Income Taxes Financial Planning for Women February 2008 Garman/Forgue  Personal Finance  9th ed. Presented by Danielle Wal...
Objectives - be able to: <ul><li>Calculate your marginal tax rate & apply in tax planning </li></ul><ul><li>Reduce your ta...
Introduction <ul><li>Tax Planning:  Seeking legal ways to reduce, eliminate, or defer income taxes. </li></ul><ul><li>Taxa...
Progressive vs. Regressive <ul><li>Progressive tax-  tax rate increases as taxable income increases. </li></ul><ul><ul><li...
Marginal Tax Bracket and Rate <ul><li>Marginal Tax Bracket (MTB)- one of the 6 income ranges that are taxed at increasing ...
Find MTB <ul><li>Use IRS tables or </li></ul><ul><li>On tax table find:  </li></ul><ul><ul><li>Taxable income & tax due </...
Progressive Nature of Income Tax *Single filers Segment of  Taxable  Income (Marginal Tax Bracket) Marginal Tax Rate First...
Marginal Tax Rate and Financial Decisions <ul><li>Need to know MTB for investment decisions </li></ul><ul><li>Other financ...
Filing Status & Tax Rates <ul><li>IRS 2007 tax rate schedules </li></ul><ul><ul><li>http://www.irs.gov/formspubs/article/0...
8 Steps in Calculating Your Income Taxes <ul><li>Determine your total income </li></ul><ul><li>Determine and report your g...
8 Steps to Calculating Your Income Taxes <ul><li>6. Determine your preliminary tax liability </li></ul><ul><li>7. Subtract...
Adjusted Gross Income (AGI) <ul><li>Income (just a few) </li></ul><ul><ul><li>Wages and Salaries </li></ul></ul><ul><ul><l...
Personal Exemptions and Standard Deductions <ul><li>Personal Exemptions-  $3400 x number of people that taxpayer’s income ...
Personal Exemptions <ul><li>Based on the number of people supported by the taxpayer’s income </li></ul><ul><ul><li>Spouse,...
Standard Deductions Filing status Standard Deduction Single or married filing separately $5,350 Married filing jointly or ...
Itemized Deductions <ul><li>Medical and Dental Expenses </li></ul><ul><li>Taxes You Paid </li></ul><ul><li>Mortgage Intere...
Tax Credits <ul><li>After PE and SD you determine your Tax Liability </li></ul><ul><li>Subtract tax credits </li></ul><ul>...
Tax Credits <ul><li>Hope Scholarship Credit </li></ul><ul><li>Lifetime Learning Credit </li></ul><ul><li>Earned Income Cre...
Retirement Savings Tax Credit <ul><li>50% ($1,000 credit for $2,000 savings) </li></ul><ul><ul><li>AGI: Singles: $15,000; ...
Reduce Taxes Through Proper Planning <ul><li>Practice legal  tax avoidance , not  tax evasion . </li></ul><ul><li>A dollar...
Reduce Taxable Income Via Your Employer <ul><li>Premium only Plan </li></ul><ul><li>Transportation reimbursement plan </li...
Tax Terminology <ul><li>Taxable  </li></ul><ul><li>Tax-deferred </li></ul><ul><li>Tax-free (tax-exempt) </li></ul><ul><li>...
Tax Sheltered Investments <ul><li>Investments that yield returns that are tax advantaged </li></ul><ul><ul><li>IRAs, Tradi...
After-Tax Yield <ul><li>Because of tax-exempt status of some investments they may provide lower than average returns </li>...
After-Tax Yield <ul><li>Example- </li></ul><ul><ul><li>35% combined federal and sate marginal tax rate </li></ul></ul><ul>...
Overwithholding <ul><li>When employees have their employers withhold more in estimated taxes than the tax liability ultima...
Top 3 Financial Missteps <ul><li>Turn all your income tax planning over to someone else </li></ul><ul><li>Overwithhold too...
Hiring a Tax Preparer <ul><li>Anyone can be a tax preparer!! </li></ul><ul><li>Make sure to do your research </li></ul><ul...
Hiring a Tax Preparer <ul><li>Free file - AGI needs to be $54,000 or less </li></ul><ul><ul><li>http://www.irs.gov/efile/a...
Tax Changes for 2007 <ul><li>Deduction for mortgage insurance premiums is phased out for taxpayers with adjusted gross inc...
