3 Income and Taxes 3 1 Income Objectives

3 Income and Taxes

3. 1 Income

Objectives • List and describe examples of earned income • Identify common payroll deductions, and explain how net pay is determined • Describe common types of employee benefits • Explain work-life balance Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Key Terms • • • earned income wage overtime wage piecework salary commission tip bonus gross pay • • payroll deduction Form W-4 dependent net pay FICA taxes employee benefit compensation work-life balance Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Essential Question • Why is it important for a worker to understand how net income is calculated? Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income • Earned income is the income received from employment, including self-employment – wages – salaries – commissions – tips – bonuses – self-employment income Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • A wage is payment for work that is usually calculated on an hourly, daily, or piecework basis – Example: an hourly wage, which is a fixed amount paid for each hour worked – Paid on a schedule, such as every week or every two weeks Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • Minimum wage is the lowest hourly wage employers can pay most workers by law • The US government sets and enforces the minimum wage through the Fair Labor Standards Act (FLSA) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • Overtime wage is the amount paid for working time in a week that is beyond the standard 40 hour workweek • Eligible workers who work more than 40 hours per week must receive overtime pay at least 1. 5 times their regular hourly rate for the hours in excess of 40 Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) regular earnings: 40 hours $10 per hr = $400 overtime rate: $10 per hr 1. 5 = $15 per hr overtime earnings: 4 hours $15 per hr = $60 total earnings: $400 + $60 = $460 Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • Piecework is a wage based on a rate per unit of work completed – Example: garment workers paid by the number of garments completed – Total piecework wages must add up to at least the minimum wage Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • Salary is a fixed payment for work and is expressed as an annual figure – Paid in periodic equal payments at regular intervals during the year – Examples are weekly, biweekly, semimonthly, monthly • Salaried workers are expected to put in as much time as it takes to do the job Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • A commission is income paid as a percentage of sales made by a salesperson – Some people work on a commission-only basis – Others may receive a combination of a base salary plus commission – Income can vary from month to month or year to year Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • A tip is money paid for service beyond what is required – Also called a gratuity – This money belongs to workers, not their employers – Common for food servers, taxi drivers, hair stylists, and other service-industry workers • FLSA requires that tipped workers be paid at least the minimum wage Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • A bonus is money added to an employee’s base pay – Incentives to encourage workers to perform better – Usually based on worker performance, length of time with the company, or company performance Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Earned Income (Continued) • Self-employed people work for themselves and earn income called profit or self-employment income – Self-employed workers include artists, carpenters, consultants, and others – Self-employed workers must arrange and pay for their own employment-related benefits Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions • Gross pay is total income before payroll deductions • A payroll deduction is a subtraction from gross pay • Some deductions are mandatory – Social Security taxes – Medicare taxes – income taxes Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) • The federal income tax system is built on a payas-you-earn concept – Each working person pays taxes from each paycheck instead of in one lump sum each year – State and local income taxes usually work this way, too Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) • Form W-4 is the Employee’s Withholding Allowance Certificate that helps an employer determine how much income tax to withhold from an employee’s paychecks as payroll deductions • When you begin a job, your employer will ask you to complete a Form W-4 Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) Goodheart-Willcox Publisher Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) • The amount of income tax withheld from your paycheck depends on multiple factors – how much is earned – marital status – number of allowances claimed Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) • An allowance is an amount of earnings not subject to income taxes • Taxpayers may take an allowance for themselves and for each dependent • A dependent is an individual who relies on someone else for financial support, such as a child, a spouse, or an elderly parent • The more allowances that are claimed, the smaller the amount of tax that is withheld Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) • Net pay, or take-home pay, is gross pay (plus bonuses) minus payroll deductions • Based on the information provided on the Form W-4, deductions are made from gross pay Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) • Most workers in the United States are covered by the Federal Insurance Contributions Act (FICA) • FICA taxes, or Social Security and Medicare taxes, are taxes paid by the employee and employer that are used to finance the federal Social Security and Medicare programs Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) • FICA is a matching tax • Employers must match the amount of FICA tax that the employees pay; each pays 7. 65% – 6. 2% for Social Security with an annual cap on income that is subject to Social Security taxes – 1. 45% for Medicare with no cap on income taxed for Medicare Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Payroll Deductions (Continued) • Federal, state, and local withholding taxes are deducted from gross pay based on earnings, marital status, and the number of withholding allowances claimed • Other voluntary deductions may be withheld for health, dental, vision, and other insurance that employees get through their employers Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Benefits • An employee benefit, or fringe benefit, is a form of noncash compensation received in addition to a wage or salary • Compensation is wages or salaries and benefits paid to employees Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Benefits (Continued) • Common benefits include: – insurance – retirement plan – sick leave and vacation time – flexible work schedule – childcare – profit-sharing program – opportunities for continuing education and professional development Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Work-Life Balance • Work-life balance is the amount of time an individual spends at work compared to the amount of time spent in a personal life – personal leave – family leave – flextime – job sharing – telecommuting Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 1 Review 1. Name the US government law that sets and enforces the minimum wage. The Fair Labor Standards Act (FLSA) sets and enforces the minimum wage. 2. What is income called when you earn it working for yourself rather than for a company? Income earned while working for yourself is known as self-employment income. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 1 Review (Continued) 3. Explain why the federal income tax system is known as a pay-as-you-earn system. The federal income tax system is known as a pay-as-you-earn system because a working person pays taxes from each paycheck instead of in one lump sum each year. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 1 Review (Continued) 4. What is an employee benefit? An employee benefit is a form of noncash compensation received in addition to a wage or salary. 5. Name one of the ways an organization can offer work-life balance to its employees. Personal leave, family leave, flextime, job sharing, telecommuting. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

