Taxes are the price we pay for civilization. What did Oliver. Wendell Holmes mean by his statement? CHAPTER

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1 HAPTER 7 Incm Taxs Taxs ar th pric w pay fr civilizatin. Olivr Wnll Hlms, Jr., Amrican Jurist 7-1 Tax Tabls, Wrkshts, an Schuls 7-2 Mling Tax Schuls 7-3 Incm Statmnts 7-4 Frms 1040EZ an 1040A 7-5 Frm 1040 an Schuls A an B What i Olivr Wnll Hlms man by his statmnt? What yu think? What wul ur cuntry b tay withut taxs? Wul stunts sacrific all th srvics gvrnmnt prvis just t pay n tax? Hw wul thir livs b iffrnt? Exactly what srvics taxs prvi, an whr wul w b withut thm? Hav stunts ra th passag alu an lt thm ffr cmmnts abut th pssibilitis. TEAHING RESOURES Instructr s Rsurc D ExamViw D, h. 7 Hmwrk, h. 7 schl/math/ financialalgbra It taks a lt f mny t run lcal, city, stat, an fral gvrnmnts. Th mny cllct thrugh taxs hlps ths agncis fun plic frcs, fir partmnts, plitical fficrs, tachrs, rsarch, military fns, public assistanc prgrams, an much mr. Thr ar many iffrnt typs f taxs, incluing sals taxs, prprty taxs, scial scurity taxs, an incm taxs. Althugh mst ppl n t lik t pay taxs, thy s bcaus it is rquir by law. Plus, ppl raliz that gvrnmnt srvics ar an ssntial part f ay-t-ay lif. In this chaptr, yu will b larning abut hw taxpayrs cmput an rprt thir incm taxs t th gvrnmnt _07_ch07_p in 326 3/15/11 2:55 PM

2 Rally? Th Tax Funatin is a nnpartisan ucatinal rganizatin whs missin is t... ucat taxpayrs abut sun tax plicy an th siz f th tax burn brn by Amricans at all lvls f gvrnmnt. Each yar, th Funatin calculats th avrag numbr f ays it wul tak Amricans t arn nugh mny t pay ff thir ntir yar s incm tax bt. Starting with January 1st, th Funatin trmins th first at that avrag Amricans wul b wrking fr thmslvs rathr than wrking t pay ff taxs. This at is call Tax Frm Day. Tax Frm Day changs frm yar t yar bas upn a varity f cnmic factrs. Examin ths Tax Frm ats. Yar Tax Frm Day Yar Tax Frm Day 1993 April April April April April April April April April April April April May April May April 23 Fr xampl, if all f a prsn s incm wnt t pay taxs frm th bginning f 2008, th avrag Amrican wul hav wrk until April 23 bfr bing fr frm his r hr tax burn. HAPTER OVERVIEW In this chaptr stunts will us tax tabls, as wll as iscvr th quatins an picwis functins upn which th prgrssiv tax systm is bas. REALLY? REALLY! Oftn, stunts wh wrk part-tim nly pay Scial Scurity. Thy n t pay fral r stat withhling taxs. nsquntly, thy ar nt attun t th ia that mny is withhl frm thir paychcks which is us t prvi gvrnmnt srvics. Thrfr, part f th mny thy arn gs t th gvrnmnt. Stunts can translat this int th fact that thy spn sm prtin f thir wrking tim making mny just t pay taxs. If this fractin f tim spnt is rallcat int n sli chunk f tim starting January 1, th cncpt f Tax Frm Day mrgs. Rally! GUENTERMANAUS, LEEZSNOW/ISTOKPHOTO.OM _07_ch07_p in 327 3/15/11 2:55 PM

3 Th harst thing in th wrl t unrstan is th incm tax. Albrt Einstin 7-1 Objctivs Exprss tax schuls algbraically. mput fral incm taxs using a tax tabl an tax schuls. Tax Tabls, Wrkshts, an Schuls Ky Trms prprty tax sals tax incm tax taxabl incm tax Intrnal Rvnu Srvic (IRS) singl marri filing jintly qualifying wiw(r) marri filing sparatly ha f hushl EXAMINE THE QUESTION At first glanc, this may appar t b a vry basic qustin vryn pays taxs! But wh ar th taxpayrs? This lssn will infrm stunts abut th typs f taxs that ar lvi an th catgris f taxpayrs wh pay thm. LASS DISUSSION Aftr rviwing th thr typs f taxs list, ask stunts which thy pay nw an which thir parnts pay nw. Ask stunts what th statmnt Yur annual tax changs as yur annual incm changs mans. Wh pays taxs? Imagin hw much mny it taks t run yur city, stat, an fral gvrnmnts. Whr s th mny cm frm fr plic frcs, th spac prgram, military fns an natinal scurity, halth rsarch, scial prgrams, an thr gvrnmnt prgrams? Taxpayrs! Thr ar many iffrnt typs f taxs. Prprty taxs ar cllct bas n th valu f th prprty yu wn. Sals taxs ar cllct bas n th valu f itms yu purchas. Incm taxs ar cllct bas n th amunt f taxabl incm yu arn. Yur tax is th amunt f mny yu must pay t th gvrnmnt. It is th pric yu pay t bnfit frm gvrnmnt srvics. Fral taxs ar cllct by th Intrnal Rvnu Srvic (IRS). Althugh ppl n t lik t pay taxs, thy ar rquir an ppl raliz taxs ar ncssary. Yu rprt yur taxabl incm n a frm call a tax rturn. TEAH In rr t prvi answrs fr xrciss in this chaptr, th tax schuls an frms us t cmplt th xrciss ar ths that wr availabl at fr Yu can nrich th xrcis by having stunts btain th mst rcnt tax schuls an frms. TASHKA/ISTOKPHOTO.OM 328 haptr 7 Incm Taxs 49657_07_ch07_p in 328 3/15/11 2:55 PM

4 Yur filing status is a scriptin f yur marital an family status n th last ay f th yar. Yu must inicat yur filing status n yur tax rturn. Th chics fr filing status ar Singl unmarri taxpayrs. Marri Filing Jintly r Qualifying Wiw(r) marri ppl wh fill ut n tax rturn tgthr r a wiw(r) wh mts th qualificatins utlin by th IRS. Marri Filing Sparatly marri ppl wh fil tw sparat rturns. Ha f Hushl a spcial filing status fr crtain unmarri taxpayrs wh supprt ppl in aitin t supprting thmslvs. Yur annual tax changs as yur annual incm changs. T fin th tax n yur taxabl incm, yu us a tax tabl r a tax schul. Tax tabls ar asir t us than tax schuls, but with a littl algbra, yu can mastr th us f th tax schul. TEAH Ask stunts t list srvics that cmmunitis, twns, villags, r citis supply t rsints. Mak sur thy raliz th srvics ar pai fr thrugh a varity f lcal, stat, an fral taxs. EXAMPLE 1 In th tax tabl haings, rlat th trms at last an but lss than t mathmatical symbls. In tax tabls, th first numbr in th rang is inclu in th intrval. In tax schuls, th scn numbr in th rang is Skills an Stratgis Hr yu will larn hw t us tax tabls, tax schuls, an tax wrkshts t cmput yur taxs. inclu in th intrval. This incnsistncy may caus cnfusin whn stunts ar writing intrvals. EXAMPLE 1 Rn is singl. H is using an IRS tax frm an calculats that his taxabl incm is $51,482. Th instructins tll him t us th tax tabl t trmin his taxs. Hw much s Rn w in taxs? SOLUTION Tax tabls list th tax fr an incm intrval. Examin th prtin f a tax tabl shwn at th right. Ntic that th haings in th tw clumns ra At last an But lss than. Th first rw is us by taxpayrs whs taxabl incm is at last $51,000, but lss than $51,050. Lt t rprsnt th taxabl incm. Using cmpun inquality ntatin, this can b xprss as t 51,000 an t < 51,050 This can als b symbliz using intrval ntatin as 51,000 t < 51,050 Rn s taxabl incm f $51,482 is at last $51,450 but lss than $51,500. Lk acrss this lin until it intrscts with th clumn titl Singl. Rn ws $9,213 in taxs. If lin 43 (taxabl incm) is At last But lss than 51,000 Singl An yu ar Marri Marri filing filing jintly sparatly * Yur tax is Ha f a hushl 51,000 51,050 9,100 6,851 9,100 7,819 51,050 51,100 9,113 6,859 9,113 7,831 51,100 51,150 9,125 6,866 9,125 7,844 51,150 51,200 9,138 6,874 9,138 7,856 51,200 51,250 9,150 6,881 9,150 7,869 51,250 51,300 9,163 6,889 9,163 7,881 51,300 51,350 9,175 6,896 9,175 7,894 51,350 51,400 9,188 6,904 9,188 7,906 51,400 51,450 9,200 6,911 9,200 7,919 51,450 51,500 9,213 6,919 9,213 7,931 51,500 51,550 9,225 6,926 9,225 7,944 51,550 51,600 9,238 6,934 9,238 7,956 51,600 51,650 9,250 6,941 9,250 7,969 51,650 51,700 9,263 6,949 9,263 7,981 51,700 51,750 9,275 6,956 9,275 7,994 51,750 51,800 9,288 6,964 9,288 8,006 51,800 51,850 9,300 6,971 9,300 8,019 51,850 51,900 9,313 6,979 9,313 8,031 51,900 51,950 9,325 6,986 9,325 8,044 51,950 52,000 9,338 6,994 9,338 8,056 HEK YOUR If r rprsnts Rn s taxabl incm, xprss his tax intrval as an inquality using intrval ntatin. HEK YOUR Answr 51,450 r < 51, Tax Tabls, Wrkshts, an Schuls _07_ch07_p in 329 3/15/11 2:55 PM

