- We have computed thatthe tax on Ramona and Kay's
- We have computed that the tax
on Ramone and Kay's taxable income
taxable income of $59,000 is $6,699.
of 59 thousand dollars is $6699.
Now we will see if they have any tax credits,
And there are a variety of taxcredits that are available.
and there are a variety of tax credits that are available.
Remember that a tax creditis a direct reduction
Remember that a tax credit
is a direct reduction in the amount of tax that Ramone
in the amount of tax thatRamona and Kay must pay.
and Kay must pay. So if they get a 100 Dollar tax credit
So, if they get a $100 tax credit,
the amount of tax that they pay is reduced
the amount of tax they pay is reduced from $6699 to $6599.
from $6,699 to $6,599.
The most common tax credit,and one that is applicable
The most common tax credit,
and one that is applicable to the Ramone and Kay here
to Ramona and Kay here,is the child tax credit.
is the child tax credit.
Remember when Ramona andKay were listing their
Remember when Ramone and kay
were listing their Dependent children?
dependent children?
They said that two of theirchildren, Taraz and Camilla,
they said that two of their children,
Taraz and Kamilla, are less than 17 years old.
are less than 17 years old.
For each one of these children,
Ramone and Kay get a Child Tax Credit
of two thousand Dollars.
For a total child tax credit of $4,000.
For a total child tax credit of four thousand Dollars.
Remember the different between a tax
Remember, the difference between a tax deduction
deduction and a tax credit.
and a tax credit. A tax deduction,
A tax deduction, such as the deduction
such as the deduction for the
for the $8,000 IRA contribution,
eight thousand Dollar IRA contribution,
reduces your taxable income.
reduces your taxable income,
A tax credit directlyreduces the amount of tax
A tax credit directly reduces the amount of tax
that you owe, dollar for dollar.
that you owe Dollar for Dollar.
Now, why does this child tax credit exist?
This tax credit represents societal support for families
for families who are rearing children.
who are rearing children.
This child tax credit is targeted at lower,
lower and middle income families.
and middle income families.
This child tax creditsolely disappears for people
This child tax credit solely disappears for people
with AGI, or adjusted grossincomes above $400,000.
with AGI, or adjusted gross incomes, above $400,000.
Ramona and Kay alsoreceive a $500 tax credit
Ramone and Kay also receive a five hundred dollar tax credit
for their additional dependent, Lilly,
for their additional dependent,
Lilly, who is 17 years old or older.
who is 17 years old or older.
Their total tax credit, $4,500.
Their total tax credit; $4500.
So, the tax Ramona and Kay must pay is not
So the tax Ramone and Kay must pay is not $6699,
$6,699, but instead is only $2,199.
but instead is only $2199.
That's the $6,699 initial amount minus
That's the $6699 initial amount
the $4,500 dollars in child tax credits.
minus the $4500 in child tax credits.
Okay, the final step incompleting this Form 1040,
Okay the final step in completing this form 1040
for Ramona and Kay, is determining whether
for Ramone and Kay is determining
they must pay additional taxwhen they file their tax,
whether they must pay additional tax
when they file their tax,
or whether they get a tax refund.
While we know that they owe tax of $2,199.
Well, we know that they owe tax of $2199.
Some of that has already been withheld
their paychecks by their employers,
from their paychecks by their employers
and was sent into thegovernment on their behalf.
and was sent into the government on their behalf.
This amount, which totals$5,000 for Ramona and Kay,
This amount, which totals five thousand Dollars
for Ramone and Kay, Is reported in their W-2 forms.
is reported in their W-2 forms.
We can see that the news is good,
We can see that the news is good
because if they've already sent in five thousand dollars,
and their total tax is only $2,199,
and their total tax is only $2199,
they are entitled to a refund.
The amount of the refund is $2,801.
The amount of the refund is $2801.
That's the $5,000 they already sent in,
That's the five thousand dollars they already sent in
minus the $2,199, which is their tax.
minus the $2199 which is their tax.
Now, let's address a question you
Now lets address a question you might never have considered;
might never have considered.
Why is this income taxwithheld from my paycheck?
why is this income tax withheld from my paycheck?
Why not just wait and haveme pay the full amount
Why not just wait and have me pay the full amount
when I file my tax return?
Well, this practice startedin the United States in 1943.
Well, this practice started in the United States
in 1943. The US government needed steady tax collections
The US government needed steadytax collections throughout
throughout the year from tax payers
to finance world war two.
Income taxes were withheld from paychecks,
rather than having taxpayers pay all their
rather than have tax payers pay all their tax
tax at the end of the year.
at the end of the year.
Now, a side benefit for the government,
Now, a side benefit for the government
of this system of tax withholding
is that the government gets it's money
is that the government gets its money
before the taxpayer hasa chance to spend it.
before the tax payer has a chance to spend it.
So, Ramona and Kay willget a refund of $2,801.
So Ramone and Kay will get a refund of $2801.
Now, is that good news?
Now, is that good news, or is that bad news?
Or is that bad news?
Well, it's good news and bad news.
The good news is that it'salways good to receive
The good news is that it's always good
to receive an influx of cash.
an influx of cash.
Essentially what has happenedis that Ramona and Kay
Essentially what has happened is that
Ramone and Kay have been forced to save
have been forced to save,
because the federal government,through the employers,
because the federal government,
through the employers,
has withheld too muchmoney from their paychecks.
has withheld too much money from their paychecks.
They have been forced to save $2801.
They can now do somethingspecial with that money.
They can now do something special with that money.
A tax refund is good news and bad news,
A tax refund is good news, and bad news,
but let's focus on the good news.
but lets focus on the good news.
Ramone and Kay are going to get a tax refund of $2801.
There's even better news here.
We know how to complete a Form 1040.
we know how to complete a form 1040.
We are tax pros.