZ but is a little longer.

• Some of them include…• Certain IRA contributions• Student loan interest• Some college tuition and fees• Etc…• You can’t do this on the 1040EZ

How the EZ could cost you

• The case of Joe:• Finished college last year and got a full-time job

making $35,000. • He’s single, renting, and has no investment

income• Perfect person for the 1040EZ…– For Uncle Sam he is

• Filing the 1040EZ, Joe will likely overpay his taxes

How could the EZ cost you

• The 1040EZ doesn’t offer the same tax breaks found on the other forms– The more complicated the forms, the more tax

breaks.• Since Joe just graduated college, he has a

student loan ($2,500)• He also started a Traditional retirement

account which he put in $3,000.

How the EZ could cost you

• 1040 EZ• Joe owes taxes on

$35,000• Joe falls into the 25%

tax bracket• Joe overpaid a lot on his

taxes

• 1040A• Joe owes taxes on

$29,500• Joe falls into the 15%

tax bracket• Joe saved a lot on taxes

How to fill out the 1040EZ

• First fill out your name and other personal information

• Once you do this once, the IRS will send you a booklet and peel off label with the information you used

How to file

• Line 1:• Enter the amount from box one on your W-2– More than one W-2…Add both numbers from box

1 together and enter that number• Line 2: • You will get this number from the bank or

other financial institution– 1099-INT– 2 or more you would add together

How to file

• Line 3:• Will almost never apply to you…leave blank• Line 4:• Just add lines 1, 2, and 3• Adjusted Gross Income: Sum of your wages

and taxable interest

How to file

• Line 5: Determine if you can be claimed as a dependent