The Basics of Taxes Vocabulary

Taxes

A sum of money demanded by a government to support the government itself as well as specific facilities or services

Taxpayers

A person who pays a tax to national, state, county or municipal (city/town) governments

T/F “You are better off being in a community than by yourself"

F: b/c…

• as a community member, you recieve many benefits you could not pay for individually

  • Roads, libraries, military for national security, public schools, police and fire departments, recreation (parks, trails)

• taxes are a way members of a community provide for one another

How do taxpayers pay taxes?

From income tax, payroll tax, property tax, sales tax, excise tax

Income Tax

tax on earned and unearned income

Earned income

money earned from working for pay

• ex: Wages and salaries earned from employment

Unearned income

income received from sources other than employment

• ex: Interest earned from a savings account

Components of Income tax

Federal income tax + State income tax

Federal Income tax

Tax is determined by?

• Earned and unearned income

• Higher income = more tax paid

Paid by?

• Majority of people living in the U.S.

Helps fund?

• Operations of federal gov.

• Government programs: education, defense of the nation, disaster relief

State Income Tax

Tax is determined by?

• Earned and unearned income

• Higher income = more tax paid

Paid by?

• Those living in states with a state income

• Not all states have this

Helps fund?

• Varies by state

  • Ex: state highways, operations of state gov.

Payroll Tax

A tax on earned income that supports the Social Security and Medicare programs (also known as FICA)

Tax is determined by?

• A set of % of earned income

• Deducted out of paycheck (except for self-employed)

Paid by?

• Individuals who earn income from working for pay

• Employers

Helps fund?

• Social Security program

• Medicare program

What is Social Security?

Purpose

• Income for: Retirees, people with profound disability, children who lost a parent, a person with children who has experienced the death of a spouse

Tax charged

• 6.2% of earned income. Up to an annual maximum

• Paid by each worker and matched by each employer

What is Medicare?

Purpose

• Helps pay for health care for senior citizens → 65 and older

Tax charged

• 1.45% of earned income

• No limit

• Piad by each worker and matched by each employer

Employers pay Social Security and Medicare

Match their employees tax contributions

Employee contribution: $100 +

Employer contribution: $100 =

Employer pays $200 in payroll taxes to the federal gov.

****Self-employed people pay both the employee and employer contributions

What is the difference between income tax and payroll tax?

Income Tax

1. Paid on both earned and unearned income

2. Amount paid depends on many different factors but increases as income increases

3. Funds many different operations and programs of the federal gov.

Payroll Tax

1. Paid on only earned income

2. A set percentage of earned income is paid

3. Funds the Social Security and Medicare programs

Property Tax

a tax on property, such as land, buildings (including homes), and motor vehicles

Tax is determined by?

• % of property value

• Amount paid varies depending upon where you live

Paid by whom?

• Property owners

  • Ex: Fee to license car, house, land

Helps fund?

• Schools

• Expenses of state and local gov.

Sales Tax

tax on purchased goods and services

Tax is determined by?

• A % added to the original price of an item

  • Ex: $1.00 item charged 6% sales tax

    = $1.06

Paid by?

• Anyone who purchases an item charged with this

• Some states don’t have sales tax

Helps fund?

• Expenses of state and local gov.

Excise Tax

taxes collected from the seller or retailer and as such often remain hidden in the price of a produce or service

Tax is determined by?

• Purchase of certain items: Gas, hotel rooms, airline tickets, cigarettes, alcohol

• Often included within the price of items

Paid by?

• Anyone who purchases certain items

• varies by location

Helps fund?

• Expenses of state and local gov.

Capital gain

Selling stocks, inheritance, dividends, online businesses

Summary

1. Taxes play a role in both earning and spending

2. One of the largest expenses for many peopel

3. Without taxes it would be hard to pay for many of the benefits of being a member of a community

4. Taxes are charged in many diff. forms

5. The amount of taxes you pay and what you pay those taxes on will vary depending upon where you live and your income