1. Personal Finance Garman/Forgue Ninth Edition
Chapter 4: Managing Income Taxes
PPT slide program prepared by Amy Forgue and Ray Forgue.

2. Learning Objectives
Explain the nature of progressive income taxes and the marginal tax rate.
Differentiate among the eight steps involved in calculating your federal income taxes.
Use appropriate strategies to avoid overpayment of income taxes.
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3. Introduction
Tax Planning: Seeking legal ways to reduce, eliminate, or defer income taxes.
Taxable Income: the income upon which income taxes are levied.
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4. Taxes Progressive income taxes and the marginal tax rate
Internal Revenue Service (or IRS)
Internal Revenue Code
The progressive nature of the federal income tax
Progressive tax
Regressive tax
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5. The Marginal Tax Rate Marginal tax bracket (or MTB) Marginal tax rate
Indexing
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6. Marginal Tax Rate and Financial Decisions
Your effective marginal tax rate is probably 43%.
Your average tax rate is lower.
Average tax rate: Proportion of total income paid in income taxes.
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7. 8 Steps in Calculating Your Income Taxes
Determine your total income.
Determine and report gross income after subtracting exclusions.
Subtract adjustments to income.
Subtract either the IRS’s Standard Deduction for your tax status or itemize your deductions.
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8. 8 Steps in Calculating Your Income Taxes
Subtract the value of your personal exemptions.
Determine your preliminary tax liability.
Subtract tax credits for which you qualify.
8. Calculate the balance due the IRS or the amount of your refund.
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9. Total Income Total Income: Compensation from all sources.
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10. Total Income Income to include:
Wages and Salaries
Commissions
Tips Earned
Gambling and Lottery Winnings
Include capital gains and losses in Total Income.
Long-term gain (or loss)
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11. Gross Income
Determine and report your gross income after subtracting exclusions.
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12. Gross Income Income to exclude: Gifts Inherited money or property
Income from a carpool
Federal income tax refunds
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13. Gross Income More income to exclude:
Employee contributions to flexible spending accounts
Reimbursements from flexible spending accounts
Child support payments received
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14. Subtract Adjustments to Income
Adjusted Gross Income (or AGI)
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15. Deductions
Subtract either the IRS’s standard deduction for your tax status or your itemized deductions.
Standard deduction depends on filing status.
$5350 for single individuals
$10,700 for married couples
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16. Deductions Itemized deductions: Medical and dental expenses
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17. Deductions Itemized deductions: Taxes you paid
Real Estate Property Taxes (home or land)
Personal Property Taxes
State, Local, and Foreign Income Taxes
State and Local Sales Taxes (instead of state and local income taxes)
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18. Deductions Itemized deductions: Taxes you paid
Interest Paid on Home Mortgage Loans
“Points”
Interest Paid on Home-Equity Loans
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19. Deductions Itemized deductions: Interest you paid
Interest paid on loans used for investments
Mortgage insurance premiums on new loans after January 1, 2007
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20. Deductions More itemized deductions: Gifts to charity
Casualty and theft losses
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21. Deductions
Miscellaneous deductions in excess of 2% of adjusted gross income
Other miscellaneous deductions allowed at 100%:
Gambling losses
Business expenses for workers with disabilities
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22. Exemptions Exemption (or Personal Exemption)
Subtract the value of your personal exemptions.
Each exemption reduces taxable income by $3400.
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23. Exemptions Claiming another person as an exemption
What if you are claimed as an exemption?
If someone else claims you, you cannot claim yourself.
The opposite is also true.
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24. Tax Liability Determine your preliminary tax liability.
Subtract tax credits for which you qualify.
Tax Credit: Dollar-for-dollar decrease in tax liability.
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25. Tax Credits Hope Scholarship Credit Lifetime Learning Credit
Earned Income Credit
Child Tax Credit
Child and Dependent Care Credit
Retirement Savings Contribution Credit
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26. Tax Liability
Calculate the balance due the IRS or the amount of your refund.
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27. Avoid Taxes Through Proper Planning
Practice legal tax avoidance, not tax evasion.
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28. Avoid Taxes Through Proper Planning
A dollar saved from taxes is really two dollars - or more.
Opportunity cost
Earning another dollar to replace one given to the IRS
Earnings on a dollar not given to the IRS
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29. Reduce Taxable Income Via Your Employer
Premium only plan
Transportation reimbursement plan
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30. Dependent Care Flexible Spending Account
Flexible Spending Account (or FSA or Expense Reimbursement Account)
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31. Defined-Contribution Retirement Plan
401(k) Retirement Plan
Matching Contributions
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32. Make Tax-Sheltered Investments.
Tax-Sheltered Investments: Investments that yield returns that are tax advantaged.
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33. Reducing Taxable Income: Other Strategies
Investing with pretax income
Tax-deferred investment growth
IRA
Roth IRA
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34. Reducing Taxable Income: Other Strategies
Coverdell Education Savings Account
Qualified Tuition (Section 529) programs
Govt. savings bonds
Municipal bonds
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35. Reducing Taxable Income: Other Strategies
Postpone income.
Bunch deductions.
Take all of your legal tax deductions.
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36. Top 3 Financial Missteps in Managing Income Taxes
People slip up in building and maintaining good credit when they do the following:
Turn all you income tax planning over to someone else.
Overwithhold too much income to receive a refund next year.
Ignore the impact of income taxes in you personal financial planning.
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37. Good Money Habits in Managing Income Taxes
Reduce you income taxes by signing up for tax-advantaged employee benefits at your workplace.
Contribute to you employer-sponsored 401(k) retirement plan at least up to the amount of the employer’s matching contribution.
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38. Good Money Habits in Managing Income Taxes
Buy a home to reduce income taxes.
Do your own tax return so you can learn how to reduce your income tax liability.
Maintain good tax records.
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