Introduction to Personal Finance Beginning Your Financial Journey Third Edition John Grable and Lance Palmer Chapter 4 Personal Taxation For screen reader users This file contains Animations For improved screen reader experience it is recommended to disable Animations before proceeding further in this file Copyright 2024 John Wiley Sons Inc Chapter Outline Learning Objectives 1 3 LO 1 Explain the purpose and types of taxes LO 2 Describe how to calculate taxable income LO 3 Describe how to calculate marginal and effective tax rates on income and capital assets Copyright 2024 John Wiley Sons Inc Chapter Outline Learning Objectives 4 6 LO 4 Discuss how federal income tax credits for education health insurance and households with children can help to lower income taxes LO 5 Explain how to apply Medicare and Social Security taxes to self employment income LO 6 Identify income tax planning strategies to lower taxes and maximize after tax wealth Copyright 2024 John Wiley Sons Inc Understanding Your Taxes LO 1 Explain the purpose and types of taxes Copyright 2024 John Wiley Sons Inc L O 1 Understanding Your Taxes Taxes are financial obligations imposed on individuals and businesses by government entities Governments use taxes to Build infrastructure Provide social welfare Pay for national defense Provide other public services Encourage economic activity Copyright 2024 John Wiley Sons Inc L O 1 Types of Taxes In any given year nearly all working adults will pay the following types of taxes Federal income taxes State income taxes where applicable Payroll taxes Sales taxes Property taxes Copyright 2024 John Wiley Sons Inc L O 1 Federal and State Income Taxes Gross pay is the total amount earned before taxes and other deductions Withholdings are taken out of an employee s pay by the employer and are either mandated by law Net pay is gross pay minus withholdings elected by employees Copyright 2024 John Wiley Sons Inc L O 1 Payroll Taxes The Federal Insurance Contributions Act FICA tax is used exclusively to pay for two government programs Social Security FICA Old Age Survivor and Disability Insurance OSADI This applies to earned income up to 167 700 2024 Medicare FICA health insurance HI This applies to all earned income Copyright 2024 John Wiley Sons Inc L O 1 Amy s Pay Stub Copyright 2024 John Wiley Sons Inc L O 1 Sales Taxes Sales taxes are imposed by state and local governments on the sale of certain goods and services and are paid when you buy something These taxes are determined based on two factors 1 The tax base is the amount of money that will be taxed generally the cost of the item you purchase 2 The tax rate is used to calculate the amount of tax owed and is generally denoted as a percentage rate such as 7 5 Tax Base Tax Rate Tax Copyright 2024 John Wiley Sons Inc L O 1 Property Taxes A property tax is assessed based on the value of property you own such as your car or your home Vary by state and are most often assessed by the city or county Often referred to as ad valorem taxes which means according to value Based on the current assessed value of the property Determined by each taxing authority city or state Copyright 2024 John Wiley Sons Inc L O 1 Need for Taxes Common Types of Taxes Imposed by City State and Federal Governments Copyright 2024 John Wiley Sons Inc L O 1 Forms of Taxation Three General Types of Tax Systems Copyright 2024 John Wiley Sons Inc L O 1 Taxes and the Government Federal surplus annual federal tax revenue exceeds annual federal expenditures decreases the U S debt Federal deficit annual expenditures exceed annual revenue The U S debt money the U S has borrowed and must repay 2023 total U S government debt was projected to be more than 33 1 trillion adds to the U S debt Copyright 2024 John Wiley Sons Inc L O 1 Share of Total Income and Total Taxes Copyright 2024 John Wiley Sons Inc L O 1 The Internal Revenue Service Breakdown of Federal Tax Revenue Copyright 2024 John Wiley Sons Inc L O 1 Federal Income Tax Base LO 2 Describe how to calculate taxable income Copyright 2024 John Wiley Sons Inc L O 2 Overview of Federal Income Tax Returns A tax return is information that the taxpayer compiles and reports to the I R S on a standardized form The Tax Return Process Required file a federal income tax return if your income is above a certain level Not required but a good idea file a federal income tax return even if you owe no tax because you can claim a refund for any taxes withheld Copyright 2024 John Wiley Sons Inc L O 2 Tax Formula Gross income Deductions for adjusted gross income Adjusted gross income Deductions from adjusted gross income Taxable income tax base Tax rate s multiplied by taxable income Assessed income tax Other taxes and penalties Credits and withholdings Net tax due or refund Copyright 2024 John Wiley Sons Inc L O 2 Entering Personal Information Copyright 2024 John Wiley Sons Inc L O 2 Filing Status Copyright 2024 John Wiley Sons Inc L O 2 Dependents Qualifying children are considered dependents of the taxpayer and must pass four general tests support age relationship and abode Support Age Relationship Abode The child did not provide more than half of his or her own support during the tax year At the end of the tax year the child is Younger than 19 and younger than the taxpayer OR OR A full time student younger than 24 and younger than the taxpayer Taxpayer s child adopted child stepchild or his or her descendant Taxpayer s sibling half sibling step sibling or descendant of any of them The child must live with the taxpayer for more than half the year excluding temporary absences such as schooling vacations and illness Copyright 2024 John Wiley Sons Inc L O 2 Calculating Total Income Gross income the sum of all your income Adjusted gross income AGI amount calculated after the for AGI deductions expenses allowed by Congress to offset gross income Taxable income the amount remaining to be taxed after the from AGI deductions standard or itemized standard deduction is an amount set by Congress and is determined by your filing status itemized deductions are specific expenditures that taxpayers can claim instead of the standard deduction Copyright 2024 John Wiley Sons Inc L O 2 Adventures in Personal Finance LO 2 Visit the IRS website to learn about the Volunteer Income Tax Assistance VITA program or the Tax Counseling for the Elderly TCE program Is there a VITA or TCE near where you live where you could receive help with your tax return or volunteer