5 EXAMPLE 2 Rviw th structur f th chart with th stunts. Thy will n t first subtract th amunt in th last clumn frm th taxabl incm bfr calculating th prcnt. HEK YOUR Answr $65,100 EXAMPLE 2 Maria an Dn ar marri taxpayrs filing a jint rturn. Thir cmbin taxabl incm is $153,900. Th IRS ffrs a tax schul s that taxpayrs can calculat thir tax. Us th tax schul blw fr marri taxpayrs filing jintly t calculat Maria an Dn s tax. Schul Y-1 If yur filing status is Marri filing jintly r Qualifying wiw(r) If yur taxabl Th tax is: incm is: Ovr 16,050 65, , , ,700 But nt vr $16,050 65, , , ,700 10% $1, % 8, % 25, % 44, % 96, % f th amunt vr 16,050 65, , , ,700 SOLUTION Maria an Dn s taxabl incm is vr $131,450, but nt vr $200,300. If t rprsnts thir taxabl incm, this can b xprss in intrval ntatin as 131,450 < t 200,300 Thy shul us th infrmatin n lin 4 t trmin thir tax. Thir tax is $25, % f th amunt vr 131,450. Tax = 25, (153, ,450) Thir tax is $31,836. HEK YOUR Using th tabl abv, what taxabl incm wul yil a tax f xactly $8,962.50? HERJUA/ISTOKPHOTO.OM 330 haptr 7 Incm Taxs 49657_07_ch07_p in 330 3/15/11 2:55 PM

6 EXAMPLE 3 Th IRS inclus th tax schul fr infrmatin purpss nly. Fr taxabl incms vr $100,000, taxpayrs must us th tax wrksht. Hr is a prtin f th wrksht fr marri taxpayrs filing jintly. alculat Maria an Dn s tax using this wrksht. EXAMPLE 3 Rviw th structur f th chart with th stunts. This wrksht is mr usr frinly than th schul in th prvius xampl. Hr, stunts can prfrm th calculatins frm lft t right. SOLUTION Maria an Dn s taxabl incm f $153,900 is vr $131,450, but nt vr $200,300, as inicat in th scn lin f th wrksht. T calculat thir tax, thy ntr thir taxabl incm in that lin f clumn (a). Ovr $131,450 but nt vr $200,300 $ 28% (.28) $ $ 11, $ 153,900 lumn (b) asks thm t tak 28% f that incm. That is, multiply th incm by That amunt is ntr in clumn (c). 153, = 43,092 lumn () says t subtract $11, frm th amunt that was just calculat an t ntr th iffrnc in th last clumn. 43,092 11,256 = 31,836 Maria an Dn w $31,836 in taxs. This agrs with th amunt thy cmput using th tax schul. HEK YOUR Davia an Jhn hav a taxabl incm f $118,675. Us th Marri Filling Jintly wrksht abv t trmin th amunts fr clumns (a) an (c). What is thir calculat tax? HEK YOUR Answr (a) 118,675; (c) 29,668.75; $22, EXTEND YOUR Answr 0.25x 7, EXTEND YOUR has has a taxabl incm f x llars. This amunt is vr $100,000, but nt vr $131,450. Exprss his tax algbraically. 7-1 Tax Tabls, Wrkshts, an Schuls _07_ch07_p in 331 3/15/11 2:55 PM

