Economy and Income

1.       Begin
by asking:  What usually determines how
much income a person makes?

Student responses will vary greatly, but most will
suggest that income is related to skills or knowledge (education, training,
experience, physical abilities, etc.)

2.       Summarize
the discussion by reviewing factors that affect a person’s ability to earn
income.   Explain that these qualities,
skills and knowledge are called “human capital.”

www.InvestorWords.Com defines “human capital as “The set of skills which an employee acquires
on the job, through training and experience, and which increase that employee's
value in the marketplace.”

3.       Project or distribute copies of Handout
1, “Education Pays.”
From the BLS “Education Pays” web site: http://www.bls.gov/emp/ep_chart_001.htm

Chart:  Education
pays in higher earnings and lower unemployment rates

Note: Data are
2009 annual averages for persons age 25 and over. Earnings are for full-time
wage and salary workers.

Source: Bureau
of Labor Statistics, Current Population Survey.

BLS has some
data on the employment
status of the civilian non-institutional population 25 years and over by
educational attainment, sex, race, and Hispanic origin online.

The Bureau of
the Census also has data on the educational
attainment online.

4.       Review
the data from the graphic.  Point out the
relationships between education level, median weekly income, and unemployment
rates.

If necessary, review these definitions of terms
used in the graphic.

Definitions (from the BLS Glossary):

Educational attainment:  The highest diploma or degree, or level of work towards a diploma or
degree, an individual has completed.

Unemployed persons: Persons aged 16 years and
older who had no employment during the reference week, were available for work,
except for temporary illness, and had made specific efforts to find employment
sometime during the 4-week period ending with the reference week. Persons who
were        waiting to be recalled to a
job from which they had been laid off need not have been looking for work to be
classified as unemployed.

Unemployment rate:  The unemployment rate represents the number unemployed
as a percent of the labor force.

Median wage (income): An occupational
median wage estimate is the boundary between the highest paid 50 percent and
the lowest paid 50 percent of workers in that occupation. Half of the workers
in a given occupation earn more than the median wage, and half the workers earn
less than the median wage.

5.       Ask:  How much more does a high school graduate
make in a year than a high school dropout (median income)?

HS Dropout              $454
per week x 52 weeks = $23,608

HS Diploma              $624
per week x 52 weeks = $32,448

Annual Difference…………...……………………….. $8,840

Calculate how much the difference will add to over
a forty year work life.  For simplicity,
assume that the difference remains constant.

$8,840 x 40 years = $353,600

6.       Ask:
What is a four-year Bachelors Degree worth – compared to a high school diploma?

Bachelor’s Degree     $1,025
per week x 52 weeks = $53,300

HS Diploma                 $624 per week x 52 weeks = $32,448

Annual Difference …….…………………………….... $20,852

Difference over forty years…………………………..$834.080

7.       Ask:
What is the potential value of more education?

Students should be able to generalize the positive
correlation between   educational
attainment and income.

8.       Direct
students to the left side of the graphic, “Unemployment rate in 2009.”

Generally define the unemployment rate.  See the definitions after direction #4.

Ask:  What is
the relationship between educational attainment and unemployment rates?

Point out that as educational attainment level
increases, the groups’ unemployment rate decreases.   A high school drop-out has more than twice
the chance of being unemployed than a person with an Associate Degree
(according to the average unemployment rate for each group).  Even in 2009, in the heart of a serious
recession, people with at least four-year college degrees had relatively low
unemployment rates (2.5 – 5.2 percent).

9.       Ask
students to generalize about the correlation between educational attainment and
unemployment rates.

Students should explain the indirect correlation:
as education increases, potential for unemployment decreases.

10.     Conclude:
Ask students to generalize about the importance of education as illustrated in
the “Education Pays” graphic.

1.         Ask:  What happens when the economy “grows”?

Elicit student ideas about growth – more goods and services,
larger population, higher incomes, etc.

Provide this definition of economic growth:  An increase of per capita gross domestic
product (per capita GDP).

