Chapter 4: Managing Taxes

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Chapter 4 Managing Taxes
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Objectives

• Explain how taxes are administered and
  classified.
• Describe the concept of the marginal tax rate.
• Determine who should file an income tax return.

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Objectives

• Describe the two ways of paying taxes payroll
  withholding and estimated taxes.
• Identify the three steps involved in calculating
  federal income taxes.
• Understand planning strategies to legally avoid
  overpayment of income taxes.
• Explain the basics of IRS audits.

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Taxes on Purchases

• State and local taxes are added to the purchase
  price of goods.
• Excise tax is imposed on specific goods and
  services
• Gasoline
• Cigarettes
• Alcohol
• Tires
• Air travel
• Telephone service

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Taxes on Property

• Real estate property tax is based on the value of
  land and buildings.
• Personal property taxes on the value of
  automobiles, boats, furniture, and farm equipment
  are imposed in some areas.

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New Math
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Taxes on Wealth

• Estate tax-federal tax imposed on the value of an
  individuals property at the time of death.
• Inheritance tax-state tax levied on the value of
  property bequeathed by a deceased individual.

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3 Steps in Determining Taxes

1. Determining Adjusted Gross Income
2. Computing Taxable Income
3. Calculating Taxes Owed

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What is Tax Management?
ATTENTION!
A PLANNING PROCESS FOR TAX

• Reduction
• Deferment
• Elimination

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Administration/Classification of Income Taxes

• Federal tax laws
• Progressive nature of income tax
• Regressive

• Marginal tax rate
• Effective marginal tax rate
• Average tax rate

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Step 1 Determining Adjusted Gross Income (AGI)
Earned Income-money received by personal
effort. Investment Income-money received in the
form of dividends, interest, or rent Passive
Income-activities in which you do not actively
participate. Other Income-Alimony, awards,
lottery winning, prizes
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Other Items That Impact Income
Exclusion-amount not included in gross income.
Tax Exempt Income-another name for
exclusions-Qualified scholarships and fellowships
where money is used for tuition, fees, supplies,
and equipment, VA payments Tax Deferred
Income-income that will be taxed at a later
date Adjusted Gross Income (AGI)-gross income
after certain reductions have been made Tax
Shelters-immediate tax benefits and a reasonable
expectation of a future financial return (IRAs
Keoghs)
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Taxes on Earnings

• Social Security
• Income Tax
• Federal tax
• State tax in all but 7 states
• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

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The Marginal Tax Rate Affects Your Final Decision
3,650 personal exemption is not taxed
5,700 standard deduction is not taxed
Next 8,350 of income is taxed at 10
Remaining 16,700 of income is taxed at 25
Next 25,600 of income is taxed at 15
0 0 835.00
3,840.00
4,175
Gross Income 60,000 Taxes 8,850 Marginal
Tax Rate 25
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Eight Steps in Calculating Your Income Taxes
Step 1
Total Income
Subtract exclusions
Step 2
Gross Income
Subtract adjustments to income.
Step 3
Adjusted Gross Income
Subtract standard deduction or total itemized
deductions.
Step 4
Subtotal
Taxable Income
Subtract value of exemptions
Step 5
Apply tax table or tax-rate schedule to determine
liability.
Step 6
Final tax liability
Subtract tax credits
Step 7
Calculate balance owed or refund.
Step 8
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Step 2 Computing Taxable Income

• Deduction-an amount subtracted from AGI to arrive
  at taxable income.
• Standard deduction (5,700/single in 2010)
• Itemized deduction
• Exemption-a deduction from AGI for yourself, your
  spouse, and qualified dependents (3,650 in 2010)

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Step 3 Calculating Taxes Owed

• Use your taxable income in conjunction with the
  appropriate tax table or tax schedule.
• Marginal tax rate-the tax on the last dollar of
  income.
• Average tax rate-total tax due divided ty your
  taxable income.
• Tax credit-amounts subtracted from the amount of
  tax owed.

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The Progressive Nature of the Federal Income
Tax-2010
If your filing status is Single
If your taxable income is Over But not over -- The tax is Of the amount over--
0 8,350 ------------ 10 0
8,350 33,950 835.00 15 8,350
33,950 82,250 4,675.00 25 33,950
82,250 171,550 16,750.00 28 82,250
171,550 372,950 41,754 33 171,550
372,9650 ---------- 108,216 35 372,950
The Tax Rate Schedule is shown so you can see the
tax rate that applies to all levels of taxable
income. It is not used to figure ones taxes.
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Tax Credit Versus Tax Deduction

• 100 tax credit reduces your taxes by 100
• 100 tax deduction reduces taxes by your tax
  bracket. For instance, if a person is in the 25
  tax bracket it would reduce your taxes by 25

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Who Should File a Tax Return?
STUDENTS WITH

• Earned income
• Unearned income
• Transfer payments

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Is it Taxable Income? Is it Deductible?
Is it Taxable Income? Yes No
Lottery Winnings
Child Support Received
Workers Compensation Benefits
Life Insurance Death Benefits
Municipal Bond Interest Earnings
Bartering Income
Is it Deductible? Yes No
Life Insurance Premiums
Cosmetic Surgery for Improved Looks
Fees for Traffic Violations
Mileage for Driving to Volunteer Work
An Attorneys Fee for Preparing Will
Income Tax Preparation