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Income Taxes

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... 15th, or 29th. 30. Tax Changes for 2007 ... Paper check through the mail. ... filed returns in as little as 10 days but paper refunds will take 4-6 weeks. ... – PowerPoint PPT presentation

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Title: Income Taxes


1
Income Taxes
  • Financial Planning for Women
  • February 2008
  • Garman/Forgue Personal Finance 9th ed.
  • Presented by Danielle Walker

2
Objectives - be able to
  • Calculate your marginal tax rate apply in tax
    planning
  • Reduce your taxable income
  • Differentiate between adjustments, deductions,
    credits
  • Recognize taxable income lt gross
  • Adjust W-4 withholding
  • Avoid instant refund schemes
  • Know Utah has 2 tax systems

3
Introduction
  • Tax Planning Seeking legal ways to reduce,
    eliminate, or defer income taxes.
  • Taxable Income the income upon which income
    taxes are levied

4
Progressive vs. Regressive
  • Progressive tax- tax rate increases as taxable
    income increases.
  • U.S. income tax
  • Regressive tax- as income rises, the tax demands
    a decreasing proportion of a persons income.
  • State sales tax

5
Marginal Tax Bracket and Rate
  • Marginal Tax Bracket (MTB)- one of the 6 income
    ranges that are taxed at increasing rates as
    income goes up
  • Marginal Tax Rate- the rate at which one is taxed
    in each bracket
  • Tax brackets are adjusted each year for inflation

6
Find MTB
  • Use IRS tables or
  • On tax table find
  • Taxable income tax due
  • Add 100 to taxable income and find tax due
  • The difference MTB
  • 10, 15, 25, 28, 33 or 35
  • Most taxpayers are in 10 or 15 MTB

7
Progressive Nature of Income Tax
Single filers
8
Marginal Tax Rate and Financial Decisions
  • Need to know MTB for investment decisions
  • Other financial decisions affect taxes
  • Example-
  • 25 MTB
  • Give 100 to charity (tax-deductible)
  • Essentially you give 75 to charity and the
    government gives 25!!
  • Only if itemized deductionsgt standard deduction

9
Filing Status Tax Rates
  • IRS 2007 tax rate schedules
  • http//www.irs.gov/formspubs/article/0,,id164272,
    00.html
  • Single
  • Married, filing jointly or qualifying widower
  • Married, filing separately
  • Head of household

10
8 Steps in Calculating Your Income Taxes
  • Determine your total income
  • Determine and report your gross income after
    subtracting exclusions
  • Subtract adjustments to income
  • Subtract either the standard deduction or
    itemized deductions
  • Subtract the value of your personal exemptions

11
8 Steps to Calculating Your Income Taxes
  • 6. Determine your preliminary tax liability
  • 7. Subtract tax credits for which you qualify
  • 8. Calculate the balance due the IRS or the
    amount of your refund

12
Adjusted Gross Income (AGI)
  • Income (just a few)
  • Wages and Salaries
  • Commissions
  • Tips Earned
  • Gambling and Lottery Winnings
  • Capital Gains and Losses
  • Exclusions/Adjustments
  • Gifts
  • Inherited money or property
  • Income from a carpool
  • Federal income tax refunds
  • Child support payments

AGI- gross income less any exclusions and
adjustments
13
Personal Exemptions and Standard Deductions
  • Personal Exemptions- 3400 x number of people
    that taxpayers income supports
  • Standard Deduction- amount that all tax payers
    may subtract from their AGI
  • Amount depends on filing status
  • Deduct itemized deductions if gt SD
  • You only pay fed. taxes on income gt your personal
    exemption(s) standard or itemized deductions.
    (taxable income)

14
Personal Exemptions
  • Based on the number of people supported by the
    taxpayers income
  • Spouse, children, parents, etc.
  • Must provide more than half of financial support
  • For 2007 each exemption reduces taxable income by
    3,400
  • Adjusted yearly for inflation

15
Standard Deductions
16
Itemized Deductions
  • Medical and Dental Expenses
  • Taxes You Paid
  • Mortgage Interest You Paid
  • Gifts to Charity
  • Casualty and Theft Losses
  • Job Expenses and Most Other Misc. Deductions

17
Tax Credits
  • After PE and SD you determine your Tax Liability
  • Subtract tax credits
  • Tax Credit- dollar-for-dollar decrease in tax
    liability
  • Refundable or Nonrefundable
  • Refundable- can get paid even if you do not owe
    income taxes! Must file to collect!

18
Tax Credits
  • Hope Scholarship Credit
  • Lifetime Learning Credit
  • Earned Income Credit
  • Child Tax Credit
  • Child and Dependant Care Credit
  • Adoption Credit
  • Mortgage Interest Credit
  • Retirement Savings Contribution Credit
  • Elderly or Disabled Tax Credit
  • Energy-Savings Tax Credit

19
Retirement Savings Tax Credit
  • 50 (1,000 credit for 2,000 savings)
  • AGI Singles 15,000 MFJ 30,000
  • 20 (400 credit for 2,000 savings)
  • AGI Singles 16,250 MFJ 32,500
  • 10 (200 credit for 2,000 savings)
  • AGI Singles 25,000 MFJ-50,000

20
Reduce Taxes Through Proper Planning
  • Practice legal tax avoidance, not tax evasion.
  • A dollar saved from taxes is really two dollars -
    or more
  • Opportunity cost
  • Earning another dollar to replace one paid to the
    IRS
  • Earnings on a dollar not paid to the IRS