2.         Explain the
basic concepts of per capita GDP

Per capita:  per person (population)

GDP: measure of a
country's overall economic output. It is the market value of all final goods
and services made within the borders of a country in a year.

Per capita GDP:
The nation’s total output divided by the population

3.         Ask: What
happens if a nation’s output (GDP) increases and its population also increases
by the same percentage?

Example:

Population increases 5 percent in one year, 1,000,000 to
1,050,000 (+50,000)

GDP increases 5 percent in 1 year, $1,000,000,000 to $1,050,000,000
(+$50,000,000)

In year 1, the per capita GDP is: $1,000 ($1,000,000,000
divided by 1,000,000)

In year 2, the per capita GDP is: $1,000 ($1,050,000,000
divided by 1,050,000)

If the population and the output grow at the same rate, the
“real” increase is zero.

For there to be real
growth, each individual has to have more output, income or consumption of goods
and services.

4.         Ask: What
happens if the nation’s output increases, but there is inflation?

Generalize that “inflation” (a rise in the price level) does
not crate real growth.

Example:

The nation’s GDP increases from $1,000,000,000 to
$1,050,000,000 ($50,000,000)

The increase in the nation’s GDP is 5 percent.

The nation’s price level (CPI) increases from 100 to 105 – 5
percent.

The nation’s population remains constant (no change).

Real GDP and per capita GDP remain the same after adjusting
for inflation – the 5% price rise)

Summarize:  “Real”
growth must be greater than the rate of inflation for people to have more
purchasing power, and output of goods and services.

5.         Go to the
Bureau of Economic Analysis web page: www.bea.gov.

Briefly introduce the Bureau of Economic Analysis: http://www.bea.gov/about/mission.htm

Briefly review the types of data available from the BEA: http://www.bea.gov/newsreleases/rels.htm

6.  Go to the most
recent BEA news release on real GDP growth. 
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Review the news release and define the key terms.

Gross domestic
product (GDP).  The market value of
goods and services produced by labor and property in the United States,
regardless of nationality; GDP replaced gross national product (GNP) as the
primary measure of U.S. production in 1991.

Real: adjusted
for inflation.

Q1, Q2, Q3 or Q4:  Designation for the first quarter
(January-March) of the year. The year is divided into four quarters.  GDP is reported quarterly.   Each quarterly GDP estimate are made (and
revised) three times over a three month period. For example:  The results for Q1 (January-March) are
announced in the following April, May and June.

7.         For classroom lessons on real GDP growth,
go to www.EconEdLink.org.   Search the grade 9-12 lessons for “Focus on
Economic Data: Real GDP Growth.”   The
“Focus on Economic Data” lessons are published monthly from September through
May, each school year.

8.         To compare
the gross domestic products, real GDPs, and per capita GDPs of different
countries, go to the CIA World Factbook, “Guide to Country Comparisons.”: https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html

The CIA data is adjusted to “purchasing power parity” or PPP.  PPP means that the purchasing power of
different currencies is equalized for a given basket of goods.  The CIA figures are stated in U.S. dollars.

1.         Ask: What is
inflation?  Student responses will vary,
but generally will be something about higher prices. 

2.         Generalize
this BLS definition of inflation: “a process of continuously rising prices, or
equivalently, of a continuously falling value of money.

Clarify:  “continuously rising prices” (most or
all prices, not just individual prices) over some period of time.

Clarify:  “falling value of money” or your income
does not purchase as many goods and services.

3.         Ask:  What does it mean to you when your income
cannot purchase as many goods and services?

Generalize about “standard of living” or the amount of wants
you can satisfy with your income. 
Inflation reduces your ability to satisfy your wants.

4.         Go to the
Bureau of Labor Statistics web page on Consumer Price Index, http://www.bls.gov/cpi/.

Review the basic definitions of consumer prices, items 1-9,
“CPI FAQs, http://www.bls.gov/cpi/cpifaq.htm

The Consumer Price
Index (CPI) is a measure of the average change over time in the prices paid
by urban consumers for a market basket of consumer goods and services.

