Tax for Teens Vocab Definitions WS 1 Lesson

Tax for Teens… Vocab/Definitions WS 1

Lesson 1 Introduction Note: All information is based on 2011 data 2

Did You Know Nearly 1/3 all students work 40+ hours per week in summer ¼ work 35+ hours per week during the school year Average teen saves $1000 of summer wages 3

What’s the Problem? Teens don’t understand how TAX applies to them Most forfeit a refund!!! Is this you? ? ? 4

Objectives… Basic Tax Law Exemptions Dependents Withholdings Payroll Taxes Income Deductions When and How to File a Tax Return (We will focus on Federal Tax in this Unit) 5

Lesson 2 I’ve Got A Job! What’s an I-9 and a W-4? 6

Form I-9 – Employment Eligibility Verification Proves you aren’t an illegal alien Penalty if not one on file for each employee Keep 3 years after employee is gone Acceptable documents used to prove citizenship: Passport Voter’s registration School or military ID Driver’s license Social security card 7

So What Is A W-4? New employees fill out this form Tells employers how much federal income tax to withhold from paycheck 8

Filling Out the W-4 Correctly If don’t fill out correctly: Owe money when taxes are due April 15 Could be taking out too much tax from paycheck Lose potential interest 9

A Few Key Terms You Need To Know WITHHOLDING: Represents money that an employer deducts from paycheck to pay all or part of employee’s taxes However, depending how much you make for the rest of the calendar year, you may not have to pay federal income tax. If this is you, you would be EXEMPT from paying 10

Are you Exempt? Exempt if: 1. 2. 3. 4. Weren’t required to pay federal income tax last year Don’t expect to this year either (made less than $5800) If under 19 or a full-time student (or until 24 yr/full time) If have to pay, will depend on if parents CAN claim you as a dependent DEPENDENT: A person who relies on another taxpayer for at least half of his or her support (food, shelter, clothing, education, etc. ) If divorced Custodial parent (has child 1 more day than other) One makes more money 11

Examples: If you live with parents and under 19, you can be claimed as a dependent regardless of how much you make. While your parents may not choose to claim you, test is whether they CAN. If they can claim you and you are under 19, and expect to make under $5800 in the calendar year, you will likely NOT have to pay federal income tax. Note: If you are at least 19 but under 24, parents can still claim you as a dependent as long as you are a FULL -TIME Student! In-Class Am I Exempt WS 12

I don’t qualify for exempt status – now what? Need to fill out the personal allowances worksheet on the W-4 form! The more exemptions (allowances) you claim, the less tax withheld from paycheck Claim “ 0” will result in the largest amount of tax to be withheld Do: Pg. 6 then Fill out W 4 WS 13

What if I Make a Mistake? Claim exempt and make more than $5800? More than likely have to owe taxes! If you don’t claim exempt (0 allowances) More than likely break even or receive a refund! 14

Lesson 3 Where’s All The Money I Earned? 15

Where’s All The Money I Earned? Payroll Taxes Collected from employers and employees to provide retirement benefits (social security, Medicare) This amount is paid regardless of income earned Will NOT get back until retirement 16

The Paycheck Stub Miscellaneous Information Gross Income Deductions May get refund on Fed and State No refund on SS or Medicare Net Income 17

P. 10 - verbal W 4 qz/Am I Exempt QZ

Lesson 4 What’s This, More Forms? W-2 s and 1099 -INTs 19

What? More Forms? W-2 – will have 3 copies Your records Attach to state tax return Attach to federal tax return 1099 -INT 20

The W-2 Must receive these by January 31 st from your employer Summarizes How much you made during the year (Earned Income) How much you paid in for taxes Use to help fill out tax return If error, see employer to fix 21

1099 -INT Receive this form from your bank Shows interest earned for year Remember: Interest is considered “unearned income” and may have to pay tax on it! 23

W-2 and 1099 -INT will help you to determine whether you are required to, or should, file a federal tax return! 25

Lesson 5 Am I Required to File a Tax Return? 26

Am I Required to File a Tax Return (as a dependent)? Due April 15! Required? Depends… *Your income for the year *If parents can claim you, you must file if: 1. Your unearned income was over $950 2. Your earned income was 3. Filing Requirement Worksheet for Most Dependents 1. 2. 3. Calculate Gross Income: (earned income + unearned income) Enter dependent's earned income plus $300 Minimum amount 4. Compare lines 2 and 3. Enter larger amt (Adjusted Earned Income) 5. IS: Gross Income > Adjusted Earned Income? MUST file 6. IS: Gross Income < Adjusted Earned Income? DOES NOT have to file $950

Am I Required to File a Tax Return? John Garcia, 18, earned $4200 working at the local library and was paid $210 in interest from his bank savings account. Filing Requirement Worksheet for Most Dependents 1. Calculate Gross Income: (earned income + unearned income) 2. Enter dependent's earned income plus $300 3. Minimum amount 4. 5. 6. Compare lines 2 and 3. Enter larger amt (Adjusted Earned Income) IS: Gross Income > Adjusted Earned Income? MUST file IS: Gross Income < Adjusted Earned Income? DOES NOT have to file $950

Am I Required to File a Tax Return? Jill Williams, 18, had two jobs during the past year. She worked as a waitress at La Fogata, where she earned $6800 and as a summer counselor, where she earned $2400. Jill also made $375 in interest. Filing Requirement Worksheet for Most Dependents 1. Calculate Gross Income: (earned income + unearned income) 2. Enter dependent's earned income plus $300 3. Minimum amount 4. 5. 6. $950 Compare lines 2 and 3. Enter larger amt (Adjusted Earned Income) IS: Gross Income > Adjusted Earned Income? MUST file IS: Gross Income < Adjusted Earned Income? DOES NOT have to file Do I have to file return WS

Lesson 6 Should I File a Tax Return? 30

Should I File a Tax Return? Civic Duty to File Voluntary Compliance Government relies on people to: Report their income Calculate tax liability correctly File on time 31

To Pay or Not to Pay… Why pay? Government uses money to fund services Ex: School Penalty Fine up to $25, 000 Imprisonment up to 1 year Or Both! 1 -6 Review 32

Forms? There are 3 forms you can choose from to file 1040 EZ – simplest to file 1040 A 1040 – most lengthy to file 33

Lesson 7 How Do I File the 1040 EZ? 34

How Do I File the 1040 EZ? Must meet requirements to use EZ: Single Claim no dependents Taxable income < $100, 000 No income other than wages, salaries, and tips (shown on W-2) Up to $1500 taxable interest (shown on 1099 INT) 35

Filling out the 1040 EZ Terminology: Adjusted Gross Income (AGI) Sum of wages and taxable interest Deduction Amount tax payers may subtract from their AGI before tax is determined (reduction in income) Taxable Income Part of income you must pay taxes on Credit Direct reduction of taxed owed 36

Sending in the Return Photocopy the EZ form for record Mail in W-2 & 1099 INT with return Check if owe payable to “United States Treasury” 37

Don’t Want to Pay? What could you have done differently? If you don’t choose to pay, IRS will add 5% to what you owe for each month you don’t pay! W-2 Claimed “ 0” rather than exempt so take taxes out Watch out for scam artists! 1040 EZ Prob WS 38

Other Ways for Government to Collect Money Income tax not only source Social Insurance taxes and contributions (retirement and unemployment) Excise tax (tax on gas, cigarettes, and alcohol) Estate and gift tax Customs duties (imports) Other miscellaneous receipts 39

Where Does Your Money GO? Year 2011 – in billions of dollars National Defense % of debt 718 Billion 20% Social Security 731 20% Healthcare (Medicare, 769 13% Interest on National Debt 230 6% Education 72 2% Medicade, child health ins program) Chap 7 review 1040 EZ quiz 40

Lesson 8 How Do I File the 1040 Form? 41

How Do I File 1040 Form? File this form if: Received dividends or capital gains from an investment Received tips of $20 or more in any month that you didn’t report Box 8 of W-2 shows tips allocated Earned income from your own business Won money in lottery or raffle Received non-employee compensation Social Security pension 42

Preliminaries Matter Be sure to have: 1099 Dividends & Distributions form Any records of receipts Ex: E-Bay, lottery, drawings 43

Filing Status and Exemptions Filing status affects amount tax paid Exemptions $3700 each exemption may be subtracted from adjusted gross income Exemptions help reduce taxable income! But you probably won’t qualify More than likely, parents can claim you 45

What is Income? Income: “all income from whatever source derived” Types of Compensations for Services: Fees Commissions Prizes and awards Fringe benefits Tickets, clothing given to you by employer instead of money 46

Other Income Continued… Income derived from business Deductible expenses Must be “ordinary and necessary” Interest and Dividends Earnings/Profits to persons who own stock Considered taxable income Capital Gains and Losses Capital gain: profit from the sale or exchange of investment Short Term Long Term Reported on 1099 -DIV 47

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Exclusions From Income Certain economic benefits don’t have to count as income = exclusions from income Gifts Must see Dominant Reason was out of affection, respect, admiration, charity Ex: transfer of property Inheritances Scholarships May be excluded from income if used to pay tuition/course related fees De Minimis Fringe Benefits Ex: Store’s photocopier, company coffee, telephone Ebay winnings (pg 41) Do pg 42 WB 50

Adjusted Gross Income (AGI) Income reduced by certain expenses Ex: Student Loan Interest One half of self-employment tax Schedule SE Penalty on early withdrawal of savings Ex: Certificate of Deposit 51

Standard & Itemized Deductions Standard Deduction: Base amount of income that is not taxed (reduces taxable income) Income: $5800 Itemized Deduction: State and Local Taxes Gifts to Charity Job Expenses – mileage? Travel Uniforms – if not adaptable to general, everyday use Education – if maintain or improve skills and/or meet requirements of employer Other: tools, supplies for job, professional journals, protective clothing 52

Credits A direct reduction of tax owed Credit actually deducted from the amount you owe (dollar for dollar) Credits offered: Encourage certain behavior Assist those in need Provide relief 53

Credit Examples Child Care Expenses Elderly or Disabled Adoption Expenses Buying new electric car Education expenses Form 8863 Refundable Credit: EIC – person who claiming receives FULL amount of credit even if exceeds tax liability 54

Payment or Refund? Payment: Due April 15 Refund: Check Direct Deposit Chap 8 Review 1040 Prob WS 55

Lesson 9 Conclusion 56

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