1. Tax Management CHAPTER PLAYLIST SONGS:
“God Bless the Child” by Chris Botti and Paula Cole
“Money for Nothing” by Dire Straits
“Tax Man” by George Harrison

2. Learning Objectives
LO 9-1 Describe the purposes of taxes, the different types of taxes, and the principles of progressive and regressive taxes.
LO 9-2 Examine the logic, terms, and process of filing taxes.
LO 9-3 Distinguish between different types of tax rates, and know when they apply and how to calculate them.
LO 9-4 Analyze strategies to legally minimize tax liabilities.

3. Taxes
“But in this world, nothing can be said to be certain, except death and taxes.” ~ Benjamin Franklin ( )
Taxes: Fees charged by the government on a product,
income, or activity
Direct Tax: Fee levied directly on personal income 
Indirect Tax: Charge levied on consumption,
expenditure, privilege, or right, but not on income or
property
 Public Goods and Services: Government-provided
services that protect and support citizens. Examples
include services provided by the police, fire, library, and
the military

4. Progressive vs. Regressive Tax
Different rates based on income
Designed to create equity among citizens
“Robin Hood” tax
Applied uniformly
Higher percentage tax on lower income earners than higher income earners

5. Regressive Tax Sales Tax – 0% to 10% or higher
Excise tax – consumer products such as tobacco, alcohol, gasoline
Property tax – based on the value of your property
Gift tax – a percentage tax
Capital gains tax – a percentage tax
Estate tax
Social Security tax – 6.2% of income up to $106,800
Medicare tax – 1.45% of income

6. Do the Math
You make $17,500/year. Your parents make $69,000/year. You both pay $100 per year in gasoline tax.
What percent of your income goes toward this tax?
What percent of your parents income goes toward this tax?
Is this a regressive or progressive tax?

7. Federal Tax Rates for Taxable Income (2011)
Married Couples Filing Jointly
Most Single Filers
Standard Deduction
$11,600
$5,800
10%
Not over $17,050
Not over $8,500
15%
$17,051 – $69,000
$8,501– $34,500
25%
$69,001 – $139,350
$34,501 – $83,600
28%
$139,351 – $212,300
$83,601 – $174,400
33%
$212,301 – $379,150
$174,401 – $379,150
35%
Over $379,150

8. W-4 Form
Determines the amount of taxes withheld from your paycheck

9. W-4 Personal Allowances Worksheet (Figure 9.2)

10. Deductions and Adjustments Worksheet (Figure 9.3)

11. Two-Earners/Multiple Jobs Worksheet (Figure 9.4)

12. Withholding Tax Guidelines
To avoid penalty, you need to withhold at least 100% of what you paid last year or 90% of what you owe in the current year.
Quarterly estimated tax payment needs to be made if there is a shortfall between what is withheld and what is owed.
Income on which taxes are not withheld:
Alimony
Self-employment
Investment income

13. Filing Taxes – Filing Status
Taxes for the previous year are due April 15th or the first business day after April 15 if it falls on a weekend or federal holiday
Five Filing Statuses:
Single
Married filing jointly
Married filing separately
Qualified widow(er) with dependent child
Head of household

14. Filing Taxes – Gross Income
Earned income
Wages
Commissions
Tips
Farming
Unearned income
Investment income
Royalties
Pensions
Alimony
Unemployment

15. Filing Taxes Adjusted gross income (AGI)
Gross income minus tax deductions
Deductions—must choose standard or itemized
Standard deduction based on filing status (2011)
Married filing jointly $11,400
Head of household $8,400
Single or married filing separately $5,700
Itemized deductions – qualified expenses that are not taxed
Mortgage interest
State and local taxes
Personal property taxes
Charitable contributions
Medical expenses
Casualty and theft losses
Job-related and school expenses

16. Filing Taxes - Exemptions
Exemption: A dollar amount allowed by law that reduces your adjusted gross income that would otherwise be taxed
Dependents must:
Be a U.S. citizen or resident of Canada or Mexico
Be related or a member of the taxpayer’s household for the entire year
Not file a joint return with a spouse
Have a gross income of less than $3,650 (2009) (not applicable for a taxpayer’s child who is under 19 or under 24 if a full-time student)
Depend on you for more than half of their support and live with you or be a relative