The CPI represents
all goods and services purchased for consumption by the reference population (U
or W) BLS has classified all expenditure items into more than 200 categories,
arranged into eight major groups. Major groups and examples of categories in
each are as follows:

•  FOOD AND BEVERAGES (breakfast
cereal, milk, coffee, chicken, wine, full service meals, snacks)

•  HOUSING (rent of
primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

•  APPAREL (men's
shirts and sweaters, women's dresses, jewelry)

•  TRANSPORTATION (new
vehicles, airline fares, gasoline, motor vehicle insurance)

•  MEDICAL CARE
(prescription drugs and medical supplies, physicians' services, eyeglasses and
eye care, hospital services)

•  RECREATION
(televisions, toys, pets and pet products, sports equipment, admissions);

•  EDUCATION AND
COMMUNICATION (college tuition, postage, telephone services, computer software
and accessories);

•  OTHER GOODS AND
SERVICES (tobacco and smoking products, haircuts and other personal services,
funeral expenses).

Also included within these major groups are various
government-charged user fees, such as water and sewerage charges, auto
registration fees, and vehicle tolls. In addition, the CPI includes taxes (such
as sales and excise taxes) that are directly associated with the prices of
specific goods and services. However, the CPI excludes taxes (such as income
and Social Security taxes) not directly associated with the purchase of
consumer goods and services.

The CPI does not include investment items, such as stocks,
bonds, real estate, and life insurance. (These items relate to savings and not
to day-to-day consumption expenses.)

NOTE: For more
background information, go to Chapter 17, “Consumer Price Index,” BLS
Handbook of Methods, http://www.bls.gov/opub/hom/pdf/homch17.pdf.

5.   Explain that the
actual level of the CPI is important over time, but the important factor for
consumers is the short-term change in the price level.

Explain how the change (increase or decrease) in the CPI is
determined:

Use this example:

1.         What is the
measurement of the current CPI (market basket)?          250

2.         What was the previous month’s CPI?                                                     240

3.         What was the
monthly increase (decrease)?                                           10

4.         Divide the
change by the previous month CPI.                                    
.04

The change in the CPI from month 1 to month 2 is .04
percent.  This can be “annualized” by
multiplying by 12 (for generalization purposes only.)

.04 x 12 months = 8 percent (annualized rate)

6.         For lessons
on the consumer price index, go to www.EconEdLink.org.   Sort for grade 9-12 lessons on “Focus on
Economic Data: Consumer Price Index.”

The Focus on Economic Data lessons on the consumer price
index are published monthly, September through May. 

NOTE: BLS CPI data is released monthly, on the second Friday of each
month.  http://www.bls.gov/news.release/cpi.nr0.htm

7.         Summarize
the importance of measuring the CPI, according to the BLS:

“The CPI is the most widely used measure of inflation and is
sometimes viewed as an indicator of the effectiveness of government economic
policy. It provides information about price changes in the Nation's economy to
government, business, labor, and private citizens and is used by them as a
guide to making economic decisions. In addition, the President, Congress, and
the Federal Reserve Board use trends in the CPI to aid in formulating fiscal
and monetary policies.”

“An interesting example is the use of the CPI as a deflator
of the value of the consumer's dollar to find its purchasing power. The
purchasing power of the consumer's dollar measures the change in the value to
the consumer of goods and services that a dollar will buy at different dates.
In other words, as prices increase, the purchasing power of the consumer's
dollar declines.

Discuss generally how understanding price level changes can
benefit economic decision-making.

8.  Review the recent history of the CPI, http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_num...

Discuss how price level changes may be irregular form month to month, dependant on a variety of factors.

One key factor is changes in energy prices (primarily oil), which are generally more volatile - changing more radically from month to month.  Note that some economists look at the "core" CPI, which does not include the more volatile energy and food prices.

BLS information about the core CPI:  http://www.bls.gov/cpi/cpiqa.htm#Question_1.  See questions 1-3.

