Modules 90-97

Module 95

1040EZ tax form - if you earned less than $100,000 the previous year - if you earned less than $1,500 in interest last year - no grandma, no kids - only sources of income are wages, tips, scholarships or compensation for unemployment Virginia tax form 760 total income also called gross income--> all your sources of income, including earned, unearned, and investment income adjusted gross income your total or gross income minus any adjustments STANDARD DEDUCTION free pass—you do not have to pay taxes on the amount of the standard deduction- every taxpayer is eligible Itemize list standard deductions individually itemized deductions individually listed items that quality for tax returns (USFG pays you) tax credits to be subtracted from the AMOUNT YOU OWE (e.g. foreign taxes) your situation If your finances are not too complicated, choose a basic software package. If you have complicated finances, you need software with extra features. your paperwork if you track your financial data on your computer in spreadsheets, then choose a software program that can import that data. your budget If you are on a budget, consider how much you want to pay. Inexpensive programs may not have all the forms. Remember, you need new software every year! your experience If you think you will need help, make sure the software has online support or a help hotline. Watch out for extra fees! your technology If you want to file taxes from your phone or touch-screen, there are apps for that. Look online for applications. choose a tax preparer if he or she is qualified and will stand by you during an audit you want an additional tax deduction for next year you want someone with experience to do your taxes avoid a tax preparer if he or she guarantees you a refund he or she offers you a refund up front he or she wants a percentage of your refund Total income, or gross income, refers to most of your sources of income, including earned, unearned, and investment income. It is important to understand that not all sources of income are subject to taxes or even to the same tax rates. That makes calculating your tax liability a little tricky. The first step is to determine your adjusted gross income—your total, or gross, income minus any adjustments. These adjustments include IRAs, student loan interest, and tuition and fees. You learned about these adjustments in Module 92. The next step is to calculate your taxable income. Step 3: How do you calculate your taxable income? First, you take your adjusted gross income and subtract deductions, credits, and taxes. Let's focus on tax deductions first. Every taxpayer is eligible to take a standard deduction. The standard deduction is kind of like a free pass—you do not have to pay taxes on this amount. How much is a standard deduction? It depends on your filing status and the current rates set by the government. In 2010, the standard deduction for a single taxpayer was $5,700.00 and double that amount for married couples.1 The federal government regularly changes the amount of standard deductions. You can find the information in your tax form instructions or online. Not everyone uses a standard deduction, however. Some people's financial lives are more complicated, and they qualify for other kinds of deductions. If these deductions add up to more than the amount of the standard deduction, the taxpayer will want to itemize, or list, them individually, on a tax return. These are called itemized deductions. Tax credits are different from deductions. Deductions reduce the amount of your taxable income. Tax credits reduce the amount of taxes you owe. In other words, you subtract deductions from your adjusted gross income, but you subtract credits from the amount of taxes you owe. Think of a tax credit as the government repaying you for some of your expenses. Read the list of tax credits below. In this module, you learned the basics of preparing taxes, including what forms to select and what paperwork—such as W-2 forms and interest statements—you will need. You also learned the difference between tax deductions, which reduce your taxable income, and tax credits, which reduce the amount of taxes you owe. Finally, you learned about tax preparation options—whether to use a software program or a professional tax preparer. You should consider your financial situation before making either choice.

