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FIN 200: Personal Finance
Topic 6-TaxesLawrence Schrenk, Instructor
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Learning Objectives
1. Discuss the structure of personal taxes in the United States. ▪
2. Explain the role that tax considerations should play in financial decision-making
3. Describe recent changes and new trends in Taxation.
NOTE: Completing complicated tax forms is NOT a learning objective. ▪
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Tax Preparation Recommendations
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Limitations and Warnings
One chapter in a book and one lecture do not make you a tax expert. Know what you do not know.
Our goal cannot be for you to have all the skills necessary to complete complicated tax forms with multiple schedules.
If you want to do it yourself...become an accountant.
Changes in tax codes.
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Goal
Our goal is to make you aware of the tax implications of financial decision-making.
How can you make financial decisions in calendar year that will minimize your taxes come April?
What do you need to do before you go to your tax preparer?
Avoiding ‘Opps!’ moments
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What Forms Can You Do?
1040EZ ▪ You should be able to do this one after the course,
but it’s so simple that you also could probably do it without this course.
1040 without Schedules You might want to attempt this if you are not
itemizing or your deductions are very simple. 1040 with Schedules
Go to an expert (suggestions). ▪
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Tax Preparation Software
TurboTax, etc. Reviews, More Reviews, and yet More Reviews
General Consensus: TurboTax is one of the best And one of the most expensive. ▪
Comments Does one suit your needs? Go with a major software firm. Preview versions of software ▪
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The Range of Taxes
Federal Income Tax FICA (Federal Insurance Contributions Act) Medicaid
State Income Sales Tax
County Property Tax
City Income Tax Commuter Tax
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Tax Types
Progressive Increases with Income Inflation and Tax ‘Creep’ Federal Income Tax Shifts tax to higher ability-to-pay
Regressive Uniform Tax Social Security Taxes Value-added tax or other sales tax Shifts tax to lower ability-to-pay
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Federal Tax Rate
Taxable Income(Single Rate 2008)
0%5%
10%15%20%25%30%35%40%
$0-$8,025 $8,025-$32,550
$32,550-$78,850
$78,850-$164,550
164550-357700
$357,700and over
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Marginal versus Average Tax
Average tax rate is the average rate you pay on your entire income.
Marginal tax rate is the rate you will pay on your next dollar of income.
If marginal tax rate > average tax rate, it is progressive.
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Tax Implications of Financial Decision-Making
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Minimize Income
Know what does not count: Proceeds of life insurance contracts payable by reason of
death, Child support payments, Welfare benefits, Money contributed to retirement accounts, Gifts, Return of invested capital.
For every detail (if fact of every federal law) you can search the US Code Collection. Just be prepared for the ‘legalese’.
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Maximize Deductions
Taxes (such as local income, state, real estate, foreign, and personal property taxes)
Medical and dental expenses Interest expenses on mortgages, home equity loans,
and real estate Charitable work or contributions to tax-exempt
organizations Casualty and theft losses Job expenses Impairment-related expenses for persons with
disabilities Educational expenses
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Maximize Credits
Earned Income Tax Credit Child Tax Credit Child and Dependent Care Credit State Tax Credits
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End of Year Strategies
Extra mortgage payment Pay property taxes early Charitable donations Realize investment losses Increases retirement savings
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Recent Changes (since 2000)
Lower Tax Rates Increased Child Credit Expanded Retirement Savings More Educational Benefits Estate Tax Phased Out Reduced Capital Gains and Dividend Taxes
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Sunset 2011
Rates Revert $500 Child Credit Retirement Savings Decreased Educational Benefits Estate Tax Back Dividends Taxed as Ordinary Income
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Online Sources of More Information
Tax Policy Center Urban Institute Brooking Institution
Tax Guide for Investors Fairmark.com
IRS WebPages for Individuals Online Tools
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Ethical Dilemma
The IRS Code allows for the deduction of expenses incurred in traveling to a job interview. Fritz, Erica, and their two children have used this deduction to fund their vacations for the last eight years. They each apply for several jobs for which they are qualified. Any interviews are scheduled during their vacation. They deduct only those expenses allowed under the IRS Tax Code. This plan has resulted in between $300 and $500 in allowable tax deductions each year. If the perfect job offer presents itself, they would give it serious consideration.
a. Discuss whether you think Fritz and Erica are being ethical in using the IRS Code to fund
b. Do you see other areas of the tax code discussed in this chapter that could be subject to abuses?
