CHAPTER PLAYLIST SONGS: - PowerPoint Presentation

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CHAPTER PLAYLIST SONGS: “God Bless the Child” by Chris Botti and Paula Cole “Money for Nothing” by Dire Straits “Tax Man” by George Harrison

Tax ManagementSlide2

Learning ObjectivesLO 9-1 Describe the purposes of taxes, the different types of taxes, and the principles of progressive and regressive taxes.LO 9-2 Examine the logic, terms, and process of filing taxes.LO 9-3 Distinguish between different types of tax rates, and know when they apply and how to calculate them.LO 9-4 Analyze strategies to legally minimize tax liabilities.Slide3

Taxes“But in this world, nothing can be said to be certain, except death and taxes.” ~ Benjamin Franklin (1706-1790) Taxes: Fees charged by the government on a product, income, or activity Direct Tax: Fee levied directly on personal income  Indirect Tax: Charge levied on consumption, expenditure, privilege, or right, but not on income or

property

Public Goods and Services:

Government-provided

services that protect and support citizens. Examples

include services provided by the police, fire, library, and

the militarySlide4

ProgressiveRegressiveDifferent rates based on incomeDesigned to create equity among citizens“Robin Hood” taxApplied uniformlyHigher percentage tax on lower income earners than higher income earnersProgressive vs. Regressive TaxSlide5

Regressive TaxSales Tax – 0% to 10% or higherExcise tax – consumer products such as tobacco, alcohol, gasolineProperty tax – based on the value of your propertyGift tax – a percentage tax Capital gains tax – a percentage taxEstate taxSocial Security tax – 6.2% of income up to $106,800Medicare tax – 1.45% of incomeSlide6

Do the MathYou make $17,500/year. Your parents make $69,000/year. You both pay $100 per year in gasoline tax.What percent of your income goes toward this tax?What percent of your parents income goes toward this tax?Is this a regressive or progressive tax?Slide7

Federal Tax Rates for Taxable Income (2011)Tax Rate

Married Couples Filing Jointly

Most Single Filers

Standard Deduction

$11,600

$5,800

10%

Not over $17,050

Not over $8,500

15%

$17,051 – $69,000

$8,501– $34,500

25%

$69,001 – $139,350

$34,501 – $83,600

28%

$139,351 – $212,300

$83,601 – $174,400

33%

$212,301 – $379,150

$174,401 – $379,150

35%

Over $379,150

Over $379,150Slide8

W-4 FormDetermines the amount of taxes withheld from your paycheck Slide9

W-4 Personal Allowances Worksheet (Figure 9.2)Slide10

Deductions and Adjustments Worksheet (Figure 9.3)Slide11

Two-Earners/Multiple Jobs Worksheet (Figure 9.4)Slide12

Withholding Tax GuidelinesTo avoid penalty, you need to withhold at least 100% of what you paid last year or 90% of what you owe in the current year.Quarterly estimated tax payment needs to be made if there is a shortfall between what is withheld and what is owed. Income on which taxes are not withheld:AlimonySelf-employmentInvestment incomeSlide13

Filing Taxes – Filing StatusTaxes for the previous year are due April 15th or the first business day after April 15 if it falls on a weekend or federal holidayFive Filing Statuses:SingleMarried filing jointlyMarried filing separatelyQualified widow(er) with dependent childHead of householdSlide14

Filing Taxes – Gross IncomeEarned incomeWagesCommissionsTipsFarmingUnearned incomeInvestment incomeRoyaltiesPensionsAlimonyUnemploymentSlide15

Filing Taxes Adjusted gross income (AGI)Gross income minus tax deductionsDeductions—must choose standard or itemizedStandard deduction based on filing status (2011)Married filing jointly $11,400Head of household $8,400Single or married filing separately $5,700Itemized deductions – qualified expenses that are not taxedMortgage interestState and local taxes

Personal property taxes

Charitable contributions

Medical expenses

Casualty and theft losses

Job-related and school expensesSlide16

Filing Taxes - Exemptions Exemption: A dollar amount allowed by law that reduces your adjusted gross income that would otherwise be taxedDependents must:Be a U.S. citizen or resident of Canada or MexicoBe related or a member of the taxpayer’s household for the entire yearNot file a joint return with a spouseHave a gross income of less than $3,650 (2009) (not applicable for a taxpayer’s child who is under 19 or under 24 if a full-time student)Depend on you for more than half of their support and live with you or be a relativeSlide17

