Chapter 13: Individual Income Tax and Tax Planning Chapter 13 Individual Income Tax and Tax Planning

 2005 Kaplan Financial 2 Chapter 13: Individual Income Tax and Tax Planning Federal Income Tax Law Objectives Revenue-raising objectives Economic objectives Social objectives

 2005 Kaplan Financial 3 Chapter 13: Individual Income Tax and Tax Planning Individual Income Tax Rates Ordinary rates Capital gain rates Capital asset/Dividends Sale or exchange Long-term holding period Alternative Minimum Tax (AMT) rates

 2005 Kaplan Financial 4 Chapter 13: Individual Income Tax and Tax Planning Determining Income Tax Liability – Taxable Income Total Income Less: exclusions from gross income Gross Income Less: deductions for Adjusted Gross Income Adjusted Gross Income (AGI) Less the larger of: Standard Deduction or Itemized Deductions Less: personal and dependency exemptions Taxable Income

 2005 Kaplan Financial 5 Chapter 13: Individual Income Tax and Tax Planning Deductions for AGI Business expenses Net capital losses ($3,000) Self-employed expenses Alimony paid IRA contributions Moving expenses Education expenses

 2005 Kaplan Financial 6 Chapter 13: Individual Income Tax and Tax Planning Itemized Deductions Medical expenses (> 7.5% AGI) State & local income taxes Property taxes Mortgage interest Investment Expenses (< Investment Income) Charitable contributions Casualty/Theft losses (> 10% AGI + $100) Miscellaneous (> 2% AGI)

 2005 Kaplan Financial 7 Chapter 13: Individual Income Tax and Tax Planning IRS Guidance Letter rulings Determination letters Revenue rulings Private letter rulings Revenue procedures Technical advice memoranda

 2005 Kaplan Financial 8 Chapter 13: Individual Income Tax and Tax Planning The IRS Audit Process Penalties Failure-to-file penalties Failure-to-pay-tax penalties Accuracy-related penalties Fraud penalties

 2005 Kaplan Financial 9 Chapter 13: Individual Income Tax and Tax Planning Payroll Taxes FICA taxes for employers and employees 6.2% OASDI on $90,000 (2005) 1.45% Medicare Self-employment tax Double the employee’s rate FUTA tax calculation

 2005 Kaplan Financial 10 Chapter 13: Individual Income Tax and Tax Planning Tax-Advantaged Investments Investment in tax-exempt securities Tax shelters Employee benefits Acceleration of deductions Deferral of tax gains Exemption opportunities