Utah Changes for 2007 <ul><li>What's New for 2007 Tax Year </li></ul><ul><ul><li>Dual Income Tax System:  The Utah individ...
Utah Changes for 2007 <ul><ul><li>Utah Educational Savings Plan Credit:  An investment in a 529 may be taken as a deductio...
Utah Changes for 2007 <ul><ul><li>Refundable Commercial Energy System Tax Credit:  A new refundable credit is available fo...
Receiving Your Refund <ul><li>Split refunds among up to three accounts </li></ul><ul><ul><li>banks, mutual funds, brokerag...
A Word of Caution <ul><li>Beware of Tax Refund Anticipation Loans (aka rapid refund) </li></ul><ul><ul><li>Very costly </l...
A Word of Caution: RapidTax.com <ul><li>Rapid Access Loan (1-2 Day Refund) Get a loan in the amount of your refund in as l...
On a Lighter Note <ul><li>The guy who said that truth never hurts never had to fill out a Form 1040. </li></ul><ul><li>Ano...
March 5, 2007!! <ul><li>Investment Planning </li></ul><ul><ul><li>Note that it is the FIRST Wednesday due to Spring Break!...
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Income Taxes

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  • Gross income includes earned and unearned income that one is required to report. One can make exclusions for money that is not subject to federal taxation Adjustments are after determining taxable income- can subtract things like moving expenses to a new job location, higher-education expenses tuition and fees
  • Opportunity cost- The most valuable alternative that must be sacrificed to satisfy a want. What could have been done with that money or what you sacrifice for not having that money Earning another dollar- if you pay a dollar too much in taxes, you may need to earn another dollar to replace it. A dollar saved in taxes, may be two dollars in your pocket Earnings- If the two dollars saved are invested…earnings on that investment?
  • FSA- employees can fun qualified medical expenses on a pretax basis through salary reduction. Use it or lose it!! Defined-Contribution- pretax contributions that lower tax liability
  • Tax deferred- interest, dividends, or capital gains that are allowed to grow without taxes until distributions are taken.
  • Min. amount it would cost $70.95 So to get your refund 8 days faster it would cost $8.86 a day!!!
  • Income Taxes

    1. 1. Income Taxes Financial Planning for Women February 2008 Garman/Forgue Personal Finance 9th ed. Presented by Danielle Walker
    2. 2. Objectives - be able to: <ul><li>Calculate your marginal tax rate & apply in tax planning </li></ul><ul><li>Reduce your taxable income </li></ul><ul><li>Differentiate between adjustments, deductions, & credits </li></ul><ul><li>Recognize taxable income < gross </li></ul><ul><li>Adjust W-4 withholding </li></ul><ul><li>Avoid instant refund schemes </li></ul><ul><li>Know Utah has 2 tax systems </li></ul>
    3. 3. Introduction <ul><li>Tax Planning: Seeking legal ways to reduce, eliminate, or defer income taxes. </li></ul><ul><li>Taxable Income: the income upon which income taxes are levied </li></ul>
    4. 4. Progressive vs. Regressive <ul><li>Progressive tax- tax rate increases as taxable income increases. </li></ul><ul><ul><li>U.S. income tax </li></ul></ul><ul><li>Regressive tax- as income rises, the tax demands a decreasing proportion of a person’s income. </li></ul><ul><ul><li>State sales tax </li></ul></ul>
    5. 5. Marginal Tax Bracket and Rate <ul><li>Marginal Tax Bracket (MTB)- one of the 6 income ranges that are taxed at increasing rates as income goes up </li></ul><ul><li>Marginal Tax Rate- the rate at which one is taxed in each bracket </li></ul><ul><li>Tax brackets are adjusted each year for inflation </li></ul>
