Taxes
Objectives
1.
List the types of taxes and explain
the purpose of taxes.
2.
Describe the U.S. tax system and
explain how it works.
3.
List and define basic tax
terminology.
4.
Demonstrate preparation of an
Discuss
1. What do you know about taxes and filing
a tax return?
2. What are things you've heard about taxes
or tax returns but are confused about or
not totally clear about?
3. What is your personal opinion about
What are taxes and why must we
pay them?
Taxes: payment imposed on a
taxpayer by a government.
There are many kinds of taxes;
we’ll look at 4 big kinds.
They pay for services according
to priorities set by governments
(federal, state, and local)
As citizens of the US, Oregon,
Pay Your Taxes!
These people didn’t:
• Martha Stewart – Paid $220,000 in back taxes • Wesley Snipes - Didn’t file tax return while
earning $14M over a three year period. Sentenced to 3 year prison term.
• Richard Hatch (1st winner of Survivor) Spent 51
months in prison for tax evasion.
• Leona Helmsley – convicted of evading $1.2M
in taxes. Spent 21 months in prison. She also gave her dog $12M.
• Nicolas Cage – Ghost Rider. Owed $6M.
• Ozzy/Sharon Osbourne – Owed $1.7M but paid
it once publicized.
What does tax money
fund?
Social Welfare Programs
• WIC, SNAP, housing assistance
Infrastructure
• Roads, sewers, public
transportation
Education
Military
Public Safety
• Fire Service, Police
Libraries
Federal and State Agencies
(FBI, Parks Service, FDA,
CFPB, etc.)
4 Main Categories of
Taxes
4 Categories of Taxes
1. Taxes on Purchases (sales or excise taxes):
Sales tax - tax added to the purchase of products. No general sales tax in OR, DE, NH, MT. WA’s is 6.5%
Excise tax - imposed on specific goods and services: gas, telephone, air travel, cigarettes, alcohol, etc.
•Cigarette excise tax varies by state. Low $.17 per pack in MO, $4.35 per pack in NY.
•Oregon's cigarette tax $1.32 per pack, 28th highest. Also a $1.01 federal excise tax.
•Oregon’s gas tax is $ .30 a gallon, 14th highest.
Federal gas tax is $.18 a gallon. Oregon is
A Closer Look at the Tobacco Tax
Cigarette and other tobacco taxes
are used to fund many programs for
Oregonians:
• Police and fire services • Schools
• Roads
• Parks and other public services • The Oregon Health Plan
• Senior citizens transportation services • Tobacco use reduction
Types of Taxes Continued
2. Taxes on Property:
• This is based off of the value
of land and buildings and is used by local governments.
• Median property tax in
Clackamas County is $3245.
Source: Smartasset.com
• OC has property tax of
approx. $18 per $1000 of
assessed value. Ex: $300,000 would pay $5400 annually in property taxes. Assessed
value is ~80% of market value.
Source: League of Oregon Cities
Clackamas County Department of Assessment and Taxation is
Types of Taxes Continued
3. Taxes on income from work (payroll taxes)
Income includes wages, salary, commission, bonus
or tips.
Two main types of payroll taxes:
1. Income Tax (States and federal govts. can have income taxes)
-Oregon's income tax rate range is 5-9.9%. Federal is 10-39.6%
2. Federal Insurance Contributions Act (FICA)–tax that pays into Social Security and Medicare.
-Employees pay 7.65% of income to FICA: (6.2% to SS, 1.45% to Medicare). Employer contributes another 7.65%. Self employed people pay both parts.
Interact: What does FICA pay for? How much of your pay is put into these
Federal Income and
Outlays
Social Programs: food stamps,
unemployment, assistance for needy families.
Physical/Human Development: spending on agriculture, energy programs, transportation, job training, etc.
Type of Taxes Continued
4. Taxes on Wealth:
An estate tax is imposed on the
value of a person’s
property/assets when they die.
~2% of Americans pay this tax.
$5.45 million federal exclusion.
Oregon’s exclusion is only $1M.
Oregon’s rate is between 10-16%
depending on value of estate.
Annual gifts under $14,000 are
Why do I need to understand tax
laws?
Judge Billings Learned Hand said it well:
"anyone may arrange his affairs so that
his taxes shall be as low as possible ... for
nobody owes any public duty to pay more
than the law demands.“
Source: Investopedia.com
How does the US tax system
work?
IRS and Withholdings
Tax law, determined by
congress, is enforced by IRS
(Internal Revenue Service), a
federal agency
Primary component:
• Withholdings - monies deducted from your paycheck by your employer and sent to the IRD for various taxes.
