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Student name: ___________________________________Date:
_______________
MODULE
28
Demonstrate
the ability to file federal,
state,
and local tax forms.
Objectives:
A. Explain the difference between gross and net
pay.
B. List the deductions taken from an employee's paycheck.
C.
Explain
how to file a Federal Income Tax return.
MODULE 28: INFORMATION SHEET
TO THE STUDENT:
Read and study this information sheet and then complete the student activities
at the end of this module.
TO THE TEACHER: Current IRS information can be found on the
Internet at www.irs.gov. A complete IRS
publication on Understanding Taxes can be found at this website. This
publication includes 36 lesson plans, links to educational standards and
extensive background information.
Understanding taxes
All
governments must have some kind of tax system. It costs money to run a
government, and the tax system is the government's way of obtaining this money.
In
our country there are three levels of government -- federal, state, and local.
Since the government at each level needs money to operate, each government must
levy, or require, people to pay taxes. Some of the taxes you pay go to the
federal government, other taxes go to the state government, and still others go
to your local government.
At
the federal level, Congress has the power to levy and collect taxes. Congress
was given this power by the Constitution of the United States.
The
Constitution also gave Congress the authority it needed to establish the
Department of the Treasury. One branch of the Treasury Department is the
Internal Revenue Service, commonly referred to as the IRS. The IRS is the
federal agency responsible for collecting taxes. Congress passed the laws that
say what kinds of taxes will be levied, who must pay, and how much. The IRS
then enforces these laws and collects the taxes. All the tax money collected
goes into the U.S. Treasury.
Each state and local government has its own version of the IRS. Although much smaller and less complex, these state and local agencies have authority to levy and collect taxes from their citizens. The money then goes into the state or local treasury.
How tax dollars are spent
The federal, state, and local governments collect taxes because they need money to maintain the government. It costs money to run any government. It costs a great deal of money to run a government as large as your state government, and even more to maintain the federal government. In 2001, for example, our federal government collected $2.0 trillion in taxes.
Why
do governments need so much money? One
part of the answer is salaries for government employees. The president of the
United States, the governor of your state, legislator, judges -- all of these
people are government employees. Money is also used to fund Social Security,
Medicare and other retirement programs for the elderly; for National defense;
for community development and support for education; and for many other social
programs in public health and research.
Filing Federal Income Tax Returns
In our country everyone is responsible for figuring and paying his or her own federal income taxes. This is done by filing an income tax return. An income tax return is a formal statement of a person's income and taxes. Filing is the process of turning in (usually by mail) the completed return to the IRS.
Unless
you live in one of the few states that does not levy an income tax, you will
have to file a state income tax return as well. The laws for filing state
returns are usually similar to those for filing federal returns. Some returns
are filed at the same time as the federal returns.
Who has to file?
Anyone who earns above a certain income is required to file a tax return. Workers below that level must also file if they are due a refund. Income includes wages, tips, and bonuses. It also includes interest or dividends from savings and investments.
Usually,
workers do not receive the full amount they have earned. The total amount of
income an employer owes a worker for a given period is called gross pay.
Workers usually receive less than that amount because of payroll deductions.
These are amounts subtracted from gross pay to cover certain kinds of regular
payments. Some deductions are required. An employer must hold out money from
workers' income for government taxes and for social security taxes (called
FICA, which stands for Federal Insurance Contributions Act). There may be other
deductions as well, such as union dues, charitable contributions, pension
payments, and insurance premiums. The amount left after subtracting various
deductions from gross pay is called net pay. That is the amount a worker
actually receives. Usually, a pay stub is attached to each paycheck. The stub
lists gross pay, deductions, and net pay.
Employers
deduct money from their employees' checks on the basis of the employees' W-4
forms. A W-4 form is a legal statement allowing an employer to deduct pay from
an employee's check. If you have a job now, you filled out and signed a W-4
form when you started. The information that you supplied told the employer how
much to deduct from your checks.
