UNDERSTANDING TAXES AND

MORTGAGES

Agenda

Recap of Last WeekUnderstanding TaxesFederal Income Tax ExamplesTypes of Mortgages

Taxes: School House Rock Edition

https://www.youtube.com/watch?v=6Q3NPgHZzDo

“There’s nothing certain in life but death and taxes.”

Key Tax Terms

Progressive Tax Structure: people with higher taxable income levels pay higher marginal tax rates. Promotes equality of taxpayers’ ability to pay

Pay-as-you-go: Taxes will be withheld from your paycheck and paid to the state or federal government

Tax Liability: the amount of tax owed Tax Refund: the return of excess amounts of

income tax that a taxpayer has paid throughout the past year

Tax Deductible: an item or expense for adjusted gross income to reduce amount of taxed owed

Types of Taxes

1. Income Taxes1. Federal 2. State3. Municipal (City, Local)

2. Social Security and Medicare1. Taken out from your paycheck. (7.25% in 2014)

3. Sales1. Differs by state. 2. Excise Taxes: an indirect tax charged on the sale

of a particular good. Examples include cigarettes, gasoline, alcohol, cell phones, etc.

Calculating Taxable Income

Gross IncomeLess: Deductions for AGIAdjusted Gross IncomeLess: Deductions from AGITaxable Income

Tax Liability cont.

Gross income—total income earnedDeductions for AGI (“above line” deductions)

Trade/business expenses and production of income expenses

AGI (Adjusted Gross Income)Deductions from AGI

Expenses that Congress allows taxpayers to reduce the amount they are taxed on

Standard deduction and personal dependencyTaxable income

Deductions from AGI

1. Greater of Itemized Deductions or Standard Deduction 1a. Itemized Deductions

Certain expenditures you are allowed to deduct

OR…… 1b. Standard Deduction

$6,200 per person ($12,400 married file jointly)

2. Personal and Dependency Deduction $3,950 per person claimed on tax return (2014)

Types of Itemized Deductions

Medical ExpensesState and local income taxes, and property

taxesMortgage interest and investment interestCharitable contributionsCasualty and theft lossesMiscellaneous expenses

Gambling loss, hobby expenses, etc.

Tax Liability Formula

How to File Taxes

Online Options eFiling taxes on IRS.GOV TurboTax

Types of Mortgages

Fixed-Interest Mortgage: interest rate remains the same for the life of the loan and the payment is split into equal monthly payments for the duration. Interest payments are front-loaded so that during the first few

years of the loan term, only a small portion of the payment pays off the principal.

Most common duration is 30 years, but can differAdjustable-Interest Mortgage: interest rate changes

after a “fixed period” at the beginning of the loan. Initial interest rate during fixed period will be lower than

fixed-interest mortgage interest rate Considered riskier because the payment can change from year

to year in significant amounts.

Works Cited

Murphy, Kevin E., and Mark Higgins. Concepts in Federal Taxation 2015. United States: Cengage Learning, 2015. Print.

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