    6. 6. Find MTB <ul><li>Use IRS tables or </li></ul><ul><li>On tax table find: </li></ul><ul><ul><li>Taxable income & tax due </li></ul></ul><ul><ul><li>Add $100 to taxable income and find tax due </li></ul></ul><ul><ul><li>The $ difference = MTB </li></ul></ul><ul><ul><ul><li>10%, 15%, 25%, 28%, 33% or 35% </li></ul></ul></ul><ul><ul><ul><li>Most taxpayers are in 10% or 15% MTB </li></ul></ul></ul>
    7. 7. Progressive Nature of Income Tax *Single filers Segment of Taxable Income (Marginal Tax Bracket) Marginal Tax 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%
    8. 8. Marginal Tax Rate and Financial Decisions <ul><li>Need to know MTB for investment decisions </li></ul><ul><li>Other financial decisions affect taxes </li></ul><ul><ul><li>Example- </li></ul></ul><ul><ul><ul><li>25% MTB </li></ul></ul></ul><ul><ul><ul><li>Give $100 to charity (tax-deductible) </li></ul></ul></ul><ul><ul><ul><li>Essentially you give $75 to charity and the government gives $25!! </li></ul></ul></ul><ul><ul><ul><li>Only if itemized deductions> standard deduction </li></ul></ul></ul>
    9. 9. Filing Status & Tax Rates <ul><li>IRS 2007 tax rate schedules </li></ul><ul><ul><li>http://www.irs.gov/formspubs/article/0,,id=164272,00.html </li></ul></ul><ul><ul><li>Single </li></ul></ul><ul><ul><li>Married, filing jointly or qualifying widower </li></ul></ul><ul><ul><li>Married, filing separately </li></ul></ul><ul><ul><li>Head of household </li></ul></ul>
    10. 10. 8 Steps in Calculating Your Income Taxes <ul><li>Determine your total income </li></ul><ul><li>Determine and report your gross income after subtracting exclusions </li></ul><ul><li>Subtract adjustments to income </li></ul><ul><li>Subtract either the standard deduction or itemized deductions </li></ul><ul><li>Subtract the value of your personal exemptions </li></ul>
    11. 11. 8 Steps to Calculating Your Income Taxes <ul><li>6. Determine your preliminary tax liability </li></ul><ul><li>7. Subtract tax credits for which you qualify </li></ul><ul><li>8. Calculate the balance due the IRS or the amount of your refund </li></ul>
    12. 12. Adjusted Gross Income (AGI) <ul><li>Income (just a few) </li></ul><ul><ul><li>Wages and Salaries </li></ul></ul><ul><ul><li>Commissions </li></ul></ul><ul><ul><li>Tips Earned </li></ul></ul><ul><ul><li>Gambling and Lottery Winnings </li></ul></ul><ul><ul><li>Capital Gains and Losses </li></ul></ul><ul><li>Exclusions/Adjustments </li></ul><ul><ul><li>Gifts </li></ul></ul><ul><ul><li>Inherited money or property </li></ul></ul><ul><ul><li>Income from a carpool </li></ul></ul><ul><ul><li>Federal income tax refunds </li></ul></ul><ul><ul><li>Child support payments </li></ul></ul>*AGI- gross income less any exclusions and adjustments
    13. 13. Personal Exemptions and Standard Deductions <ul><li>Personal Exemptions- $3400 x number of people that taxpayer’s income supports </li></ul><ul><li>Standard Deduction- amount that all tax payers may subtract from their AGI </li></ul><ul><ul><li>Amount depends on filing status </li></ul></ul><ul><ul><li>Deduct itemized deductions if > SD </li></ul></ul><ul><li>You only pay fed. taxes on income > your personal exemption(s) + standard or itemized deductions. (taxable income) </li></ul>
    14. 14. Personal Exemptions <ul><li>Based on the number of people supported by the taxpayer’s income </li></ul><ul><ul><li>Spouse, children, parents, etc. </li></ul></ul><ul><ul><li>Must provide more than half of financial support </li></ul></ul><ul><li>For 2007 each exemption reduces taxable income by $3,400 </li></ul><ul><ul><li>Adjusted yearly for inflation </li></ul></ul>
    15. 15. Standard Deductions Filing status Standard Deduction Single or married filing separately $5,350 Married filing jointly or qualifying widow(er) with dependant child $10,700 Head of household $7,850 **Do not use this chart if you are over 65.
