In this world nothing is certain but death and taxes.“ Benjamin Franklin

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  • Revenue

    • Taxes (money) collected from citizens and businesses
    • Largest source is income taxes
    • Other sources include social security, unemployment insurance, inheritance, estate and property taxes, and import duties.

“Ability-to-Pay Principle”

  • “Ability-to-Pay Principle”

  • Progressive taxes

    • Federal income taxes
    • More you make, the higher percentage of income you pay in taxes

Regressive taxes

  • Regressive taxes

    • Sales tax
    • Fixed percentage, so the smaller your income the greater percentage of your income it taxes to pay

Example of Regressive Tax

  • Example of Regressive Tax

    • Low income ($10,000 per year)
      • Buy stereo for $2000
      • Pay $2000(.06) = $120 in sales tax
      • $120/$10,000 = .012 or 1.2% of income
    • High income ($80,000 per year)
      • Still pay $120 in sales tax for stereo
      • $120/$80,000 = .0015 or 0.15% of income

Proportional taxes

  • Proportional taxes

    • Also called “flat taxes”
    • Tax rate stays the same regardless of the amount
      • Property taxes are a good example
      • Percentage is the same if home is $150,000 or $1.5 million


  • The IRS

    • Internal Revenue Service
    • Established to collect taxes and enforce tax laws

The power to tax

  • The power to tax

    • Congress has power to levy
    • Proposals to increase may come from President, Dept. of Treasury or Congressmen

Paying your fair share

  • Paying your fair share

    • Tax brackets
      • Tax ranges that increase as income increases
      • Taxes increase when government needs more money to balance budget
    • All citizens are expected to prepare and file tax returns (voluntary compliance)

Tax evasion

    • Tax evasion
      • “Willful failure to pay taxes”
    • Audit
      • IRS examines your tax returns
      • Up to 7 years prior

Revolutionary War

  • Revolutionary War

    • No direct income tax
      • Constitution stated “option to tax” but not individuals directly
    • Paid for by contributions from France
    • War of 1812 had a temporary income tax
    • Government didn’t collect taxes, but didn’t provide services either

Civil War

  • Civil War

    • 1862 Lincoln instituted a progressive income tax on wages
    • After war, income tax removed
  • 16th Amendment to Constitution

    • 1909 introduced first permanent income tax
    • Ratified by ¾ of states in 1913

World War I

  • World War I

  • Social Security Act

    • As a result of the Great Depression, government expanded
    • 1935 as part of FDR’s “New Deal” created the IRS

World War II

  • World War II

    • Taxes raised to pay for war
    • Set precedence to pay for growing government

Single person

  • Single person

  • Married person filing a joint return

  • Married person filing a separate return

  • “Head of household”

  • Qualifying widow(er)

    • With a dependent child


  • Exemptions

    • Amount subtracted from income for each person who “depends” on you to live
    • Don’t pay tax on this amount
  • Personal exemption

    • Exempt yourself and spouse, if filing jointly
  • Dependent exemption

All the income you receive

  • All the income you receive

    • Wages, salaries, and tips
    • Interest income
    • Dividend income
    • Unemployment compensation
    • Social security benefits
    • Alimony
    • Others – lottery winnings, gambling, rental income, etc.

Child support

  • Child support

    • Money paid by other parent to pay for child’s living expenses
    • Not taxable to person that receives
    • Not deductible for person that pays


  • Itemize

    • If you itemize (list) your deductions, use Form 1040
      • You’d list your deductions on Schedule A
    • Common deductions

Standard Deduction

  • Standard Deduction

    • Not many deductions, then best to take standard deduction
    • Subtract set amount from adjusted gross income without having to itemize
    • Individual deductions don’t add up to standard deduction – take standard!


  • Exemptions

  • Taxable Income

    • Amount used to determine amount of federal income tax due

Who must file?

  • Who must file?

    • Those listed on P185 in your text
    • Even if your gross income is less than stated amount, file a tax return so you can get a refund!
    • May have to file if…
      • Claimed as dependent on someone else’s return
      • Owe special taxes
      • Earned $400+ from self-employment
      • Earned $100+ from a church organization that doesn’t pay social security taxes

When to file?

  • When to file?

    • April 15 of the following year
    • File late – pay penalties
    • Know you are going to be late, file for an extension
  • Short form or long form?

    • 400+ tax forms and schedules
    • 1040EZ, 1040A and 1040 are most common

Where to begin?

  • Where to begin?

    • Save receipts for itemized deductions all year
    • Save pay stubs and check W-2 when you receive towards end of January
    • Gather all documents
      • Form 1099 DIV
      • Form 1099 INT
      • W-2 from each employer
    • Determine if you will itemize
    • Make sure you save originals or copies of EVERYTHING when you are finished

Filing electronically

  • Filing electronically

    • 1040EZ and 1040A may be submitted electronically
    • Owe taxes, pay online with credit card
    • Quicker receipt of refund
    • Make sure you print a copy of your return to save!

According to book…

  • According to book…

    • Use 1040EZ if you have taxable income less than $50,000
      • NOW LIMIT IS $100,000!!
    • Single or married filing jointly
    • Under age 65
    • No dependents
    • Interest income of $1500 or less



    • Darby L. Russell, 843 Thorn St., Sewickley, PA 15143.
    • Social Security Number: 155-46-7819
    • Does not want to contribute to presidential campaign fund
    • Single and claims herself as exemption
    • Earned $24,500 last year as a financial analyst, plus $650 in interest income
    • Taxes withheld were $3,500



    • Rudder L. Healey, 1402 Bentley Ridge Blvd, Lancaster, PA 17603
    • Social Security Number: 125-14-4447
    • Does want to contribute to presidential campaign fund
    • Single and claims himself as exemption
    • Earned $9,500 last year as a waiter, plus $900 in tips – he works part-time while going to college
    • He has interest earnings of $100
    • Taxes withheld were $479

According to book…

  • According to book…

    • Taxable income less than $50,000
      • NOW LIMIT IS $100,000!!
    • Capital gains distributions, but no other capital gains or losses

Only tax credits…

    • Only tax credits…
      • Child Tax
      • Education
      • Earned Income
      • Child and Dependent Care Expenses
      • Adoption Expenses
      • Retirement Savings Contributions

Only deductions…

    • Only deductions…
      • IRA Contributions
      • Student Loan Interest
      • Educator Expenses
      • Higher Education Tuition and Fees
    • No itemized deductions!

Taxable income of $50,000 or more

  • Taxable income of $50,000 or more

    • NOW LIMIT IS $100,000!!
  • Itemized deductions

  • Self-employment income

  • Income from sale of property

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