Lecture #17: Taxes

“The hardest thing in the world to

understand is the income tax”

~Albert Einstein

Now it is time to watch a video clip on Taxes!!!

Click on the link below: http://www.brainpop.com/socialstudies/economics/taxes/ User ID: FSUSD Password: School Make sure you view in Full Screen Make sure the computer speakers are on!

•American Revolution caused debt

The Power to Collect Taxes

•Tax was necessary to pay debt

•Article 1, Section 8 of the U.S. Constitutiongranted Congress power to tax

You do not need to copy this slide into your notes!

Federal Taxes

1. Personal Income Tax—a tax people pay on their income

• Paid to federal & most state govts

2. Corporate Income Tax—a tax corporations pay on their profits

• Paid to federal & most state govts

3. Social Security Tax—a tax paid to the federal govt on income generated from employment

• ½ paid by employers & ½ paid by employees

Remember when taking

Cornell Notes you need to come up

with at least 3 questions per page!

Three Major Federal Taxes

44% comes from

Personal Income Tax

Where the Money Comes From—

for each dollar the Federal Government raises from taxes!

10.3% comes from Corporate Income Tax

38% comes from Social Security tax

7.7% comes from other federal taxes

2005 data

You do not need to copy this slide into your notes!

The Federal Government Dollar- Where It Goes

Homeland Security

1%

Medicare, andother Retirement

32%

DOD Military19%

Social Security21%

Other19%

Net Interest onthe Debt

7%

Other Taxes

1. Sales Tax—applied to the purchase of many goods

• Collected by states only—varies among states

2. Excise Taxes—placed on the purchase of certain goods—such as tobacco & gas

• Collected by the federal govt & many states

3. Property Tax—homeowners pay a tax on the value of their property

• Major revenue source for state & local govts

Three Other Taxes

The State Dollar-Where It Comes From

All Other10%

Motor Fuel Sales Tax

4%

Property Tax32%

General Sales Tax &Gross Receipts

25%

Individual Income Tax22%

Alcoholic Beverages Sales Tax

1%

Tobacco Product Sales Tax

1%

Motor Vehicle License2%

Corporate Income Tax3%

You do not need to copy this slide into your notes!

The State Dollar-Where It Goes

Social Services 21%

Government Administrative

4%

Education30%

Utility Expenditure7%

Transportation 7%

Interest on General Debt

4% Public Safety

8% Environment and

Housing7%

General Expenditure

5%

Insurance Trust Expenditure

7%

You do not need to copy this slide into your notes!

AMT • AMT—a tax that some people have to pay on top of their regular income tax

• A minimum tax is computed for a given income—if you make that income & pay at least that amount of taxes you don’t pay the AMT. If you pay less than that amount in taxes—you pay the AMT amount.

• Created in 1969 to prevent persons w/high incomes from paying little or no taxes b/c of tax write-offs.

• 1969 only 1% of the population paid AMT, today over 3% pay this tax.

• In 2006, the income was $67,890 for a person filing jointly w/2 children.

The Alternative Minimum Tax

Taxes • Proportional Taxes—everyone pays at the same rate, whatever their income level.

• A.K.A. Flat tax

• Progressive Income Tax—people pay higher rates as their income rise.

• Usually capped. • The U.S. has a progressive income tax

structure. • In 2005, tax rates were 10, 15, 25, 28, 33 & 35

percent

• Regressive Income Tax—tax rate that decreases as income levels rise.

Proportional, Progressive & Regressive Income Taxes

Countries with a flat tax structure

Country Rate Year Introduced

Estonia 26% 1994

Lithuania 33 1994

Latvia 25 1995

Russia 13 2001

Serbia 14 2003

Ukraine 13 2004

Slovakia 19 2004

Georgia 12 2005

Romania 16 2005

For your information

You do not need to

write this down!

Tax Brackets

U.S. Tax Brackets - 2006

Single Taxpayer Rate

$0-$7,550 10%

$7,551-$30,650 15%

$30,650-$74,200 25%

$74,201-$154,800 28%

$154,801-$336,550 33%

$336,551-and above 35%

You do not need to copy this slide into your notes!

Who Pays the Most Tax in the United States?

Income GroupIncome Split

PointGroup’s share of total U.S. income

Group’s share of federal income

taxes

Top 1% Above $285,424 16.12% 33.71%

Top 5% Above $126,525 30.55% 53.80%

Top 10% Above $92,663 41.77% 65.73%

Top 25% Above $56,401 64.37% 83.90%

Top 50% Above $28,654 85.77% 96.50%

Bottom 50% Below $28,654 14.23% 3.50%

Source: IRS 2003 For your information.You do not need to write this down!

The following slides are about the IRS & Filing taxes!

You do not need to write down this information in your notebooks.

This information will help you with Part 6 of your Game of Life project!

Voluntary Compliance

•Keep necessary records

•Report income accurately

•Correctly calculate tax liability

•File returnson time

Pay-As-You-Go Withholding

•Taxes are paid as income is earned

•Taxes are withheld based on Form W-4 information

Form W-2

•Shows how much employees earn

•Copy must be attached to tax return

Financial RecordKeeping

Financial Record Keeping

Save:

•Paycheck stubs

•Bank statements

•Completed tax returns and forms

•Warranty information

•Receipts

•Credit card statements

Store items in:

Financial Record Keeping

•Envelopes or accordion file

•Filing cabinets

•Computer

•Safety deposit boxes

Tax Liability

Three Methods of Tax Return Preparation

•Electronically

•Tax Preparation Software

•Manually

Electronic Tax Preparation and Transmission

Methods of Electronic Tax Preparation and Transmission

•Telefile

•Personal Computer

•Tax Professional

Refunds

HOURS AND EARNINGS

Hours Earnings

TAXES AND DEDUCTIONS

Description Amount

20 200.00 FICA

Federal

State

City

Total Taxes

15.20

10.25

5.10

1.00

31.55

TOTAL

Taxable Wages

200.00

Less Taxes

31.55

Net Pay

168.45

Exemptions are set amounts that you subtract from your gross income for yourself, your spouse, and any dependents.

Deductions are variable amounts that you can subtract from your gross income.

Filing a Tax Return

A tax return is a form on which you declare your income to the government and determine your taxable income.

Taxable income is a person’s total (or gross) income minus exemptions and deductions.

You do not need to copy this slide into your notes!

Let’s practice!

Filling out a W-4 form Filling out a 1040EZ form

Review—True or False

1. There are 5 major taxes at the federal government level.

2. The federal government and some states apply an excise tax on some items.

3. The alternative minimum tax is a tax that everyone pays on top of their regular income tax.

4. With a proportional income tax, everyone pays at the same rate.

Review—True or False

1. There are 5 major taxes at the federal government level. FALSE

2. The federal government and some states apply an excise tax on some items.

TRUE

3. The alternative minimum tax is a tax that everyone pays on top of their regular income tax.

FALSE

4. With a proportional income tax, everyone pays at the same rate.

TRUE