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Planning your Tax Strategy


Paycheck Stub A document included each pay period which outlines paycheck deductions On-The-Go Employee Beakens, Joe SSN 201-92-4856 Check # 164 Check Amount $1,102 ... – PowerPoint PPT presentation

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Title: Planning your Tax Strategy

Chapter 12
  • Planning your Tax Strategy

  • What are they?
  • What do they pay for?
  • How much do you pay in taxes?
  • Is there anyone who doesnt pay taxes?
  • What percentage do you pay in taxes?

Tax Liability
  • Liability is term used in accounting. It means
    that this is money that is owed to someone.
  • Tax Liability means the total amount of taxes
    that are owed.

Types of Taxes
  • 4 major categories of taxes
  • Purchases
  • Property
  • Wealth
  • Earnings

  • Every time you buy something. You pay taxes on
  • Excise tax is a tax on a specific goods and
    services (such as gasoline, air travel and
    telephone service) collected by federal and state

Taxes on Property
  • This is something that we discussed in the past.
  • Taxes in this category are based on the value of
    land and buildings.

Taxes on Wealth
  • Estate tax is a federal tax collected on the
    value of a persons property at the time of his
    or her death.
  • Inheritance tax is a state tax collected on the
    property left by a person to his or her heir(s)
    in a will.
  • Gift Tax is a tax collected on money or property
    valued at more than 11,000 given by one person
    to another in a single year.
  • Gifts of any amount for educational or medical
    expenses are not subject to gift taxes.

Taxes on Earnings
  • This is the biggest form of income for the
  • Income Tax is the tax on wages, salaries, and
    self-employed earnings.
  • Anytime you make money many different taxes are
    collected, state, federal, and local taxes are
    taken from every pay check that you have.
  • Social Security funds are also collected as a
    tax. These funds finance retirement, disability
    and life insurance benefits of the federal
    government's social program.

  • Internal Revenue Service
  • The police department of taxes.
  • They check to make sure that you and your
    employer pay your taxes..

Understanding Income TaxesHow much do you owe?
  • Income tax return
  • Is a form, such as 1040 or 1040 EZ on which a
    taxpayer reports how much money he or she
    received from working and other sources and the
    exact taxes that are owed.

What is taxed?
  • Gross and Adjusted Gross Income can include at
    least 3 parts.
  • Earned income the money you receive for working
    salary, hourly pay, tips, commissions.
  • Interest Income the interest that you receive
    from banks, credit unions, and savings and loan.
  • Dividend income the cash dividends that you
    receive from investments. (Capital Gains )

What is not included when we do our taxes?
  • Exclusions
  • Is another name for tax-exempt income or income
    that is not subject to taxes.
  • Tax deferred income
  • Or income that will be taxed at a later date.
  • Certificate of Deposit

Adjusted Gross Income
  • This is the amount that you pay your taxes on.
  • The Adjusted Gross Income is your gross income
    after calculating certain reductions.
  • These reductions are called adjustments to
  • These can include student loans, or retirement

Taxable Income
  • Adjusted gross income minus allowable tax
    deductions and exemptions.
  • A tax deduction is an expense that you can
    subtract from your adjusted gross income to
    figure your taxable income.

Types of deductions
Tax Table
Rate on Taxable Income Single Taxpayers Married Taxpayers
10 Up to 7000 Up to 14,000
15 7000-28,400 14,000-56,800
25 28,400-68,800 56,800-114,650
28 68,800-143,500 114,650-174,700
33 143,500-311,950 174,400-311,950
35 311,950 and up 311,950 and up
Tax Credits
  • Which is the amount of money that can be
    subtracted directly from taxes you owe.
  • Low income families
  • Earned income credit a tax credit for people
    who work and whose taxable income is less than a
    certain amount.

Payroll Withholding
  • Allowance
  • Is an adjustment on the tax withheld from your
    paycheck, based on your marital status and
    whether you have dependents.

When do you pay taxes
  • Everyone who works for a business pays on April
  • If you are self-employed you pay estimated
    payments (or if you dont want to pay a total
    amount on April 15th)

Paychecks and Tax FormsTake Charge of your
Family Economics Financial Education
Where Does My Money Go?
  • Almost 31 of an individuals paycheck is
  • Taxes are the largest expense most individuals
    will have
  • Therefore, it is important to understand the
    systematic deductions
  • U.S. tax system operates on an ongoing payment
  • Taxes are immediately paid on income earned

Paying Employees
  • Three methods employers may use to
  • pay employees
  • Paycheck-
  • Most common method
  • Employee responsible for handling the paycheck
  • Immediately see payroll stub and deductions

Paying Employees continued
  • Direct Deposit-
  • Employers directly deposit employees paycheck
    into the authorized employees depository
    institution account
  • Employee receives the paycheck stub detailing the
    paycheck deductions
  • Most secure because there is no direct handling
    of the check
  • Employee knows exactly when paycheck will be
    deposited and available

Paying Employees continued
  • 3. Payroll Card-
  • A payroll card electronically carries the balance
    of the employees net pay
  • Funds are directly deposited by an employer into
    an account at a depository institution that is
    linked to the payroll card
  • Parties involved
  • Employer
  • Employee
  • Depository institution
  • Use the payroll card for ATM withdrawals or to
    make purchases

Payroll Card
  • There are numerous fees associated with payroll
  • Number of fees depends upon the depository
  • Examples
  • Monthly or annual fee
  • ATM fee
  • Inactivity fee
  • Fee after a specific number of transactions have
    been used
  • Replacement fee if the card is lost, stolen , or
  • Load fee (when funds are placed on the card
  • Point of sale (POS) fee for using the card at a
    POS terminal, or an electronic payment processor

Benefits of Using Payroll Cards
  • Employers
  • Lower internal costs
  • Costs associated with producing, handling, and
    distributing pay checks is eliminated
  • Depository Institutions
  • Profit from the fees charged to employees,
    employers, and merchants
  • Employees
  • Safer than carrying large amounts of cash
  • Unbanked employees do not have to pay check
    cashing fees
  • Americans roughly spend 8 billion annually in
    check cashing fees
  • Can access electronic monthly statement of
  • Can receive a second card
  • Give allowances to children
  • Send money internationally
  • Easily make online purchases

Consumer Protection with Payroll Cards
  • Regulation E Electronic Fund Transfer Act
  • Protects payroll card holder from fraudulent
    charges on lost or stolen cards
  • Card holder is only liable for 50 if a lost or
    stolen card is reported within 48 hours
  • Over four million paychecks are stolen annually
    with no protection to employees
  • Regulation E provides exceptional safety and
    protection for payroll card holders

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

Starting a New Job
  • To receive a paycheck, an employee must
  • Complete a Form W-4
  • Employees Withholding Allowance Certificate
  • Complete a Form I-9
  • Employment Eligibility Verification

Form W-4
  • Employees Withholding Allowance Certificate
  • Determines the percentage of gross pay which will
    be withheld for taxes
  • Allowances
  • Used to determine the amount of federal taxes
    withheld from the paycheck
  • A person may claim a personal allowance if no one
    else claims the person as a dependent
  • Dependent a person who relies on the taxpayer
    for financial support

Steps to Completing a Form W-4
  • Print or type legal name on Line 1 and home
    address directly below the name
  • Write Social Security number on Line 2
  • On Line 3, check the appropriate box to indicate
    marital status
  • Enter a zero on Line 5 if not claiming any
  • Sign name and date the form before giving it to
    the employer
  • Keep a copy for personal records

Form I-9
  • Employment Eligibility Verification Form
  • Used to verify the eligibility of individuals to
    avoid hiring undocumented workers or others who
    are not eligible to work in the United States
  • Must provide documentation which establishes
    identity and employment eligibility
  • Examples include drivers license, passport,
    Social Security card, and birth certificate