1.         Ask: What
does it mean to be unemployed?

Elicit students opinions. 
Most will simply say “someone who is not working.” Explain that it is
not as simple as “not working.”

2.         Go to the
Bureau of labor Statistics web resource, “How the Government Measures
Unemployment,” http://www.bls.gov/cps/cps_htgm.htm.

Review items 1-6 on the web page.   This information provides a quick
introduction to the basic concepts of employment and unemployment data.

Use the examples of Elizabeth
Lloyd, Steve Hogan, and Linda Coleman (What
are the basic concepts of employment and unemployment?)  to check for understanding of the primary
classifications: employed, unemployed and not in the labor force.

3.  Go to the most
recent BLS “Employment Situation” announcement: http://www.bls.gov/news.release/empsit.nr0.htm.   Review the most recent U.S. employment and
unemployment data. 

•  Identify the
current level of employment and recent change. http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS12000000&output_view=net_1mth

•  Identify the
current unemployment rate and recent changes. 
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000

NOTE: The BLS releases national employment data on the first or second
Friday of each month at 8:30 am.

For classroom lessons on employment and unemployment data,
go to www.EconEdLink.org.  Sort the grade 9-12 lessons for the most
recent and past lessons on “Focus on Economic data: Unemployment.”  These lessons are written monthly from
September through May.

4.  Clarify the BLS definitions
of the key concepts of employment and unemployment:

Employed persons
consist of: persons who did any work for pay or profit during the survey
reference week; persons who did at least 15 hours of unpaid work in a
family-operated enterprise; and persons who were temporarily absent from their
regular jobs because of illness, vacation, bad weather, industrial dispute, or
various personal reasons. The employment-population ratio represents the
proportion of the civilian non-institutional population that is employed.

Persons are classified as unemployed if they do not have a job, have actively looked for work
in the prior 4 weeks, and are currently available for work. Persons who were
not working and were waiting to be recalled to a job from which they had been
temporarily laid off are also included as unemployed. Receiving benefits from
the Unemployment Insurance (UI) program has no bearing on whether a person is
classified as unemployed.

The unemployment rate
represents the number unemployed as a percent of the labor force.

The labor force
is the sum of employed and unemployed persons. The labor force participation
rate is the labor force as a percent of the civilian non-institutional
population. Browse various labor force
characteristics.

Persons who are neither employed nor unemployed are not in the labor force. This category
includes retired persons, students, those taking care of children or other
family members, and others who are neither working nor seeking work.
Information is collected on their desire for and availability for work, job
search activity in the prior year, and reasons for not currently searching. See
also discouraged
workers.

5.  Illustrate how the
unemployment rate is determined:

•   If the labor force
is 1,000,000 people, and                  1,000,000

•   The number of
unemployed is 50,000.                            50,000

•   The unemployment
rate is                                                  .05
(5 percent)

1.         Ask what does it mean to be unemployed?   Elicit student responses.  Students will typically refer to people who do not have a job.   

2.         Explain that defining something like unemployment is not as simple as it may seem.  Refer to the Bureau of Labor Statistics (BLS) definition of “unemployed person.” Handout 1 provides the definitions of key labor market terminology.

 Unemployed persons:   Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

 3.         Explain that the BLS conducts a monthly survey of households to determine how many persons  in that household worked and who did not work during a     designated week each month.  The BLS will only count those who are counted in the “labor force,” that is, those working or those who are unemployed and looking for work.  Persons not seeking employment (retired, under age 16, not able or not wanting to work, or having given up looking for work).  Those in the military or institutionalized are not counted.

 4.         Explain the formula for determining the unemployment rate:  The number of unemployed as a percentage of the labor force.

            Example:        Size of the labor force:                                 1,000,000 persons

                                    Number of unemployed                                50,000 persons

                                    50,000 divided by 1,000,000 =                   .05 pr 5%

 5.         Provide the class with the current labor market data.  Use the data below or data form the most recent month’s employment report.  For the most recent month’s labor force, and unemployment numbers, go to this BLS web page:           http://www.bls.gov/news.release/empsit.a.htm  

 Answer:  15,260,000 divided by 154,715,000 = 0.099

Expressed as a percentage, the unemployment rate in April, 2010 is 9.9 %

 5.         Explain that there are a few additional persons no counted as unemployed,    including:

 “Those who “worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-   management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs.”    

