Chapter 4: Managing Taxes Slide 2 Objectives Describe the two
ways of paying taxes: payroll withholding and estimated taxes.
Identify the three steps involved in calculating federal income
taxes. Understand planning strategies to legally avoid overpayment
of income taxes. Explain the basics of IRS audits. Slide 3 Taxes on
Purchases State and local taxes are added to the purchase price of
goods. Excise tax is imposed on specific goods and services
Gasoline Cigarettes Alcohol Tires Air travel Telephone service
Slide 4 Taxes on Property Real estate property tax is based on the
value of land and buildings. Personal property taxes on the value
of automobiles, boats, furniture, and farm equipment are imposed in
some areas. Slide 5 Federal tax laws Progressive nature of income
tax Regressive Marginal tax rate Effective marginal tax rate
Average tax rate Administration/Classification of Income Taxes
Slide 6 Slide 7 New Math Slide 8 Taxes on Wealth Estate tax-federal
tax imposed on the value of an individuals property at the time of
death. Inheritance tax-state tax levied on the value of property
bequeathed by a deceased individual. Slide 9 3 Steps in Determining
Taxes 1.Determining Adjusted Gross Income 2.Computing Taxable
Income 3.Calculating Taxes Owed Slide 10 Slide 11 What is Tax
Management? Reduction Deferment Elimination ATTENTION! A PLANNING
PROCESS FOR TAX: Slide 12 Total Income Tax Bracket Federal Income
Tax Bracket +State Income Tax Bracket -(Federal Income Tax Bracket
xState Income Tax Bracket) Example: Mikes federal income tax
bracket is 28% and his state income tax bracket is 7%. What is
Mikes total income tax bracket? 28% + 7% - (28%x7%) =.28+.07 - (.28
x.07) =.35 -.0196 =.33 or 33% Slide 13 Step 1: Determining Adjusted
Gross Income (AGI) Earned Income-money received by personal effort.
Investment Income-money received in the form of dividends,
interest, or rent Passive Income-activities in which you do not
actively participate. Other Income-Alimony, awards, lottery
winning, prizes Slide 14 Other Items That Impact Income
Exclusion-amount not included in gross income. Tax Exempt
Income-another name for exclusions-Qualified scholarships and
fellowships where money is used for tuition, fees, supplies, and
equipment, VA payments Tax Deferred Income-income that will be
taxed at a later date Adjusted Gross Income (AGI)-gross income
after certain reductions have been made Tax Shelters-immediate tax
benefits and a reasonable expectation of a future financial return
(IRAs Keoghs) Slide 15 Taxes on Earnings Social Security Income Tax
Federal tax State tax in all but 7 states Alaska Florida Nevada
South Dakota Texas Washington Wyoming Slide 16 2014 Federal Tax
Rate Schedules If taxable income is overbut not overthe tax is:
$0$9,07510% of the amount over $0 $9,075$36,900 $907.50 plus 15% of
the amount over $9,075 $36,900$89,350 $5,081.25 plus 25% of the
amount over $36,900 $89,350$186,350 $18,193.75 plus 28% of the
amount over $89,350 $186,350$405,100 $45,353.75 plus 33% of the
amount over $186,350 $405,100$406,750 $117,541.25 plus 35% of the
amount over $405,100 $406,750no limit $118,118.75 plus 39.6% of the
amount over $406,750 Single Slide 17 The Marginal Tax Rate Affects
Your Final Decision $3,950 personal exemption is not taxed $6,200
standard deduction is not taxed Next $9,075 of income is taxed at
10% Next $27,825 of income is taxed at 15% Remaining $42,950 of
income is taxed at 25% 0 + 0 + $835.00 + $3,840.00 + $4,175 Gross
Income = $90,000 Taxable Income = $79,850 Taxes = $15,819 Marginal
Tax Rate = 25% Average Tax Rate = 19.8% (Taxes Paid / Taxable
Income) Slide 18 How We Pay Taxes Slide 19 Eight Steps in
Calculating Your Income Taxes Step 1 Total Income Subtract
exclusions Step 2 Subtract adjustments to income. Step 3 Subtract
standard deduction or total itemized deductions. Step 4 Gross
Income Adjusted Gross Income Subtotal Taxable IncomeSubtract value
of exemptions Step 5 Apply tax table or tax-rate schedule to
determine liability. Step 6 Final tax liabilitySubtract tax credits
Step 7 Calculate balance owed or refund. Step 8 Slide 20 Slide 21
Step 2: Computing Taxable Income Deduction-an amount subtracted
from AGI to arrive at taxable income. Standard deduction
($6,200/single in 2014) Itemized deduction Exemption-a deduction
from AGI for yourself, your spouse, and qualified dependents
($3,950 in 2014) Slide 22 Step 3: Calculating Taxes Owed Use your
taxable income in conjunction with the appropriate tax table or tax
schedule. Marginal tax rate-the tax on the last dollar of income.
