Welcome to Basic Income Tax.
This is Accounting 109.
So this is Basic Income Tax, and this is the introduction section, and I am Lisa Cole,
and I will be your instructor over the next 14 programs.
We have 15 programs total, including this one.
Today what I would like to do is do an introduction, kind of introduce myself, go over the syllabus
and what texts we're going to be using, kind of the format of how the class will run, and
then we're going to get a little bit in Chapter 1.
So I do want to cover some of that today.
At this point, you should have received a syllabus from me.
If you have not, it's in the mail, it's on the way.
Send me an e-mail and let me know.
On the syllabus, it will have my e-mail, my telephone number, my office, and also my particular
office hours for whatever semester you're taking the class.
The text that we're going to be using is the Income Tax Fundamentals, so you should make
sure you have the 2009 edition.
If you're taking this in the spring of '09, or also if you're taking it in the fall of
'09, we'll be using the 2009 edition, so make sure you have the correct textbook.
Let's just kind of go over a little bit of the syllabus and what's on the syllabus.
You'll have some course objectives.
This is a Basic Income Tax class.
And on campus I teach a federal income tax class in which we cover more material, so
this is a one-credit Basic Income Tax class.
So we're going to be covering the basics.
My goal is that when you complete this class, you should be able to do a basic tax return,
and we'll go over what that means.
Basic versus one that's a little bit more complicated.
So we want to make sure you understand the individual tax model.
We want to make sure you understand what is gross income and what deductions that you
can take from gross income, and then we're going to look at how to calculate tax, how
do we get to our tax.
So we're going to look at the tax formula, we're going to look at tax tables, who can
I claim on my tax return, exemptions.
We're going to look at our Schedule A deductions, you know, can I take my interest on my home.
So we'll look at all those type of items, what's included in gross income, do I have
to include babysitting money if I babysit for someone.
So we're going to look at all those little details, what's included in our gross income
and then what can I take as a deduction.
If I have to go on a trip or do something for my job as an employee, can I take that
as a deduction?
So we're going to be looking at those items and then, finally, how do I calculate tax,
what tax credits, and then how do I pay tax, you know, how do I make my payment.
So we'll be looking at those items.
Also in your syllabus you should have the course requirements.
You will have three multiple choice exams that should be in your packet that you received
with my syllabus.
You will also have to do a final tax return.
That information is also in the packet.
And then a couple of homework assignments, which will consist of multiple choice questions
at the end of the chapter, which should also be in your packet.
So your packet is full of information.
It's full of the syllabus, it's full of the outlines.
As I lecture and go over materials, I'll be filling out chapter outlines.
You should have that.
It should be full of PowerPoints, the PowerPoints that I use from time to time, that's in your
packet.
And then also your exams are in your packet, along with your schedule of the programs that
we'll be covering.
So the withdrawal policy is in there, and then as I said before, the schedule that we'll
be covering over the next couple of programs is also in there, okay.
Make sure that if, as we go through, if you have questions or concerns or issues, that
you send me an e-mail immediately so that I can address them.
You also will have due dates.
You should have due dates on your schedules of when the first test is due, when do I need
to turn in Chapter 1 multiple choice questions, all that's in your packet and part of your
syllabus.
So make sure that you just take some time and go through that information so that you'll
understand what's due and when it's due, okay.
I wanted to, like I said, introduce myself.
I'm Lisa Cole.
This is my seventh year at Johnson County Community College teaching full-time.
Prior to teaching here full-time, I've taught at Park University prior to this.
Also I was the ticket operations accountant for the Kansas City Royals.
I also worked for the Internal Revenue Service as an auditor, and I also worked for Arthur
Andersen, when there was an Arthur Andersen, in the tax division.
So I've had a number of years of teaching experience, along with a number of years of
tax experience and other accounting experience, so just to give you a little background on
my history, okay.
Also with your textbook you should receive inside the inside cover is a disc for Tax
Cut.
Tax Cut is H&R Block's tax preparation software.
So that comes with the book, which is a great asset because you can load it on your computer.
It also comes with a state return.
We do not have time in this class to go over the details of how to work through that software,
but that software is for you to keep, and you are welcome when it's time to do your
final tax return, you're welcome to do it using that software.
So it is definitely a great asset, and so make sure you load that and begin to explore
it.
You learn to use it by just exploring it.
It doesn't come with any specific instructions.
You can get some instructions online.
