Managing Taxes

Objectives Describe the two ways of paying taxes: payroll withholding and estimated taxes. Identify the eight planning steps involved in calculating federal income taxes. Understand planning strategies to legally avoid overpayment of income taxes. Explain the basics of IRS audits.

What is Tax Management? ATTENTION! A PLANNING PROCESS FOR TAX: Reduction Deferment Elimination

Administration/Classification of Income Taxes Federal tax laws Progressive nature of income tax Regressive Marginal tax rate Effective marginal tax rate Average tax rate

The Progressive Nature of the Federal Income Tax If your filing status is Single If your taxable income is: Over: But not over -- The tax is: Of the amount over-- $0 $7,825 ------------ 10% 7,825 31,850 $782.50 + 15% 77,100 4,386.25 + 25% 160,850 15,698.75 + 28% 349,700 39,148.75 + 33% No limit 101,469.25 + 35% The Tax Rate Schedule is shown so you can see the tax rate that applies to all levels of taxable income. It is not used to figure ones’ taxes.

How Your Income is Really Taxed Assumes a single individual with gross income of $57,700 $3,500 personal exemption is not taxed. $5,450 standard deduction is not taxed. First $7,825 of income is taxed at 10%. Income $15,075 taxed at 15%. $25,850 taxed at 25%. = $57,700 Tax owed $0 + $0 + $783 + $2,261 + $6,463 = $9,507 This individual’s marginal tax rate is 25% This individual’s average tax rate is 16.5% (9,507/57,700)

Who Should File a Tax Return? STUDENTS WITH: Earned income Unearned income Transfer payments