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Money Counts: A Financial Literacy Series Wage and Tax Fundamentals Dr. Cathy F. Bowen Money Counts: A Financial Literacy Series Wage and Tax Fundamentals Dr. Cathy F. Bowen Dr. Daad Rizk Professor and Consumer Issues Specialist Department of Agricultural Economics, Sociology and Education 8 B Ferguson Building University Park, PA 16803 cbowen@psu. edu 1 -814 -863 -7870 Money. Counts: A Financial Literacy Series 301 Outreach Building University Park, PA 16802 dar 39@psu. edu 1 -(814)-863 -0214

Learning Objectives • Provide an overview of the federal taxing system • Describe tax Learning Objectives • Provide an overview of the federal taxing system • Describe tax withholding and wage statements • Review forms W 4, W 2 • Review a paycheck stub • Calculate taxes and net income • Describe the completion of the Form 1040 using key documents common for many adults.

Overview of the Federal Taxing System • Pay as you earn or pay as Overview of the Federal Taxing System • Pay as you earn or pay as you go system • Progressive tax-the more you earn the higher your tax bill (10% - 39. 6% tax rates) • Tax language—terms to know

Taxes • Internal Revenue Service (IRS) – Collects federal taxes, issues regulations, and enforces Taxes • Internal Revenue Service (IRS) – Collects federal taxes, issues regulations, and enforces tax laws written by the United States Congress

Taxes • Taxes – Compulsory charges imposed on citizens by local, state, and federal Taxes • Taxes – Compulsory charges imposed on citizens by local, state, and federal governments • Used to provide public goods and services – Largest amount of taxes a person pays is on his/her income

2013 Federal Tax Rates-Single If Taxable Income Is Then the Gross Tax Payable Is: 2013 Federal Tax Rates-Single If Taxable Income Is Then the Gross Tax Payable Is: Over But Not Over Amount $0 $8, 925 ----10% of taxable income----- 8, 925 36, 250 $892. 50 15% $8, 925 36, 250 87, 850 4, 991. 25 25% 36, 250 87, 850 183, 250 17, 891. 25 28% 87, 850 183, 250 398, 350 44, 603. 25 33% 183, 250 398, 350 400, 000 115, 586. 25 35% 398, 350 400, 000 ------ 116, 163. 75 39. 6% 400, 000 Plus (percent) Of the -Amount Over

2013 Federal Tax Rates-Married If Taxable Income Is Then the Gross Tax Payable Is: 2013 Federal Tax Rates-Married If Taxable Income Is Then the Gross Tax Payable Is: Over But Not Over Amount $0 17, 850 ----10% of taxable income----- 17, 850 72, 500 1, 785. 00 15% 17, 850 72, 500 146, 400 9, 982. 50 25% 72, 500 146, 400 223, 050 28, 457. 50 28% 146, 400 223, 050 398, 350 49, 919. 50 33% 223, 050 398, 350 450, 000 107, 768. 00 35% 398, 350 450, 000 ------ 125, 846. 00 39. 6% 450, 000 Plus (percent) Of the -Amount Over

Key Tax Terms • Income – – – Earned Unearned Tax exempt interest Taxable Key Tax Terms • Income – – – Earned Unearned Tax exempt interest Taxable interest Dividends (ordinary and qualified) • Adjusted Gross Income (AGI) – – – Adjustments (subtract from income) Educator expenses Self-employed tax Student loan interest Tuition and fees

Key Tax Terms • Tax Itemize Deductions – Standard Deduction – Exemptions – Taxable Key Tax Terms • Tax Itemize Deductions – Standard Deduction – Exemptions – Taxable Income • Other Taxes – Self-employment tax • Payments – Federal tax withheld – Earned Income Credits * Foreign Tax * Child and Dependent Care * Education * Retirement Saver’s * Taxable Income

W 4 – Employee’s Withholding Allowance Certificate W 4 – Employee’s Withholding Allowance Certificate

W 4 – Employee’s Withholding Allowance Certificate • Employee completes the certificate and files W 4 – Employee’s Withholding Allowance Certificate • Employee completes the certificate and files with employer at the beginning of employment (Human Resources) and after life events. • Employer uses the information on w-4 form to determine how much tax to withhold each pay period using the “pay-as-you-go” tax withholding method • Rules of Thumb: The higher the number of withholdings, the less tax withheld from your paycheck. More withholdings on the w-4 equals fewer taxes withheld from paycheck • Action Item: Review w-4 each year. Adjust withholdings as needed so only the needed amount of tax is withheld.

irs. gov Withholding Calculator • http: //www. irs. gov/Individuals/IRS-Withholding-Calculator irs. gov Withholding Calculator • http: //www. irs. gov/Individuals/IRS-Withholding-Calculator