But just spend some time working through the forms and going through the process, okay.
What we will cover in class is the preparation of the 2008 tax return.
So everything that we cover is going to be related to your 2008 tax return, so everything
that happened last year financially.
Okay.
So that's all the introduction I have.
I believe I covered the syllabus.
You will be submitting your work to me via e-mail.
You can mail it or you can bring it by my office, so you understand how to turn in assignments
and when they're due.
You know what textbook you should have, and at that point, I think we've covered everything
regarding the introduction.
So what I want to do is just get started and cover the first couple of pages of Chapter
1.
So if you have your book, and you should, let's begin to look at Chapter 1.
Chapter 1 deals with just the introduction and the individual income tax return, which
is our main focus, is we're going to be looking at the individual income tax return in this
class.
Okay.
It starts off talking about the history and the purpose or the objectives of the tax system.
The 16th Amendment of the Constitution that was signed or authorized on March 1st of 1913,
they authorized the tax system, the income tax, the ability to prepare a tax return in
the United States to collect tax.
So it was 1913.
So it's been a long time that we've been -- we've had a tax system.
Most believe it is just to pay for the benefits of the government, but it's not.
It's not just to raise revenue for government; it's also for social and economic policies.
Social meaning, for instance, a couple examples that they give you, and they give these to
you on Page 1-2 in your book is the social part is that they give you a deduction for
making contributions.
So if I make contributions to a charitable organization, I can get a deduction.
So they are trying to encourage you to contribute so you can get a deduction.
Also, there's an earned income credit, which we'll briefly talk about, to where low income,
people within certain ranges of income can get an additional credit, which is called
the earned income credit, and it helps increase their refund.
Child and dependent care credit; if I pay for child care, then I can get a credit for
my child care, and so, therefore, encouraging people to pay for child care.
So those are considered social reasons or social policies.
The other could be economic policies.
For instance, if I own a business, I can depreciate certain assets in my business and get a deduction
for that.
If I hire certain classes or certain type of workers, I can get a credit perhaps for
a workforce development credit.
There's different types of credit and things that their motive is to spur the economy.
When -- if you look on Page 1-2 under the New Law Alert, they talk about what happened
when we had Katrina.
That disaster caused Congress to come up with a lot of credits and deductions for economic
purposes.
You could get a credit to help the rebuilding process, a credit in the area of helping to
start new businesses or to encourage -- to develop the workforce down there.
So a lot of times when there are issues or economic issues, then it encourages different
tax credits.
So our tax law is not just to raise revenue.
It also is there to encourage social and economic policies.
Okay.
So let's look at Section 1.2, reporting and your taxable entities, okay.
We have five taxable entities, or entities that report directly to the Internal Revenue
Service.
We have individuals, and that's us, and we're going to be looking at the 1040s as we do
that, and that's our main focus.
But we also have our corporations.
Our corporations file tax returns, and they are 1120s.
And they file tax returns with the Internal Revenue Service and they pay tax.
So they pay tax as an entity, the corporations do.
Partnerships file a return, they file a 1065, but they don't pay tax to the IRS.
Partnerships file an information return, and then the partners take their share of their
income and put it on their tax return and then, therefore, they, the partners, pay tax.
So the partnership itself is not a tax paying entity.
And then also estates and trusts also file a tax return.
So we have individuals, corporations, partnerships, and estates and trusts all that pay -- that
file a tax return and pay directly to the IRS.
Okay.
And so on Page 1.
-- 1-5, the main section that I want to cover today is to look at your tax formula.
How does it get down to the point of when I do a tax return that I owe versus a refund?
That's so important to people.
I do tax returns, I volunteer to do tax returns, and sometimes people don't understand, well,
why do I owe, you know.
Or why didn't I get a refund?
I got a refund last year.
What makes up this formula that comes down to the fact that I get a refund versus owing
at the end of the year?
So we're going to look at the tax formula and look at what happens as we -- as individuals
-- because that's our focus is looking at individuals this year.
So what is the -- how does it get down to me owing, you know, what happens that makes
me owe versus getting a refund.
I would prefer to get a refund, okay.
So the first thing we want to do is what happens as we work?
As we work, we pay the IRS in the form of withholdings, okay.
So as you work and you get paid, the IRS withholds a portion of your income and they keep it.
They keep it for tax purposes.
And so the IRS does not want me as an employee to say, oh, I'll just wait and I'll pay you
everything I owe you at the end of the year.
