Chapter 14 Section 2: Federal Taxes
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Chapter 14 Section 2: Federal Taxes
Objectives: o Objectives: Describe the
process of paying individual income taxes
o Identify: the basic characteristics of corporate income taxes.
o Explain: the purpose of Social Security, Medicare, and unemployment taxes.
o Identify other types of taxes.
• Luk_20:25 And he said unto
them, Render therefore unto
Caesar the things which be
Caesar's, and unto God the
things which be God's.
o The governments main source
of revenue comes from the
federal tax on individuals’
taxable income.
o 43 percent of the governments
revenue comes from this
source.
Pay as You Earn Taxation: o The amount of federal income tax
a person owes is determined on an annual basis.
o In theory, the federal government could wait until the end of the tax year to collect individual income taxes.
o In reality that would be a problem for both taxpayers and the government.
Pay as You Earn Taxation:
o Like other employers, the
government has to pay regularly
for rent, supplies, services, and
employers salaries.
o A single annual payment from
all the nations taxpayers at
once make meeting these
expenses difficult.
Pay as You Earn Taxation: o Similarly, many people might have
trouble paying their taxes in one large sum.
o For these reasons, federal income tax is collected in a “pay-as-you-earn” system.
o This means that individuals usually pay most of their income tax throughout the calendar year as they earn income.
o They have until mid-April of the following year to pay any additional income taxes they owe.
Tax Brackets:
o The federal income tax is
progressive tax.
o In other words the tax rate raises
with the amount of taxable
income.
Tax Withholding: o Employers are responsible in part for
carrying out the system of collecting federal income taxes.
o They do so by withholding or taking payments out of your pay before you receive it.
o The amount they withhold is based on an estimate of how much you will owe in federal income taxes for the entire year.
Tax Withholding:
o After withholding the money, the
employer forwards it to the federal
government as an installment
payment on your upcoming annual
income tax bill.
Filing A Tax Return o After the calendar year ends, employers
give their employees a report stating how much income tax has already been withheld and sent to the government.
o The employee uses the information to complete a tax return.
o A tax return is a form used to file income taxes.
o On it, you declare your income to the government and figure out how much of that income is taxable.
Filing A Tax Return o Taxable Income is a person’s gross or
total income minus exemptions and deductions.
o Gross income includes earned income, salaries, wages, tips, and commissions.
o It also includes income from investment such as interest on savings account and dividends from stock.
Filing A Tax Return o Personal exemptions are set amounts
that you subtract from the gross income for yourself, your spouse, and any dependents.
o Tax deductions are variable amounts that you can subtract or deduct from your gross income.
o Deductions include such items as interest on a mortgage, donations to charity, significant medical expenses, and state and local tax payments.
Filing A Tax Return o Once you determined how much
tax you owe, you can apply any tax credits that you may be allowed.
o A tax credit is an amount that you can subtract from the total amount of your income tax.
o You can claim a credit for such things as a portion of the cost of child-care and higher education.
Filing A Tax Return o Completing a tax return allows you to
determine whether the amount of income taxes you have already paid was higher or lower than the actual amount of tax you owe.
o If you have paid more than you owe the government sends you a refund.
o If you pay less than you owe, you must pay the balance to the government.
Filing A Tax Return
o All federal income tax returns must
be sent to the Internal Revenue
Service or IRS by midnight on April
15 or the next business day if April
15 falls in a weekend.
Corporate Income Taxes: o Like individuals, corporations must
pay federal income taxes made up just over 10 percent of federal revenues in recent years.
o It can be difficult to determine corporate taxable income because they can make a lot of deductions.
o They can subtract many expenses from their income before they reach the amount of income subject to taxation.
Corporate Income Taxes:
o This includes cost of employers’
health insurance.
o Social Security
o Medicare
o Unemployment Taxes.
Corporate Income Taxes: o In addition to withholding money for
income taxes, employers withhold money for taxes authorized under the Federal Insurance Contributions Act (FICA).
o Employees and employers of FICA share payments.
o FICA taxes fund two large government social-insurance programs.
o Social Security and Medicare.
Corporate Income Taxes: o In addition to withholding money for
income taxes, employers withhold money for taxes authorized under the Federal Insurance Contributions Act (FICA).
o Employees and employers of FICA share payments.
o FICA taxes fund two large government social-insurance programs.
o Social Security and Medicare.
Social Security Taxes: o Most FICA taxes you pay go to the
social security administration to fund old-age, survivors, and disability insurance (OSADI), or social security.
o Social Security provides benefits to surviving family members of wage earners and to people whose disabilities keep them from working.
Social Security Taxes:
o Each year the government
establishes an income cap for
social security taxes.
o No social security taxes could be
withheld from a taxpayer’s
wages and salaries above that
amount.
Medicare Taxes: o FICA taxes also fund Medicare.
o The Medicare program is a national health insurance program that helps pay for the healthcare for people over age 65.
o It also covers people with certain disabilities.
o Both employees and self employed people pay the Medicare tax on all their earnings.
o There is no ceiling as there is for social security.
Unemployment Taxes: o The federal government also collects
an unemployment tax, which is paid by employers.
o In effect the tax pays for an insurance policy for workers.
o If workers are laid off from their jobs through no fault on their own, they can file an “unemployment compensation” claim and collect benefits for a fixed number of weeks.
Unemployment Taxes:
o In order to receive the benefits,
one most show that they are
actively looking for another job.
o The unemployment program is
financed by both state and federal
unemployment taxes.
Other Types of Taxes:
o Federal Excise Tax: a general
revenue tax for sale or
manufacture of a good such as
gasoline, cigarettes, alcohol,
telephone services, cable TV, etc.
Other Types of Taxes: o Estate Tax: is a tax on the estate or total
value of the money and property, of a person who has died.
o It is paid out of the person’s estate before the heirs receive their share.
o A person’s estate includes real estate, car, furniture, investments, painting, insurance, and money.
o It is a progressive tax.
o As of 2008, if the total value of an estate is $2 million or less, there is no federal estate tax.
Other Types of Taxes: o Gift Tax: is a tax on the money or
property that one person living gives to another.
o Under current law, a person can give up to $12,000 a year tax-free to each of several different people.
o This is meant to avoid estate taxes by giving away their money before they died.
Other Types of Taxes: o Import Taxes: taxes on imported
goods (foreign goods brought into the country) are called tariffs.
o Today most tariffs are intended to protect American farmers and industries from foreign competitors rather than to generate revenue.
o Tariffs raise the price of foreign items which help keep American products competitive.
Taxes That Affect Behavior: o The basic goal of taxation is to create
revenue.
o However, governments sometimes use tax policy to discourage the public from buying harmful products.
o They also use taxes to encourage constructive or helpful behavior.
o The use of taxation to discourage or encourage certain types of behavior is called a tax incentive.
Taxes That Affect Behavior:
o Federal taxes on tobacco
products and alcoholic beverages
are examples of the so called sin
taxes.
o The main purpose is to
discourage people from buying
and using these products.
Incentives:
o Incentives also come in the form
of tax credits.
o Congress has tried to encourage
energy conservation by offering a
variety of credits to consumers
and the industry.
o Such as solar panels, hybrid cars,
etc.
Discussion Questions
• Where do you think the government should
spend more tax dollars the most?
• Do you think sin taxes is a effective means
to prevent people from purchasing harmful
substances rather than banning them?
• (Write on the blank portion of your handout)
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