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tax planning (PowerPoint download)

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									Chapter 3


                                                 Tax Planning




Based on Personal Financial Planning by Gitman , Joehnk, and Billingsley. Cengage, 12e, 2011. Slides by Dorla Evans, FIN 100, The University of Alabama in
Huntsville.

                                                                                                                                                             1
Importance of Tax Planning
                Taxes are your largest
                 annual expense

                The average American
                 works more than four
                 months just to pay
                 his/hers taxes




                                          2
Tax Freedom Day




    http://www.taxfoundation.org/UserFiles/Image/Tax-Freedom-Day/TFD-graph-large.jpg
                                                                                       3
Tax Freedom Day




    http://www.taxfoundation.org/taxfreedomday/
                                                  4
              Avoiding Taxes
 1700s in England,
  taxes on windows

 Chilean tax on cars
  vs. trucks

 Peter’s the Great tax
  on beards

 French tax on rooms

 Lady Godiva
                               5
Tax Planning
 Lower income                 Lower tax bracket
    Tax-exempt muni bonds          Capital gains


 Maximize your                Tax credits
  deductions.
    Check itemizing           Don’t over withhold
                                (invest extra)
 Defer taxes to the future
    401K                      Invest tax refunds,
    IRA                        don’t spend them
    Capital gains

                                                      6
Tax Credits v Deductions
Gross Income     $40,000   Gross Income   $40,000
-Deduction        -2,000   Tax (20%)       $8,000
Taxable Income   $38,000
                           -Credit        -$2,000
Tax (20%)          7,600   Net Tax         $6,000




                                                    7
Special tax issues
 American Opportunity Tax Credit
   Up to $2,500 in refundable tax credits for undergraduate college
    education
   http://taxes.about.com/od/deductionscredits/qt/American-Opportunity-Tax-
    Credit.htm




                                                                               8
Special tax issues
 Energy Tax Credits
    Tax Credits for Energy Efficient Home Improvements
    purchase and install qualifying energy-efficient property in
     your main home in the years 2006, 2007, 2009, and 2010
    http://taxes.about.com/od/deductionscredits/qt/energytaxcr
     edit.htm


 Student Loan Interest
    Interest paid on a student loan may be tax deductible; law is
     changing 2013 to only first 5-years of interest
    http://taxes.about.com/od/deductionscredits/qt/studentloanint.htm



                                                                         9
Special tax issues
 Saver's Credit
   Allows you to get a credit for up to half of what you
    contribute to your IRA or other qualified retirement
    plan.

   To qualify: 18 or older; not a full-time student; not
    claimed as a dependent on someone else's return;
    and have an AGI that does not exceed $55,500 if
    Married Filing Jointly, $41,625 if Head of Household
    and $27,750 if Single.

   http://www.hrblock.com/taxes/tax_tips/deductions_credits/sa
    verscredit.html

                                                                  10
Question
 Does it make sense to get a rapid refund
  from tax preparer?
 A. Yes
 B. No




                                             11
Rapid Application Refund

  Amount of Loan               $250      $500     $1,000    $2,000    $3,000

  H&R Block fees               $69       $69       $69       $69       $69

  Bank fees                   $39.95    $39.95    $49.95    $69.95    $89.95

   Total fees                 $108.95   $108.95   $118.95   $138.95   $158.95

  Interest cost per period    43.6%     21.8%     11.0%      7.0%      5.3%

  Interest cost for 4 weeks    523%     261%      143%       83%       64%
  (12)
  Interest cost for 6 weeks    378%     189%      103%       60%       46%
  (8.67)
  Interest cost for 8 weeks    261%     131%       71%       42%       32%
  (6)



                                                                                12
Reasons for Being Audited
     Random
     Previous errors
     High income level
     Itemized
      deductions




                            13
Questions?




             14

								
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