1. ©2015, College for Financial Planning, all rights reserved. Session 3 Income Tax Calculation and Tax Credits CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

2. Session Details Module1 Chapter(s)1 and 2 LOs1-6 Analyze a situation to calculate taxable income. 1-7 Analyze a situation to calculate available tax credits or total tax due. 3-2

3. Steps in the Calculation Process Determine total (gross) income for tax purposes. Subtract adjustments to income. Equals AGI Determine allowable itemized deductions. Subtract allowable itemized deductions, or standard deduction, from adjusted gross income. 3-3

4. Steps in the Calculation Process Determine personal exemption amount that can be claimed. Calculate taxable income. Calculate tax using appropriate tax rate schedule or tax table. Subtract tax credits and add additional taxes to determine tax liability. 3-4

5. Tax Computation 3-5

6. Tax Rate Schedule Assume a married couple filing jointly with $250,000 taxable income. The tax is $50,765.00 + 33% ($250,000 – $230,450). $51,557.50 + $6,451.50 = $58,009.00. 3-6 Married Individuals (and surviving spouses) Filing Joint Returns $0  $18,45010% of taxable income 18,450  74,9001,845.0015%18,450 74,900  151,20010,312.5025%74,900 151,200  230,45029,387.5028%151,200 230,450  411,50051,577.5033%230,450 411,500  464,850111,324.0035%411,500 464,850  129,996.5039.6%464,850

7. Adoption Credit Nonrefundable credit up to $13,400 (for 2015) Reasonable expenses—travel, court costs, attorney fees, etc. Under age 18 or unable to care for self Not available for adopting stepchildren Phaseout between approximately $200,000 and $240,000 If special needs adoption, no out of pocket necessary Just know concept, don’t need to memorize numbers 3-7

8. Child Tax Credit $1,000 credit per dependent child Just for having a dependent under age 17 Generally, a nonrefundable credit o Sometimes refundable if taxpayer is eligible for the (refundable) earned income credit Phased out $50 for every $1,000 above $110,000 for joint filers, $75,000 for single filers 3-8

9. Child & Dependent Care Credit No phaseouts! Qualifying expenses to allow parent(s) to be gainfully employed outside of home Qualifying individuals include o care for dependent under age 13 o taxpayer has a dependent (such as a parent) or spouse unable to care for themselves 20% of qualified expenses, up to o $3,000 for one child o $6,000 for 2 or more children Higher tax bracket—better off with dependent care reimbursement account under §125 3-9

10. Income Tax Terms (Review) Income from all sources, unless specially excluded by tax law; total income for tax purposes Gross (total) income Deductions that reduce total (gross) income to arrive at adjusted gross income (AGI) Adjustments to income Amount remaining after making allowable adjustments to income Adjusted gross income (AGI) 3-10

11. Income Tax Terms Amount by which nonitemizers reduce AGI before subtracting personal exemptions to arrive at taxable income Standard deduction Typically personal expenses allowed as a deduction from AGI; amount by which itemizers reduce AGI before subtracting personal exemptions to arrive at taxable income Itemized deductions 3-11

12. Income Tax Terms A deduction amount for the taxpayer, spouse, and dependents; deducted from AGI, in arriving at taxable income Personal and dependency exemptions Amount on which tax the income tax is computed Taxable income 3-12

13. Income Tax Terms One of four categories; determines standard deduction amount allowed: (1) married filing jointly, (2) married filing separately, (3) single, or (4) head of household Filing status Percentage of tax payable on last dollar of taxable income Marginal income tax bracket 3-13

14. Income Tax Term A dollar-for-dollar offset against tax liability Tax credit Items received by a taxpayer that represent an economic benefit that are not taxed  muni bond interest, gifts received, fringe benefits, etc. Exclusions Miscellaneous itemized deductions not subject to the 2% AGI floor Miscellaneous deductions 3-14

15. Income Tax Term Miscellaneous itemized deductions that are deductible to the extent that the total exceeds 2% of AGI Tier II miscellaneous deductions The amount of taxes owed after subtracting all allowable credits Tax liability 3-15

16. Major Forms & Schedules 3-16 Itemized DeductionsInterest and Ordinary Dividends Sole Proprietorship – profit or loss from business Capital Gains and Losses S Corporations, Partnerships, Rental Real Estate Self-Employment Tax

17. Review Question 1 Taxable income is the amount a.remaining after adjustments to income are subtracted. b.from which allowable itemized deductions are subtracted. c.used to determine the tax liability. d.to which tax credits are applied. 3-17

18. Review Question 2 Nancy and Ken Price will spend $8,500 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both Nancy and Ken to work outside the home. Their adjusted gross income is estimated at $92,000. What is the amount of child care credit, if any, to which they are entitled? a.$0 b.$600 c.$1,200 d.$1,700 3-18

19. Review Question 3 Jack and Mary Ramey, both 58 years old, are married and file a joint income tax return. They have two dependent children, ages 18 and 19. In the current year, Jack earned $85,000, and Mary earned $155,000. The Rameys will contribute a total of $13,000 to their IRAs and anticipate total itemized deductions of $15,000. Neither Jack nor Mary is covered by a company pension plan. Based on the information given, what will be the Rameys’ total tax due for 2015? a.$41,932 b.$45,572 c.$46,132 d.$47,392 3-19

20. ©2015, College for Financial Planning, all rights reserved. Session 3 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning