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This lesson looks at taxes from both the big picture and the individual perspective. Students learn about why the government taxes, where the money goes, and how different income brackets pay different taxes. They also learn about their individual responsibility to pay taxes, and that their gross salary does not always reflect what they will actually take home. Finally, the class will examine ways to lower taxes through deductions, retirement accounts, etc.
PREPARATION
Grade Level: Grades 9-12
Time Allotment: Three 45 minute class periods
Subject Matter: Mathematics; Government revenue and expenditures; Net vs. gross income; Income brackets; Deductions - Pre-tax; Investment
Learning Objectives: Students will be able to:
• Analyze a pay stub
• Identify pre- and after-tax deductions
• Understand why people pay taxes
• Compare tax differences given 401(k) deductions
• Do a cost-benefit analysis of a 401(k) plan
• Critique public vs. private responsibility Standards:
McREL Economics Level 4, Standard 5, Benchmark 5
http://www.mcrel.org/compendium/standardDetails.asp ?subjectID=15&standardID=5
Understands that governments often redistribute income directly when individuals or interest groups are not satisfied with the income distribution resulting from markets, and that
governments may also redistribute income indirectly as side-effects of other government actions that affect prices or output levels for various goods and services.
McREL Economics Level 4, Standard 6, Benchmark 2
http://www.mcrel.org/compendium/
standardDetails.asp?subjectID=15&standardID=6
Understands that most federal tax revenue comes from personal income and payroll taxes, and these taxes are used to fund social security payments, the costs of national defense, medical
expenditures, and interest payments on the national debt. McREL Thinking and Reasoning Level 4, Standard 1, Benchmark 7
http://www.mcrel.org/compendium/search.asp?Action
=Search&SubjectName =21&GradeOption=ALL&Keyword=&KeywordOption =AND&Vocabulary=&VocabularyOption=AND&Topic=&TopicOption
=AND&Submit1=Submit+Search
Evaluates an argument objectively by considering all sides of an issue (e.g., using past experience, data, logical analysis.
Computer Resources:
Modem: 56.6 Kbps or faster.
Browser: Netscape Navigator 4.0 or above or Internet Explorer 4.0 or above. Macintosh computer: System 8.1 or above and at least 32 MB of RAM.
Personal computer (Pentium II 350 MHz or Celeron 600 MHz) running Windows® 95 or higher and at least 32 MB of RAM
Software: Any presentation software such as Power Point or Hyperstudio (optional) Specific Software Needed:
• Spreadsheet software (Microsoft Excel, Lotus 1-2-3, etc.) Materials:
Teachers will need the following supplies:
• Board and/or chart paper
• Copy of NOW, episode 114
• Ideally, a screen on which to project the video clips
• Handouts of Web resources if computers are not available in the classroom
• Copies of the WHERE DOES YOUR MONEY GO? student organizer
• Copies of the Pay Stub Example student organizer Students will need the following supplies:
• Computers with the capacities indicated above
• Notebook or journal
• Pens/pencils Web Resources:
Before teaching this lesson, bookmark all of the Web sites used in the lesson on each computer in your classroom, create a word-processing document with all of the Web sites listed as hyperlinks, upload all links to an online bookmarking utility such as www.portaportal.com, or make paper handouts of necessary Web pages so that students can access the information on these sites. (Note: It's a good idea to preview these sites before presenting them to your class.) Make sure that your computer has necessary media players, like RealPlayer, to show streaming clips (if applicable).
Preview all of the sites and videos before presenting them to your class.
• GPO Access: Budget of the United States Government: Historical Tables Fiscal Year 2005
http://www.gpoaccess.gov/usbudget/fy05/hist.html
This site has complete information on U.S. federal government expenditures for the fiscal year 2005.
STEPS
--Lesson 1 (PAYCHECK)— Introductory Activities
Goal: to get students interested in the upcoming lesson by personalizing the information. Pique their curiosity with the news that all of their income will not go directly to them.
1. Open up a discussion of students who have collected a paycheck. Ask the students:
• • • • • • •
How many of you have a job, or are interested in finding one? What kind of job would you like now? When you grow up? How much money do you think you can earn in a week? Has anyone collected a paycheck before?
2. Discuss what kinds of jobs students would like when they grow up, and what kind of income they hope to earn.
3. Segue into a discussion of how much tax is taken out of a paycheck and the factors that impact net income. Ask students the following questions:
Did you know that you won't be able to "take home" every dollar you earn? How much do you expect to pay in taxes?
How many of you would like to learn how to save more money, and pay less in taxes at the same time?
Learning Activities
Goal: to provide definitions of terms and a framework within which students can analyze taxes and deductions.
1. Hand out the Pay Stub Example student organizer.
2. On the board, define the following terms with the students:
• Gross pay: The total amount of salary paid before any deductions are taken out.
• Net pay: The amount of salary received after taxes and deductions have been taken out.
• Taxes: Payments made to the Government that are withheld from income.
• Deductions: Money taken out of a paycheck for retirement accounts and eligible medical and dental insurance plans. The deductions for those types of benefits are not taxed by the federal government, which means they are essentially excluded from federal taxable wages.
3. Have the students identify the above-defined terms in numerical value on the paycheck example.
4. Ask the students to provide an example of each type of deduction and benefit. Help them define what those terms mean. For example:
• • • • • Taxes Examples:
o Federal Income Tax: Taxes taken out of a paycheck that go to the federal government.
o State Income Tax: Taxes taken out of a paycheck that go to the state government. o City/Local Income Tax: Taxes taken out of a paycheck that go to the city/local
government. Explain that not everyone pays city or local taxes; it depends on where you live and work.
o Social Security: Withholdings that go into the federal government program that provides income support to people who are unemployed, disabled, or over the age of 65.
o Medicare: Withholdings that go into the federal health insurance program for people 65 and older, and also for people with disabilities.
Deductions Example:
401(k) - This is an investment account that is used for retirement. Income paid to this account is tax-deferred, which means that taxes generally are not paid until retirement. Sometimes the employer also makes contributions to this account, and they are also tax-deferred.
Discuss the value of the deductions and benefits. Explain that "Before-Tax Deductions" are a good value because they reduce the tax burden of the employee. Categorize the deductions as before-tax or after-tax. The amounts with an asterisk next to them on the paycheck are before-tax deductions which means they are excluded from federal taxable wages. These include: 401(k), dental insurance, HMO or medical insurance, and the dependent care spending account, which is money that can be set aside to pay for child care or care for the sick or elderly.
The deductions on the Pay Stub Example that are not excluded from federal taxable wages are life insurance, and the any 401(k) loan repayment.
Culminating Activity/Assessment:
Goal: for students to get a picture of how taxes can decrease take-home pay, and the extent to which deductions can lower the taxes you pay. This provides a basis for students to later analyze the value of different deduction scenarios.
1. Hand out the WHERE DOES YOUR MONEY GO? student organizer and ask students to compute the following on the first portion of the handout using the numbers from the Pay Stub Example: • • • • • •
The percentage of gross earnings paid in taxes (total taxes/gross earnings. The equation is $81.91/$452.43 = 18%).
The percentage of the federal taxable gross paid in taxes (total taxes/federal taxable gross. The equation is $81.91/$335.85 = 24%).
The percentage of gross earnings that is the net pay (net pay/gross earnings. The equation is $259.38/$452.43 = 57%).
2. Use the tax rate, or percentage of income paid in taxes, calculated from the total taxes/federal taxable gross equation to compute the amount of taxes that would have been paid if there were no deductions. This would be the tax rate, just defined, times gross earnings. Compare those two numbers using the second portion of the WHERE DOES YOUR MONEY GO? student organizer.
Tax rate with deductions (total taxes/federal taxable gross. The equation is $81.91/$335.85 = 24%).
Taxes paid without deductions (total taxes/federal taxable gross) x gross earnings. The equation is 24%*$452.53 = $108.60).
