Money Counts:A Financial Literacy Series

Wage and Tax Fundamentals

Dr. Cathy F. BowenProfessor and Consumer Issues SpecialistDepartment of Agricultural Economics,Sociology and Education8B Ferguson BuildingUniversity Park, PA 16803cbowen@psu.edu1-814-863-7870

Dr. Daad RizkMoneyCounts: A Financial Literacy Series301 Outreach BuildingUniversity Park, PA 16802dar39@psu.edu1-(814)-863-0214

Learning Objectives• Provide an overview of the federal taxing system

• Describe tax withholding and wage statements

• Review forms W4, W2

• Review a paycheck stub

• Calculate taxes and net income

• Describe the completion of the Form 1040 using key documents common for many adults.

Overview of the Federal Taxing System• Pay as you earn or pay as you go system• Progressive tax-the more you earn the higher your tax

bill (10% - 39.6% tax rates)• Tax language—terms to know

Taxes• Internal Revenue Service (IRS) – Collects federal taxes,

issues regulations, and enforces tax laws written by the United States Congress

Taxes

• Taxes – Compulsory charges imposed on citizens by local, state, and federal governments

• Used to provide public goods and services– Largest amount of taxes a person pays is on his/her

income

2013 Federal Tax Rates-SingleIf Taxable Income Is Then the Gross Tax Payable Is:

Over But Not Over Amount Plus(percent)

Of the -Amount Over

$0 $8,925 --------10% of taxable income----------

8,925 36,250 $892.50 15% $8,925

36,250 87,850 4,991.25 25% 36,250

87,850 183,250 17,891.25 28% 87,850

183,250 398,350 44,603.25 33% 183,250

398,350 400,000 115,586.25 35% 398,350

400,000 ----------- 116,163.75 39.6% 400,000

2013 Federal Tax Rates-MarriedIf Taxable Income Is Then the Gross Tax Payable Is:

Over But Not Over Amount Plus(percent)

Of the -Amount Over

$0 17,850 --------10% of taxable income----------

17,850 72,500 1,785.00 15% 17,850

72,500 146,400 9,982.50 25% 72,500

146,400 223,050 28,457.50 28% 146,400

223,050 398,350 49,919.50 33% 223,050

398,350 450,000 107,768.00 35% 398,350

450,000 ----------- 125,846.00 39.6% 450,000

Key Tax Terms• Income

– Earned– Unearned– Tax exempt interest– Taxable interest– Dividends (ordinary and qualified)

• Adjusted Gross Income (AGI)– Adjustments (subtract from income)– Educator expenses– Self-employed tax– Student loan interest– Tuition and fees

Key Tax Terms• Tax Credits

Itemize Deductions * Foreign Tax–Standard Deduction * Child and Dependent Care–Exemptions * Education–Taxable Income * Retirement Saver’s

* Taxable Income

• Other Taxes–Self-employment tax

• Payments–Federal tax withheld

–Earned Income Credit

W4 – Employee’s Withholding Allowance Certificate

W4 – Employee’s Withholding Allowance Certificate

• Employee completes the certificate and files with employer at the beginning of employment (Human Resources) and after life events.

• Employer uses the information on w-4 form to determine how much tax to withhold each pay period using the “pay-as-you-go” tax withholding method

• Rules of Thumb: The higher the number of withholdings, the less tax withheld from your paycheck.

More withholdings equals fewer taxes withheld

on the w-4 from paycheck

• Action Item: Review w-4 each year. Adjust withholdings as needed so only the needed amount of tax is withheld.

irs.gov Withholding Calculator• http://www.irs.gov/Individuals/IRS-Withholding-Calculator

Paycheck – Stub Sample PAY DATE GROSS PAY NET PAY TAXING AUTHORITY _______________________________________________________________________________________________________ 07/31/2013 $5,000.00 $3,357.52 PATTON TWP PAY PERIOD DATES MARITAL STATUS WITHHOLDING ALLOWANCE FEDERAL ADD ON _________________________________________________________________________________________________________ 07/01/2013 TO 07/31/2013 Single 2 $0.00 BUDGET RATE SHIFT/OC REG HRS OT HRS HOL HRS HOL OT AMOUNT ___________________________________________________________________________________________ 0504503 UP $0.00 0.0 0.0 0.0 0.0 0.0 $5,000.00

TAXABLE SALARY TAX WITHHELD _________________________________________________________________________________________________________

Current YTD Current YTD

FEDERAL $4,560.40 $27,128.03 FEDERAL $592.55 $3,659.21 FICA $4,872.90 $28,987.40 FICA $302.12 $1,797.22 MEDICARE $4,872.90 $28,987.40 MEDICARE $70.66 $420.33 STATE $4,872.90 $28,987.40 STATE $149.60 $889.92 LOCAL $4,872.90 $28,987.40 LOCAL $70.66 $420.33

