Lesson 13

Paying Your Taxes

Key Terms

• 1040EZ• 1099INT• 1099MISC• FICA• Gross Income• Income Tax• Standard Deduction

• Tax Audit• Tax Deduction• Tax Exemption• Tax Refund• Tax Table• W-2• W-4

Taxes• Money taken from your paycheck by the

government to pay for government services– Military– Roads– Other– Entitlements

• Unemployment• Welfare• Other

• Types of taxes– Payroll Taxes– Income Tax

What Does the Federal Government Use Taxes For?

National Defense21%

Social Security21%

Medicare12%

Income Security13%

Health10%

Net Interest9%

Other14%

What Are Payroll Taxes?• Money taken from your paycheck to pay for services

you may directly receive (now or in the future)• Called Federal Insurance Contributions Act (FICA)

Taxes– Since you may receive direct benefit from these services, it

is a form of insurance• FICA taxes– Social Security (FICA-SS)

• Money you will receive when you reach retirement (currently age 67)

• Amount of benefit you will receive is capped, so you only pay FICA-SS on a maximum of $110,100 (in 2012) of earnings

• Current rate: 6.2% of all earnings below $110,100

– Medicare• Pays for health care for those individuals who qualify

for it– Intended primarily for retirees over age 67

• Current tax rate: 1.45% of all earnings

• Your employer is required to match your FICA contributions– You pay 7.65% of your income in FICA

contributions– Your employer has to provide an identical amount

from its earnings to the government• The cost of your labor to an employer is more than just

the wage you earn!

What Is Income Tax?

• Tax the government collects on each income earner to use for government services

• Taxes withheld from each of your paychecks and sent by your employer to the Internal Revenue Service (IRS)– Government agency in charge of collecting taxes

• Amount withheld varies based on tax allowances claimed on W-4

A Note on Tax Allowances• When you get a job, you will fill out a W-4 form

claiming how many allowances you want on your income tax withholding– Can get 1 allowance for each member of your household– Additional allowance possible

• The number of allowances will determine how much is withheld from each paycheck– The more allowances, the less withheld from your

paycheck– IRS publishes withholding tables telling employers how

much to withhold from your paycheck based on your earnings & number of allowances

– Intent is to minimize the amount you may have to pay in taxes at the end of the year when you file your tax return

US Federal Tax System

• Progressive income tax– The more you make, the larger percentage of your

income you pay in income tax• Tax rate determined by tax brackets– Different parts of your taxable income are taxed

at different rates

Taxable Income• Gross Income (total of all income earned

through work, investments, etc.) minus allowed tax deductions– Tax deduction – something the IRS allows you to

deduct off of your income– Tax deductions reduce your taxable income

Types of Tax Deductions

• Standard Deduction – flat amount set annually by the IRS– $9,750 for tax year 2012

• Itemized deductions – sum total of all allowed tax deductions (charitable contributions, property taxes, mortgage interest, etc.)

• Can only use one or the other, not both– Usually use larger amount of the two– Cannot itemize deductions if using 1040EZ

Example of Taxable Income

Gross Income (sum total of all income earned through work, investment, interest on savings accounts, etc.)

$35,000

Standard Deduction $9,750Taxable Income (gross income – standard deduction)

$25,250

Tax Brackets2012 Single Adult

Taxable Income Earned Between Tax Rate

$0 - $8,700 10%$8,700 - $35,350 15%

$35,350 - $85,650 25%$85,650 - $178,650 28%

$178,650 - $388,350 33%$388,350 + 35%

Source: www.moneychimp.com

Example

Gross Income $75,000 Taxable Income $65,250

Taxable Income Between Amount Tax Rate Tax Liability

$0 - $8,700 $8,700 10% $870.00$8,700 - $35,350 $26,650 15% $3,997.50

$35,350 - $85,650 $29,900 25% $7,475.00Total Tax Liability $12,342.50Effective Tax Rate 16.46%

When Do I Pay My Taxes?

• Employer pays your taxes to the IRS throughout year

• After end of the calendar year, you must determine if you have paid enough, too little, or too much– Too little: must pay more– Too much: you will get a refund

• You must file a tax return every year with the IRS showing1. How much you earned2. How much you paid in income tax3. How much you should have paid in income taxand4. Whether you still owe more or should get a refund

• Deadline: April 15 (or April 16 or 17 if April 15 is on a weekend)– Do tax return as early as possible to determine if getting

refund or owe money• If you owe money, this gives you more time to come up with

the money you owe

– File as early as possible if getting refund

What Do I Need To File My Tax Return?

• Appropriate 1040 form (1040, 1040A, 1040EZ)• W-2s from all employers from previous year• 1099-INTs from all interest-earning accounts• 1099-DIVs from all investments for which you were paid

dividends• 1099-MISC for all other sources of income not covered

by previous forms– Business should have mailed all forms by the end of January

each year• Receipts/documentation for deductions (if itemizing)– Not needed if using 1040EZ

1040, 1040A, 1040EZ: Which One To Use?

• 1040EZ– Taxable income below $100,000– Filing status Single or Married Filing Jointly– Under age 65 and not blind– Not claiming any dependents– Interest income $1,500 or less– Not claiming any additional deductions for real estate taxes,

taxes on purchase of new motor vehicle, or disaster losses– Most appropriate form for teenagers and young adults

• 1040A & 1040– For more complicated tax situations– Check with IRS or accountant to see which form you need to use

Steps To Filling Out 1040EZ• Step 1: Determine Gross Income– Add up income on all W-2s and 1099s– There are separate lines on 1040EZ for this

• Step 2: Determine Taxable Income– Figure out Standard Deduction (will be less than

normal if you are claimed on someone else’s tax return)

– Subtract Standard Deduction from Gross Income• Step 3: Determine How Much You Paid in

Taxes– Add up all taxes paid shown on W-2s and 1099s

• Step 4: Determine How Much You Should Have Paid in Taxes– Based on your Taxable Income (the smaller

amount), look up your tax liability in the tax tables in the 1040EZ Instructions

• Step 5: Determine Your Refund or Amount You Owe– If the amount you paid is more than the amount

you should have paid, you will get a refund– If the amount you paid is less than the amount you

should have paid, you will owe the IRS money

How Do I File My Taxes

• Mail in Paper Copy of All Tax Documents– Takes longer for IRS to process– Delays getting your refund if you are due one

• Online– May be able to file directly from IRS Web site– Can use tax software (TurboTax, TaxCut, etc.) to

file electronically• Normally pay fee to do this

How Can I Receive My Refund?

• Paper Check Mailed to You– Takes longer to receive refund

• Direct Deposit– Quickest way to receive refund

Exit Pass

1. What makes up FICA taxes (two types)? 2. What percentage is each one? 3. What is progressive tax?