Chapter. Federal Income Tax. 7.1 Our Tax System 7.2 Filing Tax Returns South-Western, Cengage Learning

Transcription

1 Chapter 7 Federal Income Tax 7.1 Our Tax System 7.2 Filing Tax Returns 2010 South-Western, Cengage Learning

2 Lesson 7.1 Our Tax System GOALS Why do we pay taxes? What are the different types of taxes? Describe how the U.S. tax system works South-Western, Cengage Learning SLIDE 2

3 Purpose of Taxes In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes. These incoming funds to the government are called revenue. The government spends the revenues received according to priorities set by Congress South-Western, Cengage Learning SLIDE 3

4 Types of Taxes Progressive taxes Regressive taxes Proportional taxes 2010 South-Western, Cengage Learning SLIDE 4

5 Progressive Taxes Progressive taxes take a larger share of income as the amount of income grows. Federal income taxes are progressive South-Western, Cengage Learning SLIDE 5

6 Regressive Taxes Regressive taxes take a smaller share of income as the amount of income grows. Sales taxes are regressive South-Western, Cengage Learning SLIDE 6

7 Proportional Taxes Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of income. Property taxes are proportional South-Western, Cengage Learning SLIDE 7

8 Components of the Tax System 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 without force South-Western, Cengage Learning SLIDE 8

9 (continued) Components of the Tax System Failure to pay taxes Failure to do so can result in a penalty: 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 South-Western, Cengage Learning SLIDE 9

10 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 Office audit Correspondence audit Field audit 2010 South-Western, Cengage Learning SLIDE 10

11 Lesson 7.2 Filing Tax Returns GOALS How do you prepare tax forms 1040EZ and 1040A? 2010 South-Western, Cengage Learning SLIDE 11

12 Filing Status Filing status describes your tax-filing group. You must mark one of the following as your filing status on your tax form: Single person (not married) Married person filing a joint return Married person filing a separate return Head of household Qualifying widow(er) 2010 South-Western, Cengage Learning SLIDE 12

13 Dependents Any person who lives with you and receives more than half his or her living expenses The person must be a relative The person must be a citizen or resident of the U.S. The person cannot file a return and claim himself or herself as an exemption The person s income must not exceed the amount of the exemption 2010 South-Western, Cengage Learning SLIDE 13

14 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) South-Western, Cengage Learning SLIDE 14

15 Common Types of Income Wages, salaries, and tips Interest income Dividend income Unemployment compensation Social security benefits Child support Alimony 2010 South-Western, Cengage Learning SLIDE 15

16 Adjusted Gross Income 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 South-Western, Cengage Learning SLIDE 16

17 Adjusted Gross Income Gross income Adjustments Adjusted gross income 2010 South-Western, Cengage Learning SLIDE 17

18 Deductions Expenses the law allows you to subtract from your adjusted gross income Itemize deductions Standard deduction 2010 South-Western, Cengage Learning SLIDE 18

19 Itemize Deductions Itemize deductions are expenses you can subtract from adjusted gross income to determine your taxable income. Examples include: Medical and dental expenses beyond a specified percentage of your income State and local income taxes Property taxes Home mortgage interest Gifts to charity Losses from theft or property damage Moving expenses 2010 South-Western, Cengage Learning SLIDE 19

20 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 South-Western, Cengage Learning SLIDE 20

21 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 South-Western, Cengage Learning SLIDE 21

22 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 his or her living expenses South-Western, Cengage Learning SLIDE 22

23 Taxable Income Taxable income is the income on which you will pay tax South-Western, Cengage Learning SLIDE 23

24 (continued) Taxable Income Gross income Adjustments Adjusted gross income Deductions Exemptions Taxable income 2010 South-Western, Cengage Learning SLIDE 24

25 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. It 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 reasons from time to time South-Western, Cengage Learning SLIDE 25

26 Preparing Your Income Tax Return Who must file? When to file? Which form to use? Where to begin? Filing electronically Tax preparation software 2010 South-Western, Cengage Learning SLIDE 26

27 Form 1040EZ Step 1: Name, address, and Social Security number Step 2: Report income Step 3: Compute tax Step 4: Refund or amount owed Step 5: Sign the return 2010 South-Western, Cengage Learning SLIDE 27

28 Form 1040A Step 1: Name and address Step 2: Filing status Step 3: Exemptions Step 4: Income Step 5: Adjusted gross income Step 6: Taxable income Step 7: Tax, credits, and payments Step 8: Refund or amount owed Step 9: Signature 2010 South-Western, Cengage Learning SLIDE 28