3. 2 Tax Returns

Objectives • List examples of information needed to file an income tax return • Explain how to prepare a Form 1040 EZ • Identify sources of tax information and assistance • Describe the tax audit process Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Key Terms • • tax return voluntary compliance Form W-2 gross income unearned income taxable income adjusted gross income • tax deduction • • itemized deduction standard deduction exemption tax liability tax credit tax table audit tax audit Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Essential Question • What information is required for an individual to complete a tax return? Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics • The Internal Revenue Service (IRS) is the government agency responsible for enforcing federal income tax laws • A tax return is a report containing information used to calculate taxes owed by the taxpayer • Tax returns may also be filed with state governments, and with some cities • Not filing a tax return is a crime Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Individual income tax is the federal government’s largest source of revenue • Voluntary compliance means that the government expects individuals and businesses to voluntarily report all income that is subject to the income tax Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Some income is reported by employers • Other sources of income must be voluntarily reported by the taxpayer – tips – gains from selling personal property – income earned by independent consultants Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Individuals must file a tax return when their income reaches a level set by the IRS • If income is not great enough to require a tax return but income taxes were withheld, a return must be filed to get a refund • Refunds are never automatic Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Tax returns must be filed no later than April 15 of the year after the income was earned – If April 15 falls on a Saturday, a Sunday, or a national holiday, the filing date is extended to the next business day – Late filers are charged a penalty Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Filing status is a category that determines which tax form to use and the tax liability • It is based on your marital status on the last day of the tax year – Single – Married filing jointly (even if only one had income) – Married filing separately – Head of household (with qualifying person) – Qualifying widow(er) with dependent child Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Form W-2 is a Wage and Tax Statement that shows your earnings and the amounts of income, Social Security, and Medicare taxes withheld from your earned income during the year • You will receive a Form 1099 -MISC for income from contracted work, royalties, unemployment compensation, and other nonemployee income Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Gross income is all the income an individual receives in a year, including both earned and unearned income – A taxpayer must calculate the gross income for a tax return – Unearned income is earnings from sources other than work Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Unearned income includes: – lottery winnings – interest – rent income – dividends and capital gains – Social Security/retirement income – alimony – unemployment compensation Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Taxable income is the amount on which taxes are calculated – Tax adjustments are government-approved reductions in gross income which help reduce the amount of tax that must be paid – Adjusted gross income is calculated by subtracting adjustments from total income Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • A tax deduction is an amount that is subtracted from adjusted gross income • An itemized deduction is an allowed expense that can be deducted from adjusted gross income – mortgage interest – property taxes – state income taxes – charitable contributions Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Taxpayers who do not have enough itemized deductions can choose the standard deduction instead • The standard deduction is a fixed amount that may be deducted from adjusted gross income – Amount is set by law – Amount varies according to filing status Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • An exemption is an amount that a taxpayer can claim for each person who is dependent on that person’s income – Personal exemptions are claimed for the taxpayer and spouse, if married and filing together – Dependent exemptions are claimed for children or other individuals supported by the taxpayer Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • After all deductions have been made, the taxable income amount determines the tax liability • Tax liability is the amount of total tax owed on income for the year • A tax credit is an amount that is subtracted from the taxes an individual owes • Tax credits provide a greater advantage than exemptions because exemptions reduce taxable income, but a credit reduces taxes Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Tax forms and instructions are available for download on the IRS website – Form 1040 is referred to as the long form – Form 1040 A is referred to as the short form – Form 1040 EZ is the simplest form to use Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Form 1040 must be used by taxpayers with a taxable income more than $100, 000 • It must also be used by taxpayers who have – business or rental income – income or losses from selling assets – itemized tax deductions Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Form 1040 A can be used by taxpayers with a taxable income less than $100, 000 – No business income – Choose not to itemize deductions • Most taxpayers who have dependents, but are not homeowners, use this form Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Form 1040 EZ is for individuals with a taxable income less than $100, 000 – Must file as single or married filing jointly and claim no dependents – Income can only be from employee compensation, unemployment compensation, and interest Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Income Tax Return Basics (Continued) • Electronic filing, or e-filing, allows filing of an income tax return online • A variety of e-filing software programs are available for purchase • The IRS also offers a free e-filing service Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Preparing a Form 1040 EZ • • • Step 1: Step 2: Step 3: Step 4: Step 5: Personal Information Income Payments, Credits, and Tax Refund or Amount Owed Signature Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Preparing a Form 1040 EZ (Continued) Goodheart-Willcox Publisher Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Sources of Tax Information and Assistance • Internal Revenue Service (IRS) • Volunteer Income Tax Assistance (VITA) Program • Tax Counseling for the Elderly (TCE) Program • Tax Preparation Services • Tax Preparation Guides Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

