NJVS- Personal Financial Literacy Unit 5.2: Taxes on Income
What forms and information do I need to complete my tax return?
A W-2 for wages A 1099-INT for interest A 1099-DIV for dividends and stock sales, etc.
* W-4 Forms are completed by ______?
An employee
How many exemptions can you take?
An exemption is an amount that taxpayers can claim for themselves, their spouses, and eligible dependents (usually children). There are two types of exemptions, either personal or dependency, and each exemption reduces the income subject to tax. While both are worth the same amount, different rules apply to each.
Gross Pay
An individual's taxable income BEFORE any withholding and deductions ( what you earned)
** FICA Tax
Called the FICA (Federal Insurance Contributions Act) tax. Provides Retirement benefits for employees and for the dependents of retired workers and Benefits for the disabled and their dependents. Is a compulsory deduction
Social Security Tax
Called the FICA (Federal Insurance Contributions Act) tax. Social Security taxes provide the following benefits for employees and their dependents: Retirement benefits Benefits for the dependents of retired workers and Benefits for the disabled and their dependents.
Form W-4 (Employee's Withholding Allowance certificate)
Completed by the employee to let the employer know how much withholding to take out of their pay based on the number of allowances (exemptions) claimed.
*As the number of allowances increases, the amount of federal tax withheld...
Decreases
What credits or other deductions can you take?
Deductions reduce your income subject to tax, while credits reduce the amount of tax you pay dollar for dollar. For example, if you owe $500 in taxes and have a $200 credit you qualify for, you only pay $300 in taxes.
Compulsory Deductions (Mandatory)
Federal income tax State income tax Social Security tax (FICA) Medicare tax(FICA) Unemployment Tax (FUTA) Court Ordered Child Support
Which filing status do I qualify for?
Filing status determines the rate at which income is taxed. The five filing statuses are: 1. Single 2. Married filing a joint return 3. Married filing a separate return 4. Head of household 5. Qualifying widow(er) with dependent child. Filing status will be discussed in this lesson.
* What is Your Filing Status? : You are unmarried on the last day f the year, paid more than half the cost of maintaining your home for the year AND have a qualifying dependent living with you for more than half the year
Head of Household
Tax Liability
How much you owe in taxes
Single - Tax Filing Status
If on the last day of the year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree, you are considered single.
What happens if your tax liability is different than your annual withholdings?
If you paid too much tax over the year you get a refund, and If you paid too little, you owe the government money when you file your tax return.
Qualifying Widower - Tax Filing Status
If your spouse died during the tax year, you can use married filing jointly as your filing status for that year. In subsequent years you can file as a qualifying widower if you qualify to use that status.
* What is Your Filing Status? : You are married but decide to file separate tax returns
Married Filing Separately
* What is Your Filing Status? : You are married and have both decided to file your taxes together
Married filing jointly
Form 1040
Most Commonly Used Form Form 1040 for filing taxes, There are several versions depending on how complicated your tax return is Teenagers usually file a Form 1040-EZ because their taxes are simple.
*Tax liability is what you ___________________ in ______________________
Owe in taxes
Filing Taxes
Taxes MUST be filed by April 15th of the next year. Example: your 2020 ta.x return is due by April 15, 2021 You will need to attach a copy of each W-2 you receive to your tax return.
Federal Income Tax
Taxes used to : Finance national defense Support veterans Finance foreign affairs Finance social programs Finance community development Support law enforcement and Finance interest on the national debt.
*Which statements apply to the W-2 Form ?
The W-2 form is completed by the employee Employers must send a W-2 form to each employee ny January 31st of each year (for individual income tax purposes) The W-2 form is used to report an employee's annual wages and the amount of taxes withheld from his/her paycheck
Withholding
The amount of an employee's income that an employer sends directly to the federal, state, or local tax authority as partial payment of that individual's tax liability for the year. Taxes collected on a "pay-as-you-earn" basis, with the money taken out of your paycheck each pay period These taxes include: Federal income taxes, state income tax, and FICA tax (Federal Insurance Contributions Act) for Social Security and Medicare. Employers withhold taxes from every paycheck and send the money to the IRS on the employee's behalf. - **Unless paid 1099 - which means the employee is responsible for paying all taxes THEMSELVES at the end of the year** The first pay-as-you-go tax withholding began in 1943 during World War II, and provided a steady stream of tax revenue to the government during wartime.
Net Pay
The amount of pay received AFTER all deductions (compulsory and voluntary) have been subtracted from the gross amount Voluntary deductions can include premiums for health insurance and your contributions to a retirement account.
*How do self employed people handle taxes?
They need to pay quarterly estimated taxes four times a year
*What is form W-4 used for?
