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Unit 8: Budgeting and Finance

Unit 8: Budgeting and Finance

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Unit 8: Budgeting and Finance

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  1. Unit 8: Budgeting and Finance

    Business Essentials April 17, 2012 Mr. Archambeau
  2. Unit 8: Budgeting and Finance After discussing this PowerPoint, you will be able to do the following: Identify the types of taxes paid by consumers Describe the steps for filing a tax return Describe tax exemptions and deductions
  3. Taxes What are taxes? A tax is a charge imposed by a government to finance public services. Federal, state and local governments levy taxes. Most people pay taxes in four major categories: Purchases Property Wealth Earning
  4. Common Taxes Purchases Sales Tax Excise Tax Property Real Estate Property Tax Personal Property Tax Wealth Estate Tax Inheritance Tax Gift Tax Earnings Social Security Tax Income Tax (State and Federal)
  5. Common Taxes
  6. Income Tax Payments People make payments for federal, state and local income taxes in two ways Withholding Estimated Payments Withholding is a “pay-as-you-go” system in which an employer deducts income tax from the earnings of workers each pay period Receive your W-2 in January from your employer W-2 is a summary of a worker’s earnings for the previous year
  7. Income Tax Payments Estimated payments is a system in which payments are made quarterly (April 15, June 15, September 15, and January 15 of the next year) and paid directly to the government Examples: significant income from savings and retirement, royalties and pensions, and income from self-employment or working as an independent contractor Most states charge an income tax to fund cost of highways, state parks, and other public services Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming currently do not have a state income tax.
  8. Preparing Tax Returns The Internal Revenue Service (IRS) is part of the U.S. Treasury. The IRS is responsible for collecting federal income tax. Taxpayers are required to file, or submit, a federal income tax return each year by April 15th. The purpose of preparing a tax return is to determine the amount of tax a taxpayer is required to pay. Once a taxpayer files, they will be told if they have paid all they owe, need to pay more, or are entitled to a refund or credit.
  9. Preparing Tax Returns Seven steps to preparing a tax return: Determine gross income Calculate adjusted gross income Subtract deductions Determine exemptions Compute taxable income Calculate tax owed Make tax payments or ask for a refund or credit
  10. Steps for Preparing Tax Return Step 1:Determine Gross Income Two main types of income: Earned Income results from wages, salary, commission, fees, tips, and bonuses. Investment Income is the result of earnings from dividends, interest, and rent. Federal income tax must also be paid on other types of income such as alimony, awards, lottery winnings, and prizes. Do cash/prizes won on a game show fall into this category? Absolutely, they are subject to federal AND state taxes Tax-Exempt income is income not subject to tax (bonds) Tax-Deferred Income is income that will be taxed at a later date
  11. Steps for Preparing Tax Return Step 2: Calculate Adjusted Gross Income Certain items are subtracted from gross income to obtain adjusted gross income (AGI). Subtractions include deposits in retirement accounts and alimony payments. Step 3: Subtract Deductions A tax deduction is an amount that reduces taxable income. Subtract deductions from AGI Examples of deductions: Certain medical and dental expenses Interest paid on mortgages Contributions to charitable organizations
  12. Steps for Preparing Tax Return Step 4: Determine Exemptions An exemption is a tax deduction for the taxpayer, a spouse, and each dependent. For each exemption, taxable income is reduced by a set amount. Therefore, the more dependents a taxpayer can claim, the greater the reduction in taxable income. For a person to qualify as a dependent: The person must not earn more than a certain amount unless he or she is under 19 or is a full-time student under 24. The taxpayer must provide more than half of the dependent’s support The dependent must live with the taxpayer or be a relative
  13. Steps for Preparing Tax Return Step 5: Compute Taxable Income Taxable Income is the amount on which taxes are calculated. Taxable Income = Gross Income – (Adjustments + Deductions + Exemptions) Step 6: Taxes Owed Tax rates are the percentages used to compute the amount owed for taxes. Ranges from 10% to 35%, depending on level of taxable income A person’s income can be reduced by a tax credit, an amount subtracted directly from taxes owed.
  14. Steps for Preparing Tax Return Step 7: Make Tax Payments or Ask for a Refund or Credit Compare amount paid through the year with the amount owed for taxes If amount owed > amount paid, you owe more money If amount owed < amount paid, you can receive a refund or credit
  15. Tax Preparation There are several different ways to file your taxes, either by yourself or hiring someone to do it for you. IRS Services Tax Publications Online Sources Tax Preparation Software Tax Preparation Services