Chapter 5

Taxes

Why do we pay taxes??

Taxes and Your Paycheck

Payroll Taxes Based on earnings Paid to government by you and

employer

Income Taxes You pay on income you receive Varies on financial and family situation You are responsible for calculating!

Taxes and Your Paycheck

FICA – Federal Insurance Contribution Act Social Security

6.2% of gross income Medicare

1.45% Companies match your contribution

Withholding Money taken from paycheck and paid Avoids having to pay government all at once

Your Paycheck Stub

Gross IncomeNet Income Withholdings

Terms

W-4 (page 158) You are responsible for proper

withholdings

IRS Agency that collects income tax

Allowance Number that reduces the amount of

money withheld from your pay The larger the allowance the less

amount withheld

WithholdingWithholding too much Payroll calculated on ANTICIPATED

annual salary Results in refund

Withholding too little Funds due to government when taxes

are filed Payments can be made Reduce allowances Specify extra $$ withheld on W-4

Should you take out extra withholdings as a way to

save??

Read page 160, what do you think?

Mystery: WhereTHE CASE

Years ago, two men spent every day and night together. A third man waited for them nearby. Going outside could kill the men, but they went for short walks and drives nonetheless. Now the men lead normal lives and can go outside as often as they like.

THE MYSTERYWhere were the men and what was their profession?

CLUESThe men were experts in their field.The men’s job required travelThe men worked for the government and were selected from many applicants.The men did not travel in a car or boat.The men made history.The men’s careers really took off in 1969.

Answer:

The men were astronauts on the moon.

File a Tax Return

Must make a certain amount of moneyTax return – set of forms that tax payers use to calculate their tax obligation If you owe – you pay If you overpaid – you receive By April 15!!

DocumentsW-2Form 1099-INTForm 1040-EZ You are single or married filing jointly You have no dependents (people you support

financially) You and your spouse are under 65 Neither you and your spouse is blind Your taxable income is less than $54,000 You earn no more then $1500 in interest You had no income other than wages,

interest, tips, scholarship, or unemployment compensation

1040EZ

Adjusted Gross IncomeDeduction Standard deduction – amount you

may subtract from your adjusted gross income

Taxable IncomeFederal Income Tax Withheld

1040 EZ cont.

Total PaymentsTaxRefund/Owe? Electronic funds transfer

SignCheck for errors

5.3 – Taxes and Government

Benefit Principle Those who use a good or service

provided by the government should pay for it.

Example: Roads

Ability to Pay Principle Make more, pay more Example: Federal Income Taxes Taxes can increase from 15% to 39.6%

Taxes and Income

Progressive Taxes Higher the tax, the more you can earn Higher tax brackets, for example (15-

39%)

Regressive Taxes Less taxes (in%) the more you can earn Taxes on vehicle, for example

Proportional Taxes Same share of all people’s income

Collection of Taxes

Direct Taxes Income taxes Property taxes You pay

Indirect Taxes Someone else pays Businesses – sales taxes

Pay-as-you-earn taxes

Types of Taxes

Income Taxes Federal, State, and local

Sales TaxesProperty TaxesExcise Tax On sale of specific goods and services

– tobacco, gas, alcohol

Types of Taxes cont.

Estate (death) and gift taxes ($10,000)Business and license taxesCustom duties and tariffs

5.4 – Government Spending

The Power to influence “Sin” tax Tax cuts Charities

Public goods Roads, schools, national defense, various

regulatory agencies

Social Security and Medicare (37% of Spending)

Government Spending

National Defense, Veterans, and Foreign AffairsSocial ProgramsNet Interests on the DebtPhysical, Human, and Community DevelopmentLaw Enforcement and General Government

http://www.whitehouse.gov/omb/budget/fy2005/tables.html

Mystery: WhoTHE CASE

A person tries for years to get the financial backing needed for a commercial venture. After finally finding a backer, the person buys materials, hires employees, and begins work. The venture doesn’t meet its objective, but the person’s efforts change the world and the backers are elated by the results.

THE MYSTERYWho is the person and what year was the venture launched?

CLUESThe person is an Italian male.The venture used exiting technology in a new way.The venture made future ventures possible.The man’s financial backers are Spanish.The objective of the venture was to explore new territory.The venture began near the end of the 15th century.

Answer:

Christopher Columbus set sail in 1492, hoping to discover a new route to India.