tax for teens…

1Vocab/Definitions WS

Lesson 1

Introduction

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Note: All information is based on 2011 data

Did You Know

Nearly 1/3 all students work 40+ hours per week in summer

¼ work 35+ hours per week during the school year

Average teen saves $1000 of summer wages

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What’s the Problem?Teens don’t understand

how TAX applies to them

Most forfeit a refund!!!

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Is this you???

Objectives…Basic Tax LawExemptionsDependentsWithholdingsPayroll TaxesIncomeDeductionsWhen and How to File a Tax Return

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(We will focus on Federal Tax in this Unit)

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Lesson 2

I’ve Got A Job!What’s an I-9 and a W-4?

Form I-9 – Employment Eligibility VerificationProves you aren’t an illegal alienPenalty if not one on file for each employeeKeep 3 years after employee is goneAcceptable documents used to prove

citizenship:PassportVoter’s registrationSchool or military IDDriver’s licenseSocial security card

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So What Is A W-4?New employees fill out this formTells employers how much federal income

tax to withhold from paycheck

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Filling Out the W-4 CorrectlyIf don’t fill out correctly:

Owe money when taxes are due April 15

Could be taking out too much tax from paycheck

Lose potential interest

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A Few Key Terms You Need To Know

WITHHOLDING:Represents money that an employer deducts

from paycheck to pay all or part of employee’s taxes

However, depending how much you make for the rest of the calendar year, you may not have to pay federal income tax. If this is you, you would be EXEMPT from paying

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Are you Exempt? Exempt if:

1. Weren’t required to pay federal income tax last year2. Don’t expect to this year either (made less than

$5800)3. If under 19 or a full-time student (or until 24 yr/full time)

4. If have to pay, will depend on if parents CAN claim you as a dependent

DEPENDENT: A person who relies on another taxpayer for at least half of his or her support (food, shelter, clothing, education, etc.)

If divorced Custodial parent (has child 1 more day than other) One makes more money

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Examples:If you live with parents and under 19, you

can be claimed as a dependent regardless of how much you make.

While your parents may not choose to claim you, test is whether they CAN.If they can claim you and you are under 19,

and expect to make under $5800 in the calendar year, you will likely NOT have to pay federal income tax. Note: If you are at least 19 but under 24,

parents can still claim you as a dependent as long as you are a FULL-TIME Student!

12In-Class Am I Exempt WS Am I Exempt WS

I don’t qualify for exempt status – now what?

Need to fill out the personal allowances worksheet on the W-4 form!

The more exemptions (allowances) you claim, the less tax withheld from paycheck

Claim “0” will result in the largest amount of tax to be withheld

13Do: Pg. 6 then Fill out W4 WS

What if I Make a Mistake?Claim exempt and make more than

$5800?

More than likely have to owe taxes!

If you don’t claim exempt (0 allowances)

More than likely break even or receive a refund!

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Lesson 3

Where’s All The Money I Earned?

Where’s All The Money I Earned?Payroll Taxes

Collected from employers and employees to provide retirement benefits (social security, Medicare)

This amount is paid regardless of income earned

Will NOT get back until retirement

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The Paycheck StubMiscellaneous Information

Gross Income

Deductions

May get refund on Fed and State

No refund on SS or Medicare

Net Income

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P. 10 - verbal W4 qz/Am I Exempt QZ

Lesson 4

What’s This,More Forms?W-2s and 1099-INTs

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What? More Forms?W-2 – will have 3 copies

Your records

Attach to state tax return

Attach to federal tax return

1099-INT

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The W-2Must receive these by January 31st

from your employer

Summarizes

How much you made during the year (Earned Income)

How much you paid in for taxes

Use to help fill out tax return

If error, see employer to fix21

1099-INTReceive this form from your bank

Shows interest earned for year

Remember: Interest is considered “unearned income” and may have to pay tax on it!

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W-2 and 1099-INT will help you to determine whether

you are required to, or should, file a federal tax

return!

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Lesson 5

Am I Required to File a Tax

Return?

Am I Required to File a Tax Return (as a dependent)?

Due April 15!

Required? Depends…

*Your income for the year

*If parents can claim you, you must file if:

1.Your unearned income was over $950

2.Your earned income was over $5800

Filing Requirement Worksheet for Most Dependents 1. Calculate Gross Income:

(earned income + unearned income)

2.Enter dependent's earned income plus $300

3.Minimum amount $950

4. Compare lines 2 and 3. Enter larger amt (Adjusted Earned Income)

5. IS: Gross Income > Adjusted Earned Income? MUST file

6. IS: Gross Income < Adjusted Earned Income? DOES NOT have to file

3.

Am I Required to File a Tax Return?

John Garcia, 18, earned $4200 working at the local library and was paid $210 in interest from his bank savings account.

Filing Requirement Worksheet for Most Dependents 1.

Calculate Gross Income:

(earned income + unearned income)

2.

Enter dependent's earned income plus $300

3.

Minimum amount $950

4.Compare lines 2 and 3. Enter larger amt (Adjusted Earned Income)

5.IS: Gross Income > Adjusted Earned Income? MUST file

6.IS: Gross Income < Adjusted Earned Income? DOES NOT have to file

Am I Required to File a Tax Return? Jill Williams, 18,

had two jobs during the past year. She worked as a waitress at La Fogata, where she earned $6800 and as a summer counselor, where she earned $2400. Jill also made $375 in interest.