Average tax rate-total tax due divided ty your taxable income. Tax
credit-amounts subtracted from the amount of tax owed. Slide 23
Slide 24 Earned income Unearned income Transfer payments Who Should
File a Tax Return? STUDENTS WITH: Slide 25 Which Tax Form Should I
Use? Form 1040EZ is the simplest form to fill out. You may use Form
1040EZ if you meet all the following conditions: 1.Your filing
status is single or married filing jointly 2.You claim no
dependents 3.You, and your spouse if filing a joint return, were
under age 65 on January 1, 2015, and not blind at the end of 2014
4.You have only wages, salaries, tips, taxable scholarship and
fellowship grants, unemployment compensation, or Alaska Permanent
Fund dividends, and your taxable interest was not over $1,500
5.Your taxable income is less than $100,000 6.Your earned tips, if
any, are included in boxes 5 and 7 of your Form W-2 7.You do not
owe any household employment taxes on wages you paid to a household
employee 8.You are not a debtor in a Chapter 11 bankruptcy case
filed after October 16, 2005 9.You do not claim any adjustments to
income 10.You do not claim any credits other than the earned income
credit 11.Advance payments of the premium tax credit were not made
for you, your spouse, or any individual you enrolled in coverage
for whom no one else is claiming the personal exemption If you file
Form 1040EZ, you cannot itemize deductions or claim any adjustments
to income or tax credits (other than the earned income credit).
Slide 26 Which Tax Form Should I Use? If you cannot use Form
1040EZ, you may be able to use Form 1040A if: Your income is only
from wages, salaries, tips, taxable scholarships and fellowship
grants, interest, ordinary dividends, capital gain distributions,
pensions, annuities, IRAs, unemployment compensation, taxable
Social Security or railroad retirement benefits, and Alaska
Permanent Fund dividends Your taxable income is less than $100,000
You do not itemize deductions You did not have an alternative
minimum tax adjustment on stock you acquired from the exercise of
an incentive stock option Your only adjustments to income are the
IRA deduction, the student loan interest deduction, the educator
expenses deduction, the tuition and fees deduction, and The only
credits you are claiming are the credit for child and dependent
care expenses, the earned income credit, the credit for the elderly
or the disabled, education credits, the child tax credit, the
additional child tax credit, or the retirement savings contribution
credit Slide 27 Slide 28 Slide 29 Slide 30 Slide 31 If line 43
(taxable Income) is And you are -- At leastBut less than
SingleMarried Filing Jointly Married Filing Separately Head of A
House- Hold 26,00026,0503,4502,9963,4503,256
26,05026,1003,4583,0043,4583,264 26,10026,1503,4653,0113,4653,271
26,15026,2003,4733,0193,4733,279 26,20026,2503,4803,0263,4803,286
26,25026,3003,4883,0343,4883,294 26,30026,3503,4953,0413,4953,301
26,35026,4003,5033,0493,5033,309 Slide 32 Tax Credit Versus Tax
Deduction $100 tax credit reduces your taxes by $100 $100 tax
deduction reduces taxes by your tax bracket. For instance, if a
person is in the 25% tax bracket it would reduce your taxes by 25%
Slide 33 Slide 34 Slide 35 Is it Taxable Income? Is it Deductible?
Is it Taxable Income?YesNo Lottery Winnings Child Support Received
Workers Compensation Benefits Life Insurance Death Benefits
Municipal Bond Interest Earnings Bartering Income Is it
Deductible?YesNo Life Insurance Premiums Cosmetic Surgery for
Improved Looks Fees for Traffic Violations Mileage for Driving to
Volunteer Work An Attorneys Fee for Preparing Will Income Tax
Preparation Slide 36 Is it Taxable Income? Is it Deductible? Is it
Taxable Income?YesNo Lottery Winningsx Child Support Receivedx
Workers Compensation Benefits X Life Insurance Death Benefits x
Municipal Bond Interest Earnings x Bartering Incomex Is it
Deductible?YesNo Life Insurance Premiumsx Cosmetic Surgery for
Improved Looks x Fees for Traffic Violationsx Mileage for Driving
to Volunteer Work x An Attorneys Fee for Preparing Will x Income
Tax Preparationx