17. Filing Taxes - Taxable Income
Adjusted gross income (AGI) minus exemptions and deductions
Tax credit – reduces your tax liability dollar-for-dollar
Tax deduction – reduces your adjusted gross income (AGI)

18. Tax Forms Internal Revenue Service website www.irs.gov
IRS Forms and Publications
Form 1040EZ
Wages, salaries, tips, unemployment compensation, taxable scholarships, and fellowships add up to less than $100,000 and taxable interest is under $1,500
No dependents
Age < 65 and not blind
Filing status is single or married filing jointly
No advance earned income tax credits (EITC), no adjustments to income, no credits except EITC, and you owe no household employment taxes
No itemized deductions

19. Tax Forms
Form 1040A
Wages, salaries, tips, unemployment compensation, taxable scholarships and fellowships, investment income, capital gain distributions, and retirement plan income add up to less than $100,000
No itemized deductions
Claim only specific adjustments to income
Owe only certain types of taxes
Claim only specific credits

20. Tax Forms Form 1040 Schedule A – itemized deductions
Can be used by anyone
Most comprehensive
Can require additional schedules
70% of taxpayers use Form 1040
Schedule A – itemized deductions
Schedule C – profit/loss on business

21. Filing Popular tax software programs Paper filing Professional Filing
IRS E-file free electronic filing
Popular tax software programs
TaxACT
TurboTax
Paper filing
Professional Filing
CPA
H&R Block
Liberty Tax
Many others

22. Items to Watch for When Selecting a Tax Preparer
Figure 9.5

23. Audits
Tax evasion is risky, a felony, and punishable by 5 years imprisonment and $250,000 fine
IRS examines, or audits, a tax return to help deter tax cheating
IRS looks for irregularities when determining who to audit
Can go back 3 years for any reason or two years after the tax was paid
2008 — examined 1.1 million returns and assessed over $6.7 billion in unpaid taxes
Records to keep – see next slide

24. Tax Recordkeeping Documents to Keep for at Least 3 Years
W-2 statements showing your earnings for the year
1099 forms that show how much you received in dividends and gains on investments
Bank account tax forms showing interest earned
Documents relating to student loan and mortgage interest paid
Records of property taxes, state taxes, and other taxes paid
Receipts for charitable contributions and medical expenses (if claimed)
Receipts for work-related expenses if self-employed
Receipts for purchases and sales of stocks, bonds, or mutual funds and any contributions to retirement accounts
Credit-card statements that show business expenses or charitable contributions
Records of scholarships and what the scholarship paid for
Records related to property sold

25. Tax Rates
Marginal income tax rate – the tax rate levied on your LAST dollar of taxable income
Difference between marginal tax and average tax?
Tax Rate (2011)
Married Couples Filing Jointly
Most Single Filers
Standard Deduction
$11,600
$5,800
10%
Not over $17,050
Not over $8,500
15%
$17,051 – $69,000
$8,501– $34,500
25%
$69,001 – $139,350
$34,501 – $83,600
28%
$139,351 – $212,300
$83,601 – $174,400
33%
$212,301 – $379,150
$174,401 – $379,150
35%
Over $379,150

26. Doing the Math 9.2

27. Doing the Math 9.3

28. Alternative Minimum Tax (AMT)
Extra tax you have to pay on top of your regular income tax
Designed to make sure high earners are paying taxes
Introduced in 1969
Individuals earning over $75,000 or couples earning over $150,000
IRS form Instruction for form 6251
Need to look at your income to decide on capital gains, gifts, etc.

29. Capital Gains or Losses
Short-term gain – gain on an asset held for 12 months or less – taxed at ordinary income rate
Long-term gain – gain on an asset held for longer than 12 months – taxed at no more than 15%
The consequences of not paying your capital gains when you exercise your stock options
Example: Case of Ronald Speltz of Ely, Iowa

30. Minimize Your Tax Liability – Legally
Exemptions
Deductions
Itemizing, form 1040 schedule A
Retirement savings contributions credit
Mortgage interest credit
Lower your taxable income
Municipal bonds
Health savings account
Dependent care account

31. Minimize Your Tax Liability – Legally

32. Tax Credits Education deductions and credits
Earned income tax credit (EITC)
Energy tax credit
Hybrid/electric car tax credit