They have a pay-as-you-go program.
So that's withholdings.
So when you get your paycheck, every time, you give a little bit to the IRS, along with
the State, along with, if you live or work in Kansas City, Kansas City earnings.
And so we know that.
So that's what's happening, our federal withholdings is going directly to the Internal Revenue
Service on our behalf.
So as we work, we -- what we do is all our -- a portion of our income is withheld by
the IRS, withheld by our job, and they send it in to the IRS.
So then what we do at the end of the year, we say, okay, how much income did I make this
year?
What is my gross income?
And so, therefore, that is the starting point for our tax formula that is on Page 1.5 and
that we're going to look at here.
So I want to blow this up a little bit so you can see this.
Okay.
So let's look at our tax formula.
So, remember, we are at the point of gross income, and that's the starting point.
And we will begin a chapter and look at our gross income.
But that's our starting point.
The basic for the IRS says that all your income is considered or included in your gross income.
They want you to put it all in there, okay.
That's our starting point.
And then what they may allow you to do is have some deductions, okay.
They're going to let you deduct some things or make some adjustments to your gross income,
okay.
And so gross income being the starting point, then we have less what we call adjustments
to income.
Okay.
So we start off with our gross income and then we deduct from that what we call our
adjustments.
We get to make some adjustments to our income and we'll look at that.
And that gets us to what we call our adjusted gross income.
Okay.
So that gets us to our adjusted gross income, which we label as our AGI.
So that will get us to our adjusted gross income.
So basically we have our gross income.
They say, okay, you can make a few adjustments, so we can reduce that gross income by some
adjustments that they may give us, okay.
And we get down to our adjusted gross income at that point.
Okay.
And so next we get to -- blow that up just a little bit more.
Okay.
So next we get to have a deduction from our adjusted gross income.
We have what we call a standard deduction.
This deduction is a deduction given to you by the IRS.
And it's based on your filing status, which we will look at.
It's the standard deduction.
If I'm single it's a certain amount, if I'm married filing jointly it's a certain amount,
or if I'm head of household, and we'll look at all that in detail.
And then we also have the possibility of taking what we call itemized deductions, taking what
we call itemized deductions, and they appear on Schedule A.
You may hear them called Schedule A deductions or people may say they filed a long form,
okay.
You hear that a lot, too.
So what you do is you say, okay, these are my itemized deductions and that's like your
-- your charitable deductions, your medical deductions, your mortgage on your house, your
tax, personal property tax, and we'll look at that.
So you look at your itemized deductions and then you're going to compare it to the deduction
that the government gives you, that the IRS gives you, and you're going to take the greater
of these two, okay.
So if my standard deduction is higher, then I'm going to take it.
But if the itemized deduction is higher, I'm going to take it.
So you take the greater of the two, and then you also subtract from that your exemptions.
And this represents you get a deduction for the individuals or the dependents that you
claim on your tax return, you get a deduction for yourself, if you're married you get a
deduction for your spouse.
If you claim children, you get a deduction for them.
So those are considered your exemptions, okay.
And that gets us to our taxable income.
Okay.
So as I said, we started off with our gross income, we've already took some adjustments
out of it, and then we're going to take either the standard deduction from that or we're
going to take our itemized deduction, and then they say, okay, you can take out a little
bit for your exemptions, okay.
And then that gets you to your taxable income, okay.
That gets you to your taxable income.
And that represents the amount of income that you earned that is taxable to you, meaning
that I'm going to pay tax on.
It's not the gross, it's not what you started off with, but it's after I get to take all
these things out and I get a deduction for this.
It gets down to, oh, this is what I owe in tax or this is the amount of my income that
is going to be taxable to me.
So you get down to your taxable income, and then from that taxable income, you determine
your tax, okay.
So I'm at my taxable income and there's two ways in which I can determine what my tax
is.
I'm going to look at a tax rate schedule, okay, or I'm going to look at a tax table.
And we will go over that in detail.
One of the two I'm going to look at my taxable income number, let's say it's 10,000.
I'm going to go to the tax table and say, okay, I'm single, my taxable income is 10,000,
ah, this is my tax.
Then that represents the tax that I owe to the IRS.
That's going to represent my tax.
Okay.
Then I take my tax number and then I get some tax credits from it.
I mentioned a tax credit already, child care credit.
That's a credit, it reduces my tax.