IRS Audits • An audit is the review of financial records and statements to make sure the information is accurate as reported • A tax audit is a detailed examination of a tax return by the IRS Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

IRS Audits (Continued) • If the IRS audits your return, you have to prove the accuracy of your tax return – Answer the IRS agent’s questions honestly and completely – Provide documentation when necessary Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

IRS Audits (Continued) • You will have to pay any additional taxes, interest, and penalties that are assigned • Being accurate means to give factual, error-free information • Providing inaccurate information could extend the processing of your tax return, and may prompt an IRS investigation Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 2 Review 1. Who must file an income tax return? Individuals must file a tax return when their income reaches a level established by the IRS. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 2 Review (Continued) 2. List three basic forms used to file income taxes. A Form 1040 must be used by taxpayers with a taxable income more than $100, 000. A Form 1040 A can be used by taxpayers with a taxable income less than $100, 000 who have no business income and who choose not to itemize deductions. A Form 1040 EZ is for individuals with a taxable income less than $100, 000. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 2 Review (Continued) 3. List the steps necessary to fill out a Form 1040 EZ for a tax return. Step 1: Personal Information. Step 2: Income. Step 3: Payments, Credits, and Tax. Step 4: Tax Refund or Amount Owed. Step 5: Signature. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 2 Review (Continued) 4. What kind of information does the Internal Revenue Service (IRS) provide taxpayers? The IRS publishes free instruction booklets annually. The office also operates a system of recorded phone messages with tax information on a variety of questions. The agency offers a website and a toll-free hotline for specific questions. Walk-in service is available at some IRS offices across the country. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 2 Review (Continued) 5. Why is accuracy important when filing an income tax return? It is important to provide accurate information on a tax return form. Being accurate means to give factual, error-free information. Providing inaccurate information could extend the processing of the tax return, delay the tax refund, and may prompt the IRS to investigate the tax return. To ensure accuracy, entries and calculations should be double checked. Being accurate also means recording truthful information. Intentionally providing false information on a tax return form is a crime. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

