Chapter 7 Federal Income Tax 7 1 Our

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Chapter 7 Federal Income Tax 7. 1 Our Tax System 7. 2 Filing Tax

Chapter 7 Federal Income Tax 7. 1 Our Tax System 7. 2 Filing Tax Returns © 2010 South-Western, Cengage Learning

Lesson 7. 1 Our Tax System GOALS n Explain the purpose of taxes and

Lesson 7. 1 Our Tax System GOALS n Explain the purpose of taxes and describe the different types of taxes. n Describe the U. S. tax system and explain how it works. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 2

Purpose of Taxes n In a free enterprise system such as ours, the government

Purpose of Taxes n In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes. n These incoming funds to the government are called revenue. n The government spends the revenues received according to priorities set by Congress. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 3

Types of Taxes n Progressive taxes n Regressive taxes n Proportional taxes Chapter 7

Types of Taxes n Progressive taxes n Regressive taxes n Proportional taxes Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 4

Progressive Taxes n Progressive taxes take a larger share of income as the amount

Progressive Taxes n Progressive taxes take a larger share of income as the amount of income grows. n Federal income taxes are progressive. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 5

Regressive Taxes n Regressive taxes take a smaller share of income as the amount

Regressive Taxes n Regressive taxes take a smaller share of income as the amount of income grows. n Sales taxes are regressive. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 6

Proportional Taxes n Proportional taxes, or flat taxes, are taxes for which the rate

Proportional Taxes n Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of income. n Property taxes are proportional. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 7

Components of the Tax System n The IRS n The power to tax n

Components of the Tax System n The IRS n The power to tax n Paying your fair share n Tax rates apply to income ranges, or tax brackets. n 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. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 8

(continued) Components of the Tax System n Failure to pay taxes n Failure to

(continued) Components of the Tax System n Failure to pay taxes n Failure to do so can result in a penalty: interest charges on the taxes owed plus a possible fine. n Willful failure to pay taxes is called tax evasion, which is a serious crime punishable by a fine, imprisonment, or both. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 9

An IRS Audit n Every year, the IRS calls millions of taxpayers for an

An IRS Audit n Every year, the IRS calls millions of taxpayers for an audit, which is an examination of their tax returns. n Types of audits n Office audit n Correspondence audit n Field audit Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 10

Lesson 7. 2 Filing Tax Returns GOALS n Define basic tax terminology. n Prepare

Lesson 7. 2 Filing Tax Returns GOALS n Define basic tax terminology. n Prepare tax forms 1040 EZ and 1040 A. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 11

Filing Status n Filing status describes your tax-filing group. n You must mark one

Filing Status n Filing status describes your tax-filing group. n You must mark one of the following as your filing status on your tax form: n Single person (not married) n Married person filing a joint return n Married person filing a separate return n “Head of household” n Qualifying widow(er) Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 12

Exemptions n An exemption is an amount you may subtract from your income for

Exemptions n An exemption is an amount you may subtract from your income for each person who depends on your income to live. n Each exemption reduces your taxable income and thus your total tax. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 13

Exemptions—Who Qualifies n Yourself, unless someone else claims you on their return n Your

Exemptions—Who Qualifies n Yourself, unless someone else claims you on their return n Your spouse, if you are filing jointly n Your dependents n A dependent is a person who lives with you and for whom you pay more than half his or her living expenses. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 14

Gross Income n Gross income is all the taxable income you receive. n Earned

Gross Income n Gross income is all the taxable income you receive. n Earned income refers to money you earned from working. n Unearned income refers to money you received from passive activity (other than working). Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 15

Common Types of Income n Wages, salaries, and tips n Interest income n Dividend

Common Types of Income n Wages, salaries, and tips n Interest income n Dividend income n Unemployment compensation n Social security benefits n Child support n Alimony Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 16

Adjusted Gross Income n The law allows you to subtract some types of spending

Adjusted Gross Income n The law allows you to subtract some types of spending from gross income. n You can “adjust” your income by subtracting such things as contributions to individual retirement accounts, student loan interest, and tuition and fees. n These adjustments are subtracted from gross income to determine adjusted gross income. n Adjustments reduce income that is subject to tax. n Note that these adjustments are not available on Form 1040 EZ. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 17

Adjusted Gross Income Gross income – Adjustments Adjusted gross income Chapter 7 © 2010

Adjusted Gross Income Gross income – Adjustments Adjusted gross income Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 18

Taxable Income n Taxable income is the income on which you will pay tax.

Taxable Income n Taxable income is the income on which you will pay tax. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 19

(continued) Taxable Income Gross income – Adjustments Adjusted gross income – Deductions – Exemptions

(continued) Taxable Income Gross income – Adjustments Adjusted gross income – Deductions – Exemptions Taxable income Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 20

Deductions n Itemize deductions n Standard deduction Chapter 7 © 2010 South-Western, Cengage Learning

Deductions n Itemize deductions n Standard deduction Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 21

Itemize Deductions n Itemize deductions are expenses you can subtract from adjusted gross income

Itemize Deductions n Itemize deductions are expenses you can subtract from adjusted gross income to determine your taxable income. n Examples include: n Medical and dental expenses beyond a specified percentage of your income n State and local income taxes n Property taxes n Home mortgage interest n Gifts to charity n Losses from theft or property damage n Moving expenses Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 22

Standard Deduction n If you do not have many deductions, your tax may be

Standard Deduction n If you do not have many deductions, your tax may be less if you take the standard deduction. n The standard deduction is a stated amount that you may subtract from adjusted gross income instead of itemizing your deductions. n This amount changes each year. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 23

Tax Credits n A tax credit is an amount subtracted directly from the tax

Tax Credits n A tax credit is an amount subtracted directly from the tax owed. n It is different from a deduction. n A deduction is subtracted from adjusted gross income. n It reduces your tax by reducing the amount of income on which the tax is figured. n A tax credit reduces the tax itself. n The government allows tax credits for certain education expenses, child-care expenses, and other reasons from time to time. Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 24

Preparing Your Income Tax Return n Who must file? n When to file? n

Preparing Your Income Tax Return n Who must file? n When to file? n Which form to use? n Where to begin? n Filing electronically n Tax preparation software Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 25

Form 1040 EZ n Step 1: Name, address, and Social Security number n Step

Form 1040 EZ n Step 1: Name, address, and Social Security number n Step 2: Report income n Step 3: Compute tax n Step 4: Refund or amount owed n Step 5: Sign the return Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 26

Form 1040 A n Step 1: Name and address n Step 2: Filing status

Form 1040 A n Step 1: Name and address n Step 2: Filing status n Step 3: Exemptions n Step 4: Income n Step 5: Adjusted gross income n Step 6: Taxable income n Step 7: Tax, credits, and payments n Step 8: Refund or amount owed n Step 9: Signature Chapter 7 © 2010 South-Western, Cengage Learning SLIDE 27

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