1. Bennie D Waller, Longwood University Personal Finance Bennie Waller wallerbd@longwood.edu 434-395-2046 Longwood University 201 High Street Farmville, VA 23901

2. Bennie D Waller, Longwood University Taxes

3. Bennie D Waller, Longwood University  Most financial decisions are affected by taxes  Historical tax credits  Need to understand how taxes are imposed and what strategies can help in reducing taxes.  What role does tax planning play in personal financial planning. Taxes

4. Bennie D Waller, Longwood University Taxes Federal Income Tax Structure  Progressive tax – As you earn more, you will pay a higher tax rate  Tax rates and tax brackets  Personal exemption -  Itemized or standard deductions – mortgage interest

5. Bennie D Waller, Longwood University Taxable income is a function of adjustable gross income, deductions and exemptions  Adjusted gross income (gross income from all sources minus allowable expenses)  Deductions (standard deduction amount established by the IRS or itemized deductions)  Exemptions (IRS-allowed reduction for the earner and each dependent) Taxes

6. Bennie D Waller, Longwood University Tax rates and Brackets Source: http://www.forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard- deduction-amounts-and-more/ Individuals

7. Bennie D Waller, Longwood University Tax rates and Brackets Married Individuals Filing Joint Returns and Surviving Spouses Source: http://www.forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard- deduction-amounts-and-more/

8. Bennie D Waller, Longwood University Illustration of Progressive Taxes If you are in the 25% tax bracket, does this mean that you pay 25% on all of your taxable income?

9. Bennie D Waller, Longwood University Taxes Average Tax Rate—calculated as taxes paid divided by adjusted gross income (income after deductions). Marginal Tax Rate (or marginal tax bracket)—the percentage of the last dollar earned that goes to pay taxes Tax-deferred—income on which the payment of taxes is postponed (i.e., tax deferred retirement plan)

10. Bennie D Waller, Longwood University Taxes Assume you made $28,500 in taxable income. You tax liability would be $3,850 which is calculated as; $8,500 x.10 = 850 20,000 x.15 = 3,000 Your marginal tax rate would be 15% because that is the percentage of the last dollar earned to pay taxes. You average tax rate would be 13.5% (3,850/28,500)

11. Bennie D Waller, Longwood University Capital Gains  Capital gain/loss—the gain or loss on the sale of a capital asset.  Capital gains tax rate –  Capital gain taxes are not owed until the asset is sold.  Capital gains taxes for most homeowners on sale of their principal residence ($250,000/500,000)

12. Bennie D Waller, Longwood University Non-Income Taxes  Excise (sin) taxes—imposed on certain items and sometimes used to control consumption (e.g., alcohol, tobacco, and gasoline).  Sales taxes—state taxes are imposed on most purchases and are flat taxes in relation to the sales value.  Property taxes—taxes based on assessed value (e.g., real estate and automobiles).  Gift and estate taxes— taxes on the transfer of money or property from one taxpayer to another. Gift tax and estate tax are both progressive, meaning that as the value of the gift increases the tax rate also increases.

13. Bennie D Waller, Longwood University Other taxes  The federal government also collects Social Security and Medicare taxes.  FICA taxes (7.65%)  Social Security taxes (6.2%)  Medicare taxes (1.45%)

14. Bennie D Waller, Longwood University Filing status  The date of determination for appropriate tax filing status is the last day of the year for which the taxes are being filed.  Single (unmarried with no dependents)  Married (filing jointly)  Married (filing separately)  Head of household (unmarried with dependent)

15. Bennie D Waller, Longwood University Taxes  Cost of living increases in tax brackets, exemptions and deductions.  Tax brackets change annually to reflect changes in cost of living (inflation)  Standard deductions and personal exemptions are increased to reflect inflation.  Bracket creep – tax increase caused by inflation increasing wages

16. Bennie D Waller, Longwood University Taxes  Bracket creep – tax increase caused by inflation increasing wages  Assume your taxable income is $8,500 which means your tax liability would be $850. But what if you got a raise of $1,000 to offset increasing cost of living (increased costs of food, fuel, rent). You really have no more disposable income, but now would have a tax liability of $1,000, which is $150 more in taxes with no real increase in living standards.

17. Bennie D Waller, Longwood University Deductions  Medical —health insurance premiums, medical treatment, hospital care, and prescription drugs are tax deductible given that the amount exceeds 7.5 percent of AGI.  Tax expenses—state and local income taxes, real estate and personal property taxes are deductible.  Interest expenses—interest paid on mortgages, home equity loans, and investment loans are tax deductible. However, the tax deduction is limited to home equity loans up to $100,000.  Charitable gifts—charitable gifts to qualified organizations are tax deductible. Gifts over $250 require verification.

18. Bennie D Waller, Longwood University Collection of taxes The primary method for the collection of income tax is “pay-as- you-go.”  This means that the taxes are paid as you earn the money. This is done to keep the public from “feeling the bite” if the taxes were collected all at once.  Other methods include  quarterly tax payments  withholdings from investment earnings, and  withholdings of gambling or prize winnings.

19. Bennie D Waller, Longwood University Collection of taxes  You can control how much is deducted from your wages for taxes. The more “exemptions” you claim, the fewer taxes that are withheld from wages which might result in taxes being owed when April 15 th rolls around.  If you are single, your best bet is to claim “1” as the number of exemptions. www.irs.gov for additional information.www.irs.gov  The amount of withholdings is determined by income and other information on your W-4  W-4 is generally filled out with new employer and includes marital status and number of exemptions.

20. Bennie D Waller, Longwood University Calculating your taxes

21. Bennie D Waller, Longwood University Other Considerations Choosing the right form between 1040EZ, 1040A, or 1040 Depends on dependents, income, itemizing Common Schedules used with 1040

22. Bennie D Waller, Longwood University Other Filing Considerations File by Mail or Electronic Filing (e-file) Benefits of e-filing include: – Faster refunds – More accurate returns – Quick electronic confirmation – Delete the paperwork—nothing to mail – Federal/state e-filing

23. Bennie D Waller, Longwood University Filing Late/Amended Returns File Late—Form 4868—request an extension if unable to file by April 15 th and include estimated tax payment Amended Return—Form 1040X—file within 3 years of original tax date Amend the state and local forms as well

24. Bennie D Waller, Longwood University Being Audited An Audit is when the IRS closely examines a tax return. Returns that are most likely to be audited include:  Tax payers that were previously audited.  Income over $100,000.  Deductions in excess of 44 percent of income.  Those reporting self-employment income.

25. Bennie D Waller, Longwood University Strategies to reduce taxes General tax reduction strategies include:  Maximizing deductions using tax-deferred retirement programs and use your home as a tax shelter  Taking advantage of reduced tax rates on long term capital gains  Shift income from a family member in higher tax brackets to those in lower marginal tax bracket

26. Bennie D Waller, Longwood University Sources for preparing taxes  The IRS (www.irs.gov)  Self-help tax publications or computer programs (Intuit’s Turbo Tax).  Hire tax specialists (accountant)

27. Bennie D Waller, Longwood University Thank You