Each
January, employers are required to send each employee a W-2 form. A W-2 form is
a statement of how much money was earned and how much was deducted for taxes
during the preceding year. You must have this form to prepare your tax return.
If you worked for more than one employer during that year, you should receive a
W-2 from each employer. Employers must send a W-2 to every employee, even if
the employee worked only one day during the year.
How to file?
Filing an income tax return can be a quick and easy process, or a long and difficult one. It depends on how much money you made, how you made your money, and many other factors. When you are just starting out in the world of work, your income tax returns are usually fairly simple to do.
There
are three basic federal tax forms. Each one is designed for a specific group of
taxpayers.
Form
1040EZ. This form is for the use
of single or married filing jointly taxpayers under the age of 65 who are not
blind and claim no dependents. The upper income limit for this form is $50,000
in taxable income. There is an upper limit on interest earned that changes each
tax year. In addition, the taxpayer must receive no dividends and claim only
one personal exemption. Exemptions are reductions in taxable income given to
taxpayers for themselves and their children.
An
exemption is a set amount of money that is not taxed. The IRS lets you set
aside a fixed amount of money for each of several possible exemptions. You are
allowed an exemption for yourself. In the case where a taxpayer is claimed as a
dependent on another's tax return, no personal exemption if allowed.
A
dependent is a person who is supported by a taxpayer. If you live at home and
your parents pay most of the bills, you are a dependent. Your parents will list
you as a dependent on their tax form. Since each dependent qualifies as one
exemption, your parents will be able to subtract a fixed amount from their
income because you are their dependent.
Form
1040EZ is, as its name suggests, easy to use. There is just one sheet fill out.
This form is often referred to as the short form. A copy for 2002 is at the end
of this module. Up-to-date forms can be found each year on the IRS website.
Form
1040A. This expanded short form
can be used by taxpayers who take certain tax deductions for payments to an
individual retirement account (IRA). (A tax deduction is an expense that
reduces the income on which taxes must be paid.) Single or married taxpayers filing separately or jointly may also
use Form 1040A, as may taxpayers filing as heads of households, qualifying
widows or widowers. This is also the form for people who claim credit for
child- and dependent-care expenses. As with Form 1040EZ, taxable income must be
less than $50,000.
Form
1040 long form. All taxpayers may
use this form if they choose. You must use this form if you are self-employed
or if you wish to take more than the standard tax deductions. Form 1040 enables
you to itemize deductions, or list each one separately. Itemizing deductions
may allow a taxpayer to pay lower taxes, providing the deductions are over a
certain amount. If, for example, you have had medical and dental expenses above
a certain level, on Form 1040 you may deduct part of these expenses.
Figuring your tax
If
you can use Form 1040EZ, figuring your tax is not that difficult. It is
essentially a three-step procedure:
1. Total your income from all sources. Include wages,
salaries, tips, unemployment compensation, Alaska Permanent Fund dividends,
taxable scholarship and fellowship grants, and taxable interest of $1,500
or less.
2. Subtract the standard deduction. This amount is
provided for you on the form, right next to the line where it must be entered.
The result is your taxable income.
3. Look up the tax on your income in the tax
table, and compare it to the amount of your withholding. If more money has been
withheld than you owe, you have a refund coming. If less money has been
withheld, you will have to enclose a check or money order with your return.
For
information purposes only, a copy of the 1040EZ form for 2002 can be found at
the end of this module.
None of these steps is complicated, especially with the form guiding you. Still, if you are not sure how to go about filing your return, don't worry. There is plenty of help available. There are instructions for every form and additional booklets and instructions for every part of the filing procedure. Toll-free numbers are listed under the IRS in the telephone book. By calling these numbers you can talk to someone who can answer your questions. You can also access all the forms and instructions by going to the Internet: www.irs.gov
MODULE 28: STUDENT ACTIVITIES
TO THE STUDENT: After
reading and studying the information sheet, complete these activities to
demonstrate your understanding.
