Managing Personal Finances - Income Tax

1. © 2010 South-Western, Cengage Learning
Chapter
© 2016 South-Western, Cengage Learning
3.1 Our Tax System
3.2 Filing a Tax Return
Income Tax
3
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2. © 2010 South-Western, Cengage Learning SLIDE 2
Chapter 3
Lesson 3.1
Our Tax System
Learning Objectives
LO 1-1 List the types of taxes and explain
the purpose of each.
LO 1-2 Describe the U.S. tax system and
explain how it works.
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Chapter 3
Types of Taxes
In a free enterprise system, the
government collects money from citizens
and businesses in the form of taxes.
These incoming taxes called revenue.
The government spends the revenue
received according to priorities set by
Congress.
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Chapter 3
Types of Taxes
Progressive taxes
Regressive taxes
Proportional taxes
Other taxes
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(continued)

5. © 2010 South-Western, Cengage Learning SLIDE 5
Chapter 3
Progressive Taxes
Progressive taxes take a larger share of
income as the amount of income grows.
Federal income tax rates are
progressive.
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Chapter 3
Regressive Taxes
Regressive taxes take a smaller share
of income as the amount of income
grows.
Sales taxes are regressive.
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Chapter 3
Proportional Taxes
Proportional taxes, or flat taxes, are
taxes for which the rate stays the same,
regardless of one’s income.
Property taxes are proportional.
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Chapter 3
Other Taxes
A luxury tax is imposed on certain items,
such as yachts and private planes.
Capital gains taxes, value-added taxes,
tariffs, license and registration fees, user
fees, and tolls are also collected for
purposes of funding government
spending.
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9. © 2010 South-Western, Cengage Learning SLIDE 9
Chapter 3
How the Tax System Works
The IRS
The power to tax
Paying your fair share
Tax rates apply to income ranges, or tax
brackets.
Our income tax system is based on
voluntary compliance, which means that
all citizens are expected to prepare and file
tax returns of their own accord.
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Chapter 3
How the Tax System Works
Failure to pay taxes
Failure to pay taxes can result in interest
charges on the taxes owed, plus a possible
fine.
Willful failure to pay taxes is called tax
evasion, which is a serious crime
punishable by a fine, imprisonment, or both.
(continued)
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11. © 2010 South-Western, Cengage Learning SLIDE 11
Chapter 3
An IRS Audit
Every year, the IRS calls millions of
taxpayers for an audit, which is an
examination of their tax returns.
Types of audits
Correspondence audit
Office audit
Field audit
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12. © 2010 South-Western, Cengage Learning SLIDE 12
Chapter 3
Lesson 3.2
Filing a Tax Return
Learning Objectives
LO 2-1 List and define basic tax
terminology.
LO 2-2 Prepare tax form 1040EZ.
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Chapter 3
Filing Status
Filing status describes your tax-filing
group.
You must choose one of the following as
your filing status:
Single person (not married)
Married person filing a joint return
Married person filing a separate return
Head of household
Qualifying widow(er)
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Chapter 3
Exemptions
An exemption is an amount you may
subtract from your income for each
person who depends on your income to
live.
Each exemption reduces your taxable
income and thus your total tax.
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Chapter 3
Exemptions—Who Qualifies
Yourself, unless someone else claims
you on their return
Your spouse, if you are filing jointly
Your dependents
A dependent is a person who lives with you
and for whom you pay more than half of the
living expenses.
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16. © 2010 South-Western, Cengage Learning SLIDE 16
Chapter 3
Gross Income
Gross income is all the taxable income
you receive.
Earned income refers to money you
earned from working.
Unearned income refers to money you
received from passive activity (other than
working).
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Chapter 3
Forms of Income
Wages, salaries, and tips
Interest income
Dividend income
Unemployment compensation
Social security benefits
Alimony and child support
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Chapter 3
 The law allows you to subtract some types of
spending from gross income.
 You can “adjust” your income by subtracting such
things as contributions to individual retirement
accounts, student loan interest, and tuition and fees.
 These adjustments are subtracted from gross
income to determine adjusted gross income.
 Adjustments reduce income that is subject to tax.
 Note that these adjustments are not available on
Form 1040EZ.
Adjusted Gross Income
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19. © 2010 South-Western, Cengage Learning SLIDE 19
Chapter 3
Adjusted Gross Income
Gross income
– Adjustments
Adjusted gross income
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Chapter 3
Taxable Income
Taxable income is the income on which
you will pay tax.
Your taxable income determines your tax
liability, which is the amount of total tax
you owe on a year’s income.
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Chapter 3
Taxable Income
Gross income
– Adjustments
Adjusted gross income
– Deductions
– Exemptions
Taxable income
(continued)
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22. © 2010 South-Western, Cengage Learning SLIDE 22
Chapter 3
Deductions
Itemized deductions
Standard deductions
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Chapter 3
Itemized Deductions
 Itemized deductions are expenses subtracted from
adjusted gross income to determine taxable income.
 Examples include:
 Medical and dental expenses beyond a specified percentage
of income
 State and local income taxes
 Property taxes
 Home mortgage interest
 Gifts to charity
 Losses from theft or property damage
 Some moving expenses
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Chapter 3
Standard Deduction
 If you do not have many deductions, your tax
may be less if you take the standard deduction.
 The standard deduction is a stated amount
that you may subtract from adjusted gross
income instead of itemizing your deductions.
 This amount changes each year.
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Chapter 3
Tax Credits
 A tax credit is an amount subtracted directly
from the tax owed.
 It is different from a deduction.
A deduction is subtracted from adjusted gross income.
A deduction reduces your tax by reducing the amount of
income on which the tax is figured.
 A tax credit reduces the tax itself.
 The government allows tax credits for certain
education expenses, child-care expenses, and
other special reasons.
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26. © 2010 South-Western, Cengage Learning SLIDE 26
Chapter 3
Preparing a Tax Return
Who must file?
Estimated tax
Which form to use?
Where to begin?
Filing electronically: Tax preparation
software
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27. © 2010 South-Western, Cengage Learning SLIDE 27
Chapter 3
Form 1040EZ
Step 1: Enter name, address, and Social
Security number
Step 2: Report income
Step 3: Compute tax
Step 4: Calculate refund or amount owed
Step 5: Sign the return
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