Lesson 3: Understanding Income
LESSON 3: UNDERSTANDING INCOME (PART 1)
Students will analyze pay stubs to observe how personal choices influence tax burden
Social Studies: Students will analyze and explain ideas and governmental mechanisms to meet needs and wants of citizens, regulate territory, manage conflict, and establish order and security.
Math: Students will use observations about differences between two or more samples to make conjectures about the populations from which the samples were taken. They will also explain all items commonly withheld from gross pay.
Language Arts: Students will employ a wide range of strategies as they write.
Click here for a comprehensive curriculum matrix.
Getting Started (15 minutes):
1. Separate students into pairs and redistribute all student worksheets.
2. Draw students' attention to the Work section on Life and Work Choices Student Worksheet 1. Explain: These benefits are tax deductions. The cost for each of these items will be subtracted from your salary to reduce your taxable income. Show how this works by creating a flowchart on the board using examples from Life and Work Choices Student Worksheet 1.
3. Ask: Employee benefits such as health care, life insurance, and retirement plans are a desirable part of many professional jobs. They provide a valuable life service and can reduce your taxable income. But are there any reasons that you might decline employee benefits? (You may have a spouse who works and whose job already covers your health care, etc.)
4. Ask: Your pay is not simply your salary minus your employee benefits. What else is taken out of your paycheck? (federal, state, and local taxes)
5. Explain that a percentage of every paycheck is withheld (kept back) by your employer to prepay federal, state, and local taxes. The employer sends this money directly to the government. At the end of the year, all employees receive a W-2 form from their employer that shows exactly how much they have already paid in taxes. People use this number to complete their tax forms in April and determine if they owe additional money, or if they are due a refund. This prepayment is another form of voluntary compliance because people decide for themselves how much to prepay.
6. Explain that the amount that you take home after taxes and benefits are subtracted is called your take-home pay. Review the voluntary compliance Process of Taxes chart here to show how paycheck withholdings are an aspect of voluntary compliance.
7. Review the basic concept of taxes including the following facts:
a. Taxes are: money that people are responsible for paying to the state, federal, and/or local government. There are different kinds of taxes including income tax, property tax, and sales tax.
b. Taxes are used to pay for federal, state, and local expenses such as roads, schools, the military, and social programs. The money from taxes enables the government to support federal programs and balance the budget.
c. Everyone who earns money in the United States must pay income taxes, regardless of citizenship.
Using the Student Worksheet (10 minutes):
8. Distribute one copy of Understanding Pay Stubs Student Worksheet 2 to each pair of students. Review the instructions as a class, and direct each pair to complete the worksheet.
9. Review the answers to the questions as a class. Explain that people who are married and have children pay less in taxes, although they often pay more in benefits. Explain that in the next class, students will see how the life choices they made on Life and Work Choices Student Worksheet 1 also affect their income.
Wrap-up (10 minutes):
10. Discuss the importance of balancing what's in your paycheck with reducing your taxable income (the amount of income that you pay taxes on). Explain that this is a personal choice each person must make and is an example of how our tax system is based on individual choices. Each person gets to "make the case" for how much he or she owes in taxes through this voluntary compliance system (freely and voluntarily doing what society expects of you, such as paying taxes, but based on your wants and needs).
11. Ask: What tool would be valuable in figuring out how to balance take-home pay and taxable income? (a budget). What kinds of things could you do to find out how much money you need to live happily? (calculating all current bills, collecting receipts, using a computer, etc.)
12. Collect all student worksheets to use during the next class.
1. Who makes the most money? (They make the same amount of money.)
2. Who has the most federal income tax withheld? (John has more federal income tax withheld.)
3. Who pays more in employee benefits? (Paul)
4. What are the differences between Paul's life and John's? (Paul is married with two children. John is single.)
5. What conclusions can you draw, based on the difference in the amount of taxes each man withholds? (People who are married and/or have children pay less in taxes, even though the cost of their benefits is higher.)
6. On a separate sheet of paper, anticipate how the choices you made on Student Worksheet 1 will affect your tax withholding. (Answers will vary.)
LESSON 3: UNDERSTANDING INCOME (PART 2)
Students will learn the difference between deductions and tax credits
Life and Work Choices Student Worksheet 1, Understanding Pay Stubs Student Worksheet 2, Understanding Deductions and Tax Credits Student Worksheet 3, sample tax table (www.irs.gov/pub/irs-pdf/i1040tt.pdf), pen/pencil
Social Studies: Students will relate personal changes to social and cultural contexts
Math: Students will work flexibly with fractions, decimals, and percents to solve problems. They will also give examples of employee benefits and explain why they are forms of compensation.
Language Arts: Students will apply a wide range of strategies to comprehend, interpret, evaluate, and appreciate texts.
Click here for a comprehensive curriculum matrix.
Before class, print out one copy of the sample tax table at www.irs.gov/pub/irs-pdf/i1040tt.pdf.
Getting Started (15 minutes):
1. Redistribute all student worksheets.
2. Use Life and Work Choices Student Worksheet 1 to create a chart on the board like the one below that shows the salary, cost of benefits, salary minus benefits, and yearly take-home pay of all your students. (The tax responsibility column will be filled in later.)
Annual (yearly) Salary
Cost of Benefits (annual)
Salary - Benefits = ?
Yearly Taxable Income
Tax From Tax Table
$20,000 - $5,000 = $15,000
$35,000 - $5,000 = $30,000
3. Use the sample tax table at www.irs.gov/pub/irs-pdf/i1040tt.pdf and the choices students made about marriage and children to calculate the amount of taxes that each student would owe on their yearly taxable income.
4. Fill in the tax column from the tax table with this information. Discuss the similarities and differences between students' different tax burdens.
5. Tell students that employee benefits are a type of deduction, but there is another way to reduce the amount of taxes that you pay: tax credits.
Using the Student Worksheet (15 minutes):
6. Separate students into pairs and draw their attention to the life section on Life and Work Choices Student Worksheet 1. Explain:
a. These choices may provide you with tax credits. Tax credits do not reduce your taxable income. They reduce your tax bill.
b. A tax credit reduces your actual tax bill. It differs from a tax deduction that reduces only your taxable income.
c. Review the voluntary compliance chart here to find out the timing for yearly taxes and see the two places that taxes are affected by voluntary compliance.
7. Distribute a copy of Understanding Deductions and Tax Credits Student Worksheet 3 to each student. Instruct students to identify the deductions and tax credits that they may be eligible for, based on their responses on Life and Work Choices Student Worksheet 1.
Wrap-up (5 minutes):
8. Collect all student worksheets to use during the next class. Students' answers will vary based on their original answers in Student Worksheet 1, Life and Work Choices. When reviewing student's answers, it is important to reinforce the concepts of "refund" and "balance due" so students understand that when they complete the equation in question #6, the number will either be negative or positive. If the result is a negative number, then you have a tax refund. If the result is a positive number, then there is a balance due.
9. For homework, instruct students to research the answer to the following question for homework: What is the job of the Internal Revenue Service? The answer to this question will be discussed in the next class.