chapter © 2010 south-western, cengage learning federal income tax 7.1 7.1our tax system 7.2...
TRANSCRIPT
Chapter
© 2010 South-Western, Cengage Learning
Federal Income Tax
7.17.1 Our Tax System
7.27.2 Filing Tax Returns
7
© 2010 South-Western, Cengage Learning SLIDE 2
Chapter 7
Lesson 7.1
Our Tax System
GOALSExplain the purpose of taxes and
describe the different types of taxes.Describe the U.S. tax system and explain
how it works.
© 2010 South-Western, Cengage Learning SLIDE 3
Chapter 7
Purpose of Taxes
In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes.
These incoming funds to the government are called revenue.
The government spends the revenues received according to priorities set by Congress.
© 2010 South-Western, Cengage Learning SLIDE 4
Chapter 7
Types of Taxes
Progressive taxesRegressive taxesProportional taxes
© 2010 South-Western, Cengage Learning SLIDE 5
Chapter 7
Progressive Taxes
Progressive taxes take a larger share of income as the amount of income grows.
Federal income taxes are progressive.
© 2010 South-Western, Cengage Learning SLIDE 6
Chapter 7
Regressive Taxes
Regressive taxes take a smaller share of income as the amount of income grows.
Sales taxes are regressive.
© 2010 South-Western, Cengage Learning SLIDE 7
Chapter 7
Proportional Taxes
Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of income.
Property taxes are proportional.
© 2010 South-Western, Cengage Learning SLIDE 8
Chapter 7
Components of the Tax System
The IRSThe power to taxPaying your fair share
Tax rates apply to income ranges, or tax brackets.
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.
© 2010 South-Western, Cengage Learning SLIDE 9
Chapter 7
Components of the Tax System
Failure to pay taxesFailure to do so can result in a penalty:
interest charges on the taxes owed plus a possible fine.
Willful failure to pay taxes is called tax evasion, which is a serious crime punishable by a fine, imprisonment, or both.
(continued)
© 2010 South-Western, Cengage Learning SLIDE 10
Chapter 7
An IRS Audit
Every year, the IRS calls millions of taxpayers for an audit, which is an examination of their tax returns.
Types of auditsOffice auditCorrespondence auditField audit
© 2010 South-Western, Cengage Learning SLIDE 11
Chapter 7
Lesson 7.2
Filing Tax Returns
GOALSDefine basic tax terminology.Prepare tax forms 1040EZ and 1040A.
© 2010 South-Western, Cengage Learning SLIDE 12
Chapter 7
Filing Status
Filing status describes your tax-filing group.
You must mark one of the following as your filing status on your tax form:Single person (not married)Married person filing a joint returnMarried person filing a separate return“Head of household”Qualifying widow(er)
© 2010 South-Western, Cengage Learning SLIDE 13
Chapter 7
Exemptions
An exemption is an amount you may subtract from your income for each person who depends on your income to live.
Each exemption reduces your taxable income and thus your total tax.
© 2010 South-Western, Cengage Learning SLIDE 14
Chapter 7
Exemptions—Who Qualifies
Yourself, unless someone else claims you on their return
Your spouse, if you are filing jointlyYour dependents
A dependent is a person who lives with you and for whom you pay more than half his or her living expenses.
© 2010 South-Western, Cengage Learning SLIDE 15
Chapter 7
Gross Income
Gross income is all the taxable income you receive.
Earned income refers to money you earned from working.
Unearned income refers to money you received from passive activity (other than working).
© 2010 South-Western, Cengage Learning SLIDE 16
Chapter 7
Common Types of Income
Wages, salaries, and tipsInterest incomeDividend incomeUnemployment compensationSocial security benefitsChild supportAlimony
© 2010 South-Western, Cengage Learning SLIDE 17
Chapter 7
The law allows you to subtract some types of spending from gross income. You can “adjust” your income by subtracting such
things as contributions to individual retirement accounts, student loan interest, and tuition and fees.
These adjustments are subtracted from gross income to determine adjusted gross income. Adjustments reduce income that is subject to tax. Note that these adjustments are not available on
Form 1040EZ.
Adjusted Gross Income
© 2010 South-Western, Cengage Learning SLIDE 18
Chapter 7
Adjusted Gross Income
Gross income
– Adjustments
Adjusted gross income
© 2010 South-Western, Cengage Learning SLIDE 19
Chapter 7
Taxable Income
Taxable income is the income on which you will pay tax.
© 2010 South-Western, Cengage Learning SLIDE 20
Chapter 7
Taxable Income
Gross income
– Adjustments
Adjusted gross income
– Deductions
– Exemptions
Taxable income
(continued)
© 2010 South-Western, Cengage Learning SLIDE 21
Chapter 7
Deductions
Itemize deductions Standard deduction
© 2010 South-Western, Cengage Learning SLIDE 22
Chapter 7
Itemize Deductions
Itemize deductions are expenses you can subtract from adjusted gross income to determine your taxable income.
Examples include: Medical and dental expenses beyond a specified percentage
of your income State and local income taxes Property taxes Home mortgage interest Gifts to charity Losses from theft or property damage Moving expenses
© 2010 South-Western, Cengage Learning SLIDE 23
Chapter 7
Standard Deduction
If you do not have many deductions, your tax may be less if you take the standard deduction.
The standard deduction is a stated amount that you may subtract from adjusted gross income instead of itemizing your deductions.
This amount changes each year.
© 2010 South-Western, Cengage Learning SLIDE 24
Chapter 7
Tax Credits
A tax credit is an amount subtracted directly from the tax owed. It is different from a deduction.
A deduction is subtracted from adjusted gross income. It reduces your tax by reducing the amount of income on
which the tax is figured.
A tax credit reduces the tax itself.
The government allows tax credits for certain education expenses, child-care expenses, and other reasons from time to time.
© 2010 South-Western, Cengage Learning SLIDE 25
Chapter 7
Preparing Your Income Tax Return
Who must file?When to file?Which form to use?Where to begin?Filing electronicallyTax preparation software
© 2010 South-Western, Cengage Learning SLIDE 26
Chapter 7
Form 1040EZ
Step 1: Name, address, and Social Security number
Step 2: Report incomeStep 3: Compute taxStep 4: Refund or amount owedStep 5: Sign the return
© 2010 South-Western, Cengage Learning SLIDE 27
Chapter 7
Form 1040A
Step 1: Name and address Step 2: Filing status Step 3: Exemptions Step 4: Income Step 5: Adjusted gross income Step 6: Taxable income Step 7: Tax, credits, and payments Step 8: Refund or amount owed Step 9: Signature