Module 91

After establishing an emergency fund, you will want to think about ways to meet your other financial goals. These may be short-term, intermediate-term, or long-term goals. Short-Term Tax Planning Short-term goals can be achieved within one to two years. When thinking about your goals, it is important not to confuse your wants with your needs. Money is limited. Once money is spent, it is gone. Intermediate-term goals often take two to five years to achieve. Long-term goals take at least five years. Long-term goals include saving for retirement, buying a home, or starting a business. companies offer employer-sponsored retirement plans to which their employees can contribute. A 401(k) Plan is a contribution plan where an employee can make contributions from his or her paycheck before taxes are taken out. The contributions go into a 401(k) account and are invested and managed by the 401(k) company, with the employee often choosing the types of investments based on options provided under the plan. In some plans, the employer also makes contributions—that is, the employer matches the employee's contributions up to a certain percentage.1 A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools and other educational institutions. It is also available to employees of certain tax-exempt organizations such as religious organizations.2 A 457(b) plan is available to state or local governments and to tax-exempt non-profit organizations. Employers or employees, through salary reductions, contribute up to a certain annual limit ($16,500 in 2011 and $17,000 for 2012) on behalf of participants under the plan.3 if you do not contribute anything to your 401(k), you will not benefit from the employer's matching contributions. If you do not sign up for the employer-sponsored retirement plan that matches your contributions, it is like throwing away money! Employers will help you save for retirement—but only if you sign up for the employer-sponsored plans and contribute to your retirement account. When you retire, you will receive retirement income from the employer-sponsored plan. Sometimes, you may need to remove your savings from the plan before you retire. For instance, if you switch jobs, you can roll over the funds to the employer-sponsored retirement plan at your new job. If you "cash out" your account—taking out your money and not placing it into another retirement account—you will have to pay taxes and penalties. This is not a good idea. You should always roll over your retirement funds and keep contributing what you can so you can retire comfortably. 401 K plan contribution plan where an employee can make contributions from his or her paycheck before taxes are taken out 403 B plan retirement plan for certain employees of public schools and other educational institutions 457 B plan available to state or local governments and to tax-exempt non-profit organizations IRA personal retirement plan, as soon as you earn income 10% If you withdraw money from a retirement plan, you will have to pay taxes plus a ____ penalty for early withdrawal False True or false: If your employer offers matching contributions, then you do not need to contribute any money to your 401(k) because your employer will do it for you ----SUMMARY--- There are three types of financial goals—short-term, intermediate-term, and long-term. In choosing your goals, keep in mind that needs and wants are different. Make sure you have planned for your needs before you spend money on things that you want but do not need. A typical long-term goal is saving for retirement, which can help ensure that you will retire with financial security.

Estate tax

Estate taxes and inheritance taxes are two forms of taxation on wealth. estate tax is a tax collected on a recently deceased person's assets (e.g., bank accounts, investments, property); however, these assets must be valued at a certain amount before the estate tax kicks in. This minimum amount changes periodically based on congressional legislation. For instance, in 2012, the minimum amount was $5.12 million; estates valued at less than this amount were not taxed. In 2013, the minimum amount was raised slightly to $5.25 million as a result of the American Taxpayer Relief Act.1 The federal government and some state governments levy estate taxes.

Other Taxes

Excise taxes are imposed on certain goods or services, such as tobacco products and alcoholic beverages, gasoline and tires, air travel, and cell phone service. When you pay for gas, you pay an excise tax on top of any sales tax. If you have a cell phone, you probably pay an excise tax. Given that so many people buy gasoline for their cars, travel on airplanes, or use a cell phone, excise taxes are a regular and dependable source of revenue for governments. Tariffs are special taxes on imported products, such as steel and sugar. These taxes are usually paid by businesses rather than by individuals.