7 Applicatins Th harst thing in th wrl t unrstan is th incm tax. Albrt Einstin 1. Hw can th qut b intrprt in light f what yu hav larn? S margin. Us ths tax tabls t answr Exrciss 2 5. If lin 43 (taxabl incm) is At last But lss than 57,000 Singl An yu ar Marri Marri filing filing jintly sparatly * Yur tax is Ha f a hushl 57,000 57,050 10,600 7,751 10,600 9,319 57,050 57,100 10,613 7,759 10,613 9,331 57,100 57,150 10,625 7,766 10,625 9,344 57,150 57,200 10,638 7,774 10,638 9,356 57,200 57,250 10,650 7,781 10,650 9,369 57,250 57,300 10,663 7,789 10,663 9,381 57,300 57,350 10,675 7,796 10,675 9,394 57,350 57,400 10,688 7,804 10,688 9,406 57,400 57,450 10,700 7,811 10,700 9,419 57,450 57,500 10,713 7,819 10,713 9,431 57,500 57,550 10,725 7,826 10,725 9,444 57,550 57,600 10,738 7,834 10,738 9,456 57,600 57,650 10,750 7,841 10,750 9,469 57,650 57,700 10,763 7,849 10,763 9,481 57,700 57,750 10,775 7,856 10,775 9,494 57,750 57,800 10,788 7,864 10,788 9,506 57,800 57,850 10,800 7,871 10,800 9,519 57,850 57,900 10,813 7,879 10,813 9,531 57,900 57,950 10,825 7,886 10,825 9,544 57,950 58,000 10,838 7,894 10,838 9,556 If lin 43 (taxabl incm) is At last But lss than 60,000 Singl An yu ar Marri Marri filing filing jintly sparatly * Yur tax is Ha f a hushl If lin 43 (taxabl incm) is At last But lss than 63,000 Singl An yu ar Marri Marri filing filing jintly sparatly * Yur tax is Ha f a hushl 60,000 60,050 11,350 8,201 11,350 10,069 63,000 63,050 12,100 8,651 12,100 10,819 60,050 60,100 11,363 8,209 11,363 10,081 63,050 63,100 12,113 8,659 12,113 10,831 60,100 60,150 11,375 8,216 11,375 10,094 63,100 63,150 12,125 8,666 12,125 10,844 60,150 60,200 11,388 8,224 11,388 10,106 63,150 63,200 12,138 8,674 12,138 10,856 60,200 60,250 11,400 8,231 11,400 10,119 63,200 63,250 12,150 8,681 12,150 10,869 60,250 60,300 11,413 8,239 11,413 10,131 63,250 63,300 12,163 8,689 12,163 10,881 60,300 60,350 11,425 8,246 11,425 10,144 63,300 63,350 12,175 8,696 12,175 10,894 60,350 60,400 11,438 8,254 11,438 10,156 63,350 63,400 12,188 8,704 12,188 10,906 60,400 60,450 11,450 8,261 11,450 10,169 63,400 63,450 12,200 8,711 12,200 10,919 60,450 60,500 11,463 8,269 11,463 10,181 63,450 63,500 12,213 8,719 12,213 10,931 60,500 60,550 11,475 8,276 11,475 10,194 63,500 63,550 12,225 8,726 12,225 10,944 60,550 60,600 11,488 8,284 11,488 10,206 63,550 63,600 12,238 8,734 12,238 10,956 60,600 60,650 11,500 8,291 11,500 10,219 63,600 63,650 12,250 8,741 12,250 10,969 60,650 60,700 11,513 8,299 11,513 10,231 63,650 63,700 12,263 8,749 12,263 10,981 60,700 60,750 11,525 8,306 11,525 10,244 63,700 63,750 12,275 8,756 12,275 10,994 60,750 60,800 11,538 8,314 11,538 10,256 63,750 63,800 12,288 8,764 12,288 11,006 60,800 60,850 11,550 8,321 11,550 10,269 63,800 63,850 12,300 8,771 12,300 11,019 60,850 60,900 11,563 8,329 11,563 10,281 63,850 63,900 12,313 8,779 12,313 11,031 60,900 60,950 11,575 8,336 11,575 10,294 63,900 63,950 12,325 8,786 12,325 11,044 60,950 61,000 11,588 8,344 11,588 10,306 63,950 64,000 12,338 8,794 12,338 11,056 TEAH Exrcis 5 Stunts must wrk backwars. Imprss upn thm that nly th intrval can b trmin, nt th xact taxabl incm. ANSWERS 1. Whn yu think f smart ppl, yu may think f Einstin. Yt, h fun th tax systm cnfusing. Thrfr, th avrag citizn ns t tak tim t unrstan th systm. 4. a. 57,550 / < 57,600 b. 63,400 / < 63,450 c. 60,000 / < 60, ,300 / < 63, Dtrmin th tax fr ach filing status an taxabl incm amunt. a. singl $57,723 $10,775 b. ha f hushl $60,950 $10,306 c. marri filing jintly. marri filing sparatly $63,999 $8,794 $57,521 $10, Givn a taxabl incm amunt, xprss th tax tabl lin that wul b us in cmpun inquality ntatin. a. i = $60,124 i 60,100 an i < 60,150 b. i = $57,333 i 57,300 an i < 57, Givn th taxabl incm amunt, xprss th tax tabl lin that wul b us in intrval ntatin. S margin. a. i = $57,555 b. i = $63,411 c. i = $60,002. i = $63, Givn th filing status an th tax, intify th taxabl incm intrval that was us t trmin th tax. a. ha f hushl $9,406 at last $57,350 but lss than $57,400 b. singl $12,275 at last $63,700 but lss than $63,750 c. singl $11,538 at last $60,750 but lss than $60,800. marri filing jintly $8,291 at last $60,600 but lss than $60,650. marri filing sparatly $10,788 at last $57,750 but lss than $57, haptr 7 Incm Taxs 49657_07_ch07_p in 332 3/15/11 2:55 PM

8 Us ths tax schuls t answr Exrciss Schul Z If yur filing status is Ha f hushl If yur taxabl Th tax is: incm is: But nt Ovr vr 11,450 43, , , ,700 $11,450 43, , , ,700 10% $1, % 5, % 23, % 42, % 100, % f th amunt vr 11,450 43, , , ,700 TEAH Exrciss 6 10 Ths xrciss ffr stunts practic with a tax schul. Bfr assigning th prblms, mak sur that thy hav a grasp f th structur f th schul. 6. alculat th tax fr ach taxabl incm f a ha f hushl. a. $400,000 $115,409 b. $10,954 $1, c. $108,962 $22,303. $201,102 $48, Fr what taxabl incm wul a taxpayr hav t pay $5, in taxs? Explain yur rasning. $43,650; it is th minimum amunt in that intrval. 8. Accring t th tax schul, Rich has t pay $25,000 in taxs. What is Rich s taxabl incm? $118, Klly s taxabl incm is $110,000. Apprximatly what prcnt f hr taxabl incm is hr tax? 21% 10. Maurn s taxabl incm, t, is btwn $182,400 an $357,700. Writ an algbraic xprssin that rprsnts hr tax. 42, (t 182,400) Us this tax cmputatin wrksht t answr Exrciss alculat th tax fr ach f th taxabl incms f a ha f hushl taxpayr. a. $400,000 $115,409 b. $108,962 $22,303 c. $201,102 $48, $106,000 $21, Lt x rprsnt a ha f hushl taxpayr s taxabl incm that is vr $357,700. Writ an xprssin fr this taxpayr s tax in trms f x. 0.35x 24, Lt w rprsnt th tax fr any taxabl incm t n th intrval 182,400 < t 357,700. a. alculat th lwst tax n this intrval. $42,755 b. alculat th highst tax n this intrval. $100,604 c. Givn th intrval, 182,400 < t 357,700, xprss th tax in trms f w. 0.33w 17, Tax Tabls, Wrkshts, an Schuls _07_ch07_p in 333 3/15/11 2:55 PM

9 TEAH Exrcis 20 This xrcis is inclu t giv stunts a histrical prspctiv n tax rats thn (1990) an nw. Onc stunts hav cmplt this prblm using th 1990 tax schul, it is suggst that yu gt th mst rcnt tax schul an hav thm us ths figurs in answring th sam xrciss. Ask stunts t cmpar th rsults. What changs hav bn ma t th schul an t th amunt f tax w? ANSWERS 20a tax: $32,853.50; Exrcis 6 tax: $25,283 20b. 1990: 27%; Exrcis 6: 21% 20c. Answrs vary pning n th currnt tax schuls. 14. alculat th tax using th cmputatin wrksht fr a ha f hushl taxpayr with a taxabl incm f $115,700. $24, Using th tax schul frm Exrcis 6, calculat th tax fr th prsn in Exrcis 14. $24, Is thr a iffrnc in th tax in Exrciss 14 an 15? If s, hw much an which mth favrs th taxpayr? Thy ar th sam. 17. Us th tax tabl at th right t calculat th tax f a ha f hushl taxpayr with a taxabl incm f $27,811. $3, Us Schul Z frm Exrcis 6 t calculat th tax fr th taxpayr in Exrcis 17. $3, If lin 43 (taxabl incm) is At last But lss than 27,000 Singl An yu ar Marri Marri filing filing jintly sparatly * Yur tax is 19. Is thr a iffrnc in th tax in Exrciss 17 an 18? If s, hw much an which mth favrs th taxpayr? ys; by $1.85; Schul Z 20. In 1990, taxpayrs us th fllwing tax schul. S margin. Ha f a hushl 27,000 27,050 3,653 3,251 3,653 3,481 27,050 27,100 3,660 3,259 3,660 3,489 27,100 27,150 3,668 3,266 3,668 3,496 27,150 27,200 3,675 3,274 3,675 3,504 27,200 27,250 3,683 3,281 3,683 3,511 27,250 27,300 3,690 3,289 3,690 3,519 27,300 27,350 3,698 3,296 3,698 3,526 27,350 27,400 3,705 3,304 3,705 3,534 27,400 27,450 3,713 3,311 3,713 3,541 27,450 27,500 3,720 3,319 3,720 3,549 27,500 27,550 3,728 3,326 3,728 3,556 27,550 27,600 3,735 3,334 3,735 3,564 27,600 27,650 3,743 3,341 3,743 3,571 27,650 27,700 3,750 3,349 3,750 3,579 27,700 27,750 3,758 3,356 3,758 3,586 27,750 27,800 3,765 3,364 3,765 3,594 27,800 27,850 3,773 3,371 3,773 3,601 27,850 27,900 3,780 3,379 3,780 3,609 27,900 27,950 3,788 3,386 3,788 3,616 27,950 28,000 3,795 3,394 3,795 3, Tax Rat Schuls autin: Us ONLY if yur taxabl incm (Frm 1040, lin 37) is $50,000 r mr. If lss, us th TAX Tabl. (Evn thught yu cannt us th tax rat schuls blw if yur taxabl incm is lss than $50,000, w shw all lvls f taxabl incm s that taxpayrs can s th tax rat that applis t ach lvl.) Schul X If yur filing status is Singl Schul Z If yur filing status is Ha f hushl If th amunt n Frm 1040 lin 37, is: Ovr But nt Ovr Entr n Frm 1040 lin 38 f th amunt Ovr If th amunt n Frm 1040 lin 37, is: Ovr But nt Ovr Entr n Frm 1040 lin 38 f th amunt Ovr $19,450 15% $26,050 15% 19,450 47,050 $2, % 18,450 26,050 67,200 $3, % 26,050 47,050 97,620 10, % 47,050 67, ,930 15, % 67,200 97,620 Us Wrksht blw t figur yur tax. 134,930 Us Wrksht blw t figur yur tax. a. mpar th tax f a ha f hushl taxpayr whs taxabl incm in 1990 was $120,000 with a ha f hushl taxpayr s tax, using th tax schul frm Exrcis 6, wh arns th sam amunt. b. What prcnt f th taxabl incm was th tax in ach yar? c. G t th IRS wbsit ( an fin th mst rcnt tax rat schul. mpar th tax f th sam ha f hushl taxpayr frm part a with a ha f hushl taxpayr making th sam salary tay. What prcnt incras has thr bn in th tax frm thn t nw? 334 haptr 7 Incm Taxs 49657_07_ch07_p in 334 3/15/11 2:55 PM

10 Taxs ar pai in th swat f vry man wh labrs. Franklin D. Rsvlt Mling Tax Schuls 7-2 Ky Trms flat tax prprtinal tax prgrssiv tax systm tax brackt rgrssiv tax schul Objctiv nstruct incm tax graphs using cmpun quatins. Hw can yu graph tax schuls? Whn yu pay a sals tax, th tax prcntag rmains th sam whthr yu purchas a $13 itm r a $13,000 itm. Sals tax is a flat tax, r a prprtinal tax. Th tax rat s nt pn n th cst f th itm yu purchas. Hw s th tax schul wrk? Ds th prsn with taxabl incm f $13,000 pay th sam prcnt as th prsn wh arns $13,000,000? Thr ar iffrnt prcntags n tax schuls. This is a istinct fatur f a prgrssiv tax systm. In a prgrssiv incm tax systm, th tax rat incrass as th incm incrass. Ppl with gratr incms ar subjct t highr tax rats n part f thir incm. Lk at th first lin f th tax schul shwn. Schul Y-1 If yur filing status is Marri filing jintly r Qualifying wiw(r) If yur taxabl Th tax is: incm is: Ovr 16,050 65, , , ,700 But nt vr $16,050 65, , , ,700 10% $1, % 8, % 25, % 44, % 96, % f th amunt vr 16,050 65, , , ,700 EXAMINE THE QUESTION Our tax systm is a sris f tabls, schuls, an wrkshts. By crating tax quatins an graphs, w can gt a bttr pictur f hw th tax burn is lvi amng th iffrnt incm lvls. LASS DISUSSION Bfr xamining th schul prsnt n this pag, ask stunts hw sals tax might wrk if it was a prgrssiv rathr than a prprtinal tax. Prsnt thm with a schul in which th shppr wul hav t pay 6% n th first $50 an 8% n th amunt vr $50. Ask thm t calculat this tax an iscuss th iffrnc btwn this systm an what is currntly in plac. Ntic that all marri cupls filing jintly pay a 10% tax n th first $16,050 thy arn. If th cupl arns $16,051 r 15 millin llars fr th yar, th tax n th first $16,050 f taxabl incm yu arn is tax at th sam rat, 10%. Th nxt brackt f incm is tax at th 15% rat. Each lin f th tax schul has a iffrnt prcnt. This prcnt is call a tax brackt. Yu may hav har th xprssin I m in th 35% tax brackt. That mans th cupl arns an incm that is partly tax at a 35% rat. Kp in min that th first $16,050 f this cupl s incm is still tax at th 10% rat. 7-2 Mling Tax Schuls _07_ch07_p in 335 3/15/11 2:55 PM

11 TEAH Stunts hav likly har thir parnts, ault frins, an c-wrkrs cmplain abut th tax systm in th U.S. Th xampls in this lssn lk at th natur f th prgrssiv tax systm an hw it is rlat t intrvals, quatins, slps, an picwis functins. EXAMPLE 1 This xampl sts th stag fr crating th picwis functin. Th cmpun intrval ntatin las t th cmpun inquality ntatin. It is th lattr that is us whn graphing th picwis functin n th graphing calculatr. HEK YOUR Answr Ovr $131,450 but nt vr $200,300; 131,450 < x 200,300; x > 131,450 an x 200,300 Thr ar ppl wh supprt changing th currnt prgrssiv tax schul t a flat tax systm, t simplify incm taxs. In a rgrssiv tax schul, th tax rat crass as incm incrass. Th bat btwn flat, prgrssiv, an rgrssiv taxs can b a livly n. Which systm wul yu rcmmn? Why? Skills an Stratgis Prviusly, yu us th tax wrksht an th tax schul t calculat th tax f marri taxpayrs filing a jint rturn. Nw yu will xamin hw prcntags pn n incm in th tax schuls. EXAMPLE 1 Ml th schul shwn in tax schul ntatin, intrval ntatin, an cmpun inquality ntatin. Schul Y-1 If yur filing status is Marri filing jintly r Qualifying wiw(r) If yur taxabl Th tax is: incm is: Ovr 16,050 65, , , ,700 But nt vr $16,050 65, , , ,700 10% $1, % 8, % 25, % 44, % 96, % f th amunt vr 16,050 65, , , ,700 SOLUTION Thr ar six taxabl incm intrvals. If x rprsnts any taxabl incm, thn ths intrvals can b xprss in tax schul ntatin, intrval ntatin, an cmpun inquality ntatin as fllws: Tax Schul Ntatin Intrval Ntatin mpun Inquality Ntatin Ovr but nt vr $16,050 0 < x 16,050 x > 0 an x 16,050 Ovr $16,050 but nt vr $65,100 16,050 < x 65,100 x > 16,050 an x 65,100 Ovr $65,100 but nt vr $131,450 65,100 < x 131,450 x > 65,100 an x 131,450 Ovr $131,450 but nt vr $200, ,450 < x 200,300 x > 131,450 an x 200,300 Ovr $200,300 but nt vr $357, ,300 < x 357,700 x > 200,300 an x 357,700 Ovr $357,700 x > 357,700 x > 357,700 HEK YOUR Writ th tax schul ntatin, intrval ntatin, an cmpun inquality ntatin that wul apply t an incm f $172, haptr 7 Incm Taxs 49657_07_ch07_p in 336 3/15/11 2:55 PM

12 Tax Equatin Fr ach intrval in th tax schul byn th first, th tax is calculat by aing a fix tax t a prcntag f th iffrnc btwn th taxabl incm an sm numbr that is stat in th schul. Lt y rprsnt th tax an x rprsnt th taxabl incm. Th tax fr ach f ths intrvals can b xprss algbraically as shwn in this chart. Tax Schul Ntatin Tax Equatin Ovr but nt vr $16,050 y = 0.10x Ovr $16,050 but nt vr $65,100 y = 1, (x 16,050) Ovr $65,100 but nt vr $131,450 y = 8, (x 65,100) Ovr $131,450 but nt vr $200,300 y = 25, (x 131,450) Ovr $200,300 but nt vr $357,700 y = 44, (x 200,300) Ovr $357,700 y = 96, (x 357,700) If f(x) rprsnts th ntir tax functin fr marri taxpayrs filing jintly, thn this functin can b writtn in picwis functin ntatin. 0.10x 0 < x 16,050 1, (x 16,050) 16,050 < x 65,100 8, (x 65,100) 65,100 < x 131,450 f(x) = 25, (x 131,450) 131,450 < x 200,300 44, (x 200,300) 200,300< x 357,700 96, (x 357,700) x > 357,700 LASS DISUSSION Ask stunts wh hav a jb r hav ha a jb abut thir xprincs with paying incm taxs. Discuss with stunts why thy think th tax systm is ifficult fr th avrag Amrican t unrstan. EXAMPLE 2 With th picwis functin crat, yu can nw xamin hw th sam mathmatical rsults can b achiv using th tax cmputatin wrksht. This is an imprtant xampl an yu shul wrk thrugh it mticulusly with th class. Thy will hav pprtunitis t th sam with wrkshts fr iffrnt filing statuss. EXAMPLE 2 Hw s th picwis functin rlat t th tax cmputatin wrksht? SOLUTION Examin th tax cmputatin wrksht fr marri taxpayrs filing jintly. Althugh th numbrs in clumn () appar t hav n mathmatical significanc, thy can b fun by using th istributiv prprty fr ach f th quatins in th picwis functin. 7-2 Mling Tax Schuls _07_ch07_p in 337 3/15/11 2:55 PM

13 HEK YOUR Answr y = 0.28x 11,256; th slp is th multiplicatin amunt in that rw f th tax cmputatin wrksht an th y-intrcpt, 11,256, is th subtractin amunt EXAMPLE 3 This xampl picks up whr Exampl 2 lft ff. It asks stunts t fllw th structur utlin in th prvius xampl t xprss th quatins in y = mx + b frm. HEK YOUR Answr $6, Lking at th incms that ar at last $65,100 but nt vr $131,450, th quatin is y = 8, (x 65,100) whr y rprsnts th tax an x rprsnts th taxabl incm. Us th istributiv prprty an cmbin lik trms as fllws: Start with th quatin. y = 8, (x 65,100) Us th istributiv prprty. y = 8, x 0.25(65,100) Multiply. y = 8, x 16,275 A lik trms. y = 0.25x 7, Th final quatin is in th slp-intrcpt frm f a linar quatin. Rcall th slp-intrcpt frm f a linar quatin is y = mx + b whr m rprsnts th slp an b rprsnts th y-intrcpt. Th slp f this tax quatin is 0.25 an th y-intrcpt is 7, Rturn t th first lin f th wrksht. Fr incms that ar at last $100,000 but nt vr $131,450, yu ar instruct t cmput 25% f yur taxabl incm an thn subtract $7, frm it t cmput th tax. Exprssing th tax schul quatin in y = mx + b frm illustrats whr th numbrs in th tax cmputatin wrksht cam frm. HEK YOUR Th tax quatin fr incms vr $131,450 but nt vr $200,300 is y = 25, (x 131,450). Simplify th quatin an xplain th numrical significanc f th slp an th y-intrcpt. EXAMPLE 3 Exprss th quatins in th marri taxpayrs filing jintly schul in y = mx + b frm. SOLUTION Using th istributiv prprty an cmbining lik trms, ach f th quatins can b xprss as fllws: Tax Equatin y = mx + b Frm y = 0.10x y = 0.10x y = 1, (x 16,050) y = 0.15x y = 8, (x 65,100) y = 0.25x 7, y = 25, (x 131,450) y = 0.28x 11,256 y = 44, (x 200,300) y = 0.33x 21,271 y = 96, (x 357,700) y = 0.35x 28,425 HEK YOUR Us th apprpriat quatin frm Exampl 3 t trmin th tax fr an incm f $46, haptr 7 Incm Taxs 49657_07_ch07_p in 338 3/15/11 2:55 PM

14 EXAMPLE 4 Examin th picwis functin f(x) cmps f th first thr quatins in Exampl x 0 < x 16,050 f(x) = 0.15x ,050 < x 65, x 7, ,100 < x 131,450 Graph th functin n th apprpriat intrval. SOLUTION Mst graphing calculatrs hav a fatur that allws yu t graph th parts f a picwis functin nly n th givn mains. First, ntr ach f th thr cmpnnt quatins f th picwis functin int th calculatr as Y1, Y2, an Y3. Dfin thm nly n th apprpriat mains using cmpun inqualitis. Plt1 Plt2 Plt3 \Y1=(.10X)(X>0 a n X 16050) \Y2=(.15X-802.5) (X>16050 an X ) \Y3=(.25X ) (X>65100 an X ) Using a winw f Xmin = 0, Xmax = , Xscl = 15000, Ymin = 0, Ymax = 25000, an Yscl = 2500, th graph is shwn. EXAMPLE 4 Stunts nw larn hw t us th graphing calculatr t ntr an graph th picwis functin. B awar f th fact that ach bran f calculatr may us a iffrnt st f kystrk squncs fr picwis functins. Inclu is th mst wily us typ f graphing calculatr. Fr this bran, it is imprtant that th quatin an th main ar bth ncas in sparat sts f parnthss. hck yur calculatr wnr s manual t mak sur that yu ar familiar with th picwis functin prcss. HEK YOUR Answr (200,300, 44,828); it is th highst tax fr that tax brackt. EXTEND YOUR Answr Th prcnt f incm pai in fral taxs is gratr; thrfr, th amunt f taxs pai is gratr. 0 16,050 65, ,450 Ntic that th thr lin sgmnts nt hav th sam slp. Th circl pints n th graph ar th cusps. Th graph hlps yu unrstan th prgrssiv tax rat systm. HEK YOUR If yu wr t graph th furth quatin in th picwis functin, y = 0.28x 11,256, whr wul yu xpct th last pint in that quatin t b? Explain yur rasning. EXTEND YOUR What ar th mntary implicatins f th fact that th slp f th last sgmnt f th picwis functin is gratr than th slp f th sgmnt prcing it? 7-2 Mling Tax Schuls _07_ch07_p in 339 3/15/11 2:55 PM

15 Applicatins Taxs ar pai in th swat f vry man wh labrs. Franklin D. Rsvlt Schul X If yur filing status is Singl If yur taxabl incm is: Ovr 8,025 32,550 78, , ,700 TEAH Exrcis 4 Mak sur that stunts hav intifi th crrct main fr ach prtin f th picwis functin. It is imprtant that th npints ar inclu (r xclu) crrctly. But nt vr $8,025 32,550 78, , , Hw can th qut b intrprt in light f what yu hav larn? S margin. Us th tax schul fr a singl taxpayr fr Exrciss 2 an 3. Th tax is: 10% $ % 4, % f th amunt vr 8,025 32, Thr ar six taxabl incm intrvals in this chart. Lt x rprsnt any taxabl incm. Exprss ths intrvals in tax schul ntatin, intrval ntatin, an cmpun inquality. 16, % 40, % 103, % 78, , ,700 S aitinal answrs. 3. Lt y rprsnt th tax an x rprsnt th taxabl incm f a singl taxpayr. S margin. a. Us th tax schul t writ thr quatins in y = mx + b frm fr valus f x that ar gratr than r qual t $100,000. b. Us th istributiv prprty an cmbin lik trms t shw hw th quatins rlat t th tax cmputatin wrksht blw. Shw yur wrk an xplain yur rasning. ANSWERS 1. Incm taxs ar wrkrs taxs. Thrfr, th taxs that ar cllct ar a irct functin f th wrk that th taxpayrs. 3. a. y = 0.28x 6,021.75; y = 0.33x 14,249.25; y = 0.35x 21, b. Th quatins mnstrat th transfrmatin frm th tax schul t th tax wrksht. 4. Writ a picwis functin t rprsnt th tax f(x) fr th first thr taxabl incm intrvals in th schul fr a marri taxpayr wh is filing sparatly. S aitinal answrs. Schul Y-2 If yur filing status is Marri filing sparatly If yur taxabl Th tax is: incm is: But nt Ovr vr 8,025 32,550 65, , ,850 $8,025 32,550 65, , ,850 10% $ % 4, % 12, % 22, % 48, % f th amunt vr 8,025 32,550 65, , , haptr 7 Incm Taxs 49657_07_ch07_p in 340 3/15/11 2:55 PM

16 5. Us th 2000 tax schul fr a marri taxpayr filing jintly. Writ an quatin in y = mx + b frm fr a taxabl incm in th intrval vr $105,950 but nt vr $161,450. y = 0.31x 8, Us th 2006 tax schul fr a marri taxpayr filing jintly. Writ th picwis functin fr th tax intrvals. S aitinal answrs. 7. Us th tax schul frm Exampl 1 an Exrciss 5 an 6. Slct any incm. Writ an quatin fr that incm fr th thr iffrnt yars. Answrs vary. 8. In 1998, a singl taxpayr us this tax schul. Lt x rprsnt th singl taxpayr s taxabl incm an y rprsnt that taxpayr s tax. Exprss th tax schul as a picwis functin Tax Rat Schul Schul Y-1 If yur filing status is Marri filing jintly r Qualifying wiw(r) If th amunt Entr n n Frm 1040 Frm 1040 f th lin 39, is: But nt lin 40 amunt Ovr vr vr 43, , , ,350 $43, , , , Tax Rat Schul S aitinal answrs. n Frm Us th tax cmputatin lin 39, is: But nt wrksht fr a ha f Ovr vr hushl taxpayr. Lt x rprsnt th taxpayr s taxabl incm an y rprsnt th tax. Exprss ach lin f th wrksht as a linar quatin in y = mx + b frm. 25,350 61, , ,450 $25,350 61, , ,450 Us intrval ntatin t fin th incm rang n which ach f yur quatins is fin. S margin. 15% $6, % 23, % 41, % 86, % 43, , , ,350 Schul Y-1 If yur filing status is Marri filing jintly r Qualifying wiw(r) If yur taxabl Th tax is: incm is: Ovr 15,100 61, , , ,550 But nt vr $15,100 61, , , , Tax Rat Schul Schul X If yur filing status is Singl If th amunt 10% $1, % 8, % 24, % 42, % 91, % Entr n Frm 1040 lin 40 15% $3, % 13, % 34, % 88, % f th amunt vr 15,100 61, , , ,550 f th amunt vr 25,350 61, , ,450 Exrciss 6 8 Offr stunts practic with a varity f iffrnt schuls frm th turn f th cntury t th currnt at. ANSWERS 9. y = 0.25x 4, x 100,000 an x 112,650 y = 0.28x 8, x > 112,650 an x 182,400 y = 0.33x 17, x > 182,400 an x 357,700 y = 0.35x 24, x > 357, Mling Tax Schuls _07_ch07_p in 341 3/15/11 2:55 PM

17 Exrciss 9 an 10 Mak sur that th kystrk squncs ar writtn crrctly. A misplac r missing parnthsis can caus an rrr mssag r an incrrct graph. ANSWERS 10a. y = 0.28x 6,083.50; y = 0.33x 49,549.50; y = 0.35x 19, Yu ar givn this prtin f a tax schul frm a prvius yar fr singl taxpayrs with incms vr $71,950. If yur taxabl incm is: Ovr 71, , ,450 But nt vr 150, ,450 Th tax is: 14, % 36, % 94, % f th amunt vr 71, , ,450 a. Ml ach f th thr rws as a simplifi quatin in y = mx + b frm. S margin. b. rat an assciat tax cmputatin sprasht fr th tax schul using th linar quatins yu hav intifi. A tmplat fr th wrksht is shwn blw. S aitinal answrs. 1 Taxabl Incm At last $71,950 but 2 nt vr $150,150 Ovr $150,150 but nt 3 vr $326,450 4 Ovr $326,450 A B D E F (a) Entr taxabl incm (b) Multiplicatin amunt (c) Multiply (a) by (b) () Subtractin amunt Tax Subtract () frm (c) 11. Examin th fllwing tax cmputatin wrksht. Lt x rprsnt th taxabl incm an y rprsnt th tax. a. Lt Y1 rprsnt th graphing calculatr functin fr taxabl incms n th intrval vr $100,150 but nt vr $178,850. Writ th calculatr kystrk squnc fr th quatin that mls th tax n this intrval. B sur t inclu th intrval finitin. (0.33x )(x anx<178850) b. Lt Y2 rprsnt th graphing calculatr functin fr taxabl incms n th intrval Ovr 178,850. Writ th calculatr kystrk squnc fr th quatin that mls th tax n this intrval. B sur t inclu th intrval finitin. (0.35x )(x ) 342 haptr 7 Incm Taxs 49657_07_ch07_p in 342 3/15/11 2:55 PM

18 12. Examin this tax schul. Lt x rprsnt th taxabl incm If yur taxabl incm is: an y rprsnt th tax. But nt a. What is th calculatr Ovr vr kystrk squnc fr $8,025 an quatin that mls 8,025 32,550 th tax n th intrval vr 32,550 but nt vr 65,725? S margin. b. What is th calculatr kystrk squnc fr 32,550 65, , ,850 65, , ,850 an quatin that mls th tax n th intrval vr 100,150 but nt vr 178,850? (x )(x > an x ) 13. Us th graph f a picwis functin with thr quatins. a. A taxpayr has a taxabl incm f $21,197 $39,800. What is hr tax? $5,448 b. A taxpayr will w $21,197. What is his taxabl incm? $102,800 $5,448 c. What is th apprximat tax fr an incm f $30,000?. What is th apprxi- Taxabl Incm mat tax fr an incm f $99,000? $20,500. Nick is pai vry thr wk. H has $390 takn ut f ach paychck fr fral taxs. What is his apprximat taxabl incm? $68, Many ppl claim that nc Schul X If yur filing status is Singl thy ar marri, thy pay If yur taxabl mr taxs than thy i incm is: But nt bfr thy wr marri. Ovr vr Many call this a marriag $8,025 pnalty. ul this b tru? Supps that Alli an DWitt ar lawyrs an ach has a taxabl incm f $140,000. Thy can t ci if thy shul b marri in Dcmbr r in January. If thy marry in Dcmbr, thn thy ar cnsir marri fr th ntir tax yar an cul fil a jint rturn. If thy gt marri in January f th nxt yar, thy wul fil a sparat rturn ach as a singl taxpayr. Which filing status wul yil th lwr tax an by hw much? Tax $4,500 Schul Y-2 If yur filing status is Marri filing sparatly Th tax is: $1,045 8,025 32,550 78, , ,700 0 $10,450 $39,800 $102,800 32,550 78, , ,700 Th tax is: 10% $ % 4, % 16, % 40, % 103, % f th amunt vr 8,025 32,550 78, , ,700 Schul Y-1 If yur filing status is Marri filing jintly r Qualifying wiw(r) If yur taxabl Th tax is: incm is: Ovr 16,050 65, , , ,700 singl taxpayr; $4, But nt vr $16,050 65, , , ,700 10% $ % 4, % 12, % 22, % 48, % 10% $1, % 8, % 25, % 44, % 96, % f th amunt vr 8,025 32,550 65, , ,850 Exrcis 14 Bfr assigning this prblm, ithr hav a iscussin abut th Marriag Tax pnalty r ask stunts t an Intrnt sarch n th subjct. ANSWERS 12a. ( (x 32550)) (x>32550anx f th amunt vr 16,050 65, , , , Mling Tax Schuls _07_ch07_p in 343 3/15/11 2:55 PM