To select your withholding amount
Medicare Tax
Used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of retired workers are eligible to receive Medicare benefits upon reaching age 65.
State & Local Taxes
Vary by state and municipalities. Used For: -Education (both K-12 and higher education) and health care (The greatest amount of state spending) - Transportation - Corrections - Pension and health benefits for public employees - Care for persons with mental illness and developmental disabilities - Assistance to low-income families - Economic development - Environmental projects - State police - Parks and recreation - Housing - Aid to local governments New Jersey has a state tax of between 1.4% and 10.75% depending on income level (2010).
*Form W-2 Wages, Tips, and Other Compensation
W-2, Box 1
*Form W-2 State Wages, Tips, and Compensation
W-2, Box 16
*Form W-2 Federal Income Tax
W-2, Box 2
* *Form W-2 Social Security Tax Withheld
W-2, Box 4
*Form W-2 Medicare Tax Withheld
W-2, Box 6
Married Filing Jointly - Tax Filing Status
You are married and both you and your spouse agree to file a joint return stating your combined income. Married filing jointly taxpayers have the lowest tax rate.
Married Filing Seperately - Tax Filing Status
You are married and decide to file separate tax returns Under very rare circumstances this filing status can be beneficial financially
Mail or E-File?
You can either mail taxes or file online (e-file). If you e-file, refunds can be electronically sent to your bank account and the process is generally faster
Preparing Taxes
You can use a tax professional to prepare your taxes, such as an accountant, or purchase tax preparation software which is both easy to use and accurate. You might also find nonprofit and governmental agencies in your area that provide free tax assistance. All tax forms and information are available online at http://www.irs.gov/.
Head of Household - Tax Filing Status
You must be unmarried on the last day of the year, have paid more than half the cost of keeping up your home for the year, and have had a qualifying dependent living with you in the home for more than half the year (usually a child). However, if your dependent is a parent they do not have to live with you.
Taxes on Income
Employer deducted taxes on income that are paid to the federal government (& SOME STATE GOVERNMENT agencies) - Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming— DO NOT have state personal income tax The most common form of federal taxation. The income tax rules allow the government to collect taxes from any person or business that earns money during the year
Wage Income, Form W-2
Everyone in the United States is required to file a tax return once a year if they earn income over a certain amount. Employers must send a W-2 Form to each employee by January 31st, listing an employee's earnings and taxes withheld. A copy of each W-2 is also sent to the Internal Revenue Service. A copy must be attached to tax return
* What is Your Filing Status? : If your spouse dies during the year, you can use this status the NEXT TAX YEAR if you qualify
Qualifying widower
Voluntary Deductions
Requested by the employee themselves Can include: Premiums for health, vision, & dental insurance Contributions to a retirement account Tuition/certification deductions 401k Contributions Life Insurance Premiums Short term disability Insurance Child Support (NOT court ordered)
Withholdings vary from person to person based on ________________ and the number of ___________________ that are claimed
Salary and the number of allowances (i.e., dependents and filing status) that are claimed.
Self Employed and taxes on income
Since there is no withholding on self-employed earnings, they need to pay quarterly estimated taxes, including Social Security and Medicare, four times a year.
* What is Your Filing Status? :You are unmarried or legally separated from your spouse
Single
*Which of the taxes below are compulsory taxes from an employee paycheck?
Social Security Tax (FICA) Federal Income Tax State Income Tax Medicare tax(FICA) Unemployment Tax (FUTA) Court Ordered Child Support
Employee Withholding Taxes
Social Security tax Medicare tax Federal income taxes State and local taxes
Other Payroll Taxes
State Unemployment Insurance (SUI) State Disability Insurance (SDI) and Family Leave Insurance (FLI).
*TRUE or FALSE: You must attach a copy of your W-2 to your tax return?
TRUE
*What does withholding taxes mean?
Taking taxes from each paycheck and sending it directly to the government
*How can you prepare your taxes?
Tax Software Non-profit tax agency Tax Professional Complete tax forms
Allowances (exemptions)
The number of people whom an employee supports - (including himself or herself) i.e. A high school student who works part-time and is claimed as a dependent by a parent might claim 0 (zero) exemptions. A married man might claim 0 when his spouse has claimed him as an exemption.
Should I take the standard deduction or itemize my deductions?
The standard deduction is a set amount given to everyone who files based on their filing status. This amount is subtracted from your income, and therefore reduces the amount of tax you pay. If you itemize your deductions you can deduct certain expenses like mortgage interest, property taxes, charitable contributions, etc. You have to choose either the standard deduction or to itemize your deductions. This will be discussed more in 5.5 Reducing Your Tax Burden.