 6.         What does the unemployment rate mean?  Ask students if the unemployment rate matters to them.  NOTE: Avoid discussion of students’ personal stories if their parents are unemployed.

 7.         Remind the students that if they are under age 16 or not seeking employment, they are not unemployed, even if they are not working.  If they are over age 16 and looking for a job (even if they are full-time students), they are considered to be unemployed.

 8.         Distribute Handout 2, Employment and Unemployment Scenarios.  In small groups or as a class, discuss each scenario to determine the person’s status according to the BLS definitions.

            Review the students’ or groups’ answers by identifying the key parts of the BLS definitions.    

 Answers to Handout 2:

 a.         Bob: Bob is unemployed because he is not working and he is looking for employment.

 b.         Maria: Even though she is looking for a better job, Maria is not unemployed because she worked at least one hour for pay.

 c.         Jose:  Jose has stopped looking for work .  If he did not look for work in the previous week, he is not counted as part of the labor force and is not counted as unemployed.

 d.         Frank:  Frank is to young (under 16) to be counted as part of the labor force and cannot be counted as unemployed.

 e.         Susan: Susan is not employed and not unemployed.  Volunteer work does not count as employment and she is not looking for a job.

 f.          Pat:  Even though Pat may be working next month, she is not working at this time. She is unemployed.

 9.          Review the definitions of labor force, employment and unemployment.

 10.       Ask:   What does this mean to you?   Elicit student responses about their understanding of the impact of unemployment.  Ask:   What are the other effects of unemployment?

             Loss of jobs means loss of incomes.        

            Loss of incomes means less consumption.

            Less consumption means less demand for goods and services.

            Less demand means businesses are less likely to hire and invest.

1.  Introduce the lesson by reading the introduction.  Ask:  How does $451 become $339?

 2.         Distribute Handout 15-1, George Jones’ First Pay Check.

 3.         Review the amounts of gross pay, deductions and net pay.

 4.         Explain the deductions on the pay check using Visual/Handout 15-2, Paycheck Definitions.

 Some Basic Paycheck Definitions

 Gross pay:  The amount you earn in a pay period (# hours x wage rate).

 Net pay:  The amount you receive after deductions for taxes and other purposes.

 Income Tax:   A tax on personal income.  Income taxes can be levied at the federal, state and/or local level.

 Federal Income Tax Withholding.   Federal income tax withholding is required for all employees.  The percentage withheld depends on the estimated income and information you supplied on a W-4 Withholding form.  Federal tax rates range from 15 percent to 35 percent (2010).  Note:  Withholding and tax rates are subject to change from year to year by Congress.   

 IRS Resources:       Module 1: Payroll Taxes and Federal Income Tax Withholding

                                    Module 2: Wage and Tip Income

                                    Module 3: Interest Income

 Ohio State Income Tax Withholding.  Ohio law requires withholding for personal income taxes of 0.65 % for income of $1 to $80 per month to 8.075 % for income in excess of $8,333 per month. 

 Ohio Municipal Income Tax Withholding.  Ohio law allows municipalities to collect local income taxes.  A municipality may levy a tax of up to 1 percent without voter approval.  Local voters can authorize a tax rate of up to 2.85%.  This tax is levied at a flat rate for all residents.  Most Ohio municipalities levy a rate of 1%. 

 Withholding: Amounts deducted from gross pay for taxes, Social Security, Medicare, and/or some required or optional benefits.

 FICA:  Federal Insurance Contributions Act.  A required “contribution” toward Social Security retirement or disability income eligibility (Old-Age, Survivors, and Disability Insurance.) 

 The employee tax rate for Social Security is 6.2%.

The employer tax rate for Social Security is also 6.2%.