Compare the total taxes from the pay stub to the answer above. (The equation is $108.60-$81.91 = $26.69).
3. Gauge opinion of the tax rate, and if students on a first look think it's fair or excessive. --Lesson 2 (DEDUCTION COMPARISONS)--
Introductory Activities:
Goal: to recap the previous day's lesson, and to introduce the concepts of saving, the need to save for retirement, and the options for creating the most net gain out of a paycheck.
1. Continue discussion of previous day with a talk about who has a savings account.
2. Discuss who might have a savings account from jobs worked or gift money, or who might have a savings or investment account for college savings.
3. Ask students at what age they want to retire, and the lifestyle they hope to live when they do retire.
Learning Activities:
Goal: to provide definitions of terms, and a framework within which students can analyze different deduction options.
2. Identify and define the different types of before-tax deductions listed on the paycheck. These are the deductions with the asterisk next to them that are excluded from federal taxable wages. • • • • • • • • • • •
401(k): This is an investment that will go toward the employee's retirement. This investment is "tax-deferred" which means the employee will not pay taxes until the contributions and earnings are distributed (generally upon retirement). Not paying taxes means that your investment will increase in value much more quickly. An added benefit is that most people will pay less tax on income when they retire as they will be earning less money in which case they will probably be in a lower tax bracket. Deferring the tax payment until a person is retired means that they will likely pay less tax.
Dental: Contribution to an eligible dental insurance account. HMO: Contribution to an eligible medical insurance account.
Dep Care FSA: Contribution to the employee's spending account for child care or care for the sick or elderly. This is non-taxed income put aside in a "spending account" to use to pay for those expenses.
3. Discuss the concept of a retirement investment plan, like a 401(k). Explain to the class that many people would like to save money for retirement in addition to what the government provides via social security. There are different ways to do this, and employers can help out. Some investment plans are tax-advantaged (they are made from pre-tax earnings) while others are not. Some examples are provided below. Write the following terms on the board and define:
401(k): An employer-sponsored retirement savings plan funded with money deducted from pre-tax salary, up to an annual cap established by Congress. The employer may match some or all of the employee's contribution.
Mutual fund: A professionally managed investment that pools the capital of thousands of investors to trade in different securities, like stocks and bonds,
depending on the investment objectives of the fund. Because most mutual funds hold a large number of securities, they offer investors the opportunity to diversify, as well as the benefits of portfolio management.
Compound interest: The interest earned on interest already earned from an investment. It can be figured annually, monthly, or daily.
4. Compare the following figures from the equations that the students computed on the WHERE DOES YOUR MONEY GO?student organizer.
The net pay after the deductions. ($259.38)
The net pay without the deductions (apply the tax rate to the gross earnings. The tax rate computed is 24%).
The taxes paid given the pre-tax deductions. ($81.90)
The taxes paid without the pre-tax deductions. (total taxes/federal taxable gross) x gross earnings. The equation is 24%*$452.53 = $108.58).
5. Then compare the taxes paid in the two cases. Be sure that students understand that the lower the taxable income you make, the less taxes you pay. This means that deductions which lower income save money in taxes paid. In this example the amount saved in taxes is $26.69. Culminating Activities:
Goal: to present clear numerical scenarios to students so they can see the impact of saving over time on both their personal savings and their tax payments. Hand out the WHERE DOES YOUR MONEY GO? student organizer and the Pay Stub Example.
1. Create a spreadsheet that you will hand out to the students (or, if you have access to computers, have the students create a spreadsheet) with different scenarios that calculate taxes paid over 30 years with and without deductions, and how much an investment account can grow over 30 years.
