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Name: ___________________________________Date: ________Financial Literacy NotesIncome and TaxesObjectives:Identify different types of income and employee benefits.Relate taxation to government spending.List goods and services government provides.Identify different types of taxes.Identify common tax forms.Describe basic procedures for filing a tax return.Explain the purposes and function of the Social Security system.The Many Forms of IncomeIncome is money earned from employment and investments Governments tax income and assets to create revenue that is used to provide public goods and servicesEarned IncomeIncome received from employment is ________________________.Earned income includes:________________________________________________________________________________________________________________________________________________Employee Benefits:Some of the most valuable forms of employee compensation are not monetaryEmployee benefits often include:________________________, ________________________, _______________________________________________________________________________________________________Business Profit IncomeIncome earned by the self-employed Disadvantages of self-employment:Must arrange and pay for own employee benefits; can be costlyMust pay entire Social Security and Medicare tax, rather than half the costPayroll DeductionsNet income (take-home pay) is gross income minus payroll deductionsDeduction can lower a paycheck by 20 percent or moreBonuses increase gross incomeCommon payroll deductions:FICA (Federal Insurance Contributions Act): Social Security and Medicare Federal withholding taxState and city withholding taxes, if applicableOther benefits (insurance purchased through employers)Money Earned Outside of WorkUnearned income—income received from sources other than employment earnings from investments, sale of assets, and interest paid on savings and bondsSocial Security and retirement account paymentsrent, inheritance, awards, gifts, alimonyunemployment compensationThe Importance of TaxesGovernment uses its taxing authority to________________________________________________________________________________________________________________________________________________________________________________________________________________________Federal Government SpendingLimited resources force governments to make choices A budget reflects priorities and goals of government and its people When government spends more than it collects, it must borrow moneyDeficit spending increases the national debt333375020510500Mandatory ExpensesPayments that must be made, even if the government must borrow money to do soMake up more than 60 percent of federal government’s budgetInclude entitlement programs and interest on the national debtEntitlement programs:__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Discretionary TaxesAn expense that can be adjusted according to needs and revenuesInclude national defense expensesInclude nondefense expenses:____________________________________________________________________________________________________________State and Local Government SpendingTaxation and government spending vary widely between states and between citiesMost state and local government revenues come from__________________________________________________________________________________________________________________________________________________________________Types of Taxes____________________—paid directly to government by taxpayers____________________—imposed on one party, but paid by another____________________—imposes a higher tax rate on those with higher incomes____________________—has effect of imposing a higher tax rate on those with lower incomes____________________—imposes same tax rate on all regardless of income differencesWhat is taxed?Personal income tax—____________________Purchase tax—____________________Excise tax—_____________________________________________________________________Property tax—__________________________________________________________________Wealth tax—____________________Paying Income TaxesInternal Revenue Service (IRS) collects federal income taxesState tax returns are filed with departments of revenue in states that collect taxesYour Employers’ RoleEmployees fill out Form W-4Employers withhold taxes from employees’ paychecksAt start of year, employers mail Form W-2 to employeesForm W-4—taxes withheld depend on earnings and number of allowances claimedForm W-2—previous year’s pay and tax deductions are givenPreparing Your ReturnEach year taxpayers must file a tax report with the government showing the taxes owed311467530734000Choose one of three common forms: 1040EZ, 1040A, or 1040Choosing a Tax FormUse Form 1040, long form, _____________________________when adjustments to income, itemized tax deductions, and tax credits can reduce taxesUse short forms, 1040A or 1040EZ, if __________________________________________________________Figuring Taxable IncomeCalculate gross income based on Forms W-2 and 1099sCalculate adjusted gross income by subtracting adjustments from total incomeSubtract allowable exemptions and deductionsFiguring Taxes OwedIRS tax tables show taxes owed based on taxable incomeReduce the amount owed with tax creditsFiling on timeFiling deadline for federal taxes and most state taxes is April 15_____________________________—falsely reducing taxes_____________________________—failing to declare all income or falsifying documentsState and Local Tax Forms_____________________________Taxpayers