Module 94

Federal Individual income taxes, payroll taxes, corporate income taxes, excises, fees, estate taxes and tariffs States inheritance tax, sales and income taxes Local Property and sales taxes Estate tax federal tax collected on a recently deceased person's assets (bank accounts, investments, and property) Inheritance tax similar to a property tax. It is a state-collected tax based on the value of the property that a deceased person passed down to his or her heirs with the heirs being responsible for paying this inheritance tax state taxes do not apply grocery and health/beauty products hese returns are often highly detailed documents that include information about the taxpayer's marital status, sources of income and investments, expenses, deductions, credits, and withholdings. All this information helps determine the taxpayer's tax liability—the amount of tax owed to the government in a given year. An income tax return is important because it is the only way to determine if the government withheld too little or too much in taxes. If too little tax was withheld, the taxpayer needs to pay the remaining amount by April 15 or be subject to penalties. If too much tax was withheld, the government will send a refund or apply the overpayment to next year's taxes, depending on the taxpayer's preference. In Module 95, you will learn the basics of completing a tax return. How does the government decide how much to deduct or withhold? Payroll deductions are simple. The federal government deducts 6.2% for Social Security and 1.45% for Medicare. These percentages have changed over time but have remained steady since 1990.1 Income tax withholdings are a little trickier to calculate. Fortunately, the government and employers work together to figure out the amount. The process begins with a W-4 form, also known as an Employee's Withholding Allowance Certificate. Each employee is entitled to a certain number of allowances or exemptions, which helps determine how much money to withhold. You learned how to fill out form W-4 in Module 90. States that withhold income taxes follow formulas similar to that for federal income taxes. For example, Virginia considers the number of exemptions and the employee's taxable income bracket. The Commonwealth also considers the length of the pay period (usually weekly or biweekly) when calculating withholding. Everyone's tax situation is different, and that is why too much or too little money is often withheld. When Jessica files her annual income tax return next year, she will know if the right amount of money was withheld. If she owes a lot of taxes, or if she has a large refund, she can make adjustments the next year by filling out a new W-4 form and changing the amount of withholding. Exceptions to the Rule — The government does not deduct payroll taxes or withhold income taxes from people who are self-employed, such as farmers, independent contractors, and small business owners. However, self-employed people are still responsible for paying these taxes. They must pay taxes to the government four times a year based on their earnings from the previous year and estimates of their income for the current year. ----Each level of government levies different kinds of taxes to generate revenue. The types of taxes often overlap. The federal government receives most of its revenue from individual income taxes as well as from corporate income taxes, payroll taxes, excise taxes, fees, and tariffs. States receive the bulk of their revenues from sales and income taxes. Finally, many local governments collect property taxes and sales taxes for revenue. Most taxes are "paid as you go." The taxes most people pay regularly are sales taxes, income taxes, and payroll taxes. Many people also pay real estate taxes and personal property taxes. Sales taxes are paid when a purchase is made. Most states impose base sales taxes, and local governments may add local sales taxes, including taxes on meals or hospitality. In most states, food and medicine are either not taxed or taxed at a lower rate. The federal government works with employers to calculate income tax withholdings from employees' paychecks. Employees must first complete a W-4 form, which identifies their exemptions to income tax withholdings. FICA and Medicare are withheld for all wage earners who receive regular paychecks. Self-employed people are not subject to payroll taxes and withholdings in the same way; each quarter, they must pay estimated taxes to the government.

Module 93

Late filing penalty penalty not charged if reasonable cause is shown usually 5% of the amount due for each month the return is late usually charged if filed after the regular due date or the extension due date Late payment penalty 90% of your tax liability is paid before the regular due date maximum penalty is 25%, not charged if reasonable cause is shown usually ½ of 1% of any tax owed by the regular due date Interest interest adds up until the tax is paid one owes interest on tax not paid by the regular due date of the return When and how to file form 4868 can file the return before the extension ends if you cannot file the return on time, file form 4868 regular due date of the return Free file uses brand name tax software audit Sometimes the IRS may ask you to appear in person and provide more information about your tax return If you are audited, you must pay the amount the auditor finds you owe by a certain date, otherwise face interest charges Sales taxed bill multiply the sales tax rate by the amount of sale, and then add to the original price According to the IRS, people make many more mistakes when they file their tax returns on paper rather than electronically. People have been filing electronically for a relatively short amount of time. In 1986, the first electronic transmission of a tax return was sent to the IRS. By 1989, taxpayers in 36 states could file their taxes electronically. By 1990, all taxpayers in the country who expected a refund could file electronically. Free File is available through the IRS Web site. Those who make less than $57,000 can use the Free File service of electronic filing as well as the Free File Fillable Forms. Free File lets you pick the brand name software to use for filing electronically. However, if you made more than $57,000, you can use only the Free File Fillable Forms provided on the IRS Web site. If you are audited, you must pay the amount the auditor determines that you owe. It is very important that you follow all the directions and do what is asked by the deadline. Remember that if the auditor finds that you owe the government additional taxes, interest will start accruing on that money from the day your tax return and any taxes owed were due, not the day you first meet with your auditor. For most taxpayers, this means that interest will begin to accrue on any unpaid taxes starting April 15, the deadline to file your tax return. It is very important to meet the tax-filing deadline. If you are unable to complete a return on time, you may file an extension. Even though the deadline can be extended, you still need to pay all of your estimated taxes by April 15. There are penalties for not paying on time. It is important to be honest on your tax return. The IRS checks returns. If the agency finds an error or questions a return, the return will likely be audited. If you are audited, the IRS will notify you and ask for documentation to support the information on your tax return. You should take an audit very seriously and supply all the requested information and documentation. If you believe the IRS is making a mistake, you can argue your case in the United States Tax Court.

