1. Chapter 3 Taxes in Your Financial Plan McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Taxes in Your Financial Plan
Chapter Objectives
Identify the major taxes paid by people in our society
Calculate taxable income and the amount owed for federal income tax
Prepare a federal income tax return
Select appropriate tax strategies for various life situations
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3. Objective 1 Identify the Major Taxes Paid by People in Our Society
Planning Your Tax Strategy
Start planning for taxes ….
Goal:
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4. Types of Taxes Taxes on Purchases Taxes on Property Taxes on Wealth
Taxes on Earnings
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5. What Tax Records to Keep
Current tax forms and instruction booklets
Social security numbers
Copy of previous year’s returns
W-2 forms from employers
1099 forms (interest, self employment)
1098 (mortgage interest paid)
Receipts and documentation for expenses
Investment & business expense documents
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6. Objective 2 Calculate Taxable Income and the Amount Owed for Federal Income Tax
Step 1: Determine AGI
AGI =
Taxable Income
Net income
Gross income minus deductions
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7. Objective 2 Calculate Taxable Income
Main Components of Gross Income
Earned income
Investment income
Passive income
Other income
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8. Objective 2 Calculate Taxable Income
Total income is affected by:
Exclusions
Tax-deferred income
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9. Objective 2 Calculate Taxable Income
Adjusted gross income (AGI)
Adjustments to income
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10. Objective 2 Calculate Taxable Income
Step 2: Computing Taxable Income
Tax deduction =
Standard deduction
Itemized deductions
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11. Calculate Taxable Income Itemized Deductions
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12. Calculate Taxable Income Exemptions
Exemptions  subtracted from AGI
An exemption =
The amount of the exemption for the 2008 tax year was $3,500 per person; for 2014 it is
$3,900.
After deducting exemptions you have your taxable income
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13. Objective 2 Calculate Taxes Owed
Step 3: Calculating taxes owed
Tax table rates = marginal rates
Example:
After deductions and exemptions, a person in the 35% tax bracket pays 35 cents in taxes for every dollar of taxable income in that bracket.
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14. 2008 IRS Tax Brackets
2012 IRS Tax Table
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15. Tax on a single taxpayer’s income of $40,000
2008 IRS Tax Example
Tax on a single taxpayer’s income of $40,000
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16. Objective 2 Calculate Taxes Owed
The average tax rate = the total tax due divided by taxable income
Average tax rate < marginal tax rate
Example:
Taxable income = $40,000
Total tax bill = $6,344
Average tax rate = 15.9%
($6,344 / $40,000)
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17. Objective 2 Calculate Taxes Owed
Alternative minimum tax (AMT)
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18. Objective 2 Calculate Taxes Owed
Tax credits
Amount subtracted directly from the amount of taxes owed
Examples:
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19. Tax Credit versus Tax Deduction
Reduces Your Taxes by $100
$100 Tax Deduction
Amount Your Taxes are Reduced
is Based on Your Tax Bracket
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20. Determining Your Tax Liability
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21. Objective 2 Calculate Taxes Owed
Step 4: Making Tax Payments
Payroll Withholding
Estimated Quarterly Payments
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22. Objective 2 Calculate Taxes Owed
Step 5: Watching Deadlines-Avoiding Penalties
Form 4868  automatic six-month extension
Penalties & Interest
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23. Objective 3 Prepare a Federal Income Tax Return
Every citizen or resident of U.S. and every U.S. citizen who is a resident of Puerto Rico is required to file income tax.
Five filing status categories:
Single or legally separated
Married, filing jointly
Married, filing separately
Head of household
Qualifying widow or widower (2 years)
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24. Which Tax Form Should You Use?
≈ 400 federal tax forms and schedules
Basically the choice is between 3 forms
1040EZ
1040A
1040
Which form to use?
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25. Completing the Federal Income Tax Return
Filing status and exemptions
Income
Adjustments to income
Tax computation
Tax credits
Other taxes (such as from self-employment)
Payments (total withholding and other payments)
Refund or amount you owe
Refunds can be directly deposited to your bank account.
Payments may be directly debited from your bank account.
Your signature = Most common filing error
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26. How do I File My State Tax Return?
All but 7 states have a state income tax
Most states tax rate ranges from 1 to 10 percent
States usually require income tax returns to be filed when the federal income tax return is due
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27. How Do I File My Taxes Online?
Tax preparation software
TurboTax and TaxCut are two of the most popular tax preparation software packages
Tax software allows you to complete needed tax forms
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28. How Do I File My Taxes Online?
Free File Alliance
Online tax preparation and filing free to many taxpayers
- go to “Free File”
Various qualification criteria to file free; use “Guide Me to a Service”
Connect to selected firm’s website
Use form’s online software to prepare and file tax return
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29. Available Tax Assistance Sources
IRS Services
Publications and forms
1-800-TAX-FORM
Recorded messages
Phone hot line
Walk-in service at an IRS office
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30. Available Tax Assistance Sources
Tax publications
e.g. Ernst and Young Tax Guide and J.K. Lasser’s Your Income Tax
The Internet
Tax preparation software companies
Tax Preparation Services
Tax preparers charge between $40 and $2,000 depending on the complexity of the return
Over 40 million U.S. taxpayers pay someone else to do their taxes
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31. Types of Tax Preparation Services
One-person, local offices to large firms such as H & R Block
“Enrolled agents” = Government-approved tax experts
CPA Tax Accountants
Attorneys
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32. Evaluating Tax Services
Factors to consider:
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33. Tax Service Warnings
Ultimately you are responsible for providing complete and accurate information
Hiring a tax preparer does not guarantee that you will pay the correct amount
Beware of tax preparers that offer refunds in advance
“Refund anticipation loans” can charge interest rates in excess of 300%
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34. What if Your Return is Audited?
≈ 0.6% of all returns are audited
If you claim large or unusual deductions you are more likely to be audited.
Three types of audits:
Correspondence audit
Office audit
Field audit
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35. What if Your Return is Audited?
Audit Rights
When Audited:
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36. Objective 4 Select Appropriate Tax Strategies
Tax Planning Strategies
Practice tax avoidance
Tax Evasion
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37. Tax Planning Strategies Minimizing Taxes
If you expect
Then you should
Because
The same or a lower tax rate next year
Accelerate deductions into this year
Greater benefit to higher rate
The same tax rate next year
Delay income into next year
Delay paying taxes
A higher tax rate next year
Delay deductions
Greater benefit
Accelerate income
Taxed at lower rate
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38. Tax-Planning Strategies Consumer Purchasing
Home ownership
Use home equity line of credit to buy a car or consolidate debt
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39. Tax-Planning Strategies Consumer Purchasing
Job-related expenses may be allowed as itemized deductions
Health care expenses like FSA’s (Flexible Spending Accounts) allow you to reduce your taxable income when paying for health related expenses
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40. Tax-Planning Strategies Investment Decisions
Tax Exempt Investments
Tax Deferred Investments
Tax A type of tax shelter
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41. Tax-Planning Strategies Investment Decisions
Capital Gains
Self Employment
Advantage:
Disadvantage:
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42. Tax-Planning Strategies Investment Decisions
Children’s Investments
Children under 14 with investment income of more than $1500 are taxed at parent’s top rate
Retirement Plans
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43. Changing Tax Strategies
IRS Changes:
Personal Changes:
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