in states that collect personal income taxes must submit state tax formsElectronic FilingAdvantages of filing tax returns online: __________________________________________________________TeleFile allows taxpayers to file simple tax returns with touch-tone phonesSources of Tax Information and AssistanceThe IRS answers tax questions through free booklets, recorded messages, and a Web site Tax preparation services fill out tax forms for a feeMany taxpayers use tax preparation guides and software IRS AuditsA detailed examination of taxpayer’s tax returns by the IRSDuring audit, taxpayers must answer IRS’s questions and provide documentation when askedTaxpayers have legal protections in their dealings with the IRSTax System ReformLegislators make laws that____________________________________________________________________________________________________________________Tax LegislationMany citizens are concerned about rising taxes Questions asked when tax policy changes: Will revenues generated by the new tax exceed administration costs?Will it be fair to all taxpayers?Will it impact the economy negatively?Paying Social Security TaxesFICA taxes calculated as a percentage of income; deducted from gross payEmployers and workers split FICA taxesEmployees pay 6.2 percent for Social Security and 1.45 percent for MedicareEmployers contribute an additional 7.65 percent The self-employed pay all FICA taxes themselvesFederal government receives FICA contributions and credits them to employees’ accountsYour Social Security NumberSocial Security Administration uses SSNs to keep records of earnings; records determine benefit amounts_______________________________________________________________________________________Social Security BenefitsIf you work, your Social Security taxes pay for benefits others receiveWhen you no longer work (retire, become disabled, or die), you and your dependents will get benefits provided by other workers’ Social Security taxes Types of benefits:______________________________________________________________________________________________________________________________________________________________________________Social Security System ReformBenefits paid out will soon exceed tax collection Social Security fund will be depleted; no money to pay benefits of workers paying into the system now Taxes may have to be raised, benefits decreased, or bothCentral Ideas of the Chapter________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Vocabulary:________________________ Money added to an employee’s base pay. It is usually a reward for performance or a share of business profits. ________________________Income paid as a percentage of sales made by a salesperson. ________________________Payment and benefits received for work.________________________A limitation that affects a person’s ability to function in major life activities. ________________________Income from employment. _____________________________________________________A tax-deferred investment program that helps employees save for retirement. ________________________A form of nonmonetary compensation received in addition to a wage or salary. ________________________A government payment or benefit promised by law to eligible citizens, such as Social Security and Medicare benefits, unemployment benefits, veterans’ services, food stamps, and housing assistance. ________________________. A tax benefit that reduces the amount of income a person is taxed on. __________________________________________________The law that requires the collection of social security payroll taxes. ________________________A Wage and Tax Statement that states the amount an employee was paid in the previous year. It also gives the amounts of income, Social Security, and Medicare taxes withheld from an employee’s income during the year. ________________________The Employee’s Withholding Allowance Certificate that tells the employer how much tax to withhold from an employee’s paycheck. ________________________ A worker’s earnings before deductions. ________________________Payments from financial institutions, businesses, and government to use customers’ money. ________________________A government program administered by the states that pays certain health care costs for eligible low-income individuals and families. ________________________A federal government program that helps pay the medical expenses of people 65 and older and others with certain disabilities. ________________________The lowest hourly wage employers can pay most workers by law. ________________________Gross income (plus bonuses) minus payroll deductions. ________________________An amount subtracted from gross income. ________________________A wage that is based on a rate per unit or item completed. ________________________Payment for work that is expressed as an annual figure. ________________________The federal government’s program for providing income when earnings are reduced or stopped because of retirement, disability, or death. ________________________An amount that can be subtracted from the taxes a worker owes, if eligible. ________________________An expense that can be subtracted from a worker’s taxable income. ________________________Money paid for service beyond what is required. ________________________Earnings from sources other than work. ________________________A payment in exchange for an employee’s labor or services. The payment, which is usually in money, is paid by the hour, day, or by the piece. ................
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