Module 96

Local G -education (public schools and community colleges), libraries, police and fire departments, city and county roads, trash collection, street cleaning, animal control, public utilities State G - education (public schools, including community colleges, state colleges and universities), libraries, public welfare agencies, health care (state hospitals), state roads, state police, motor vehicle agencies, state prisons Fed G - entitlement programs (Social Security, Medicare, Medicaid); national defense and security; agriculture (subsidies and research); health services (food and drug safety, workplace safety, medical research); justice system (federal courts, prisons, law enforcement); national resources (environmental protection, conservation, pollution control, flood control); technology and space exploration; energy regulation and conservation; interest on the national debt; transportation (interstate highways, air traffic control); benefits for federal retirees and veterans; support for education (grants and research); research institutions (Library of Congress, National Archives, National Centers for Disease Control) How can the government keep track of so much money? It relies on a federal budget. The federal budget is a public document that anyone can read. The budget overview section outlines the president's goals and priorities for the next fiscal year. For example, in the overview of his 2012 federal budget proposal, President Obama outlined a list of specific goals, including cutting the deficit, eliminating specific tax breaks in an effort to raise revenues, reforming public school funding, building a nationwide wireless broadband network, and cutting billions of dollars in government administrative costs. The president sends this budget proposal to Congress, which then reviews and develops its own version of the budget, outlining goals congressional members may suggest. After Congress reviews and produces their version, the budget goes to the House and Senate floors for a vote. While the President's budget proposal is often much longer and more detailed than the congressional version, each budget covers and tracks an immense volume of expenditures.2 To find the hard funding data, you need to look deep into the budget document for the sections on itemized expenditures. The numbers can be overwhelming, so let's look at the budget from a broader perspective—the percentage of federal spending. How is the federal revenue spent? You might be surprised to learn that most federal revenues pay for only a few items—Social Security, Medicare, defense and security, "safety net" programs, and interest on the national debt. These five budget items absorb about 80 percent of federal revenue. Take a look at the pie chart below for a breakdown of the spending. a market economy, private businesses could probably provide many of the same programs and services more efficiently and cheaply. Privatization, they argue, would reduce federal spending, stop deficit spending, and pay down the national debt. Let's look at the different qualities of the private sector versus the federal government. Private Sector Federal Government often innovative sometimes bureaucratic quick to respond to the market often slow to change competitive stable profit based—must generate profits to survive need based—increased needs often increase deficit spending often focused on the short term often focused on the long term obligated to clients/customers and, in some cases, shareholders obligated to all citizens, including nonvoters At a glance, the private sector seems to be a good option for running many public programs and services. The private sector is always concerned with profits, which means it might be less likely than the federal government to waste money. It also might be more likely to eliminate bureaucratic problems and provide programs and services that customers want. This is a traditional argument against big government. However, the private sector cannot run a deficit for long periods of time, because investors expect returns, not losses. The government can spend money today to cover the citizens' needs, even if the money is not available, and pay for it at a much later date. The federal government, however, is incredibly stable even during tough economic times. It has been around for more than 200 years, and Americans know it will be there—in good and bad times, regardless of what the market does. Supporters of higher government spending argue that many government programs and services—such as national defense and "safety net" programs for the elderly, poor, disabled, and young—do not generate profits and likely would suffer or be eliminated in the hands of the private sector. It may not be efficient or make everyone happy, and it may operate at a deficit, but the federal government provides programs and services that support all American citizens. Even if you never use any federal government programs or services (which is almost impossible), you still benefit from living in a society in which government helps people. Let's consider a couple examples where the private sector would not easily replace the government. Imagine if private companies took over responsibility for national defense. How would they generate revenues? They would need to appeal to investors and customers who think that national defense is worth paying for. Investors would expect to have a say in how the companies are run, and customers would expect services in return for their purchases. Would these companies be more likely to provide national defense services to their own investors and customers than those who do not have stakes in the companies? Furthermore, if revenues declined, would