Reading a Paycheck
Family Economics Financial Education
Paycheck Stub
On-The-Go On-The-Go On-The-Go On-The-Go On-The-Go On-The-Go
EmployeeBeakens, Joe SSN201-92-4856 SSN201-92-4856 Check 164 Check 164 Check Amount1,102.98
Employee Address293 Michael GroveBillings, MT 59102          
  Pay Type-Gross Pay Deductions Deductions Current Year-to-date
   1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social Security Fed MED/EE or MedicareMedical401K Federal WithholdingState WithholdingFed OASDI/EE or Social Security Fed MED/EE or MedicareMedical401K 106.0040.8283.9119.620.000.00 503.46117.72636.00244.920.000.00
    Totals Totals 250.35 1,502.10
Pay Period 6/11/2004-7/11/2004 Pay Period 6/11/2004-7/11/2004 Pay Period 6/11/2004-7/11/2004 Pay Period 6/11/2004-7/11/2004 Pay Period 6/11/2004-7/11/2004 Pay Period 6/11/2004-7/11/2004
  • Paycheck Stub
  • A document included each pay period which
    outlines paycheck deductions

Personal Information
  • Personal Information
  • States the employees full name, address, and
    Social Security number
  • Always check to ensure this information is correct

Pay Period
  • Pay Period
  • The length of time for which an employees wages
    are calculated most are weekly, bi-weekly, twice
    a month, or monthly
  • The last day of the pay period is not always
    payday to allow a business to accurately compute

Gross Pay
  • Gross Pay
  • The total amount of money earned during a pay
    period before deductions
  • This is calculated by multiplying the number of
    hours worked by the hourly rate
  • If a person is on salary, it is the total salary
    amount divided by the specified time period

Net Pay
  • Net Pay
  • The amount of money left after all deductions
    have been withheld from the gross pay earned in
    the pay period

  • Deductions
  • The amount of money subtracted from the gross pay
    earned for mandatory systematic taxes, employee
    sponsored medical benefits, and/or retirement

Federal Withholding Tax
  • Federal Withholding Tax
  • The amount required by law for employers to
    withhold from earned wages to pay taxes
  • The amount of money deducted depends on the
    amount earned and information provided on the
    Form W-4
  • Largest deduction withheld from an employees
    gross income

State Withholding Tax
  • State Withholding Tax
  • The percentage deducted from an individuals
    paycheck to assist in funding government agencies
    within the state
  • The percentage deducted depends on the amount of
    gross pay earned

FICA (Federal Insurance Contribution Act)
  • FICA
  • This tax includes two separate taxes Fed
    OASDI/EE or Social Security and Fed MED/EE or
  • These two taxes can be combined as one line item
    or itemized separately on a paycheck stub

Social Security
  • Social Security
  • Nations retirement program, helps provide
    retirement income for elderly and pays disability
  • Based upon a percentage (6.2) of gross income,
    employer matches the contribution made by the

  • Medicare
  • Nations health care program for the elderly and
    disabled, provides hospital and medical insurance
    to those who qualify
  • Based upon a percentage (1.45) of gross income

  • Medical
  • The amount taken from the employees paycheck for
    medical benefits
  • Occurs when the employer has a medical plan for
    employees but does not pay full coverage for
    his/her benefits

Retirement Plan
  • Retirement Plan
  • The amount an employee contributes each pay
    period to a retirement plan
  • A specified percentage of the contribution is
    often matched by the employer
  • May be a 401K, a state, or local retirement plan

  • Year-to-Date
  • Total of all of the deductions which have been
    withheld from an individuals paycheck from
    January 1 to the last day of the pay period
    indicated on the paycheck stub

Now it is tax time.
  • April 15 is quickly apporaching and we must now
    do our taxes.
  • Using our W-2s and our make believe I-9s we
    will fill out the 1040ez form.

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