• • • • • •
Taxes paid over 30 years with deductions Taxes paid over 30 years without deductions
401(k) deductions growth with compound interest of 5% over 30 years 2. To create the spreadsheet do the following:
a. Column A, Rows 1-30: Multiply the "total taxes" number by 52 (since the
payments are weekly) to get the full-year amount. Put that number in each of the 30 cells. Compute the total (the formula to put in cell A31 is "=sum(A1:A30)." Total taxes = $81.91*52=$4,259.32. The sum of thirty years of taxes is $127,779.60. b. Column B, Rows 1-30: Number from 2.b. on the WHERE DOES YOUR MONEY GO? student organizer multiplied by 52 in each of the 30 cells. Compute the total (the formula to put in cell B31 is "=sum(B1:B30)." This would be 24%*$452.43=$108.58. The full-year amount would be $108.58*52=$5646.16. The sum of 30 years of these taxes would be $169,384.80.
c. Column C, Rows 1-30: Multiply the 401(k) deduction total by 52 to get the full-year amount ($1560). Put that total in the first cell (1C). Then copy the following formula through the following 29 cells in that column: =(1C*1.05)+1560. The final cell will have the culminated investment earnings from 30 years of 401(k) savings with a 5% return, or interest rate. (The final amount is $103,644,60).
3. Explain to the students that the above equation adds 5% to the previous cell's total,
representing a 5% gain in interest in the 401(k) account. Then it adds that year's contribution to the previous year's contribution plus interest gain.
4. Discuss which scenario yields the most income. --Lesson 3 (FINAL ANALYSIS)--
Introductory Activities:
good idea for students to identify/clarify their own opinions about public vs. private responsibility before beginning the debate.
1. Continue the discussion about who in the class works, and what kind of jobs students have held.
2. Discuss if they have known anyone who has been laid off, and if they have ever been laid off, for how long, etc.
3. For a perspective on public vs. individual responsibility in terms of income, benefits, retirement, etc, show a segment from the NOW show called "Risky Business." Begin the segment when the host is interviewing Peter Gosselin and he says, "We are in the midst of the great debate right now with Social Security private accounts, with bankruptcy reform, with changes in Medicaid and the possibility of changes in Medicare..." Play the tape for approximately 2 minutes and end the segment when the interviewee says, "What do you save for? How much do you save to protect yourself against that kind of change?"
4. Lead the students into a discussion of public vs. individual responsibility in terms of income, benefits, retirement, etc. Students should be asked whether or not they think the government should pay for healthcare, education, and income for the unemployed, or if it's each citizen's personal responsibility to pay for those services.
Learning Activities:
Goal: to provide an understanding of how tax dollars are used by the government. At the same time, students are encouraged to think independently about how they think those dollars should actually be spent.
1. Review the previous day's lesson, in particular the statistics of taxes vs. net pay vs. gross pay. 2. Open up the discussion of "Where do your tax dollars go?"
3. Hand out the chart break-down of the federal budget from:
• http://www.gpoaccess.gov/usbudget/fy05/hist.html (Table 3.1-Outlays by Superfunction and Functions) (Table 3.2-Outlays by Functions and Subfunction)
4. Conduct a 10-minute discussion on the major areas of the budget, including:
• • •
National defense (How much is spent on defense? What percentage of the overall budget goes for this allocation?)
Human resources (How much is spent on education, health, medicare, social security? What percentage of the overall budget goes for this allocation?)
Physical resources (How much is spent on energy, transportation, infrastructure like bridges and tunnels, regional development? What percentage of the overall budget goes for this allocation?)
• Interest on debt (How much is spent on interest on public debt? What percentage of the overall budget goes for this allocation?)
5. Go to the board, and ask for suggestions on what the government should pay for. Write each suggestion on the board.
6. With each new idea, ask for a show of hands of people who agree with what the government should pay for. Be sure to explain to the class that if the government does not pay for them, that individuals would somehow be responsible instead. What would the implications be if the government didn't pay for these things?
Culminating Activities:
Goal: to provide an assessment of public vs. private responsibility in the context of what the government should pay for.
1. Given the ideas from the class on what the government should pay for in the previous activity, have the class determine a new federal budget based on the items from the activity above that received the most show-of-hands support.
2. Divide the class into two teams.
3. Have one team argue for the class federal budget determination put together at the beginning of class, and the other side argue for the current federal budget breakdown.