the companies cut back their services? What if a national crisis arose? Could everyone count on an army run by private companies and motivated by profits? In our current system, tax dollars support national defense, and, as a result, all citizens receive protection. The Pentagon, the headquarters for the U.S. Department of Defense, is located in Arlington County, Virginia. Here is another example. What if only people with children paid for schools? What if you stopped paying taxes to support education as soon as you graduated from high school or college? After all, you would not need school anymore, and it costs so much to send other people to school. As a result, only a small and constantly changing segment of the population would pay for education. But, guess what? All Americans, even if they are not in school, benefit from good education systems. How does a middle-aged college graduate benefit from the education of another person's child? That child could grow up to become his or her doctor. Society is better off when everyone is educated, and that is why most people pay taxes to support education. The federal, state, and local governments all support education in different ways. Progressive taxes require people with more money to pay higher taxes than people who have less. With this type of tax, people who are wealthy or who earn higher incomes must pay a larger percentage of their wealth or earnings in taxes than people who earn less. Income tax is an example of a progressive tax. People who earn more pay a higher percentage of their wealth or earnings in taxes. Another way that the government helps citizens is by providing tax breaks. As you learned in Module 95, tax deductions allow taxpayers to reduce their taxable income, which lowers their taxes. They may also take advantage of tax credits, which reduce the amount of taxes owed. During tough times, the government may also cut taxes. Tax breaks and tax cuts mean that taxpayers get to keep more money in their pockets. Although they reduce government revenues, the hope is that taxpayers will either spend that extra money, which helps the economy grow, or invest it, which increases their assets. So, even though the government actually collects less revenue, many people benefit from consumer spending or investment. Are there any drawbacks to tax breaks and tax cuts? Absolutely. Two things can happen when the federal government does not collect enough revenue. First, it may have to cut back on programs or services. This response, however, may hurt low-income families or elderly retirees who depend on those programs or services. Second, it could respond with deficit spending—borrowing money to make up for the missed revenue. In this case, public services might not get cut, but the deficit spending will increase the national debt. In turn, interest payments on the debt will go up, driving up the debt amount even more. No one likes the feeling of being in debt, and, when the entire country is in debt, all Americans share that feeling and the burden of paying it back. In 2012, the national debt had grown to nearly $16 trillion, alarming many government leaders that the debt is bankrupting the nation. For years, a fierce political fight has been occurring in Congress about methods for reducing the national debt. In general, some leaders favor reducing—or, in some cases, eliminating—federal spending on many programs and services while imposing no new taxes on Americans. Their opponents on the other side want to maintain many of these programs and services at their current, or only slightly reduced, funding levels by raising taxes on wealthier Americans. This disagreement is ongoing and is one of the defining issues of 21st century America. Examine each argument and decide what strategy sounds best for addressing the national debt. Does one strategy work better than the other? If not, can you determine a combination of each plan that may provide the best option? Discuss some of your ideas with your classmates and listen to their opinions. SUMMARY In this module, you learned that the federal budget outlines the president's proposed goals and spending allotments. While Congress starts with the president's proposal as a basis, it ultimately determines and passes the official federal government budget. The federal government spends trillions of dollars annually on a range of expenditures; 80 percent of the federal budget, however, is allotted to only a handful of programs and services, which fall into the categories of Social Security, defense and security, Medicare, "safety net" programs, and interest on the national debt. While some have argued that the private sector could do a better job of running many government programs, the federal government is less influenced by market trends and is more stable. Plus, its main purpose is to protect and support its citizens, regardless of market trends or economic outlooks. The government also redistributes wealth indirectly through taxes. Progressive taxes require people with more wealth or higher incomes to pay more in taxes than people with less money. Proportional taxes, or flat taxes, require everyone to pay the same tax rates. Regressive taxes require people with lower incomes to spend a greater percentage of their money on taxes. Sales taxes can be considered either proportional or regressive. Finally, you learned that federal tax cuts have several effects. They allow taxpayers to keep more of their money to spend on consumer goods or investments. On the other hand, tax cuts reduce federal revenues, which, in turn, could lead to a downsizing or elimination of programs and services. Tax cuts may also cause budget deficits, which escalate the national debt.

