Income Taxesand You

Unit 1

“Income Taxes and Filing a Tax Return”

Why are taxes so important??

Everyday expense of life

Allows local, state and federal governments to offer services Medicare

Medicaid

Military

Police

Fire protection

Public schools

Road maintenance

Parks

Libraries

Safety inspection of foods, drugs, and other products

Types of Taxes

Sales tax

Property tax

Estate tax

Inheritance tax

Income tax

Internal Revenue Service (IRS)Federal Agency, part of the Department of Treasury, that collects taxes

Primary function = collect federal income taxes and to enforce the nation’s tax laws

Click icon to add picture

Understanding Income Taxes

Every year, millions of taxpayers prepare income tax returns and send to the IRS

Income tax return is a form such as a 1040 or 1040EZ on which a taxpayer reports how much money he or she received from work and other sources and the exact taxes owed

Tax owed is determined by filling out the returns and comparing the amount of tax your employer withheld from your paycheck

Gross and Adjusted Gross Income

Most income is taxable Earned income

Interest income

Dividend income (investments)

Some is not subject to taxes – aka “tax-exempt”

You pay tax on your ‘adjusted gross income’ – this is your gross income after calculating certain reductions

Taxable IncomeTax Deductions and Exemptions

Taxable Income = your adjusted gross – tax deductions/exemptions

Tax Deductions An expense that you can subtract from your adjusted gross

Every tax payer receives at least the ‘standard deduction’ = standard amount of money set by the IRS that is not taxed

Exemptions

A deduction from adjusted gross income for the taxpayer, the spouse, and qualified dependents

Once you know your taxable income, you calculate how much tax you owe using tables provided by the IRS

Form W-2

‘Wage and Tax Statement’

Lists your annual earnings for that job

Lists the amount of tax withheld from your paycheck State

Federal

Social Security (FICA, Medicare)

By law, employers must send you this form by January 31st each year

Who must file?

Citizens or a resident of the United States or a US Citizen who resides in Puerto Rico

Must file if income is above a certain amount specified by your filing status

Single – never married, divorced or legally separated with no dependents

Married, filing a joint return – married couple with combined income

Married, filing separate returns – each spouse paying for his or her own tax

Head of Household – unmarried individual or surviving spouse who maintains a household, paying more than ½ the costs

Qualifying widow/widower – spouse dies within the last 2 years and who has a dependent

Deadlines and Penalties

File by April 15th, unless day falls on a weekend

May file for an extension

If you owe tax, you must pay when you send in the completed form(s)

Can set-up monthly payments if needed with penalty

Refunds are processed when you file your return

Not paying your taxes and not filing is called tax evasion – BAD!!!

Choosing the Tax Form

Simplest form

Taxable income less than $100,000

Single or married (jointly)

Under age 65

No dependents

No more than $1500 taxable interest

No itemizing or claim any tax credits

1040EZ

Choosing the Tax Form Continued…

1040A Taxable income less than

$100,000

Claim the standard deduction

Claim tax credit for child/dependent(s)

Deductions for retirement, student loan interest, educator expenses

Tax credit for child care expenses

1040

Expanded version of 1040A

Taxable income is more than $100,000

Self-employment income

Income from the sale of property

State Income Tax Return

Tax payers pay 1 to 10 percent of their adjusted gross income

Same deadlines as federal returns

New York State form – IT-201

States that DO NOT have state income tax

Alaska

Florida

Nevada

South Dakota

Texas

Washington

Wyoming

Filing your income tax return

Traditional paper forms and mailing

Filing electronically through the Internet

Use programs such as Turbo Tax

Use a professional tax preparer