8 2 Federal Taxes 8 2 Federal Taxes

[ 8. 2 ] Federal Taxes

[ 8. 2 ] Federal Taxes Learning Objectives • • • Identify the basic characteristics and importance of individual and corporate income taxes at the national level. Explain the purpose and importance of Social Security, Medicare, and unemployment taxes. Identify other types of taxes levied at the national level.

[ 8. 2 ] Federal Taxes Key Terms • • • withholding, tax return Taxable income Personal exemptions Tax deductions tax credit estate tax gift tax tariffs. tax incentive.

Individual and Corporate Income Taxes The United States has a government “of the people, by the people, for the people. ” For that government to function, it needs the economic backing of the American people. If you work and pay income taxes, you are helping to support the work the government does. Taxes are of great economic importance to the nation.

Individual Income Taxes • The government’s main source of revenues is the federal tax on individuals’ taxable income. • Close to 50% of the revenue is from individuals • In recent times, the receipts do not cover the full cost of government, therefore large sums of money have to be borrowed to cover the deficits. • The federal income tax is collected in a “pay-asyou-earn” system which spreads out the burden. • Taxes are due April 15 every year

Based on this graph, what effect would an economic downturn, with lower corporate and individual earnings, have on government receipts? Explain.

Individual Tax Brackets • The federal income tax is a progressive tax. • Married & single people have different brackets. • Each year, the IRS publishes new tax rate schedules that reflect any changes in the federal tax code. • Proponents argue its equity, opponents argue incentive to work hard

Tax Withholding • Withholding – taking payments out of your pay before you receive it –Employers are responsible for sending this to the gov’t by law –Based on an estimate of how much you will owe in income taxes for the year

Filing a Tax Return • After the calendar year, employers give their employees a report called a W 2, which tells them how much tax came out of their check for the year. • Tax Return – a form used to file income taxes –Declare your income to the gov’t and figure out how much of it is taxable

Filing a Tax Return • Taxable income – a person’s gross (or total) income minus exemptions & deductions –Gross income = salaries, wages, tips, commissions, interest, dividends –Personal exemptions – set amounts that you subtract from your gross for any dependents (spouse, kids, etc. )

Deductions • Tax deductions – amounts that you can subtract from your gross income –Might include mortgage interest, medical expenses, charitable donations

Tax Credits • Tax credit – an amount that you can subtract from the total amount of your income tax –Examples: child care, college tuition –At this point you determine if you have paid more than necessary or owe the gov’t (if more, you get a return)

Corporate Income Tax • Corporations must pay federal income tax on their taxable income. –Corporations take a large number of deductions including the cost of employee health insurance

New Corporate Tax Rate • The Tax Cuts and Jobs Act of 2017 changed the top corporate tax rate from 35% to one flat rate of 21%. This rate will be effective for corporations whose tax year begins after January 1, 2018, and it is a permanent change.

FICA • Employers withhold money for taxes authorized under the Federal Insurance Contributions Act, or FICA. • FICA taxes fund two large government social-insurance programs, Social Security and Medicare. • Employees and employers share FICA payments.

Social Security Taxes • Social security taxes • Most FICA taxes go to the Social Security Administration to fund oldage, survivors, and disability insurance • Established in 1935 to ease the hardships of the Great Depression • No soc. sec. tax can be withheld above $113, 000 in income

Medicare Taxes • FICA taxes fund Medicare • Medicare is a national health insurance program that helps pay for healthcare for people over age 65 • Currently experiencing a widening gap between revenue and expenses

The gap between what Medicare takes in and what it spends has been widening. What are two possible solutions to the problem presented by this graph?

Unemployment Taxes • Unemployment tax is paid by employers which is an insurance policy for workers. • If laid off through no fault of their own, they can file an “unemployment compensation” claim and collect benefits for a fixed number of weeks – Pays 60% of avg. weekly earnings

Other National Taxes • Excise Tax – a general revenue tax on the sale of a good – Examples: cigarettes, alcohol, gas, cable TV • Estate Tax – a tax on the total value of money and property of a person who has died – Only paid if the estate is worth more than $11. 4 million!

Other National Taxes • Tariffs – taxes on imported goods (foreign goods) –The idea is to raise the prices of foreign items, which may help keep American products more competitive

Other National Taxes • Tax Incentive – the use of taxation to discourage or encourage behavior –Example: tax deduction for charitable giving (encouragement), excise taxes are discouragement

Quiz: Individual and Corporate Income Taxes What is a person’s taxable income? A. the income subject to the highest tax rate B. the income subject to the lowest tax rate C. gross income minus exemptions and deductions D. all the money a person earns in a given year

Quiz: Social Security, Medicare, and Unemployment Taxes Which idea or concept underlies Social Security, Medicare, and unemployment taxes? A. establishing a proportional taxation system B. ensuring that people do not have to save for their retirement C. correcting inequities in the individual income tax D. supporting people who have limited ability to support themselves through work

Quiz: Other National Taxes Why do we have tariffs today? A. to protect American farmers and industries from foreign competitors B. to discourage people from buying harmful products C. to keep people from avoiding estate taxes by giving away money before they die D. to encourage energy conservation and other worthwhile activities