    16. 16. Itemized Deductions <ul><li>Medical and Dental Expenses </li></ul><ul><li>Taxes You Paid </li></ul><ul><li>Mortgage Interest You Paid </li></ul><ul><li>Gifts to Charity </li></ul><ul><li>Casualty and Theft Losses </li></ul><ul><li>Job Expenses and Most Other Misc. Deductions </li></ul>
    17. 17. Tax Credits <ul><li>After PE and SD you determine your Tax Liability </li></ul><ul><li>Subtract tax credits </li></ul><ul><ul><li>Tax Credit- dollar-for-dollar decrease in tax liability </li></ul></ul><ul><ul><li>Refundable or Nonrefundable </li></ul></ul><ul><ul><ul><li>Refundable- can get paid even if you do not owe income taxes! Must file to collect! </li></ul></ul></ul>
    18. 18. Tax Credits <ul><li>Hope Scholarship Credit </li></ul><ul><li>Lifetime Learning Credit </li></ul><ul><li>Earned Income Credit </li></ul><ul><li>Child Tax Credit </li></ul><ul><li>Child and Dependant Care Credit </li></ul><ul><li>Adoption Credit </li></ul><ul><li>Mortgage Interest Credit </li></ul><ul><li>Retirement Savings Contribution Credit </li></ul><ul><li>Elderly or Disabled Tax Credit </li></ul><ul><li>Energy-Savings Tax Credit </li></ul>
    19. 19. Retirement Savings Tax Credit <ul><li>50% ($1,000 credit for $2,000 savings) </li></ul><ul><ul><li>AGI: Singles: $15,000; MFJ: $30,000 </li></ul></ul><ul><li>20% ($400 credit for $2,000 savings) </li></ul><ul><ul><li>AGI: Singles: $16,250; MFJ: $32,500 </li></ul></ul><ul><li>10% ($200 credit for $2,000 savings) </li></ul><ul><ul><li>AGI: Singles: $25,000: MFJ-$50,000 </li></ul></ul>
    20. 20. Reduce Taxes Through Proper Planning <ul><li>Practice legal tax avoidance , not tax evasion . </li></ul><ul><li>A dollar saved from taxes is really two dollars - or more </li></ul><ul><ul><li>Opportunity cost </li></ul></ul><ul><ul><li>Earning another dollar to replace one paid to the IRS </li></ul></ul><ul><ul><li>Earnings on a dollar not paid to the IRS </li></ul></ul>
    21. 21. Reduce Taxable Income Via Your Employer <ul><li>Premium only Plan </li></ul><ul><li>Transportation reimbursement plan </li></ul><ul><li>Flexible Spending Accounts (FSA) </li></ul><ul><li>Defined-Contribution Retirement Plan </li></ul><ul><ul><li>401(k) Retirement Plan </li></ul></ul><ul><ul><li>Matching Employer Contributions </li></ul></ul>
    22. 22. Tax Terminology <ul><li>Taxable </li></ul><ul><li>Tax-deferred </li></ul><ul><li>Tax-free (tax-exempt) </li></ul><ul><li>Tax Sheltered </li></ul>
    23. 23. Tax Sheltered Investments <ul><li>Investments that yield returns that are tax advantaged </li></ul><ul><ul><li>IRAs, Traditional and Roth </li></ul></ul><ul><ul><li>Coverdell Education Savings Account </li></ul></ul><ul><ul><li>529 College Savings Plans </li></ul></ul><ul><ul><li>Government Savings Bonds </li></ul></ul><ul><ul><li>Municipal Bonds </li></ul></ul><ul><ul><li>Capital Gains on Housing </li></ul></ul>
    24. 24. After-Tax Yield <ul><li>Because of tax-exempt status of some investments they may provide lower than average returns </li></ul><ul><li>Determine the after-tax yield to see if it is worth it. </li></ul><ul><ul><li>After-tax yield = taxable yield x (1- federal marginal tax rate) </li></ul></ul>
    25. 25. After-Tax Yield <ul><li>Example- </li></ul><ul><ul><li>35% combined federal and sate marginal tax rate </li></ul></ul><ul><ul><li>Municipal bond 3.5% yield </li></ul></ul><ul><ul><li>Taxable corporate bond 5.7% yield </li></ul></ul><ul><ul><li>5.7 x (1- 0.35) = 3.71 </li></ul></ul><ul><ul><ul><li>The 5.7% taxable bond is the way to go! </li></ul></ul></ul>
    26. 26. Overwithholding <ul><li>When employees have their employers withhold more in estimated taxes than the tax liability ultimately due. </li></ul><ul><li>A poor strategy of forced savings </li></ul><ul><li>Opportunity cost- what could have been done/earned with that money??? </li></ul><ul><li>File a new W4 to decrease your withholding and automatically invest or payoff debt </li></ul><ul><ul><li>http://www.irs.gov/individuals/article/0,,id=96196,00.html </li></ul></ul>
