Presentation is loading. Please wait.

Presentation is loading. Please wait.

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 6 The Tax Environment.

Similar presentations


Presentation on theme: "Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 6 The Tax Environment."— Presentation transcript:

1

2 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 6 The Tax Environment

3 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Tax Base What is taxed (e.g., income, property) The tax structure: –progressive –regressive –proportional

4 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Federal Personal Income Tax Progressive Tax rates (brackets) from 10 to 38.6 percent as of 2002 The importance of the last (marginal) tax bracket New law reduces tax rates over time

5 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. A Tax Shelter Avoids taxes Reduces taxes Defers taxes

6 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Examples of Tax Shelters Tax-exempt bonds Capital gains Tax-deferred pension plans Tax-deferred annuities Life insurance Employee stock option plans

7 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Most Important Tax Shelters Tax-exempt bonds Capital gains Tax-deferred pension plans

8 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Capital Gains Are either short-term or long-term Short-term is a year or less Short-term capital gains tax rate: the investor's marginal tax rate

9 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Capital Gains Long-term is greater than a year Long-term capital gains tax rate: 10 percent or 20 percent Are only taxed once realized May hold an asset indefinitely and avoid capital gain taxes

10 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Capital Losses Offset capital gains The order of offsetting gains and losses: –first, short-term losses offset short-term gains –second, long-term losses offset long-term gains

11 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Capital Losses –third, net short-term losses offset long-term gains or –net long-term losses offset short- term gains

12 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Capital Losses –fourth, net short-term or long- term losses are used to offset income from other sources –$3,000 ($1,500) limitation –losses exceeding $3,000 ($1,500) are carried forward

13 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Tax Deferred Pension Plans Deductible (traditional) Individual Retirement Account (IRA) Contribution limit: $3,000 annually of earned income If not covered by a pension plan, contributions are deductible from taxable income

14 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Tax Deferred Pension Plans If covered by a pension plan, contributions may be deductible from taxable income (subject to earned income limitations) Assets in the account: selected by the individual Withdrawals: taxable

15 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Keogh Account For the self-employed Contribution limit: 25 percent of income or $35,000 (whichever is smaller) Effective contribution limit is 20 percent

16 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Keogh Account Contributions: deductible from taxable income Assets in the account: selected by the individual Withdrawals: taxable

17 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. 401(k) and 403(b) Plans Plan offered by an employer Participation by employee: voluntary Contributions: deductible from taxable income

18 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. 401(k) and 403(b) Plans Employer may match employee contributions Assets in the account: chosen from alternatives determined by employer Withdrawals: taxable

19 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Non-deductible Roth IRA Contribution limit: $3,000 annually Contributions: not deductible from income Assets in the account: selected by the individual Withdrawals: non-taxable

20 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Deductible Versus the Non-deductible IRA Importance of the tax rate –when funds contributed –when funds are withdrawn Different limitations –on income –participation in the plans –when funds have to be withdrawn

21 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Tax-deferred Annuities Contract for series of future payments Contract purchased today Income earned by the investment: –not currently taxable –taxable as withdrawn

22 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Life Insurance Difference between –face value –cash value Growth in cash value not currently taxable Death benefit: not taxable to beneficiary

23 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Employee Stock Option Plans Stock purchase plans: –must be offered to virtually all employees –generally the purchase price is lower than the stock's price –possible source of long-term capital gains

24 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Employee Stock Option Plans Incentive stock options: –granted to selected employees –purchase price: equal to current price (when issued) –possible source of long-term capital gains

25 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Estate Taxation Levied on value of the individual's estate Progressive rates to 50 percent Rates to decrease over time

26 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Estate Taxation Spousal exemption Tax credit exempts under $1 million Tax credit will increase In 2010, estate tax is scheduled to be repealed

27 Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Corporate Federal Income Taxation Progressive Rates rise to 35 percent Phase out of lower corporate rates Most public corporations pay 35 percent


Download ppt "Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 6 The Tax Environment."

Similar presentations


Ads by Google