21
Reduce Taxable Income Via Your Employer
  • Premium only Plan
  • Transportation reimbursement plan
  • Flexible Spending Accounts (FSA)
  • Defined-Contribution Retirement Plan
  • 401(k) Retirement Plan
  • Matching Employer Contributions

22
Tax Terminology
  • Taxable
  • Tax-deferred
  • Tax-free (tax-exempt)
  • Tax Sheltered

23
Tax Sheltered Investments
  • Investments that yield returns that are tax
    advantaged
  • IRAs, Traditional and Roth
  • Coverdell Education Savings Account
  • 529 College Savings Plans
  • Government Savings Bonds
  • Municipal Bonds
  • Capital Gains on Housing

24
After-Tax Yield
  • Because of tax-exempt status of some investments
    they may provide lower than average returns
  • Determine the after-tax yield to see if it is
    worth it.
  • After-tax yield taxable yield x (1- federal
    marginal tax rate)

25
After-Tax Yield
  • Example-
  • 35 combined federal and sate marginal tax rate
  • Municipal bond 3.5 yield
  • Taxable corporate bond 5.7 yield
  • 5.7 x (1- 0.35) 3.71
  • The 5.7 taxable bond is the way to go!

26
Overwithholding
  • When employees have their employers withhold more
    in estimated taxes than the tax liability
    ultimately due.
  • A poor strategy of forced savings
  • Opportunity cost- what could have been
    done/earned with that money???
  • File a new W4 to decrease your withholding and
    automatically invest or payoff debt
  • http//www.irs.gov/individuals/article/0,,id96196
    ,00.html

27
Top 3 Financial Missteps
  • Turn all your income tax planning over to someone
    else
  • Overwithhold too much income to receive a refund
    next year
  • Ignore the impact of income taxes in your
    personal financial planning

28
Hiring a Tax Preparer
  • Anyone can be a tax preparer!!
  • Make sure to do your research
  • What qualifications do they have?
  • How qualified do I need them to be?
  • What do they charge?
  • Do I want tax advise all year round?
  • Make sure to check out agencies as well as
    individuals

29
Hiring a Tax Preparer
  • Free file - AGI needs to be 54,000 or less
  • http//www.irs.gov/efile/article/0,,id118986,00.h
    tml
  • USU Accounting students provide VITA assistance
    in basement of USU Business building
  • Open Wednesdays 5-9 pm Saturdays 9 am-1 pm
    February 13th - April 5th.
  • For more info Joe Fail failing21_at_yahoo.com
  • The VITA lab will not be open March 8th, 12th,
    15th, or 29th

30
Tax Changes for 2007
  • Deduction for mortgage insurance premiums is
    phased out for taxpayers with adjusted gross
    incomes exceeding 100,000 (50,000, if married
    filing separately).
  • To deduct any charitable donation, taxpayers must
    have a bank record or a written communication
    from the recipient showing the name of the
    organization and the date and amount of the
    contribution.

31
Utah Changes for 2007
  • What's New for 2007 Tax Year
  • Dual Income Tax System The Utah individual tax
    law was changed for 2007 to allow you to
    calculate your Utah tax liability two ways and
    then pay the lower amount.
  • Utah Educational Savings Plan (529) Deduction
    Expanded The deduction for an investment in a
    Utah Educational Savings Plan has been increased
    for 2007.

32
Utah Changes for 2007
  • Utah Educational Savings Plan Credit An
    investment in a 529 may be taken as a deduction
    (Part 3 of TC-40S) under the traditional tax
    system. It may also be used as a credit under the
    single rate tax system when calculating the tax
    on line 13 of TC-40.
  • Nonrefundable Residential Energy System Tax
    Credit a new credit is available for a system
    installed on a residential unit that supplies all
    or part of the energy required.

33
Utah Changes for 2007
  • Refundable Commercial Energy System Tax Credit A
    new refundable credit is available for a
    commercial energy system.
  • For more information - http//incometax.utah.gov/n
    ew.php

34
Receiving Your Refund
  • Split refunds among up to three accounts
  • banks, mutual funds, brokerage firms or credit
    unions
  • To encourage savings
  • Direct deposit to one account
  • Paper check through the mail.
  • IRS will process electronically filed returns in
    as little as 10 days but paper refunds will take
    4-6 weeks.

35
A Word of Caution
  • Beware of Tax Refund Anticipation Loans (aka
    rapid refund)
  • Very costly
  • Similar to a payday loan!!
  • File electronically and it is almost as fast

36
A Word of Caution RapidTax.com
  • Rapid Access Loan (1-2 Day Refund)Get a loan in
    the amount of your refund in as little as 1-2
    business days after IRS acknowledgment. Loan must
    be approved and fees will be deducted from the
    loan. Available again in January, 2008. 29.99
  • See below for additional fees charged by SBBT
    bank.
  • Refund Amount SBBT Fee
  • 300 - 3500 3
  • 3501 - 4500 105
  • In addition to the fees stated above,there is an
    account handling fee of 30.95.

37
On a Lighter Note
  • The guy who said that truth never hurts never had
    to fill out a Form 1040.
  • Another difference between death and taxes is
    that death is frequently painless.
  • Children may be deductible, but they are still
    taxing.
  • Tax Humor (page 1)?From Tom Antion Associates -
    http//www.antion.com/humor/speakerhumor/taxes.htm

38
March 5, 2007!!
  • Investment Planning
  • Note that it is the FIRST Wednesday due to Spring
    Break!!
  • Remember to bring a friend!
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