19 Thy tak th mny ut f yur paychck bfr yu can g ut an spn it. Rbrt Hpkins, Financial Avisr 7-3 Incm Statmnts Objctivs Intrprt an us th infrmatin n a pay stub, W-2 frm, an 1099 frm. Ky Trms grss pay nt pay tak-hm pay paychck pay stub Frm W-4 withhling tax Frm W-2 Frm 1099 tax-frr cntributin caftria plan flxibl spning accunt (FSA) EXAMINE THE QUESTION Salary is a mntary agrmnt btwn an mply an mplyr fr wrk prfrm. Unfrtunatly, th actual amunt that an mply taks hm is ftn far lss than th agr upn amunt u t uctins frm th salary. Bfr bginning th lssn, prassss stunts knwlg f th typs f uctins mplys can hav takn frm thir salaris. LASS DISUSSION Ask stunts t rcall th finitin f nt prcs frm haptr 1. Hw might th trms nt prcs an nt pay b rlat? G t th IRS wbsit ( t fin a cpy f th W-4 frm. Why is yur tak-hm pay lwr than yur salary? Emplys hav many xpnss. Ths inclu fral incm tax, stat incm tax, city incm tax, Scial Scurity tax, Micar tax, isability insuranc fs, pnsin plan cntributins, ntal insuranc fs, an mical insuranc fs. Ths xpnss can a t thusans f llars ach yar. Rathr than having mplys pay ths csts in a singl yarly paymnt, thy ar istribut thrughut th yar. Amunts ar uct, r subtract, frm th mply s grss pay, r ttal pay. Th amunt f mny that th mply taks hm is th nt pay, r tak-hm pay. With ach paychck n a pay stub, r pay slip, mplys rciv a listing f thir wags an what amunts wr uct. Ths uctins ar bas n infrmatin that mplys submit t thir mplyrs. Th uctins fr tax withhlings ar bas n infrmatin that mplys submit n Frm W-4, Emplys Withhling Allwanc rtificat. Th mplyr withhls th uctins an sns th amunt t th apprpriat gvrnmnt r privat agncy. Fral, stat, an lcal incm taxs ar withhling taxs sinc mplyrs withhl ths taxs an sn thm t th gvrnmnt. Scial Scurity an Micar paymnts ar als withhl an snt t th gvrnmnt. At th n f th yar, an mplyr cmpils a list f ach mply s uctins. This infrmatin is usually n th last pay stub f th yar. Th withhling ata is put n Frm W-2, Wag an Tax Statmnt, which must b givn t mplys by th n f January. This infrmatin is us t cmput fral, stat, an lcal incm taxs. Whn filing yur incm tax frms, yu must submit a cpy f yur W-2. Nt all incm cms frm wags, salaris, an tips. Ppl mak mny frm intrst n bank accunts, intrst frm stcks, ryaltis, an mr. Ths typs f incm ar nt wags. It is up t taxpayrs t rprt this incm n thir yarly tax frms. Rathr than gtting a W-2 frm frm ths surcs, taxpayrs ar snt a Frm Ths amunts ar rprt t th gvrnmnt as wll as th taxpayr. 344 haptr 7 Incm Taxs 49657_07_ch07_p in 344 3/15/11 2:55 PM

20 Skills an Stratgis Hr yu will larn hw t mak calculatins bas n raing pay stubs, W-2, an 1099 frms. EXAMPLE 1 Barbara start a nw jb an wants t vrify that hr nt pay has bn cmput crrctly. Hr grss pay pr pay pri is $ Sh has th fllwing uctins: FIA tax 6.2%, Micar tax 1.45%, fral withhling tax $47.51, stat withhling tax $16.62, rtirmnt insuranc cntributin $9.00, isability insuranc f $2.56, mical insuranc f $12.00, an ntal insuranc f $6.00. What shul hr nt pay b fr this pay pri? SOLUTION First, calculat th Scial Scurity an Micar taxs t th narst cnt by multiplying th grss pay tims th tax rat. Scial Scurity tax = Micar tax = A all f th uctins t trmin th ttal uctins = Subtract uctins frm grss pay = Th nt pay is $ HEK YOUR What prcntag f Barbara s grss pay fr this pay pri accunts fr all f hr uctins? Run t th narst tnth f a prcnt. TEAH Discuss uctins that ar takn frm yur paychck (fral, stat, an lcal taxs, mical insuranc, unin us). Explain that taxs ar withhl frm salary an snt by th mplyr t th tax agncy. EXAMPLE 1 It is a g practic t priically chck th accuracy f th pay stub. Th rr that th uctins ar ma is irrlvant. Rmin stunts that Micar tax is pai n all incm whil thr is a ciling n th taxabl incm fr Scial Scurity tax. HEK YOUR Answr 42.4% EXAMPLE 2 Th assumptin is ma in this prblm that Lrna will nt rach th Scial Scurity incm limit. EXAMPLE 2 Examin Lrna s biwkly pay stub. Assuming that Lrna s salary an uctins rmain th sam thrughut th calnar yar, hw much will b takn ut f hr ttal annual grss salary fr fral an stat taxs? SOLUTION Lrna rcivs 26 paychcks a yar. Th fral an stat uctins ar cnstant. T fin th ttal amunt cntribut t taxs, multiply th biwkly amunts by 26 an fin th sum f ths uctins. Fral uctin 26 = Fral uctin fr yar 1, = 26, Stat uctin 26 = Stat uctin fr yar EARNINGS PERIOD AMOUNT YTD AMOUNT 3/15-3/28 $4, $32, DEDUTIONS TAX TYPE AMOUNT YTD AMOUNT Scial Scurity $ $1, Micar Fral Tax Stat Tax Family Halth Ins. Rtirmnt $65.67 $ $1, $7, $ $1, ADJUSTMENTS ITEM AMOUNT YTD AMOUNT Unin Dus $61.00 $ $67.55 $ $50.00 $ = 7, A th fral an stat uctins. 26, , = 33, Th ttal uctin fr stat an fral taxs fr th yar is $33, Incm Statmnts _07_ch07_p in 345 3/15/11 2:55 PM

21 HEK YOUR Answr Ys; 35.4% f hr annual salary will b uct fr taxs. EXAMPLE 3 This may b th first tim that stunts hav sn a W-2 frm. Bfr bginning this xampl, tak a fw mmnts t rviw th infrmatin that is inclu in this W-2 an iscuss thr ata that cul b inclu as wll. It is a taxpayr s rspnsibility t ithr cmplt tax frms n thir wn r us a tax prparatin agncy t it. It is th mplyr s rspnsibility t giv ach mply a W-2 frm n latr than a spcifi at which can chang frm yar t yar. Th u at is usually th n f January fllwing th tax yar. HEK YOUR Answr apprximatly 70.8% Mak sur that stunts ra this prblm crrctly. Th xrcis is asking fr th prcnt f th incm sh actually taks hm an nt th prcnt that sh is tax. HEK YOUR Emplys can chs t incras thir tax withhling if thy fl that th amunt calculat fr th tax uctins may nt b nugh t mt th ttal tax at th n f th yar. Frm hr past rcrs, Lrna knws that hr ttal tax is usually 30% f hr annual salary. At th rat f uctin shwn n this pay stub, will Lrna s mplyr hav takn nugh ut f ach paychck t mt hr tax bligatin fr th yar? Explain yur answr. Th W-2 Frm Yur prsnal W-2 frm is a yarly accunting f yur tax withhlings. It inclus prsnal infrmatin abut yu as an mply, such as yur nam, arss, an plac f mplymnt, Scial Scurity numbr, taxabl arnings, taxs pai, an mr. If yu wrk mr than n jb uring a tax yar, yu will rciv a W-2 frm frm ach mplyr. EXAMPLE 3 On January 30th, Jann Tscan rciv this W-2 frm frm hr mplyr. Hw much i Jann pay in taxs uring th yar? b Emplyr intificatin numbr (EIN) c Emplyr s nam, arss, an ZIP c ntrl numbr Saf, accurat, OMB N FAST! Us 1 Wags, tips, thr cmpnsatin 7 9 Avanc EI paymnt Emply s first nam an initial Last nam Suff. 11 Nnqualifi plans f Emply s arss an ZIP c a Emply s scial scurity numbr rawfish astl 500 Pcan Parkway lfax, Luisiana Jann S. 3 Dlta Qun Driv lfax, Luisiana Rtirmnt plan Thir-party sick pay Fral incm tax withhl Scial scurity tax withhl Allcat tips 12a S instructins fr bx Stat Emplyr s stat ID numbr 16 Stat wags, tips, tc. 17 Stat incm tax 18 Lcal wags, tips, tc. 19 Lcal incm tax 20 Lcality nam Tscan Statutry mply 14 $76, Scial scurity wags $76, Micar wags an tips Scial scurity tips Othr 4 12b 12c 12 Visit th IRS wbsit at $15, $4, Micar tax withhl Dpnnt car bnfits $76, $5, $76, $1, SOLUTION In this W-2 frm, th Fral incm tax withhl is list in Bx 2. Th stat tax is list in Bx 17, an th lcal incm tax is list in Bx 19. Th ttal amunt that Jann pai that yar in taxs is th sum f th amunts in ths thr bxs. 15, , ,092 = 22, Jann s ttal amunt pai in taxs fr th yar is $22, HEK YOUR What prcnt f Jann s grss incm i sh actually tak hm? 346 haptr 7 Incm Taxs 49657_07_ch07_p in 346 3/15/11 2:55 PM