4. Each side has to include an analysis of public vs. private responsibility.
5. Hold a short discussion after the debate to determine who made the better argument. EXTENSION ACTIVITIES:
• Students can identify and write to their congressperson about concerns they have regarding 1) the tax rate; 2) the federal budget; and 3) how tax dollars are spent.
• Investigate recent tax cuts signed into law and create a debate about recent changes to the tax code. Use the information from the NOW show, The Great Tax Debate.
WHERE DOES YOUR MONEY GO? STUDENT ORGANIZER
1. Do the following computations based on the information about taxes and earnings in the Pay Stub Example. Write your answers in the space provided.
The percentage of gross earnings paid in taxes = total taxes/gross earnings
The percentage of the federal taxable gross paid in taxes = total taxes/federal taxable gross
The percentage of gross earnings that is the net pay = net pay/gross earnings.
2. Based on the tax rate from the 1.a. total taxes/federal taxable gross equation, compute the amount of taxes that would have been paid if there were no deductions. Write your answers in the space provided.
Tax rate with deductions = total taxes/federal taxable gross
Taxes paid without deductions = (total taxes/federal taxable gross) x gross earnings
Compare the total taxes number from the pay stub to the answer you got in the previous question.
3. Create a spreadsheet with different scenarios that calculate a) taxes paid over 30 years with deductions; b) taxes paid over 30 years without deductions; and c) how much an investment account can grow over 30 years. Write your answers in the space provided. To create the spreadsheet do the following:
Column A, Rows 1-30: Multiply the "total taxes" number by 52 (since the payments are weekly) to get the full-year amount. Put that number in each of the 30 cells. Compute the total (the formula to put in cell A31 is "=sum(A1:A30)."
Column B, Rows 1-30: Number from 2.b. above, multiplied by 52, in each of the 30 cells. Compute the total (the formula to put in cell B31 is "=sum(B1:B30)."
Column C, Rows 1-30: Multiply the 401(k) deduction total by 52 to get the full-year amount. Put that total in the first cell (1C). Then copy the following formula through the following 29 cells in that column: "=(C1*1.05)+1560." The final cell will have the culminated investment earnings from 30 years of 401(k) savings with a 5% return, or interest rate.
NOTE: The above equation adds 5% to the previous cell's total, representing a 5% gain in interest in the 401(k) account. Then it adds that year's contribution to the previous year's contribution plus interest gain.
3 2 1
PAYSTUB EXAMPLE
ABC Corp. Employee Name: Mary Smith
450 Chamber Street Social Security #: 999-99-9999
Somewhere, USA 01010 Period End Date: 01/07/05
Wages Deductions
Current Y-T-D Current Y-T-D Description Hours Rate Amount Amount Description Amount Amount
• Excluded from federal taxable wages Regular Overtime Holiday Tuition 40.00 1.00 10.00 15.00 400.00 15.00 37.43* 400.00 15.00 0.00 37.43 Federal Withholdings Social Security Tax Medicare
Tax NY State Income Tax NYC Income Tax NY SUI/SDI Tax Other 401(k) Life Insurance Loan Dental HMO
Dep Care FSA
37.29 24.83 5.81 8.26 5.11 0.61 27.15* 2.00 30.00 2.00* 20.00* 30.00* 37.29 24.83 5.81 8.26 5.11 0.61 27.15 2.00 30.00 2.00 20.00 30.00
Totals 452.43 452.43 Deduction Totals 193.06 193.06
Taxable Gross 335.85 335.85
NET PAY 259.38 259.38
ABC Corp. Payroll Advice # 00000000 450 Chamber Street Advice of Credit Date 1/07/2005 Somewhere, USA 01010
Pay TWO HUNDRED FIFTY NINE AND 38/100 DOLLARS To the MARY SMITH
Order of 215 MAIN STREET ANYTOWN, USA 98765 NON-NEGOTIABLE 1 Details of applicable federal, state, and local taxes paid. 2 401(k) savings is a pre-tax deduction. 3 are pre-tax deductions. Flexible Spending Accounts (for health care, child or dependant care, parking expenses)
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