Paycheck – Stub Sample Paycheck – Stub Sample

Gross to Net Income Gross to Net Income

Wage and Tax Statement Wage and Tax Statement

1099 and 1098 • 1099 Misc – Non-employee independent contractor services, rental income, etc. 1099 and 1098 • 1099 Misc – Non-employee independent contractor services, rental income, etc. , • 1099 INT – Interest income on investment accounts, saving bank account, etc. , • 1098 – Mortgage Interest Statement, mortgage points, mortgage insurance premiums • 1098 T – Tuition Statement • 1098 E – Student Loan Interest Statement

1099 -Miscellaneous Income 1099 -Miscellaneous Income

1099 -Interest Income 1099 -Interest Income

1099 Dividends & Distributions 1099 Dividends & Distributions

1098 Mortgage Interest Statement 1098 Mortgage Interest Statement

1098 -T Tuition Statement 1098 -T Tuition Statement

1098 -E Student Loan Interest 1098 -E Student Loan Interest

Poll #5 Which statement best describes how you get taxes prepared? I…. 1. Use Poll #5 Which statement best describes how you get taxes prepared? I…. 1. Use VITA-volunteer income tax assistance or a similar free service 2. Prepare my own federal/state tax returns using a computer program (i. e. , Turbo tax ) 3. Prepare my own federal/state tax returns by hand (paper forms or printable pdfs from irs. gov) 4. Hire a professional to prepare my federal and state taxes each year

Rule of Thumb Use only Form 1040 • Changes are minimal from year to Rule of Thumb Use only Form 1040 • Changes are minimal from year to year. • Used for most complicated returns. • Decreases chance you will overlook a tax benefit. • You learn the form

Completing a Tax Return Completing a Tax Return

Think! • Basic addition and subtraction problem! • • Income (+) Adjusted Gross Income Think! • Basic addition and subtraction problem! • • Income (+) Adjusted Gross Income (-) Taxes and Credits (+ and -) Other Taxes (+) Payments (+) Overpayment=refund Underpayment=Amount you Owe

Step 1—List Personal Information Step 1—List Personal Information

Step 2—Add income Step 2—Add income

Step 3 - Subtract Adjustments Step 3 - Subtract Adjustments

Step 4 -Subtract deductions, exemptions. Figure tax on taxable income and subtract credits. Step 4 -Subtract deductions, exemptions. Figure tax on taxable income and subtract credits.

Step 5 -Add/Total other taxes Step 6 - Add payments made and refundable tax Step 5 -Add/Total other taxes Step 6 - Add payments made and refundable tax credits

Step 7 - Finishing Details Step 7 - Finishing Details

Schedule A Schedule A

Schedule A Schedule A

Schedule A-continued Schedule A-continued

Schedule A (itemized deductions) • Allowable deductions for taxpayers – Medical and dental expenses Schedule A (itemized deductions) • Allowable deductions for taxpayers – Medical and dental expenses – – – Taxes you paid Interest you paid Gifts to charity Casualty and theft losses Job expenses Other miscellaneous deductions

Tax Tips for College Students 1. If you have earned income, file even if Tax Tips for College Students 1. If you have earned income, file even if not required to get taxes withheld back and/or Earned Income Tax Credit. 2. Create a tax folder at the beginning of each year. Store tax related documents in the folder. 3. Practice doing your current return using a paper form. 4. Understand your family situation. Can your parents claim you on their return? Confirm this before filing. 5. Generally, state taxes are paid in the state earned. 6. Use the Form 1040 exclusively. Line number stays the same.

Tax Tips for College Students 7. Understand the education credits that apply to you. Tax Tips for College Students 7. Understand the education credits that apply to you. 8. If your grants and scholarships covered your tuition and fees, you cannot take the education credits. Why? You had no out of pocket costs. 9. Self-employed or have taxable fellowships—send in estimated quarterly payments (see Form 1040 -ES). 10. Avoid underpayment penalty. Pay 90% of current filing year tax bill, 100% of tax shown on prior year bill. Less than $1000 owed = no penalty. 11. See IRS apps and topical videos. 12. Lesson—Understanding Taxes

Additional Resources Additional Resources

Questions and Comments? Thank you for participating! Dr. Cathy F. Bowen Professor and Consumer Questions and Comments? Thank you for participating! Dr. Cathy F. Bowen Professor and Consumer Issues Specialist Department of Agricultural Economics, Sociology and Education 8 B Ferguson Building University Park, PA 16803 cbowen@psu. edu 814 -863 -7870 (o) Dr. Daad Rizk Money. Counts: A Financial Literacy Series 301 Outreach Building University Park, PA 16802 dar 39@psu. edu 1 -(814)-863 -0214