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2Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
The Federal Income Tax
• What are taxes for?
4Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
What kinds of taxes can you name? (there are many)
http://whatistaxed.com/other_taxes.htm
5Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
Most Important: the Federal Income Tax
• The personal income tax is the federal government’s main source of revenue.–What is “income”?
6Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
Gross (Total) Income
Any money that “comes in” to a household Earned income (job) Interest income (savings; CDs) Dividend income (investments)
Gross and Adjusted Gross Income
The IRS measures your “gross income” or “total income” before making adjustments based on need and your family situation:
8Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
The Income Tax Return
Understanding Income Taxes
You determine the amount of tax you owe when filling out your income tax returns. Some examples of these forms include:
1040 1040EZ
If the income tax you paid through your employer is greater than your tax liability, you will receive a refund.
income tax returna form on which a taxpayer reports how much money he or she received from working and other sources, and the exact taxes that are owed
9Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
How much will I owe?
(Step 0 – Calculate your Gross Income)
Add up all your income, earned and unearned.
Jobs, tips, wages, investment income, interest, and gambling wins all count here.
10Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
How much will I owe?
(Step 1 - figure out Adjusted Gross Income)
You pay income tax on your adjusted gross income, not on your gross income.
Reduce your income (with reductions, or adjustments) through such items as:
Contributions to an IRA Student loan interest
Money used towards these does not count towards your income taxes!
adjusted gross income
your gross income after calculating certain reductions
11Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
How much will I owe?
(Step 2: Figure Out Your Taxable Income)
After you have your adjusted gross income, you may further reduce your taxable income by using deductions and exemptions!
What are some ways I’ve already shared that you can pay less in taxes?
taxable income
your adjusted gross income less any allowable tax deductions and exemptions
12Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
Tax Deduction
•an expense that you can subtract from your adjusted gross income to figure your taxable income
Two types of deduction:–Itemized
• Calculated from a list of items that can be taken off your taxes
–Standard•A set dollar amount: no calculation required
13Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
Tax DeductionsEvery taxpayer receives at least the standard deduction. If qualified for both – choose which is more
• Standard Deduction– Single: $6,100– Head of Household: $8,950– Married Filing Joint
: $12,200– Married Filing Separately
: $6,100
• Itemized Deduction– Calculated by
receipts/spending in: • Medical expenses• Charity donations• State and local taxes• Real estate taxes• Mortgage spending• Some work expenses• Fees paid to tax preparers
14Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
Exemptions
A tax deduction (from your adjusted gross income) for your dependents
A dependent must not earn more than a set amount unless he or she is under age 19 or is a full-time student under age 24.
He or she must be a specified relative or live in the home of the taxpayer who claims him or her on the tax return.
More than half of a dependent’s support must be provided by the taxpayer who claims him or her on the tax return.
exemptiona deduction from adjusted gross income for the taxpayer, the spouse, and qualified dependents
15Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
How Much Do I Owe?
(Part 3: Calculating Your Tax)Once you know your taxable income, you can calculate how much income tax you owe by using a:
Tax Table Tax Rate Schedule
Your income tax may be reduced by a tax credit. A tax credit:
Is an expense that you can subtract from your adjusted gross income
Results in a dollar-for-dollar reduction in the amount of taxes you owe
tax creditan amount of money that can be subtracted directly from taxes you owe
16Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
Review: How Much Do I Owe?
• How do I figure out how much I owe?
17Personal Finance Unit 4 Chapter 12 © 2007 Glencoe/McGraw-Hill
How Much Do I Owe?
• Find Gross Income• Find Adjusted Gross Income (take out
reductions)• Find Taxable Income (take out
deductions and excemptions)• Look at a table (and take out “tax
credits”)