Taxes on Earnings

Payroll taxes—deductions for Social Security and Medicare—are deducted from each of your paychecks. Look at your pay stub, and you will see the word FICA under the deductions column. FICA stands for Federal Insurance Contributions Act—the 1935 legislation that created Social Security, an entitlement program for retirees. Workers who contribute for a set number of years are eligible to receive regular Social Security checks after they retire. You will also find the word Medicare on your pay stub. Medicare is a medical insurance benefit provided by Social Security. Current retirees are eligible to use Medicare to help pay medical bills. You do not have a choice about paying payroll taxes; by law, employers deduct them automatically. Medicare is a medical insurance benefit provided by Social Security. Current retirees are eligible to use Medicare to help pay medical bills. You do not have a choice about paying payroll taxes; by law, employers deduct them automatically.

Module 90

Taxes are needed to run the federal, state, and local governments. After all, these governments provide many goods and services, which cost money. -Federal and state services are funded mostly through the federal income tax and state income taxes. -Income taxes are based on how much money a person earns. -In the Commonwealth of Virginia, there is also a sales tax, which is based on how much money a person spends. - Sales taxes pay for many state and local services. -Local governments mainly rely on property taxes, which are paid by businesses and individuals who own property, such as real estate. -Federal payroll taxes pay for Social Security and Medicare, and they are based on the wages a person earns. Federal Income Tax As you earn more money, you will pay more federal income tax. -The federal income tax is considered a progressive tax, which means the tax rate increases as a person's taxable income increases. -In other words, with a progressive tax, people who make more money are required to pay higher taxes. -In each tax bracket, a higher tax on additional income is added to the lower tax from the previous bracket. In the Commonwealth of Virginia and most other states, workers also pay state income taxes. This tax is withheld from your pay and paid directly to the state when you receive a paycheck. - A sales tax is collected when consumers buy taxable items. ---The seller must then pay those taxes to their state and local governments. -In Virginia, the sales tax is composed of both state and local sales taxes. ---The state sales tax is the same throughout the state, but local governments can impose their own sales taxes on top of the state sales tax. Since sales taxes are the same for everyone, they are considered--- regressive taxes---. This means that people who make less money pay a higher percentage of their incomes in taxes. This is important because people who make less money tend to spend more of their incomes and save less. On the other hand, people with higher incomes tend to save larger portions of their incomes. ---If you earn a paycheck, your employer will withhold, or keep, a percentage for taxes and then pay that amount to the federal and state governments. This practice is called withholding. ---- If your employer withholds more income tax than you owe, you will receive a refund at the end of the year. By doing this, you will have lent the government your money—however, the government will not pay you any interest on the loan. When you start a new job, an employer will give you two forms: an I-9 form and a W-4 form. An I-9 establishes your employment eligibility, and a W-4 informs your employer about how much to withhold from your paycheck. The Internal Revenue Service (IRS) issues the W-4 form. If your employer does not give you a W-4, you are considered "working under the table." This is illegal because it means your employer is not telling the government about your work. Your employer is also asking you to break the law, which requires you to report your total income to the government. For further information, roll your mouse over the different sections of the W-4 below. An exemption means that you do not expect to earn enough money to owe any taxes at all. You must be careful because if you do not have enough taxes withheld, you will have to pay them when your taxes are due at the end of the year. If you owe a significant amount, you can be fined for not having enough withheld. You can claim an exemption if you did not owe any taxes last year AND if you expect a refund of all your withholding this year. To review, no federal income taxes will be withheld if you claim an exemption or if you fill in "Single" on your W-4. Gross pay is the amount you earn before paying any income taxes. Net pay is the amount you receive after all income taxes are deducted. FICA OASDI is the deduction for Social Security's Old Age, Survivor's, and Disability Insurance. FICA Medicare is the deduction for Medicare premiums, which is set aside to cover a portion of health care costs for U.S. residents who are at least 65 years old or who are under 65 and disabled. Social Security payments also may be made to your dependents if you die. Additionally, if you become disabled and cannot work, Social Security can provide money to offset your health care costs and as compensation for your lost earnings. How much of your gross income do you pay in payroll taxes? It varies from year to year because the U.S. government changes these rates occasionally to provide tax relief or to infuse more money into these programs. If your job happens to be interrupted for a while—for instance, maybe you worked for an employer during the summer, took a break for school during the fall, and came back to work during winter break—you would have to complete only one W-4 at the beginning of your employment, unless you wanted to make changes. Taxes are important because they help the federal, state, and local governments perform various functions for citizens. Americans pay income taxes, Social Security and Medicare taxes, and state and local taxes. Many of these are deducted directly from a worker's paycheck. A W-4 form is used to help determine the amount of those deductions. Withholding Describes when an employer takes out an employer for taxes for the government Gross pay Amount received before any income tax amounts are taken Exemptions Workers do not have to pay these Payroll tax pay for Social Security and Medicare, and they are based on the wages a person earns Progressive tax people who make more money are required to pay higher taxes Regressive tax people who make less money pay a higher percentage of their incomes in taxes (e.g. sales taxes) I-9 Establishes your eligibility to work W-4 Tells employer how much to withhold from your paycheck