Filing Taxes - Taxable Income Adjusted gross income (AGI) minus exemptions and deductionsTax credit – reduces your tax liability dollar-for-dollarTax deduction – reduces your adjusted gross income (AGI)Slide18

Tax FormsInternal Revenue Service website www.irs.gov IRS Forms and PublicationsForm 1040EZWages, salaries, tips, unemployment compensation, taxable scholarships, and fellowships add up to less than $100,000 and taxable interest is under $1,500No dependentsAge < 65 and not blind Filing status is single or married filing jointlyNo advance earned income tax credits (EITC), no adjustments to income, no credits except EITC, and you owe no household employment taxes

No itemized deductionsSlide19

Tax FormsForm 1040AWages, salaries, tips, unemployment compensation, taxable scholarships and fellowships, investment income, capital gain distributions, and retirement plan income add up to less than $100,000No itemized deductionsClaim only specific adjustments to incomeOwe only certain types of taxesClaim only specific creditsSlide20

Tax FormsForm 1040Can be used by anyoneMost comprehensiveCan require additional schedules70% of taxpayers use Form 1040Schedule A – itemized deductionsSchedule C – profit/loss on businessSlide21

FilingIRS E-file free electronic filingPopular tax software programsTaxACT TurboTaxPaper filingProfessional FilingCPAH&R BlockLiberty TaxMany othersSlide22

Items to Watch for When Selecting a Tax PreparerSlide23

AuditsTax evasion is risky, a felony, and punishable by 5 years imprisonment and $250,000 fineIRS examines, or audits, a tax return to help deter tax cheatingIRS looks for irregularities when determining who to auditCan go back 3 years for any reason or two years after the tax was paid2008 — examined 1.1 million returns and assessed over $6.7 billion in unpaid taxesRecords to keep – see next slideSlide24

Tax Recordkeeping Documents to Keep for at Least 3 YearsW-2 statements showing your earnings for the year1099 forms that show how much you received in dividends and gains on investmentsBank account tax forms showing interest earned Documents relating to student loan and mortgage interest paid Records of property taxes, state taxes, and other taxes paidReceipts for charitable contributions and medical expenses (if claimed)Receipts for work-related expenses if self-employed

Receipts for purchases and sales of stocks, bonds, or mutual funds and any contributions to retirement accounts

Credit-card statements that show business expenses or charitable contributions

Records of scholarships and what the scholarship paid for

Records related to property soldSlide25

Tax RatesMarginal income tax rate – the tax rate levied on your LAST dollar of taxable incomeDifference between marginal tax and average tax?Tax Rate (2011)

Married Couples Filing Jointly

Most Single Filers

Standard Deduction

$11,600

$5,800

10%

Not over $17,050

Not over $8,500

15%

$17,051 – $69,000

$8,501– $34,500

25%

$69,001 – $139,350

$34,501 – $83,600

28%

$139,351 – $212,300

$83,601 – $174,400

33%

$212,301 – $379,150

$174,401 – $379,150

35%

Over $379,150

Over $379,150Slide26

Doing the Math 9.2Slide27

Doing the Math 9.3Slide28

Alternative Minimum Tax (AMT)Extra tax you have to pay on top of your regular income taxDesigned to make sure high earners are paying taxesIntroduced in 1969Individuals earning over $75,000 or couples earning over $150,000IRS form 6251 Instruction for form 6251Need to look at your income to decide on capital gains, gifts, etc.Slide29

Capital Gains or LossesShort-term gain – gain on an asset held for 12 months or less – taxed at ordinary income rateLong-term gain – gain on an asset held for longer than 12 months – taxed at no more than 15%The consequences of not paying your capital gains when you exercise your stock optionsExample: Case of Ronald Speltz of Ely, IowaSlide30

Minimize Your Tax Liability – LegallyExemptionsDeductionsItemizing, form 1040 schedule ARetirement savings contributions creditMortgage interest creditLower your taxable incomeMunicipal bondsHealth savings accountDependent care accountSlide31

Minimize Your Tax Liability – LegallySlide32

Tax CreditsEducation deductions and creditsEarned income tax credit (EITC)Energy tax creditHybrid/electric car tax credit