The wage base limit for year 2009 is $106,800.  (No withholding above this level.)

 Medicare:    A required “contribution” toward Medicare and Medicaid retirement healthcare eligibility.

 The employee tax rate for Medicare is 1.45%.

The employer tax rate for Medicare tax is 1.45%.

There is no wage base limit for Medicare tax.

Why Pay Taxes?

 Show with the IRS online slide show on “Your Role as a Taxpayer.’  http://www.irs.gov/app/understandingTaxes/whys/thm01/les01/media/ss_thm01.pdf

 Discuss briefly about the meaning of each slide.  For instance, slide #7 is where federal tax revenues are spent – the federal budget.  Students should be able to identify the ways they benefit from each category of spending – directly or indirectly.

 Resources:              Lesson 1: Why Pay Taxes?

                        Lesson 3: The Taxpayers Responsibilities

                        Lesson 4: The Taxpayers Rights

 Introduce the primary way federal income taxes are collected through withholding from payrolls.

 Resources: Lesson 2: Your First Job

                        Lesson 3: Methods of Filing                    

Introduce the topic of a tax base using the IRS “Understanding Taxes” Theme 4 Slide Show, “What is Taxed and Why?” http://www.irs.gov/app/understandingTaxes/whys/thm04/les01/media/ss_thm04.pdf

 Federal Income Tax Withholding.   Federal income tax withholding is required for all employees.  The percentage withheld depends on the estimated income and information you supplied on a W-4 Withholding form.  Federal tax rates range from 15 percent to 35 percent (2009).  Note:  Withholding and tax rates are subject to change from year to year by Congress.   

 Resources: Module 1: Payroll Taxes and Federal Income Tax Withholding

                        Module 2: Wage and Tip Income

                        Module 3: Interest Income

 Ohio State Income Tax Withholding.  Ohio law requires withholding for personal income taxes of 0.65 % for income of $1 to $80 per month to 8.075 % for income in excess of $8,333 per month. 

 Ohio Municipal Income Tax Withholding.  Ohio law allows municipalities to collect local income taxes.  A municipality may levy a tax of up to 1 percent without voter approval.  Local voters can authorize a tax rate of up to 2.85%.  This tax is levied at a flat rate for all residents.  Most Ohio municipalities levy a rate of 1%. 

 Other Withholding

 Social Security, or  “Old-Age, Survivors, and Disability Insurance (OASDI) program, is a social insurance program funded by payroll taxes referred to as Federal Insurance Contributions Act (FICA). Employers and employees are required to contribute to Social Security through tax withholding. Social security provides benefits for retirement, disability, and death, benefits which may also provides through private pension plans.

 Social security taxes are withheld each pay date. The employer is responsible for paying the social security taxes due. For each year a FICA contribution is assessed, the employee receives credit toward retirement benefits from the Social Security Administration (SSA).  In addition to Social Security, Medicare taxes on the employer and the employee are also withheld. The total FICA withholding is comprised of Medicare and Social Security. Medicare provides retirees with health benefits.

 Some categories of workers who are exempt from paying Social Security taxes, including state or local government workers who are participating in an alternative retirement system, college students employed under federal work-study programs, postdoctoral researchers, and teaching assistants or research assistants. Under some circumstances, ministers or individuals providing religious services are not subject to FICA withholding.

 FICA/Social Security and Medicare Withholding (2009)

 The employee tax rate for Social Security is 6.2%.

The employer tax rate for Social Security is also 6.2%.

The wage base limit for year 2009 is $106,800.  (No withholding above this level.)

 The employee tax rate for Medicare is 1.45%.

The employer tax rate for Medicare tax is 1.45%.

There is no wage base limit for Medicare tax.

 Source: Internal Revenue Service, URL: http://www.irs.gov/

Classroom Lesson: Lesson 4: The Social Security Act of 1935

 Employee Benefits.   As a condition of employment, individuals may be subject to certain expenses that are deducted from gross pay.  These may include meals, employee purchases deducted from pay or benefits such as educational assistance, parking, child care, or company automobiles.  Some benefits are considered taxable income and some are not.