Module 97

To ease taxpayers' tax liability, the federal government allows them to deduct taxes paid at state and local levels when calculating their federal taxable incomes. Taxpayers may deduct income taxes, real property taxes, and personal property taxes that they have already paid to state and local governments. Those state and local taxes add up, so these deductions can be really helpful in reducing a taxpayer's taxable income. Since 2005, sales taxes have been deductible; before this law went into effect, taxpayers could not deduct sales taxes from their federal income taxes.1 Individuals can deduct state and local income taxes paid, or they can deduct sales taxes paid. This allows taxpayers to choose which deduction they want to take, depending on which one is larger. Generally speaking, the deduction works best for people who live in a state with no income tax or where the sales tax deduction is larger than their state income tax deduction. To itemize or not to itemize, that is the question. If you want to take advantage of the tax deductions described in the previous section, you must itemize your deductions on your federal income tax form. Itemizing seems like a lot of work. Should you bother or just take the standard deduction? Think back to what you learned about standard deductions and tax credits in Module 95. Remember, a standard deduction is like a free pass. You do not have to pay federal taxes on the amount of your standard deduction. To find the standard deduction, you identify your income and filing status in an IRS tax table. Here is why you might want to itemize your deductions: Your deductions may add up to more than the standard deduction. That means you can reduce your taxable income and your tax liability. Saving money on your taxes may be worth the effort to itemize. It is really not that much more work to itemize. Look at the form Schedule A (Form 1040). This is where you itemize some of your deductions. You need to focus only on lines 5-8 in the section called Taxes You Paid. Changes in Tax Regulations and Shifts in Tax Burden By now, you know that if taxpayers take deductions when calculating their federal income tax returns, they can lower their taxable incomes and their tax liabilities. This means they pay less in taxes to the federal government. In Module 96, you learned that the federal government cannot balance its budget if it takes in less revenue than it spends. So, what happens when tax deductions reduce federal revenues? It sounds bad, but there are some benefits for taxpayers and state and local governments. The benefits described below illustrate just how interdependent the different levels of government are. What Levels of Government Benefit from Tax Deductions? State and local governments benefit because taxpayers face a smaller overall tax burden. Taxpayers are able to keep more of their income, which is often spent or invested in their local communities. As a result, state and local governments collect more revenue. The federal government deliberately assists taxpayers, which indirectly benefits state and local governments. These governments would not benefit nearly as much if the federal tax policy allowed deductions for estate taxes. The reason is that the number of taxpayers subject to estate taxes is smaller compared to the number who pay state and local taxes. Therefore, state and local governments have a larger tax base from which to collect. Allowing state and local governments to collect more revenue also benefits the country as a whole. The money taxpayers save from paying fewer taxes is often spent or invested. These activities help return money to circulate in the economy, which is good for everyone. Furthermore, as these governments collect more revenue, they can fund programs and services that can improve the quality of life in the area. This can attract new residents, which grows the tax base, and provide more revenues for state and local governments. In addition, the deductions help ease tax burdens on taxpayers who live in high-tax states. Tax burden reflects not the actual taxes you pay but the overall impact of paying those taxes. People who pay a larger percentage of their incomes in taxes bear greater tax burdens. Tax burdens vary across the country because each state has a different tax policy. People who live in states with no or low state income tax rates, or no sales taxes, have lighter tax burdens than people who live in places with high state income or sales taxes. The federal deductions for state income and sales taxes help reduce the tax burden for citizens living in high-tax states. What would happen if the tax laws were changed so that state and local taxes could not be deducted? State and local governments may see their revenues decrease, which could lead to cuts in expenditures, including public programs and services. Canceling the deductions would shift tax burdens on individuals, too. Without federal tax deductions, people in high-tax states would once again bear the weight of paying higher federal income taxes on top of their other taxes. ---SUMMARY--- The government tries not to tax citizens too much because they will not have enough money to spend or invest. One way the federal government eases Americans' tax burdens is through tax deductions. Taxpayers can deduct real property taxes, personal property taxes, and either state income taxes or general sales taxes. To take these deductions, taxpayers must itemize their tax forms by completing a 1040 Schedule A. Itemizing does not require a lot of work if you keep careful records during the year. Although tax deductions cut into federal revenues, state and local governments benefit indirectly when taxpayers keep more money and spend or invest it in these areas. When this occurs, state and local governments can collect more revenue. real property taxes paid to local/state government based on real estate buildings and land Only real property owners get to benefit from this tax deduction goes toward reducing your taxable income state income taxes paid on wages to state government Anyone who pays state income tax and who also itemizes his or her federal tax return is eligible to use this tax deduction the value of the income tax deduction depends on your federal income tax bracket sales taxes paid on point of sale to local or state government People living in states that do not collect income tax benefit You can collect all your sales receipts and add up all your actual sales taxes for what it is worth personal property tax paid to local government People living in places that impose personal property tax benefit Multiply the amount of taxes paid by the percentage of your tax bracket for what it is worth tax liability amount in taxes owed each year False True or false: The end of tax deductions for state and local taxes will increase the tax burdens on people in low-tax states excise taxes Which of the following may NOT be deducted from federal income taxes? general sales taxes If taxpayers choose to deduct state income taxes, which of the following may NOT be deducted from their federal income taxes? Sales tax From 2005 through 2011, if you deducted your state income tax from your federal taxable income, you could NOT deduct-