Some things are a deduction, deducted from my taxable income.
Some things are a credit, it reduces my tax.
Okay.
So I'm going to subtract that from my tax and then also on the flip side of it we could
have some additional taxes.
If I take money out of my retirement before I'm 69 and a half, I may have to pay an additional
tax, okay.
So you have tax credits that reduce our taxes and then we have additional taxes that increase
our taxes, okay.
So then once we do that, that gets us down to our tax due, the actual amount that I owe
the IRS, okay.
That gets me down to the actual amount that I owe IRS.
So let's say I've done all these calculations and I get down to my tax due was $5,000.
My tax due was $5,000.
So I owe the IRS $5,000.
Okay.
But don't forget about my jar here.
Remember, as I was working, I was paying the IRS, so they already have some of my money.
So the question is, do I have $5,000 paid in?
Or do I not?
Okay.
And that's going to determine if I need to pay more to get to my $5,000 or if the IRS
owes me, okay.
So that jar that -- or that money that I've been paying into the IRS, that represents
what we call our withholding.
And so that's what the IRS already has.
So I'm going to take my $5,000 and then I'm going to deduct from that the withholding,
okay, the amount that I've already paid in.
Also, I can deduct from that payments that I made directly to the IRS, maybe not through
withholding, but directly to the IRS, and these are maybe quarterly estimated payments
that I may make, okay.
And so a lot of times people do that, self-employed people who don't have an employer taking that
money out, they pay quarterly estimated payments, so every three months they make a payment
into the IRS to make sure that they have that jar of money.
So that jar of money either comes from your employer, through your paycheck, or if you're
self-employed you're making it in directly to them.
And then some of us, as employees we also can make estimated payments, if I don't think
I'm going to have enough paid in, then because there's penalties, and we'll look at that
for not having enough paid in, okay.
And so I'm going to -- now I have my tax due of 5,000.
I look at my withholdings, and let's say that when I look at the withholding I had $7,000
withheld or paid in.
So, therefore, the IRS owes me that $2,000 difference back.
They don't get to keep it.
I can tell them to keep it and apply it to next year or I can ask for it as a refund.
And so, therefore, that would be a refund.
The flip side of it is that what if I had 5,000 that was due and I only had 4,000 paid
in?
Therefore, I would owe $1,000, and that would be my -- considered my balance due.
So that's how you get down to the fact of do I owe or do I get a refund.
That's confusing to people.
It's how much did I have paid in?
How, you know, did I -- how many deductions did I get a chance to take?
So we start off with our gross income, we get deductions, we get credits, we get down
to taxable income, we figure out our tax, and then we compare that to our withholding,
our payments that we've paid in to the IRS.
So that represents your tax formula that was covered on Page 1-5 in your textbook, okay.
And so I do want to stop there for our first session, but what you need to do is begin
to read through Chapter 1.
At the end of Chapter 1, the multiple choice questions are going to be due, so I would
advise you just to begin to read through those and as I go over Chapter 1 it will help you
be prepared to answer those multiple choice questions.
Also, you already have your Exam 1.
And you can begin to read through those questions, and then as we cover Chapter 1, you should
be able to answer the questions on your exam that are based on Chapter 1, okay.
So the way our class will continue to go is that I will cover the materials, I will do
problems to help you understand it, I will try to do illustrations to make it clear to
you how everything works, but the goal is, is that when you are completed with this class,
you should be able to prepare a basic tax return, which will start with gross income.
We will go over the adjustments to gross income to get to your adjusted gross income.
We use that number a lot.
We will look at our itemized deductions.
We will learn what the standard deductions are.
And then we will go over who can we take or claim on our tax return and which we can get
an exemption for.
We will look at how to calculate tax using the tax rate schedules and the tax table.
Then we will look at some tax credits.
We will look at what may cause us to have some additional taxes.
And we will briefly look at the payments, how do I make those quarterly payments and
withholding.
So we will be able to in this one-credit Basic Income Tax class -- keep in mind there's a
federal income tax class that goes into rental and some other depreciation and some other
things that we don't cover in this class.
So this is the end of program one and the introduction.
Look forward to the next session when we will be looking at who do we claim on our tax return,
and the filing status, how do I file.
Can I file single?
If I'm married do I file married filing jointly?
If I'm not married but have any children, do I file single or do I have a head of household
status?
So we will be covering those items in the next program.
That's it.
(Music.)