    27. 27. Top 3 Financial Missteps <ul><li>Turn all your income tax planning over to someone else </li></ul><ul><li>Overwithhold too much income to receive a refund next year </li></ul><ul><li>Ignore the impact of income taxes in your personal financial planning </li></ul>
    28. 28. Hiring a Tax Preparer <ul><li>Anyone can be a tax preparer!! </li></ul><ul><li>Make sure to do your research </li></ul><ul><ul><li>What qualifications do they have? </li></ul></ul><ul><ul><li>How qualified do I need them to be? </li></ul></ul><ul><ul><li>What do they charge? </li></ul></ul><ul><ul><li>Do I want tax advise all year round? </li></ul></ul><ul><ul><li>Make sure to check out agencies as well as individuals </li></ul></ul>
    29. 29. Hiring a Tax Preparer <ul><li>Free file - AGI needs to be $54,000 or less </li></ul><ul><ul><li>http://www.irs.gov/efile/article/0,,id=118986,00.html </li></ul></ul><ul><li>USU Accounting students provide VITA assistance in basement of USU Business building </li></ul><ul><ul><li>Open Wednesdays 5-9 pm & Saturdays 9 am-1 pm February 13th - April 5th. </li></ul></ul><ul><ul><ul><li>For more info: Joe Fail [ [email_address] ] </li></ul></ul></ul><ul><ul><li>The VITA lab will not be open March 8th, 12th, 15th, or 29th </li></ul></ul>
    30. 30. Tax Changes for 2007 <ul><li>Deduction for mortgage insurance premiums is phased out for taxpayers with adjusted gross incomes exceeding $100,000 ($50,000, if married filing separately). </li></ul><ul><li>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. </li></ul>
    31. 31. Utah Changes for 2007 <ul><li>What's New for 2007 Tax Year </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Utah Educational Savings Plan (529) Deduction Expanded: The deduction for an investment in a Utah Educational Savings Plan has been increased for 2007. </li></ul></ul>
    32. 32. Utah Changes for 2007 <ul><ul><li>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. </li></ul></ul><ul><ul><li>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. </li></ul></ul>
    33. 33. Utah Changes for 2007 <ul><ul><li>Refundable Commercial Energy System Tax Credit: A new refundable credit is available for a commercial energy system. </li></ul></ul><ul><li>For more information - http://incometax.utah.gov/new.php </li></ul>
    34. 34. Receiving Your Refund <ul><li>Split refunds among up to three accounts </li></ul><ul><ul><li>banks, mutual funds, brokerage firms or credit unions </li></ul></ul><ul><ul><li>To encourage savings </li></ul></ul><ul><li>Direct deposit to one account </li></ul><ul><li>Paper check through the mail. </li></ul><ul><li>IRS will process electronically filed returns in as little as 10 days but paper refunds will take 4-6 weeks. </li></ul>
    35. 35. A Word of Caution <ul><li>Beware of Tax Refund Anticipation Loans (aka rapid refund) </li></ul><ul><ul><li>Very costly </li></ul></ul><ul><ul><li>Similar to a payday loan!! </li></ul></ul><ul><ul><li>File electronically and it is almost as fast </li></ul></ul>
    36. 36. A Word of Caution: RapidTax.com <ul><li>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 </li></ul><ul><li>*See below for additional fees charged by SBBT bank. </li></ul><ul><ul><li>Refund Amount SBBT Fee </li></ul></ul><ul><ul><li>$300 - $3500 3% </li></ul></ul><ul><ul><li>$3501 - $4500 $105 </li></ul></ul><ul><ul><li>In addition to the fees stated above,there is an account handling fee of $30.95. </li></ul></ul>
    37. 37. On a Lighter Note <ul><li>The guy who said that truth never hurts never had to fill out a Form 1040. </li></ul><ul><li>Another difference between death and taxes is that death is frequently painless. </li></ul><ul><li>Children may be deductible, but they are still taxing. </li></ul><ul><li>Tax Humor (page 1)
 From Tom Antion & Associates - http://www.antion.com/humor/speakerhumor/taxes.htm </li></ul>
    38. 38. March 5, 2007!! <ul><li>Investment Planning </li></ul><ul><ul><li>Note that it is the FIRST Wednesday due to Spring Break!! </li></ul></ul><ul><ul><li>Remember to bring a friend! </li></ul></ul>
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