payroll tax

fed gov

income tax

fed gov/state gov

..

individual income taxes are the biggest source of the federal tax revenue.

Inheritance tax

is similar to a property tax. It is collected by states based on the value of the property the deceased person passed down to his or her heirs; the heirs must pay an inheritance tax based on the value of this property. These taxes on wealth are not everyday taxes. Many people go through their entire lives without having to pay them.

Sales tax

is the most common tax that people encounter on a daily basis. Each time you buy most items, such as meals, books, or laptop computers, a sales tax is added to your bill. Sales taxes are especially important sources of revenue for states and local governments. As you will learn later, sales taxes do not always apply to all purchased items. To calculate sales tax, it is important to change the percentage to a decimal. So, a 2.5% sales tax rate is expressed as 0.025 after being changed to a decimal. To calculate 2.5% of a number, multiply by 0.025. You can round answers to the nearest cent.

Income tax

is yet another deduction from your paycheck. The federal government and most states collect income taxes by withholding some of your pay. You will learn more about this later in the module.

real estate property tax

local government

inheritance tax

state gov

estate tax

state government | federal government

excise tax

state government | federal government

Property taxes

usually refer to taxes on real estate, such as houses or land. Every year, municipalities calculate the value of local homes, office buildings, farms, land, and other real estate and send the owner a tax bill based on that value. These taxes often are billed quarterly (four times per year) or biannually (two times per year); although, homeowners with mortgages can arrange to contribute some of their monthly payments toward property taxes. Some municipalities also levy taxes on personal property. Owners of cars, boats, and farm equipment, for example, usually are taxed annually on the value of their vehicles. In some places, personal property, such as furniture, is taxed annually, too. Individuals must calculate the worth of their specific assets and pay taxes accordingly.