Chapter 7 Federal Income Tax
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Transcript Chapter 7 Federal Income Tax
Chapter
7
Federal Income Tax
7.1 Our Tax System
7.2 Filing Tax Returns
© 2010 South-Western, Cengage Learning
Purpose of Taxes
In a free enterprise system such as ours,
the government collects money from
citizens and businesses in the form of
taxes.
These incoming funds to the government
are called revenue.
The government spends the revenues
received according to priorities set by
Congress.
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 2
As income
increases…
Progressive
taxes take
a larger
share
TAX RATE
INCOME
Progressive Taxes
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 3
INCOME
Regressive Taxes
As income
increases…
Regressive
taxes take a
smaller
share
TAX RATE
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 4
INCOME
Proportional Taxes
As income
increases…
Proportional
taxes
remain at a
constant
rate
TAX RATE FLAT
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 5
Components of the Tax System
The power of The Internal Revenue
System (IRS) ---To collect taxes, and
enforce tax laws
Paying your fair share
Our income tax system is based on
voluntary compliance---meaning???
It is solely the individuals
responsibility to prepare, file,
and pay taxes.
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 6
Components of the Tax System
Failure to pay taxes
Failure to do so can result in a penalty.
Penalties for not paying taxes could be interest
charges on the taxes owed plus a possible fine.
Willful failure to pay taxes is called tax
evasion.
Punishable by a fine, imprisonment, or both
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 7
An IRS Audit
Every year, the IRS calls millions of
taxpayers for an audit, which is an
examination of their tax returns.
NEVER will they email or call and ask
you your name and social security
number!!! **Possible scam
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 8
Define basic tax terminology.
FILING TAX RETURNS
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 9
Filing Status
Filing status describes your tax-filing
group.
You must mark one of the following as
your filing status on your tax form:
Single person (not married)
Married person filing a joint return
Married person filing a separate return
“Head of household”
Qualifying widow(er)
© 2010 South-Western, Cengage Learning
Chapter 7
SLIDE 10
Exemptions
An exemption is an amount you may
subtract from your income for each
person who depends on your income to
live.
Each exemption reduces your taxable
income and thus your total tax.
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 11
Gross Income
Just like we have Gross Pay before
deductions(Fed. Income SS, and
Medicare taxes) we have Gross
Income, before adjustments,
deductions and exemptions.
Gross income is all the taxable income
you receive.
Common Types of Income (some are not taxable)
Wages, salaries, and tips
Interest income
Dividend income
Unemployment compensation
Social security benefits
Child support
Alimony
© 2010 South-Western, Cengage Learning
For details go to
page 142 &143 in
text book
Chapter 7
SLIDE 12
Adjusted Gross Income
The law allows you to subtract some types of
spending from gross income.
These adjustments are subtracted from
gross income to determine adjusted gross
income.
Adjustments reduce income that is subject to
tax
You will be asked for your AGI whenever
you borrow money.
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 13
Adjusted Gross Income
Gross income
– Adjustments
Adjusted gross income
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© 2010 South-Western, Cengage Learning
SLIDE 14
Taxable Income
Gross income
– Adjustments
Adjusted gross income
– Deductions
– Exemptions
Taxable income
Taxable income is the income on which you will pay tax.
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 15
Deductions
Itemize deductions
Examples include:
Medical and dental expenses beyond a specified percentage of
your income
State and local income taxes
Property taxes
Home mortgage interest
Gifts to charity
USUALLY “older “people
Standard deduction
If you do not have many deductions, your tax may
be less if you take the standard deduction.
USUALLY “younger” less complicated finances.
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 16
Tax Credits
A tax credit is an amount subtracted directly
from the tax owed.
The government allows tax credits for certain
education expenses, child-care expenses, and
other reasons from time to time.
Usually special line on tax form (ex. Katrina)
What others????
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 17
Preparing Your Income Tax Return
Who must file?
When to file?
Which form to use?
Where to begin?
Filing electronically
Tax preparation software
Chapter 7
© 2010 South-Western, Cengage Learning
SLIDE 18
Bring textbook to class
Monday to look at 1040EZ,
1040A, 1040
Chapter 7
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SLIDE 19