Taxes

www.irs.gov

Tax

• Requires payment to local, state, or national government

*** IRS (Internal Revenue Service )is in charge of Federal Taxes

Importance of taxes

A) Primary way the government collects money

B) Give the government the money it needs to operate

Milton Friedman• Helped come up with a solution to people

NOT paying their share of income tax

• Established tax withholding from employees’ paychecks

Revenue• Income received by a government from

taxes and non-tax sources

Without Revenue:

The government would NOT be able to provide the goods and services,

such as:

National defense, highways, education, law enforcement

Where does the power to tax come from?

• Stated in the U.S. Constitution

(Federal Government)

Constitution: Article 1, section 8, Clause 1

• “To law and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States; but all duties, imposts, and excises shall be uniform throughout the United States.”

Where are the limits on the Power to Tax come from?

• Stated in U.S. Constitution

(Federal Government)

What are FIVE (5) limits on the power to tax?

A) NOT for individual interestsB) Federal taxes must be the SAME in every

stateC) Can NOT violate the freedoms promised

by the First AmendmentD) Can collect taxes ONLY on ImportsE) Taxes most be divided up among states

according to population

Describe ways to tax according to…

• Value of the object taxed

AND

• How the tax is structured

Tax Base

• Income, property, good, or service that is subject to tax

Four types of Tax Bases

• Individual Income Tax – tax on a person’s income

• Sales Tax – good or service being sold

• Property Tax – value on property

• Corporate Tax – value on company’s profits

Types of Tax Bases:

1. Corporate TaxCorporate Tax – tax on the value of the company’s profits

2. Property TaxProperty Tax – A tax on thevalue of the property

3. Sales TaxSales Tax – A tax on the dollar value of a good or service being sold

Example:

4. Individual Income TaxIndividual Income Tax –A tax on a person’s income

Four (4) Characteristics of a Good Tax• Simplicity – easy to understand

• Efficiency – collect taxes without spending too much time or money

• Certainty – Clear to taxpayer when tax is due, how much, and how to pay

• Equity – should be fair

Three Types of Tax Structures

• Proportional Tax

• Progressive Tax

• Regressive Tax

Proportional Tax

• The percentage of income paid in taxes remains the same for all income levels

• Example: “Flat Tax”

Progressive Tax

• The percentage of income paid in taxes increases as income levels increase

• Example: Income Tax

Regressive Tax

• The percentage of income paid in taxes decreases as income increases

• Example: Sales Tax

Income Proportional Tax

Progressive Tax

Regressive Tax

$30,000

% of income

Amount

15%

$4,500

10%

$3,000

20%

$6,000

$100,000

% of income

Amount

15%

$15,000

30%

$30,000

5%

$5,000

Examples of Tax Structures:

$30,000 $100,000

Proportional 15%

$4,500

15%

$15,000

Progressive 10%

$3,000

30%

$30,000

Regressive 20%

$6,000

5%

$5,000

TWO (2) ways to determine “Fairness”

• Benefits-Received Principle

• Ability-to-pay Principle

Benefits-received Principle• Pay taxes base on the level of benefits s/he

expects to receive

• Example: Gasoline tax (maintains roads)

Ability-to-pay Principle

• Pay taxes based on their ability to pay

• Example: Progressive income tax

(More income = more taxes paid)

Withholding

• Taking tax payments out of an employee’s pay before s/he receives it.

• Examples: Social Security, Medicare

Tax Return

• Form used to file income taxes

• Due every year by April 15th

• Taxable Income – income on which tax must be paid

• Gross Income – total income

• Net income – income after taxes are deducted

• Deductions – Variable amounts that you can subtract, or deduct from your gross income

Why is April 15th important?

This is the day –every year—that individual income taxes are due

(with some exceptions)

You must file 3 tax forms: Federal, State, and Local

Who has to file their income taxes?

Normally, if you are SINGLE (not married), you do NOT have to file you taxes if

you made less than

$8,750 LAST YEAR$8,750 LAST YEAR

(BEFORE taxes—your gross income)

How can you file your taxes?

• Mail• Phone• Internet (e-file)

Where do I get forms from?

• Post office

• Internet (www.irs.gov)

• Phone

• IRS office

• Mail

• CD Rom

What items should you have ready when filing?

• Social Security numbers

• W-2 forms (from ALL employers for that year)

http://www.irs.gov/pub/irs-pdf/fw2.pdf

1099 Forms

(ex: dividends)http://www.irs.gov/pub/irs-pdf/f1099r03.pdf

• Receipts for itemized deductions

• Bank Account numbers (to have money automatically deposited)

What is the 1040?

1040:1040: “Long form”

1040A:1040A: Medium form

1040EZ:1040EZ: “Easiest” form

Who can file a 1040?

1.Taxable income of $50,000 or more

1.Itemized deductions 2.Self-employment income 3.Income from sale of property

http://www.irs.gov/pub/irs-pdf/f1040.pdf

Who can file a 1040A?

1.Taxable income below $50,000 2.Capital gain distributions3.Specific tax credits (child tax, education, earned income, child and dependent care expenses, adoption and retirement savings contributions 4.Only deductions for IRA contributions, student loan interest, educator expenses or higher education tuition and fees 5.No itemized deductions

http://www.irs.gov/pub/irs-pdf/f1040a.pdf

Who can file a 1040EZ?

1.Taxable income below $50,0002.Single or Married Filing Jointly3.Under age 65 4.No dependents 5.Interest income of $1,500 or less

http://www.irs.gov/pub/irs-pdf/f1040ez.pdf

http://www.irs.gov/pub/irs-pdf/i1040ez.pdf

What if you can’t pay?

http://www.irs.gov/taxtopics/tc202.html

1. Direct Debit from your bank account

2. Payroll deduction from your employer

3. Routine installment