UNEMPLOYMENT $3.50 LST $4.33 $26.00

EMPLOYEE DEDUCTIONS / REDUCTIONS _________________________________________________________________________________

Current YTD Current YTD

RETIREMENT $312.50 $1,859.37 LTD $9.46 MEDICAL $84.62 DENTAL $5.70 VISION $0.78 PARKING $36.00

Gross to Net Income GROSS

GROSS SALARY 5,000.00 5,000.00 100.00%

MEDICAL (84.62) (84.62) VISION (0.78) (0.78) DENTAL (5.70) (5.70) PARKING (36.00) (36.00)

TAXABLE INCOME 4,872.90 FICA (302.12) -6.20%MEDICARE (70.66) -1.45%STATE (149.60) -3.07%LOCAL (70.66) -1.45%UNEMPLOYMENT (3.50) -0.07%LST (4.33) -0.09%

RETIREMENT (312.50) (312.50) TAXABLE INCOME 4,560.40 FEDERAL TAX (592.55) -12.99%

LTD (9.46) NET INCOME 3,357.52 -32.85%

NET

Wage and Tax Statement

1099 and 1098• 1099 Misc – Non-employee independent contractor

services, rental income, etc.,• 1099 INT – Interest income on investment accounts,

saving bank account, etc.,• 1098 – Mortgage Interest Statement, mortgage points,

mortgage insurance premiums• 1098 T – Tuition Statement • 1098 E – Student Loan Interest Statement

1099-Miscellaneous Income

1099-Interest Income

1099 Dividends & Distributions

1098 Mortgage Interest Statement

1098-T Tuition Statement

1098-E Student Loan Interest

Poll #5Which statement best describes how you get taxes prepared?

I….

1.Use VITA-volunteer income tax assistance or a similar free service

2.Prepare my own federal/state tax returns using a computer program (i.e., Turbo tax )

3.Prepare my own federal/state tax returns by hand (paper forms or printable pdfs from irs.gov)

4.Hire a professional to prepare my federal and state taxes each year

Rule of ThumbUse only Form 1040

•Changes are minimal from year to year.

•Used for most complicated returns.

•Decreases chance you will overlook a tax benefit.

•You learn the form

Completing a Tax Return

Think!

• Basic addition and subtraction problem!

• Income (+)

• Adjusted Gross Income (-)

• Taxes and Credits (+ and -)

• Other Taxes (+)

• Payments (+)

• Overpayment=refund

• Underpayment=Amount you Owe

Step 1—List Personal Information

Step 2—Add income

Step 3- Subtract Adjustments

Step 4-Subtract deductions, exemptions. Figure tax on taxable income and subtract credits.

Step 5-Add/Total other taxes

Step 6- Add payments made and refundable tax credits

Step 7- Finishing Details

Schedule A

Schedule A

Schedule A-continued

Schedule A (itemized deductions)

• Allowable deductions for taxpayers– Medical and dental expenses

– Taxes you paid

– Interest you paid

– Gifts to charity

– Casualty and theft losses

– Job expenses

– Other miscellaneous deductions

Tax Tips for College Students

1. If you have earned income, file even if not required to get taxes withheld back and/or Earned Income Tax Credit.

2. Create a tax folder at the beginning of each year. Store tax related documents in the folder.

3. Practice doing your current return using a paper form.

4. Understand your family situation. Can your parents claim you on their return? Confirm this before filing.

5. Generally, state taxes are paid in the state earned.

6. Use the Form 1040 exclusively. Line number stays the same.

Tax Tips for College Students

7. Understand the education credits that apply to you.

8. If your grants and scholarships covered your tuition and fees, you cannot take the education credits. Why? You had no out of pocket costs.

9. Self-employed or have taxable fellowships—send in estimated quarterly payments (see Form 1040-ES).

10. Avoid underpayment penalty. Pay 90% of current filing year tax bill, 100% of tax shown on prior year bill. Less than $1000 owed = no penalty.

11. See IRS apps and topical videos.

12. Lesson—Understanding Taxes

Additional ResourcesTo learn more about federal taxes Explore IRS developed videos, videos with sign language, multilanguage videos, podcasts on taxes Understanding Taxes To Get Help Completing your 2013 Tax Return @ University Park Penn State VITA—University Park VITA is available for U. S. Citizen or resident alien with a household income of $51,500 or less for the 2013 Tax Year. To Find VITA sites nationwide (Check irs.gov site) (Income limitations for most sites in 2013 is $51,500. Pennsylvania—Resources for Individual Taxpayers PA Department http://apps.irs.gov/app/understandingTaxes/of Revenue Commonly asked questions about Pennsylvania Tax Returns

Questions and Comments?

Thank you for participating!

Dr. Cathy F. BowenProfessor and Consumer Issues SpecialistDepartment of Agricultural Economics,Sociology and Education8B Ferguson BuildingUniversity Park, PA 16803cbowen@psu.edu814-863-7870 (o)

Dr. Daad RizkMoneyCounts: A Financial Literacy Series301 Outreach BuildingUniversity Park, PA 16802dar39@psu.edu1-(814)-863-0214