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Federal Income TaxesChapter 4
Help fund national, state, local efforts◦Cost of running the governments◦Roads, bridges, schools, libraries, etc.◦National defense – armed forces◦Police/fire protection◦Government programs Welfare, farm programs, special interest, etc.Your goal should be to MAXIMIZE your after-tax incomeWhy Do We Pay Income Taxes?
US uses a progressive tax system◦Your tax rate (%) increases as your income increases◦High income households pay a higher percentageEveryone starts out paying the same rate◦Bill Gates pays the same rate as you on the first portion of his incomeMarginal tax rate = the taxes owed on the next dollar you earnAverage tax rate = total taxes / taxable incomeMarginal vs Average Tax Rates
Gross income minus:◦Federal income taxes withheld◦State income taxes withheld◦FICA (Social Security & Medicare) -- 7.65%Filling out a W-4 form◦The more exemptions you list, the less income tax they withhold◦Fill out when you start a job◦Can make changes laterTake-Home Pay
You can easily do your own taxesGet the instruction bookREAD the instructionsUse for specific questionsSome tax software is okay◦But I would compare to the “by-hand” resultsAl’s Tax Tips
Round off to the nearest $1Document your numbersCheck your mathWhen in doubt, read the instructions!Keep copies of your calculationsAl’s Tax Tips
Determine if you have to file◦Single, not a dependentGross income > ~$10,350◦As a dependent Unearned income > $1,050 or earned income > $6,300Determine which form to use◦1040EZ◦1040A◦1040General Info
Look at the IRS Form 1040◦Address & personal info◦Filing status◦Exemptions◦Income◦