NOTE: You will need a copy of one of your paycheck
stubs or a sample from your teacher for Activity 4.
Activity 1: Figuring Your Withholding Allowance
When you begin your first
job, your employer will ask to fill out Form W-4, "Employee's Withholding
Allowance Certificate." The information you write on this form will tell
the employer how much money to withhold from your pay for federal income tax.
Each allowance that you
claim lowers the amount of tax that must be withheld from your pay. You may
claim an allowance for yourself, allowances for dependents, and certain other
deductions and credits.
Using the information below
about Mary Smith, complete the Personal Allowance Worksheet and fill out the
W-4 form on the next page.
Mary Smith is single. No one claims her as a
dependent and she has no dependents. She has one job and expects to earn over
$12,000 this year. Last year she earned a little less and paid income tax. Her
social security number is 990-00-4321. Her address is 1920 May Street,
Pittsburgh, PA 66762. She shares the
rent with two other roommates.
Activity 2: Federal Income Tax Form W-2
Refer to the W-2 form
below to answer the following questions.
1.
How much money was withheld for federal
income tax? $_______________
2.
How much money was withheld for social
security? $___________________
3.
How much money did Carol earn working
for Jackson Manufacturing Co.?
$______________
4.
Which copy of the W-2 form will be attached to Carol's federal tax
returns? ___________
5.
How much money was withheld from Carol's paycheck for state and local
taxes?
$___________
Activity 3:
Figuring out amount of income tax owed
Taxpayers have a choice
when figuring out the amount of income tax they must pay. One way is to allow
the Internal Revenue Service to figure the amount of tax owed. The second way
is for the taxpayers to determine the amount themselves by using the tax tables
found in the tax preparation booklet. Read the example at the top of the Tax
Table on the next page. Then find the amount of tax for each of the following
examples.
Single Married,
filing jointly
$18,732 _________ $20,546
_________
$20,888 _________ $26,574
_________
$18,215 _________ $26,312
_________
$18,976 _________ $18,101
_________
$26,326 _________ $20,395
_________
Activity 4: Studying a paycheck stub
A paycheck has two main
parts: the check itself and the check stub. The paycheck stub contains an
employee's record of the deductions that are subtracted from the total wages
earned.
Using one of your pay
stubs, or one provided by the teacher to fill in the following items. Each
block lists information about the employee's deductions. A list of the types of
deductions follows. Find the correct amount of each deduction, if available,
and write the amount next to the term.
1. Gross pay $_______
2. Net pay $_______
3. FICA $_______
4. Federal withholding
tax $_______
5. State taxes $_______
6. Local taxes $_______
7. Health insurance $_______
8. Other insurance $_______
9. Overtime pay $_______
10. Adjustment $_______
11. Retirement 401K $_______
12. Days/hours worked $_______
13. Yearly gross pay $_______
14. Yearly withholding $_______
MODULE 28: STANDARDS ADDRESSED IN THIS MODULE
Pennsylvania’s
Academic Standards for Career Education and Work
13.3.11. Career Retention (Keeping a Job)
D.
Compare and contrast gross and net pay.
From
13.3.8…Analyze personal budgets.
·
Expenses
·
Income
·
Investing
·
Needs
·
Savings
·
Taxes
·
Wants
Pennsylvania’s Academic
Standards for Reading, Writing, Speaking and Listening (RWSL)
1.1.11. Learning
to Read Independently
E.
Establish
a reading vocabulary by identifying and correctly using new words acquired
through the study of their relationships to other words. Use a dictionary
or related reference.
Secretary’s
Commission on Achieving Necessary Skills (SCANS)
COMPETENCIES
Resources: Identifies, organizes, plans,
and allocates resources, including time and personal money.
| ©
2003. The Professional Personnel Development Center , Penn State University. |
| To return to the Table of Contents click here. To print copies of the CAPS materials click here. |