Do I have to file return WS

Filing Requirement Worksheet for Most Dependents 1.

Calculate Gross Income:

(earned income + unearned income)

2.

Enter dependent's earned income plus $300

3.

Minimum amount $950

4.Compare lines 2 and 3. Enter larger amt (Adjusted Earned Income)

5.IS: Gross Income > Adjusted Earned Income? MUST file

6.IS: Gross Income < Adjusted Earned Income? DOES NOT have to file

Lesson 6

Should I File a Tax Return?

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Should I File a Tax Return?Civic Duty to File

Voluntary Compliance

Government relies on people to:

Report their income

Calculate tax liability correctly

File on time31

To Pay or Not to Pay…Why pay?

Government uses money to fund services

Ex: School

Penalty

Fine up to $25,000

Imprisonment up to 1 year

Or Both! 321-6 Review

Forms?There are 3 forms you can choose from to file

1040EZ – simplest to file

1040A

1040 – most lengthy to file

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Lesson 7

How Do I File the 1040EZ?

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How Do I File the 1040EZ?Must meet requirements to use EZ:

Single

Claim no dependents

Taxable income < $100,000

No income other than wages, salaries, and tips (shown on W-2)

Up to $1500 taxable interest (shown on 1099INT)

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Filling out the 1040EZTerminology:

Adjusted Gross Income (AGI)Sum of wages and taxable interest

DeductionAmount tax payers may subtract from

their AGI before tax is determined (reduction in income)

Taxable IncomePart of income you must pay taxes on

CreditDirect reduction of taxed owed

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Sending in the ReturnPhotocopy the EZ form for record

Mail in W-2 & 1099 INT with return

Check if owe payable to “United States Treasury”

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Don’t Want to Pay? What could you have done differently?If you don’t choose to pay, IRS will

add 5% to what you owe for each month you don’t pay!

W-2

Claimed “0” rather than exempt so take taxes out

Watch out for scam artists!

381040 EZ Prob WS

Other Ways for Government to Collect Money

Income tax not only source

Social Insurance taxes and contributions (retirement and unemployment)

Excise tax (tax on gas, cigarettes, and alcohol)

Estate and gift tax

Customs duties (imports)

Other miscellaneous receipts 39

Where Does Your Money GO? Year 2011 – in billions

of dollars% of debt

National Defense 718 Billion 20%

Social Security 731 20%

Healthcare (Medicare, Medicade, child health ins program)

769 13%

Interest on National Debt

230 6%

Education 72 2%

40Chap 7 review 1040 EZ quiz

Lesson 8

How Do I File the 1040 Form?

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How Do I File 1040 Form?File this form if:

Received dividends or capital gains from an investment

Received tips of $20 or more in any month that you didn’t report

Box 8 of W-2 shows tips allocatedEarned income from your own businessWon money in lottery or raffleReceived non-employee compensation Social Security pension

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Preliminaries Matter

Be sure to have:

1099 Dividends & Distributions form

Any records of receipts

Ex: E-Bay, lottery, drawings

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Filing Status and ExemptionsFiling status affects amount tax paid

Exemptions

$3700 each exemption may be subtracted from adjusted gross income

Exemptions help reduce taxable income!

But you probably won’t qualify

More than likely, parents can claim you

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What is Income?Income: “all income from whatever

source derived”

Types of Compensations for Services:FeesCommissionsPrizes and awardsFringe benefits

Tickets, clothing given to you by employer instead of money

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Other Income Continued…Income derived from business

Deductible expensesMust be “ordinary and necessary”

Interest and DividendsEarnings/Profits to persons who own stockConsidered taxable income

Capital Gains and LossesCapital gain: profit from the sale or exchange

of investmentShort TermLong TermReported on 1099-DIV

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Exclusions From IncomeCertain economic benefits don’t have to count as income =

exclusions from income Gifts

Must see Dominant Reason was out of affection, respect, admiration, charity

Ex: transfer of property

Inheritances

Scholarships May be excluded from income if used to pay tuition/course

related fees

De Minimis Fringe Benefits Ex: Store’s photocopier, company coffee, telephone

Ebay winnings (pg 41)

50Do pg 42 WB

Adjusted Gross Income (AGI)Income reduced by certain expenses

Ex:

Student Loan Interest

One half of self-employment taxSchedule SE

Penalty on early withdrawal of savingsEx: Certificate of Deposit

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Standard & Itemized DeductionsStandard Deduction: Base amount of

income that is not taxed (reduces taxable income)Income: $5800 Itemized Deduction:

State and Local Taxes Gifts to Charity Job Expenses – mileage? Travel Uniforms – if not adaptable to general, everyday use Education – if maintain or improve skills and/or

meet requirements of employer Other: tools, supplies for job, professional

journals, protective clothing52

CreditsA direct reduction of tax owedCredit actually deducted from the

amount you owe (dollar for dollar)

Credits offered:

Encourage certain behavior

Assist those in need

Provide relief

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Credit ExamplesChild Care Expenses

Elderly or Disabled

Adoption Expenses

Buying new electric car

Education expensesForm 8863

Refundable Credit: EIC – person who claiming receives FULL amount of credit even if exceeds tax liability

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Payment or Refund?Payment:

Due April 15

Refund:

Check

Direct Deposit

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1040 Prob WSChap 8 Review

Lesson 9

Conclusion

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