Income Taxes by ramhood17

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

                                    1
   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 < gross
• Adjust W-4 withholding
• Avoid instant refund schemes
• Know Utah has 2 tax systems          2
           Introduction
• Tax Planning: Seeking legal ways to
  reduce, eliminate, or defer income
  taxes.
• Taxable Income: the income upon
  which income taxes are levied



                                        3
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 person’s income.
  – State sales tax

                                           4
  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



                                                     5
               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
                                              6
       Progressive Nature of
           Income Tax
Segment of Taxable Income Marginal Tax
(Marginal Tax Bracket)    Rate
First $7,825                            10%
Over $7,825 but not over $31,850        15%
Over $31,850 but not over $77,100       25%
Over $77,100 but not over $160,850      28%
Over $160,850 but not over $349,700     33%
Over $349,700                           35%

                                   *Single filers   7
    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 deductions> standard deduction
                                                    8
  Filing Status & Tax Rates
• IRS 2007 tax rate schedules
  – http://www.irs.gov/formspubs/article/0,,id=1
    64272,00.html
  – Single
  – Married, filing jointly or qualifying widower
  – Married, filing separately
  – Head of household

                                                9
8 Steps in Calculating Your
      Income Taxes
1. Determine your total income
2. Determine and report your gross
   income after subtracting exclusions
3. Subtract adjustments to income
4. Subtract either the standard
   deduction or itemized deductions
5. Subtract the value of your personal
   exemptions
                                         10
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



                                              11
       Adjusted Gross Income
                (AGI)
• Income (just a few)       • Exclusions/Adjustments
   – Wages and Salaries        – Gifts
   – Commissions               – Inherited money or
   – Tips Earned                 property
   – Gambling and Lottery      – Income from a carpool
     Winnings                  – Federal income tax
   – Capital Gains and           refunds
     Losses                    – Child support payments

                *AGI- gross income less any exclusions
                                      and adjustments

                                                          12
  Personal Exemptions and
    Standard Deductions
• Personal Exemptions- $3400 x number of
  people that taxpayer’s income supports
• Standard Deduction- amount that all tax
  payers may subtract from their AGI
  – Amount depends on filing status
  – Deduct itemized deductions if > SD
• You only pay fed. taxes on income > your
  personal exemption(s) + standard or
  itemized deductions. (taxable income)
                                             13
     Personal Exemptions
• Based on the number of people
  supported by the taxpayer’s 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
                                               14
        Standard Deductions
Filing status                                 Standard
                                              Deduction
Single or married filing separately           $5,350

Married filing jointly or qualifying          $10,700
widow(er) with dependant child
Head of household                             $7,850


**Do not use this chart if you are over 65.               15
       Itemized Deductions
1.   Medical and Dental Expenses
2.   Taxes You Paid
3.   Mortgage Interest You Paid
4.   Gifts to Charity
5.   Casualty and Theft Losses
6.   Job Expenses and Most Other Misc.
     Deductions
                                         16
             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!
                                                    17
             Tax Credits
• Hope Scholarship    • Adoption Credit
  Credit              • Mortgage Interest
• Lifetime Learning     Credit
  Credit              • Retirement Savings
• Earned Income         Contribution Credit
  Credit              • Elderly or Disabled
• Child Tax Credit      Tax Credit
• Child and           • Energy-Savings Tax
  Dependant Care        Credit
  Credit
                                          18
   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

                                           19
    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
                                                 20
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


                                           21
          Tax Terminology
•   Taxable
•   Tax-deferred
•   Tax-free (tax-exempt)
•   Tax Sheltered




                            22
 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

                                            23
           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)

                                                    24
          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!


                                                25
          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,,id=96196,0
    0.html                                             26
  Top 3 Financial Missteps
1. Turn all your income tax planning over
   to someone else
2. Overwithhold too much income to
   receive a refund next year
3. Ignore the impact of income taxes in
   your personal financial planning


                                        27
     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
                                              28
      Hiring a Tax Preparer
• Free file - AGI needs to be $54,000 or less
  – http://www.irs.gov/efile/article/0,,id=118986,00.html
• 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@yahoo.com]
  – The VITA lab will not be open March 8th, 12th,
    15th, or 29th

                                                            29
     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.
                                             30
    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.

                                                31
  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.


                                                     32
    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/new.php




                                                         33
    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.

                                                      34
        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




                                                   35
          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.
                                                                 36
          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


                                                     37
          March 5, 2007!!
• Investment Planning
  – Note that it is the FIRST Wednesday due
    to Spring Break!!
  – Remember to bring a friend!




                                              38

								
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