Income Taxes
    Financial Planning for Women
           February 2008
Garman/Forgue Personal Finance 9th ed.
    Presente...
Objectives - be able to:
• Calculate your marginal tax rate &
  apply in tax planning
• Reduce your taxable income
• Diffe...
Introduction
• Tax Planning: Seeking legal ways to
  reduce, eliminate, or defer income
  taxes.
• Taxable Income: the inc...
Progressive vs. Regressive
• Progressive tax- tax rate increases as
  taxable income increases.
  – U.S. income tax
• Regr...
Marginal Tax Bracket and
            Rate
• Marginal Tax Bracket (MTB)- one of the
  6 income ranges that are taxed at
  i...
Find MTB
• Use IRS tables or
• On tax table find:
  – Taxable income & tax due
  – Add $100 to taxable income and find tax...
Progressive Nature of
           Income Tax
Segment of Taxable Income Marginal Tax
(Marginal Tax Bracket)    Rate
First $7...
Marginal Tax Rate and
     Financial Decisions
• Need to know MTB for investment
  decisions
• Other financial decisions a...
Filing Status & Tax Rates
• IRS 2007 tax rate schedules
  – http://www.irs.gov/formspubs/article/0,,id=1
    64272,00.html...
8 Steps in Calculating Your
      Income Taxes
1. Determine your total income
2. Determine and report your gross
   income...
8 Steps to Calculating Your
      Income Taxes
6. Determine your preliminary tax liability
7. Subtract tax credits for whi...
Adjusted Gross Income
               (AGI)
• Income (just a few)       • Exclusions/Adjustments
   – Wages and Salaries   ...
Personal Exemptions and
    Standard Deductions
• Personal Exemptions- $3400 x number of
  people that taxpayer’s income s...
Personal Exemptions
• Based on the number of people
  supported by the taxpayer’s income
  – Spouse, children, parents, et...
Standard Deductions
Filing status                                 Standard
                                              D...
Itemized Deductions
1.   Medical and Dental Expenses
2.   Taxes You Paid
3.   Mortgage Interest You Paid
4.   Gifts to Cha...
Tax Credits
• After PE and SD you determine your
  Tax Liability
• Subtract tax credits
  – Tax Credit- dollar-for-dollar ...
Tax Credits
• Hope Scholarship    • Adoption Credit
  Credit              • Mortgage Interest
• Lifetime Learning     Cred...
Retirement Savings Tax
           Credit
• 50% ($1,000 credit for $2,000 savings)
  – AGI: Singles: $15,000; MFJ: $30,000
...
Reduce Taxes Through
       Proper Planning
• Practice legal tax avoidance, not tax
  evasion.
• A dollar saved from taxes...
Reduce Taxable Income Via
     Your Employer
•   Premium only Plan
•   Transportation reimbursement plan
•   Flexible Spen...
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
  – Co...
After-Tax Yield
• Because of tax-exempt status of some
  investments they may provide lower
  than average returns
• Deter...
After-Tax Yield
• Example-
  – 35% combined federal and sate marginal
    tax rate
  – Municipal bond 3.5% yield
  – Taxab...
Overwithholding
• When employees have their employers
  withhold more in estimated taxes than the tax
  liability ultimate...
Top 3 Financial Missteps
1. Turn all your income tax planning over
   to someone else
2. Overwithhold too much income to
 ...
Hiring a Tax Preparer
• Anyone can be a tax preparer!!
• Make sure to do your research
  – What qualifications do they hav...
Hiring a Tax Preparer
• Free file - AGI needs to be $54,000 or less
  – http://www.irs.gov/efile/article/0,,id=118986,00.h...
Tax Changes for 2007
• Deduction for mortgage insurance premiums
  is phased out for taxpayers with adjusted
  gross incom...
Utah Changes for 2007
• What's New for 2007 Tax Year
  – Dual Income Tax System: The Utah
    individual tax law was chang...
Utah Changes for 2007
– Utah Educational Savings Plan Credit: An
  investment in a 529 may be taken as a deduction
  (Part...
Utah Changes for 2007
  – Refundable Commercial Energy System Tax
    Credit: A new refundable credit is available for a
 ...
Receiving Your Refund
• Split refunds among up to three accounts
   – banks, mutual funds, brokerage firms or credit
     ...
A Word of Caution
• Beware of Tax Refund Anticipation
  Loans (aka rapid refund)
  – Very costly
  – Similar to a payday l...
A Word of Caution:
            RapidTax.com
• Rapid Access Loan (1-2 Day Refund)Get a
  loan in the amount of your refund ...
On a Lighter Note
• The guy who said that truth never hurts never
  had to fill out a Form 1040.
• Another difference betw...
March 5, 2007!!
• Investment Planning
  – Note that it is the FIRST Wednesday due
    to Spring Break!!
  – Remember to br...
Upcoming SlideShare
Loading in...5
×

Income Taxes

720

Published on

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
720
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
5
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Income Taxes

  1. 1. Income Taxes Financial Planning for Women February 2008 Garman/Forgue Personal Finance 9th ed. Presented by Danielle Walker 1
  2. 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 < gross • Adjust W-4 withholding • Avoid instant refund schemes • Know Utah has 2 tax systems 2
  3. 3. Introduction • Tax Planning: Seeking legal ways to reduce, eliminate, or defer income taxes. • Taxable Income: the income upon which income taxes are levied 3
  4. 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 person’s income. – State sales tax 4
  5. 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 5
  6. 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 6
  7. 7. 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
  8. 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 deductions> standard deduction 8
  9. 9. 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
  10. 10. 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
  11. 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 11
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 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! 17
  18. 18. 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
  19. 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 19
  20. 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 20
  21. 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 21
  22. 22. Tax Terminology • Taxable • Tax-deferred • Tax-free (tax-exempt) • Tax Sheltered 22
  23. 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 23
  24. 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) 24
  25. 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! 25
  26. 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,,id=96196,0 0.html 26
  27. 27. 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
  28. 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 28
  29. 29. 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
  30. 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. 30
  31. 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. 31
  32. 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. 32
  33. 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/new.php 33
  34. 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. 34
  35. 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 35
  36. 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. 36
  37. 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 37
  38. 38. March 5, 2007!! • Investment Planning – Note that it is the FIRST Wednesday due to Spring Break!! – Remember to bring a friend! 38
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×