22 EXAMPLE 4 Amy Springfil wrks fr Pun Rig Financial Plannrs. Hr mplyr uss an lctrnic W-2 frm as shwn at th right. What accunts fr th iffrnc btwn hr wags list in Bx 1 an hr Scial Scurity an Micar wags list in Bxs 3 an 5? SOLUTION Thr is a $13,200 iffrnc btwn th amunt in Bx 1, $78,900, an th amunt list in bth Bxs 3 an 5, $92,100. Bth ar b Emplyr intificatin numbr (EIN) c Emplyr s nam, arss, an ZIP c ntrl numbr arn wags, but thy rflct iffrnt incm amunts us fr th calculatin f Amy s taxs. Th 6.2% Scial Scurity tax an th 1.45% Micar tax wr calculat n $92,100, hr ttal incm. Amy ma tax-frr cntributins t hr rtirmnt plan. Th $12,200, shwn in Bx 12a, was uct frm hr grss arnings bfr any fral r stat taxs wr calculat. Th mny is bing plac in a qualifi rtirmnt accunt; thrfr, taxs n this mny ar frr until Amy maks a withrawal frm th accunt aftr sh rtirs. Th tax-frr cntributin t Amy s rtirmnt fun nly accunts fr part f th iffrnc. Thr is still $1,000 that must b intifi. Bx 14 lists af125 $1,000. Sctin 125 f th U.S. Tax utlins a caftria plan in which mplys can hl back a prtin f thir pr-tax wags fr th paymnt f crtain mical, chilcar, parntal car, an nnrimburs mical insuranc xpnss. Th caftria plan is a typ f flxibl spning accunt (FSA). This is an mplyr-spnsr plan in which mplys chs t psit funs that will b us fr th sl purpss utlin abv an nly in th spcifi 12-mnth pri f tim. This is a us it r ls it plan. If all f th mny in th plan is nt spnt by th n f th 12-mnth pri, th mny cannt rturn t th mply. Bx 14 inicats that Amy psit $1,000 int this accunt. Th sum f th tax-frr cntributin an th FSA psit accunts fr th iffrnc in wag ttals. Saf, accurat, OMB N FAST! Us 1 Wags, tips, thr cmpnsatin 7 9 Avanc EI paymnt Emply s first nam an initial Last nam Suff. 11 Nnqualifi plans f Emply s arss an ZIP c a Emply s scial scurity numbr Pun Rig Financial Plannrs 2000 Hazlw Lan Rivral, Nw Yrk Amy 8 ughlin Driv Rigw, NY Rtirmnt plan Thir-party sick pay Fral incm tax withhl Scial scurity tax withhl Allcat tips 12a S instructins fr bx Stat Emplyr s stat ID numbr 16 Stat wags, tips, tc. 17 Stat incm tax 18 Lcal wags, tips, tc. 19 Lcal incm tax 20 Lcality nam Springfil Statutry mply $78, $5, $78, Scial scurity wags $92, Micar wags an tips $92, Scial scurity tips X 14 Othr caf125 $1, b 12c 12 Visit th IRS wbsit at $15, $5, Micar tax withhl $1, Dpnnt car bnfits E $12, EXAMPLE 4 Th fact that this is an lctrnic W-2 frm has n baring n th infrmatin r th calculatins. It is just an altrnativ way that an mplyr can prvi th infrmatin t th mply. This xampl iscusss tax-frr cntributins. Mak sur that stunts unrstan th maning f th wr frr. Th cntributins ma t any tax-frr plan will b tax at sm pint in th futur (usually aftr rtirmnt) but at a iffrnt rat. HEK YOUR Answr $3,564 This prblm can b slv in mr than n way. Onc stunts hav a slutin, ncurag thm t fin an altrnativ mth. HEK YOUR Amy pays 20% fral tax an 7% stat tax. Hw much i sh sav in taxs by putting mny in hr tax frr an flxibl spning accunts? 7-3 Incm Statmnts _07_ch07_p in 347 3/15/11 2:55 PM

23 1099 Frm Anthr typ f incm statmnt is th Intrnal Rvnu Srvic s Frm This frm is us t rprt iffrnt typs f incm thr than wags, salaris, an tips such as bank intrst, ryaltis, cntract wrk, an s n. Diffrnt 1099 frms ar us pning upn th incm typ. An xampl f a 1099 frm is shwn hr fr a taxpayr wh maks ryaltis frm th sal f a bk that h wrt. Unlik th wags rprt n th W-2 frm, 1099 incm has yt t b tax. It will b a t th mply s ttal incm an us in th calculatin f taxs whn filling ut th incm tax rturn. ORRETED (if chck) PAYER S nam, strt arss, city, stat, ZIP c, an tlphn n. 1 Rnts OMB N Nrth-Eastrn Publishing Suth Strt incinnati, Ohi PAYER S fral intificatin numbr REIPIENT S nam Avi Eamn PO Bx REIPIENT S intificatin numbr $ 2 Ryaltis 11 5, $ 3 Othr incm 5 Fishing bat prcs 6 Mical an halth car paymnts $ $ 7 Nnmply cmpnsatin 8 Avi must rprt this ryalty amunt as incm whn filling ut hr incm tax frms. All f th IRS frms an instructin bklts can b accss n th Intrnal Rvnu wbsit at $ 12 Substitut paymnts in liu f ivins r intrst $ $ Strt arss (incluing apt. n.) 9 Payr ma irct sals f 10 rp insuranc prcs ity, stat, an ZIP c Dlphia, KY Accunt numbr (s instructins) 15a Sctin 409A frrals $ Frm 1099-MIS 15b Sctin 409A incm $ 13 $ $ Excss gln parachut 14 Grss prcs pai t paymnts an attrny $ $ 16 Stat tax withhl 17 Stat/Payr s stat n. $ $ $5,000 r mr f cnsumr pructs t a buyr (rcipint) fr rsal Frm 1099-MIS 4 Fral incm tax withhl Miscllanus Incm 18 Stat incm $ $ py B Fr Rcipint This is imprtant tax infrmatin an is bing furnish t th Intrnal Rvnu Srvic. If yu ar rquir t fil a rturn, a nglignc pnalty r thr sanctin may b imps n yu if this incm is taxabl an th IRS trmins that it has nt bn rprt. WAKILA/ISTOKPHOTO.OM 348 haptr 7 Incm Taxs 49657_07_ch07_p in 348 3/15/11 2:55 PM