Unit 1:

Income

1. Identify components and sources of income. 2. Analyze how career choice, education, skills,

and economic conditions affect income and goal attainment. 3. Relate taxes, government transfer payments,

and employee benefits to disposable income.

Careers

PLANNING YOUR CAREER

0 Job – work that you do mainly to earn money

0 Career – commitment to work in a field that you find interesting and fulfilling0 Must fulfill personal goals0 Must also fulfill financial goals

Career Decisions

0 Will affect:0 Money you make0 People you meet0 Spare time you have

0 Career should reflect:0 Interests, values, goals (money and personal fulfillment)

Career Decisions

0 Standard of Living – a measure of quality of life based on amounts and kinds of goods and services that you enjoy

0 A career will involve opportunity costs0 Time vs Money

0 Potential Earning Power - Amount of money you may earn over time0 Education0 Field of Study0 Working well with others0 Creative0 Communication skills

Career Decisions

Personal Factors

0 Aptitudes – natural abilities that people possess0 Interest Inventories – tests that help you identify the

activities you enjoy the most.0 Your personality

Stages of Career Planning

0 Assess personal goals, abilities and interests - research careers

0 Identify job opportunities in chosen field0 Develop resume and cover letter—apply0 Interview for positions—improve skills0 Consider job offers-accept a job0 Plan and implement a program for career

development

Social Influences

0 Demographic trends – tendencies of people that are grouped by age, gender, ethnicity, education or income

0 Geographic trends – cost of living vs salaries earned in big cities or smaller towns

Economic Factors

0 Interest rates0 Price increases0 Demand for certain goods and services

Trends in Industry and Technology

0 Manufacturing industry:0 Increased competition by other countries0 Automation in the factories

0 Service industry:0 Provide service for a fee0 Fastest growing area in our economy

Income and Taxes“Taxes are what we

pay for civilized

society.”

- Oliver Wendell

Holmes, Jr., 1904

Why are taxes so important?

Why are taxes so important?

Fund public goods and services

0 Medicare and Medicaid0 National Defense / Military 0 Police & fire protection0 Public schools and libraries0 Road Maintenance0 Parks and recreation0 Health and food inspections for our safety

Effective Tax Planning

Helps you have more money left over after paying taxes and living expenses

0 Research how current laws and regulations affect you0 Maintain complete and accurate tax records0 Minimize your tax liability

0Tax Liability: total amount of taxes owed

Types of Taxes

0 Taxes on Purchases0 Sales tax: everyday consumer products0 Excise tax: collected on specific goods and services

(gasoline, air travel, telephone service)

0 Taxes on Property0 Real estate tax: based on value of land and buildings –

primary source of income for local governments 0 Personal property tax: based on the value of items

such as cars and boats

Types of Taxes (cont.)

0 Taxes on Wealth0 Estate tax: federal tax collected on the value of a

person’s property at the time of his death0 Inheritance tax: state tax collected on the value of the

property left by a person to his heirs in a will0 Gift tax: collected on any money or property valued at

over $14,000 given from one person to another in one year

Types of Taxes (cont.)

0 Taxes on Earnings (Income Taxes)0 Federal Income Tax: paid to federal government on any

earned income (wages, salaries, commissions, tips, bonuses), interest income, dividend income, or capital gainsLargest amount of taxes paid by an individualCollected by the Internal Revenue Service (IRS)• Federal agency that collects income taxes and enforces nation’s tax laws• “pay as you earn” basis – taxes taken out of your paycheck by your

employer and sent to IRS each pay period

Types of Taxes (cont.)

0 Income Taxes (continued)0 State Income Tax: paid to the individual state (laws

governing what is taxed differ from state to state)0 City Income Tax: collected by about 2000 cities 0 Social Security Tax: pays for retirement, disability and

survivor benefits 0Also called FICA – Federal Insurance Contributions Act

0 Medicare Tax: health insurance program for people 65 and older

Types of Income (cont’d)

0 Gross Pay: total amount of money an employee earns in a pay period

0 Net Pay: the amount of money an employee actually receives in a pay period after deductions

0 Gross Income: includes earned income, interest income, and dividend income minus tax-exempt income

Income Types (cont’d)0 Adjusted Gross Income: gross income after adjustments

(reductions such as student loan interest or contribution to 401K) used for tax calculations

0 Taxable Income: adjusted gross income less any tax deductions and exemptions and used to determine income tax

0 Tax-exempt income: income not subject to taxes (municipal bonds)

0 Tax-deferred income: income taxed at a later date (401k contributions)

So…What has to come out of your paycheck??

