1. Chapter 4 Lecture 2 Tax Planning and Strategies

2. Calculating Your Taxes Who has to file an income tax return. Who has to file an income tax return. Choosing a tax form. Choosing a tax form. Determining gross or total income. Determining gross or total income. Calculating adjusted gross income (AGI). Calculating adjusted gross income (AGI). Subtracting deductions. Subtracting deductions. Claiming exemptions. Claiming exemptions. Calculating taxable income. Calculating taxable income. Subtract credits. Subtract credits. Determine taxes due. Determine taxes due.

3. Filing Status Classifications Single. Single. Married filing jointly. Married filing jointly. Married filing separately. Married filing separately. Head of household. Head of household. Surviving spouse. Surviving spouse.

4. Who Has to File an Income Tax Return Single (under 65) and income is at least $8,200. Single (under 65) and income is at least $8,200. Single Dependent. Single Dependent. Unearned income is at least $800. Unearned income is at least $800. Earned income is at least $5,000. Earned income is at least $5,000. Married filing jointly and income is at least $16,400. Married filing jointly and income is at least $16,400. Note: All thresholds are adjusted annually for inflation. Note: All thresholds are adjusted annually for inflation.

5. Choosing a Tax Form Form 1040EZ. Form 1040EZ. Taxable income is less than $100,000. Taxable income is less than $100,000. Cannot itemize deductions. Cannot itemize deductions. Form 1040A. Form 1040A. Taxable income is less than $100,000. Taxable income is less than $100,000. Allows for more sources of income. Allows for more sources of income. Cannot itemize deductions. Cannot itemize deductions. Form 1040 (“long form”). Form 1040 (“long form”). Use for more complicated transactions. Use for more complicated transactions. Only form that allows you to itemize deductions. Only form that allows you to itemize deductions.

6. Individual Income Tax Formula Total income (everything received) - Exclusions/tax-exempt income_______________ = Gross income (GI) - Adjustments______________________________ = Adjusted Gross Income (AGI) - Greater of standard or itemized deductions - Exemptions claimed __________________________________ = Taxable income (TI) = Taxable income (TI) * Tax rates: 10%-35%______________________ = Tax liability - Tax credits - Tax prepayments___________________________ = Tax due or refund

7. Gross Income Gross (or total) income is the sum of all taxable income. Gross (or total) income is the sum of all taxable income. 3 types of income: 3 types of income: Active income. Active income. Investment (or portfolio) income. Investment (or portfolio) income. Passive income. Passive income. Not all income is taxable. Not all income is taxable.

8. Exclusions/ Tax Exempt Income Loans. Loans. Gifts and inheritances. Gifts and inheritances. Scholarships and grants. Scholarships and grants. Workers’ compensation (but not unemployment benefits). Workers’ compensation (but not unemployment benefits). Child support payments (but not alimony). Child support payments (but not alimony). Life insurance proceeds. Life insurance proceeds. Municipal bond interest. Municipal bond interest. Roth IRA earnings (but not traditional IRA earnings). Roth IRA earnings (but not traditional IRA earnings). $250,000 gain on sale of personal residence. $250,000 gain on sale of personal residence.

9. Exclusions vs. Deferrals Exclusions and tax exempt income. Exclusions and tax exempt income. Never taxed. Never taxed. Deferred income. Deferred income. Not taxed currently but will be taxed in the future. Not taxed currently but will be taxed in the future. Retirement contributions. Retirement contributions. Traditional IRA earnings. Traditional IRA earnings.

10. Taxable Amounts included in Gross Income Wages, salaries, and tips. Wages, salaries, and tips. Capital gains, dividends, and interest. Capital gains, dividends, and interest. Alimony received. Alimony received. Pension funds and IRA distributions. Pension funds and IRA distributions. Business income (SE). Business income (SE). Rental income. Rental income. Unemployment benefits. Unemployment benefits. Gambling, lottery, and prizes. Gambling, lottery, and prizes.

11. Capital Gains Capital Asset. Capital Asset. Personal use (gain but no loss). Personal use (gain but no loss). Held for investment (stock). Held for investment (stock). Held for > 1 year. Held for > 1 year. 15% tax rate in 2006. 15% tax rate in 2006. $3,000 reduction of ordinary income if capital losses exceed capital gains. $3,000 reduction of ordinary income if capital losses exceed capital gains. Personal residence-$250,000 exemption. Personal residence-$250,000 exemption.

12. Employee Stock Options Incentive stock options (ISOs) Incentive stock options (ISOs) Grant – no tax consequences. Grant – no tax consequences. Exercise--no tax consequences except for AMT. Exercise--no tax consequences except for AMT. Disposition-- 1 year--capital gain. Disposition-- 1 year--capital gain. Non-qualified stock options. Non-qualified stock options. Grant—no tax consequences if no readily ascertainable FMV. Grant—no tax consequences if no readily ascertainable FMV. Exercise--ordinary income. Exercise--ordinary income.

13. Nontaxable Employee Fringe Benefits Value of child and dependent care services paid for by the employer and incurred to enable the employee to work. Value of child and dependent care services paid for by the employer and incurred to enable the employee to work. Value of the use of a gym or other athletic facility (must be on employer’s premises). Value of the use of a gym or other athletic facility (must be on employer’s premises). Employer-provided educational assistance. Employer-provided educational assistance.