Chapter 14 Section 2: Federal Taxes

Objectives: o Objectives: Describe the process of paying individual income taxes o Identify: the basic characteristics of corporate income taxes. o Explain: the purpose of Social Security, Medicare, and unemployment taxes. o Identify other types of taxes.

Luk_20:25 And he said unto them, Render therefore unto Caesar the things which be Caesar's, and unto God the things which be God's.

o The governments main source of revenue comes from the federal tax on individuals taxable income. o 43 percent of the governments revenue comes from this source.

Pay as You Earn Taxation: o The amount of federal income tax a person owes is determined on an annual basis. o In theory, the federal government could wait until the end of the tax year to collect individual income taxes. o In reality that would be a problem for both taxpayers and the government.

Pay as You Earn Taxation: o Like other employers, the government has to pay regularly for rent, supplies, services, and employers salaries. o A single annual payment from all the nations taxpayers at once make meeting these expenses difficult.

Pay as You Earn Taxation: o Similarly, many people might have trouble paying their taxes in one large sum. o For these reasons, federal income tax is collected in a pay-as-you-earn system. o This means that individuals usually pay most of their income tax throughout the calendar year as they earn income. o They have until mid-april of the following year to pay any additional income taxes they owe.

Tax Brackets: o The federal income tax is progressive tax. o In other words the tax rate raises with the amount of taxable income.

Tax Withholding: o Employers are responsible in part for carrying out the system of collecting federal income taxes. o They do so by withholding or taking payments out of your pay before you receive it. o The amount they withhold is based on an estimate of how much you will owe in federal income taxes for the entire year.

Tax Withholding: o After withholding the money, the employer forwards it to the federal government as an installment payment on your upcoming annual income tax bill.

Filing A Tax Return o After the calendar year ends, employers give their employees a report stating how much income tax has already been withheld and sent to the government. o The employee uses the information to complete a tax return. o A tax return is a form used to file income taxes. o On it, you declare your income to the government and figure out how much of that income is taxable.

Filing A Tax Return o Taxable Income is a person s gross or total income minus exemptions and deductions. o Gross income includes earned income, salaries, wages, tips, and commissions. o It also includes income from investment such as interest on savings account and dividends from stock.

Filing A Tax Return o Personal exemptions are set amounts that you subtract from the gross income for yourself, your spouse, and any dependents. o Tax deductions are variable amounts that you can subtract or deduct from your gross income. o Deductions include such items as interest on a mortgage, donations to charity, significant medical expenses, and state and local tax payments.

Filing A Tax Return o Once you determined how much tax you owe, you can apply any tax credits that you may be allowed. o A tax credit is an amount that you can subtract from the total amount of your income tax. o You can claim a credit for such things as a portion of the cost of child-care and higher education.

Filing A Tax Return o Completing a tax return allows you to determine whether the amount of income taxes you have already paid was higher or lower than the actual amount of tax you owe. o If you have paid more than you owe the government sends you a refund. o If you pay less than you owe, you must pay the balance to the government.

Filing A Tax Return o All federal income tax returns must be sent to the Internal Revenue Service or IRS by midnight on April 15 or the next business day if April 15 falls in a weekend.

Corporate Income Taxes: o Like individuals, corporations must pay federal income taxes made up just over 10 percent of federal revenues in recent years. o It can be difficult to determine corporate taxable income because they can make a lot of deductions. o They can subtract many expenses from their income before they reach the amount of income subject to taxation.

Corporate Income Taxes: o This includes cost of employers health insurance. o Social Security o Medicare o Unemployment Taxes.

Corporate Income Taxes: o In addition to withholding money for income taxes, employers withhold money for taxes authorized under the Federal Insurance Contributions Act (FICA). o Employees and employers of FICA share payments. o FICA taxes fund two large government social-insurance programs. o Social Security and Medicare.

Social Security Taxes: o Most FICA taxes you pay go to the social security administration to fund old-age, survivors, and disability insurance (OSADI), or social security. o Social Security provides benefits to surviving family members of wage earners and to people whose disabilities keep them from working.

Social Security Taxes: o Each year the government establishes an income cap for social security taxes. o No social security taxes could be withheld from a taxpayer s wages and salaries above that amount.

Medicare Taxes: o FICA taxes also fund Medicare. o The Medicare program is a national health insurance program that helps pay for the healthcare for people over age 65. o It also covers people with certain disabilities. o Both employees and self employed people pay the Medicare tax on all their earnings. o There is no ceiling as there is for social security.

Unemployment Taxes: o The federal government also collects an unemployment tax, which is paid by employers. o In effect the tax pays for an insurance policy for workers. o If workers are laid off from their jobs through no fault on their own, they can file an unemployment compensation claim and collect benefits for a fixed number of weeks.

Unemployment Taxes: o In order to receive the benefits, one most show that they are actively looking for another job. o The unemployment program is financed by both state and federal unemployment taxes.

Other Types of Taxes: o Federal Excise Tax: a general revenue tax for sale or manufacture of a good such as gasoline, cigarettes, alcohol, telephone services, cable TV, etc.

Other Types of Taxes: o Estate Tax: is a tax on the estate or total value of the money and property, of a person who has died. o It is paid out of the person s estate before the heirs receive their share. o A person s estate includes real estate, car, furniture, investments, painting, insurance, and money. o It is a progressive tax. o As of 2008, if the total value of an estate is $2 million or less, there is no federal estate tax.

Other Types of Taxes: o Gift Tax: is a tax on the money or property that one person living gives to another. o Under current law, a person can give up to $12,000 a year tax-free to each of several different people. o This is meant to avoid estate taxes by giving away their money before they died.

Other Types of Taxes: o Import Taxes: taxes on imported goods (foreign goods brought into the country) are called tariffs. o Today most tariffs are intended to protect American farmers and industries from foreign competitors rather than to generate revenue. o Tariffs raise the price of foreign items which help keep American products competitive.

Taxes That Affect Behavior: o The basic goal of taxation is to create revenue. o However, governments sometimes use tax policy to discourage the public from buying harmful products. o They also use taxes to encourage constructive or helpful behavior. o The use of taxation to discourage or encourage certain types of behavior is called a tax incentive.

Taxes That Affect Behavior: o Federal taxes on tobacco products and alcoholic beverages are examples of the so called sin taxes. o The main purpose is to discourage people from buying and using these products.

Incentives: o Incentives also come in the form of tax credits. o Congress has tried to encourage energy conservation by offering a variety of credits to consumers and the industry. o Such as solar panels, hybrid cars, etc.

Discussion Questions Where do you think the government should spend more tax dollars the most? Do you think sin taxes is a effective means to prevent people from purchasing harmful substances rather than banning them? (Write on the blank portion of your handout)