0 Average person pays over 30% of paycheck to taxes0 Employers required by Federal Law to deduct:

0 Social security (FICA)0 Medicare tax0 Federal income tax0 State and/or city tax (where required)

Taxes & Starting a New Job

0 To receive a paycheck, an employee must complete:0 W-4 Form (Employee’s Withholding Allowance

Certificate)0Determines percentage of gross pay withheld for taxes

0 I-9 Form (Employment Eligibility Verification)0Confirms citizenship status

W-4 Form0Employer uses to withhold (deduct) money to send to the

Internal Revenue Service0Amount withheld is based on number of allowances

0Allowance: adjustment to the tax withheld from paycheck based marital status and number of dependents0A person may claim a personal allowance if no one else claims the

person as a dependent0 Dependent: a person who relies on the taxpayer for financial support

0Reduces amount of income taxes an employer withholds and sends to IRS

0Puts more money in your pocket now but may mean you owe taxes when filing tax return

Completing a W-4 Form

0 Legal Name and address0 Social Security number0 Marital status0 Number of Allowances (yourself, spouse, dependents)0 Any additional money you want withheld0 If you are exempt from income tax0 Sign and date form

http://www.stlouisfed.org/education_resources/personal-finance-101-chats/personal-finance-101-chat-w-4

/

I-9 Form

0 Used to verify the eligibility of individuals to avoid hiring undocumented workers or others who are not eligible to work in the United States

0 Must provide documentation which establishes identity and employment eligibility0 driver’s license, passport, Social Security card, or birth

certificate

Reading a Paycheck Stub

On-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

0A document included with paycheck each pay period which outlines paycheck deductions

Reading a Paycheck– Personal InformationOn-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

0States the employee’s full name, address, and Social Security or Employee Identification number

0Always check to ensure this information is correct

Reading a Paycheck – Pay PeriodOn-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

0Length of time for which an employee’s wages are calculated; most are weekly, bi-weekly, twice a month, or monthly

0Last day of the pay period is not always payday to allow a business to accurately compute wages

Reading a Paycheck – Gross PayOn-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

0 Total amount of money earned during a pay period before deductions

0 Calculated by multiplying number of hours worked by hourly rate

0 If employee is on salary - total salary amount divided by the specified number of pay periods

Reading a Paycheck – Net Pay

On-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

Amount of money left after all deductions have been withheld from the gross pay earned in the pay period.

Reading a Paycheck – Deductions

On-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

Amount of money subtracted from the gross pay for mandatory taxes, employee-sponsored medical benefits, and/or retirement benefits

Reading a Paycheck– Federal Withholding TaxOn-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

– Amount required by law for employers to withhold from earned wages to pay taxes

– Amount of money deducted depends on amount earned and information provided on Form W-4

– Largest deduction withheld from an employee’s gross income

Reading a Paycheck– State Withholding TaxOn-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

– Percentage deducted from an individual’s paycheck to assist in funding government agencies within the state

– Amount deducted depends on amount of gross pay earned

Reading a Paycheck – FICA

On-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

Federal Insurance Contribution Act– Includes two separate taxes: Social Security and

Medicare– These two taxes can be combined as one line item or

itemized separately on a paycheck stub

Reading a Paycheck – Year to Date

On-The-Go

EmployeeBeakens, Joe

Employee Identification201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2004-7/11/2004

Total of all of the deductions which have been withheld from an employees paycheck from January 1 to the last day of the pay period indicated on the paycheck stub.

Taxes Paid by Employer

0 Employers must pay social security and Medicare taxes equal to the amount the employee pays

0 Self-employed individuals pay taxes at a higher rate

Tax Evasion vs Tax Avoidance

0 Tax Evasion: Failure to pay legally due taxes

0 Tax Avoidance: Legal means of decreasing your tax bill

Tax Avoidance0Tax Deduction: expense that can be subtracted

from adjusted gross income to reduce taxable income0Standard deduction (changes every year)0Itemized deductions

Medical or dental expenses (7.5% AGI)Interest on mortgagesReal estate taxes paidCharitable contributionsUnreimbursed employment expenses

0Exemption: deduction for a dependent or someone that you support financially (spouse or child)

Preparing an Income Tax Return

Income Tax Return: form on which a taxpayer reports how much money he/she has received from working and other sources and the exact taxes owed

0 US citizens required to file (voluntary compliance)0 Deadlines and Penalties

0April 150Extension to October 15

0Standard Tax Forms01040EZ01040A01040

W-2 Form

0 Employer sends each employee and the IRS a W-2 Form0 Annual earnings0 Amount withheld

0Federal income taxes0Social Security0State and/or local income taxes

0 Must be sent to employees by January 31 each year

Taxpayer Rights

0Information on taxpayer’s return is private

0Taxpayers have the right to appeal an IRS decision

“The income tax law is a lot of bunk. The government can’t collect legal taxes from illegal money.”

- Al Capone

Filing a 1040EZ Return

0 Taxable income less than $100,0000 Single or married0 Under age 650 No dependents0 Wages, tips, salaries0 No itemized deductions0 Can be filed by mail or electronically

http://www.stlouisfed.org/education_resources/personal-finance-101-chats/pf-101-chat-1040ez/

Tax Assistance

0 IRS Web Site (www.irs.gov)0 Software (Quicken, TurboTax)0 Professionals (H & R Block)0 Books