3. 3 Government Spending

Objectives • Explain the purpose of federal, state, and local taxes • Define types of tax classifications • Discuss the federal tax code • Describe the Social Security program Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Key Terms • levy • mandatory expenditure • Social Security • Medicare • disability • Medicaid • transfer payment • discretionary expenditure • direct tax • indirect tax • progressive tax • regressive tax • proportional tax Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Essential Question • Why do state, local, and federal government agencies impose taxes on taxpayers? Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending • The primary purpose of taxes is paying for governmental operations, facilities, and services • Federal, state, and local governments generate revenue by taxing individuals and businesses Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • To levy a tax means to use legal authority to impose a payment • Legislators may raise or lower taxes for many reasons – Stabilize the economy – Address social challenges – Influence taxpayer behavior Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) Goodheart-Willcox Publisher Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Federal Government Spending – Taxation is the primary source of revenue for the federal government – In years when the government spends more than it collects, it must borrow money • This is called deficit spending • Deficit spending increases the national debt Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • The US Treasury divides all spending into three categories – mandatory spending – discretionary spending – interest on the national debt Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Mandatory expenditures are those Congress legislated into law – Must be paid for each year – About 60 percent is for entitlements – Largest entitlement program is Social Security, followed by Medicare Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) Goodheart-Willcox Publisher Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Social Security is a federal program that provides income when earnings are reduced or stopped because of retirement, serious illness or injury, or death • Social Security is funded by payroll taxes Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Medicare is a federal program that pays for certain health-care expenses for older citizens and others with disabilities • Medicare is funded by payroll taxes • A disability is a limitation that affects a person’s ability to function in major life activities Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Medicaid is a government program that pays certain health-care costs for eligible, low-income individuals and families – Administered by state governments – Funded by the state Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Other entitlement programs – federal employee retirement benefits – veterans’ pensions and medical care – nutrition assistance – unemployment compensation – housing assistance Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Income from entitlement program sources is: – usually not taxable – called a transfer payment • A transfer payment is a payment made to an individual from the federal government through various social benefit programs Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Discretionary spending is the portion of the budget that Congress spends through annual appropriations • A discretionary expenditure is an expense item that can be adjusted according to needs and revenues Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Two main categories of discretionary spending – National defense equips the armed forces and pays for military personnel, research, and technology – Nondefense discretionary spending includes government operations and a wide array of programs Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) Goodheart-Willcox Publisher Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • Interest on National Debt is a mandatory expense item – Must be paid, even if the government must borrow money to pay it – Paid to financial institutions, foreign investors and governments, and individuals who buy government securities Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) • State and Local Government Spending – Sales, real estate, and personal property taxes make up a large part of state and local revenues – Most states and localities also rely on personal and corporate income tax for a large share of their revenues Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Government Spending (Continued) Goodheart-Willcox Publisher Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Types of Taxes • Personal income tax is levied on earnings – Federal income tax – Most states also tax income • Sales tax is levied by state and local governments on purchases of goods and services • Excise tax is levied by federal and state governments on the sale and transfer of certain items Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Types of Taxes (Continued) • Property tax is levied on property owned – Real estate tax is based on the value of land buildings owned – Personal property taxes are assessed in some states on items such as cars, boats, furniture, and other assets Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Types of Taxes (Continued) • Wealth tax is levied on assets – Estate tax is imposed by the federal government and must be paid out of the estate before assets are distributed for estates over a certain amount – Gift tax is levied by the federal government on donors or givers who transfer assets over a given amount to others Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Types of Taxes (Continued) • Classification by how taxes are paid – A direct tax is paid directly to the government by the taxpayer (personal income tax) – An indirect tax is a tax levied on one person or entity, but shifted to or paid by another (sales tax) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Types of Taxes (Continued) • Classification by how the tax rate is applied – A progressive tax imposes a higher tax rate on those with higher incomes (income tax) – A regressive tax has the effect of imposing a higher tax rate on those with lower incomes (sales tax takes a higher percentage of income from consumers with lower incomes) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Types of Taxes (Continued) • Classification by how the tax rate is applied – A proportional tax imposes the same tax rate on all individuals or entities regardless of differences in income or ability to pay • Sometimes called a flat tax • Sales tax is also an example of proportional tax Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Federal Tax Code • Major changes in tax policies can cause major changes in the economy • Tax proposals and policies are evaluated on: – effectiveness – fairness – impact Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Social Security • President Franklin Roosevelt signed the Social Security Act into law in 1935 • Medicare became part of the law in 1965 • As you work, you earn Social Security credits that later determine your benefit eligibility – Usually four per year – Number required to receive benefits varies – Typically 40 credits (ten years of work) Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Social Security (Continued) • Social Security retirement benefits – Workers become eligible for full retirement benefits at 67 – Early retirement can begin as early as age 62, but with reduced retirement benefit payments Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Social Security (Continued) • Social Security disability benefits – May be received by a worker who becomes disabled before retirement age – Worker must present evidence that the disability prevents him or her from earning a living Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Social Security (Continued) • Social Security survivors’ benefits – May be paid to certain family members if the worker dies – A lump-sum payment may be made when a worker dies, usually to the surviving spouse Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Social Security (Continued) • Social Security divorced people’s benefits – Former spouse can be eligible for benefits on a worker’s record under certain circumstances – Does not affect the amount of benefits the worker and the worker’s family are entitled to receive Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Social Security (Continued) • Future of Social Security depends on responsible fiscal action today – increasing taxes – decreasing benefits – both Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 3 Review 1. What is the primary purpose of taxes? Paying for government operations, facilities, and services is the primary purpose of taxes. 2. What is deficit spending? In years when the government spends more than it collects, it must borrow money. This is called deficit spending, and it increases the national debt. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 3 Review (Continued) 3. Describe transfer payments as a source of income. Provide an example of a transfer payment. A transfer payment is a payment made to an individual from the federal government through various social benefit programs. Examples of social benefit programs offered by the government include Social Security, Medicare, and Medicaid. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.

Section 3. 3 Review (Continued) 4. List the classifications that are used for taxes. There are different classifications of taxes. Examples are direct and indirect taxes and progressive, regressive, and proportional taxes. 5. What types of benefits are included in the Social Security program? The Social Security program offers retirement, disability, survivors’, and divorced people’s benefits. Copyright Goodheart-Willcox Co. , Inc. May not be posted to a publicly accessible website.