1. Federal Income tax

2. Learning Objective Identify the Major Taxes Paid by People in Our Society
Planning Your Tax Strategy
Start planning for taxes ….
Know current tax laws as they affect you
Maintain complete and appropriate tax records
Make purchase and investment decisions that reduce your tax liability
Goal: Paying your fair share but still taking
advantage of tax benefits.

3. Types of Taxes Taxes on Purchases Sales tax & excise tax
Taxes on Property
Real estate property tax
Personal property tax
Taxes on Wealth
Federal estate tax
State inheritance tax
Taxes on Earnings
Income tax and Social Security

4. What's a W-2 form?
Watch this video to discover what a W-2 is and why it’s crucial to completing your taxes.
Answer these questions.
List two things that the W-2 form tells you.
What’s an advantage to always filing a tax return, regardless of how much money you made?

5. Learning Objective Calculate Taxable Income and the Amount Owed for Federal Income Tax
Step 1:
Determine Adjusted Gross Income AGI
AGI is the sum of all your taxable income minus specific deductions

6. Learning Objective Calculate Taxable Income
Main Components of Gross Income
Earned income
Usually includes wages, salary, commissions, fees, tips, and bonuses
Investment income
Money received in the form of dividends, interest, or rent from investments
Other income
Alimony, awards, lottery winnings, and prizes

7. Learning Objective Calculate Taxable Income
Total income is affected by:
Exclusions
Amounts excluded from gross income
Also referred to as tax-exempt income; income not subject to federal income tax
Example = interest on municipal bonds, life insurance death benefits, welfare, child support
Tax-deferred income
Income that will be taxed at a later date, such as earnings from an traditional individual retirement account (IRA)

8. Learning Objective Calculate Taxable Income
Adjusted gross income (AGI)
Gross income can be reduced by things like

9. Learning Objective Calculate Taxable Income
Step 2: Computing Taxable Income
Tax deduction = amount subtracted from adjusted gross income (AGI) to arrive at taxable income
Standard deduction
Itemized deductions

10. Calculate Taxable Income Itemized Deductions
Possible Itemized Deductions
Medical & dental expenses (>7.5% of AGI)
Taxes
Interest
Contributions
Casualty and theft loses
Moving expenses
Job-related and other miscellaneous expenses

11. Calculate Taxable Income Exemptions
Exemptions  subtracted from AGI
An exemption = a deduction for yourself, your spouse, or qualified dependents
The amount of the exemption for the 2015 tax year is $4,000 per person
After deducting exemptions, you have your taxable income

12. Tax Record-Keeping System (Recall from the previous unit)

13. Learning Objective Calculate Taxes Owed
Step 3: Calculating taxes owed
Tax table rates = marginal rates
The tax rate paid on the last (or next) dollar of taxable income.
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.

14. 2015 IRS Tax Brackets single
Taxable Income Tax Rate
$0 to $9, %
$9,226 to $37,450 $ plus 15% of the amount over $9,225
$37,451 to $90,750 $5, plus 25% of the amount over $37,450
$90,751 to $189,300 $18, plus 28% of the amount over $90,750
$189,301 to $411,500 $46, plus 33% of the amount over $189,300
$411,501 to $413,200 $119, plus 35% of the amount over $411,500
$413,201 or more $119, plus 39.6% of the amount over $413,200

15. 2015 IRS Tax Example
What is the tax on a married taxpayer’s income of $90,025

16. Learning Objective Calculate Taxes Owed
The average tax rate = the total tax due divided by taxable income
What this means is how much of your income is going towards taxes
Example:
Taxable income = $90,025
Total tax bill = $14,756
Average tax rate = ($14,756 /$90,025) =16.4%

17. Learning Objective Calculate Taxes Owed
Alternative minimum tax (AMT)
Paid by taxpayers with high amounts of certain deductions and various types of income
Designed to ensure that those who receive tax breaks also pay their fair share of taxes

18. Learning Objective Calculate Taxes Owed
Tax credits
Amount subtracted directly from the amount of taxes owed
Examples:
Earned income credits
Foreign tax credits
Child and dependent care credits
Retirement tax credits
Adoption tax credits
Education credits to offset college education expenses

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

20. Determining Your Tax Liability

21. Learning Objective Calculate Taxes Owed
Step 4: Making Tax Payments
Payroll Withholding
Based on the number of exemptions and the expected deductions claimed
Estimated Quarterly Payments
Estimated tax payments made throughout the year based on income made during the year and reported on Form 1099.

22. Learning Objective Calculate Taxes Owed
Step 5: Watching Deadlines-Avoiding Penalties
Form 4868  automatic six-month extension
Submit estimated tax due with Form 4868 by April 15
Penalties & Interest
Underpayment of quarterly estimated taxes may require paying interest on the amount owed
Underpayment due to negligence or fraud can result in penalties of 50 to 75 percent

23. Learning Objective 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
Unmarried individual or surviving spouse who has a child or dependent relative
Qualifying widow or widower with a dependent (2 years)

24. Which Tax Form Should You Use?
≈ 800 federal tax forms and schedules
Basically the choice is between 3 forms
1040EZ
1040A
Used by 60%
Which form to use?
Type of income
Amount of income
Number of deductions
Complexity of tax situation
Used by 20% of taxpayers

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

26. Federal Income Tax Form 1040EZ

27. 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

28. How Do I File My Taxes Online?
Tax preparation software
H&R Block At Home (formerly Tax Cut) and TurboTax are two of the most popular tax preparation software packages
Using software can save 10 or more hours

29. Selecting Tax Software
Considerations:
Personal situation
Special tax situation
Features in the software
“Audit check”
Future planning
State tax filing online
Technical aspects
Hardware and operating system requirements
Online support

30. 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

31. Evaluating Tax Services
Factors to consider:
Training and experience of the tax
professional
Fee for preparing taxes and how determined
Questionable deductions suggested?
If return is audited, will the preparer represent the client?
Is tax preparation the main business activity, or is it a front for other financial products?

32. Tax Service Warnings
Ultimately you are responsible for providing complete and accurate information
If your professional tax preparer makes a mistake, you are still responsible for paying the correct amount, plus any interest and penalties.
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%

33. What if Your Return is Audited?
≈ 1.0% 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 for minor questions
Office audit takes place at an IRS office
Field audit is the most complex, with an IRS agent visiting you at your home, your business or your accountant’s office