 Health Insurance.  An employer may pay for some portion of an employee’s health insurance coverage. Some employers will pay for all of the cost.  Others will pay a portion and the employee will pay the remaining cost.  Still other employers will pay for all or some of the cost of dental care insurance, vision care insurance, or long-term disability insurance.

 Retirement.  In addition to Social Security withholding, employees may have an option or be required to participate in an employer-sponsored retirement plan.  These plans will usually include an employee contribution and, possibly, a matching contribution from the employer.  In addition to retirement plans, many employees are eligible to participate in IRA, 401K, or 403B Plans, which are private tax-sheltered savings plans.  These can often be deducted from gross income prior to taxes being determined. 

 Union Dues or Professional Associations.   You may choose or be required to join a union or professional organization at your place of employment or in your professional field.  The dues can often be deducted automatically from your paycheck.

 Other Employee Benefits.  Many employers will offer benefits such as childcare, education payments, parking, special clothing or discounted purchases. These can often be deducted from the paycheck.  Some benefits may be provided free of chare, but can increase the taxable income amount.

 Teacher Note: To determine the deductions and net pay for pay rates and time periods, try this web site: URL: http://www.paycheckcity.com/NetPayCalc/netpaycalculator.asp.

 Income Tax Rates

 Explain that withholding is an estimate of the taxes that will be paid.   This provides a “pay as you go” system to provide government revenues throughout the year. The actual amount of an individual’s taxes depends on multiple factors – including allowable deductions, exemptions, credits, etc.

 Federal personal income tax rates for individual filers range from 10 percent for taxable incomes of $0 to $8,350 to 35 percent for taxable income over $372,950.

 Resource: Federal Personal Income Tax (2009) Tables:  http://www.irs.gov/pub/irs-pdf/i1040tt.pdf  Note: Scroll down to the last page of this section for an overview of tax rates.

 Ohio personal income tax rates range from .618 percent (people with taxable income of $0 to 500) to 6.24 percent (for taxable income over $100,000).

 Resource: Ohio Personal Income Tax (2009) Tables: http://tax.ohio.gov/documents/forms/ohio_individual/individual/2008/PIT_IT1040_Instructions.pdf  Note: Scroll down to page 36 of the instructions for an overview of Ohio personal income tax rates.

 Use Exhibit #1, Mary Smith’s First Pay Check to illustrate how withholding may impact gross pay.  The exhibit is included at the end of this section.

 For additional details and activities on topics related to tax return preparation, payment and tax form filing, use these IRS “Understanding Taxes” lessons:

 Module 4: Dependents

Module 5: Filing Status

Module 6: Exemptions

Module 7: Standard Deduction

Module 8: Claiming Child Tax Credit and Additional Child Tax Credit

Module 9: Tax Credit for Child and Dependent Care Expenses

Module 10: Education Credits

Module 11: Earned Income Credit

Module 12: Refund, Amount Due, and Record Keeping

Module 13: Electronic Tax Return Preparation and Transmission

Module 14: Self-Employment Income and the Self-Employment Tax

 Other Tax Topics

 Fairness in Taxes

 Lesson 1: How to Measure Fairness

Lesson 2: Regressive Taxes

Lesson 3: Progressive Taxes

Lesson 4: Proportional Taxes

Lesson 5: How Taxes Affect Us

 Additional topics related to the broad concept of taxes and tax issues are included in Theme 4, “What is Taxed and Why” and Theme 5, Impact of Taxes.”

 Lesson 1: Federal/State/Local Taxes

Lesson 2: Taxes in a Market Economy

Lesson 3: Income Tax Facts

Lesson 4: Direct and Indirect Taxes

 Ohio Sales Taxes

 For information about Ohio sales taxes, go to the Ohio Department of Taxation web page “FAQs - Sales & Use Tax: Sales Tax” http://www.tax.ohio.gov/faqs/Sales/sales.stm

 Theme 5:      Impact of Taxes