Why collect it during the year?
• More likely that people will pay their taxes.
• Spread out payments over time instead of having a huge bill at the end of the year.
Withholdings Continued
Pay stub shows:
• rate of pay
• hours worked
• gross pay
• withholdings
• net pay
Withholdings are itemized (listed).
Include:
• Federal Income Tax
• State Income Tax
• Worker’s Compensation
• FICA (Social Security and Medicare)
You may have other withholdings that
aren’t taxes. Ex: 401(k), health insurance, union dues, etc.
Form W-4
Withholdings are only an estimate of what you owe the
government. This is why we file a return.
Estimate depends on: income level, # of people you support
that live with you (dependents), and certain expenses (mortgage interest, property taxes, donations, etc.)
W-4:
• Fill out when you are hired. Can be updated.
• Determines how much to withhold from pay.
• You claim “allowances,” which are based on your marital
status, # of children, and other factors.
• The more allowances you claim, the less that is withheld
(taken out) each pay period and vice versa.
• Does not change the amount you owe, it only effects how
Form W-2
W-2: A statement of your earnings and
withholdings for the previous year. You
should receive it in the mail by January 31.
Interact: Explain
the functions of
the W-2 and W-4.
How much money
was withheld for
the Federal
Tax Returns
End of the year comparison ofwithholdings to taxes owed.
• Underpayment = more owed • Overpayment = return of money
Audits – an examination of your tax
return.
< 1% of individual tax returns were
audited in 2015. (Time.com)
Of people who reported income of over
Progressive, Regressive, and
Proportional Taxes
Progressive income tax
system. Tax rate (%)
increases when your taxable
income increases. Wealthy
carry more of the tax burden.
Sales/excise taxes are
regressive (lower income
earners pay more as a
percentage of income) and
property taxes are
proportional – (same rate for
everyone, just depends on
value of house).
2013 Federal Tax Brackets
MarginalTax Rate Single
Married Filing Jointly or Qualified
Widow(er)
Married Filing
Separately HouseholdHead of
10% $0-$8,925 $0-$17,850 $0-$8,925 $0-$12,750
15% $36,250$8,925- $17,850-$72,500 $36,250$8,925- $12,750-$48,600
25% $36,250-$87,850 $72,500-$146,400 $36,250-$73,200 $125,450
$48,600-28% $183,250$87,850- $146,400-$223,050 $111,525$73,200- $125,450-$203,150
33% $183,250 -$398,350 $223,050-$398,350 $111,525-$199,175 $203,150-$398,350
35% $398,350-400,000 $398,350-$450,000 $199,175-$225,000 $398,350-$425,500
Tax Rate Example
Example: suppose your taxable income
(after deductions and exemptions)
was exactly $100,000 in 2013 and
your status was single; then your tax
would be calculated like this:
This puts you in the 28% tax
bracket; but as a percentage of your
income, your tax is about 21.3%.
Interact: Do you agree or disagree with a progressive tax system?
$8,925-$0 X 10% $892.50
$36,250-$8,925
X 15% $4,098.5 0
$87,850-$36,250 X 25% $12,900
100,000-87,850 X 28% $3,500
How is a return calculated?
• Earned income (W-2) • Investment income • Prize money
• Pension
• Interest income (1099-INT)
• Unemployment income
Gross Income - Adjustments = AGI
• Traditional IRA contributions
• Student loan interest • Alimony payments • Moving expenses
You get to take these and still can take the standard deduction.
These are “above the line” deductions.”
Step 1 in determining your taxable income. Adjusted Gross Income determines if you will qualify for certain tax breaks.
How is a return calculated?
Standard OR Itemized
Take whichever is greater.
Itemized Deductions: • Mortgage interest
• Charitable contributions • Property taxes
• State income taxes • And more
Deductions reduce the amount of income that is taxed.
an amount for: • you
• spouse • children
• qualifying relative
was $4000 per person last year
Based on the number of people in your
household that you support.
AGI - Deductions - Exemptions = Taxable Income
How is a return calculated?
Look up your taxable income in the tax table (online). This shows your fair share of the tax bill. Then, subtract any tax credits.
Tax Credit: Unlike deductions which are subtracted from your income, credits are subtracted directly from the amount of taxes owed.
Credits exist for dependent children, child care expenses, adoption costs, education costs, and energy efficient appliance and car purchases.
Compare this number with your withholdings for the year.
Tax Owed
Your Withholdings
Step 3: Calculating Taxes Owed
If withholdings > tax owed, then you get a refund.
Other Factors
How do you keep track of your tax
documents?
Which tax form to use?
Who will prepare your tax return?
Where do you get tax information?