1. PFIN 3 4 Preparing Your Taxes GITMAN/ JOEHNK/ BILLINGSLEY
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2. LEARNING OUTCOMES
1 Discuss basic principles of income taxes and determine your filing status
2 Describe the sources of gross income and adjustments to income, differentiate between standard and itemized deductions and exemptions, and calculate taxable income
3 Prepare a basic tax return using the appropriate tax forms and rate schedules
4 Explain who needs to pay estimated taxes, when to file or amend your return, and how to handle an audit
PFIN4 | CH3
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3. 6 Implement an effective tax planning strategy
LEARNING OUTCOMES (continued)
5 Know where to get help with your taxes and how software can make tax return preparation easier
6 Implement an effective tax planning strategy
PFIN4 | CH3
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4. Dues paid for membership in a society Objective of tax planning
Taxes
Dues paid for membership in a society
Cost of living in a country
Objective of tax planning
Maximize the amount of money that one can keep by legally minimizing the amount one pays
PFIN4 | CH3
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5. Marginal tax rate: Paid on the next dollar of taxable income
Income Taxes
Type of tax levied on taxable income by the federal, state, and local governments
Progressive tax structure: Larger the amount of taxable income higher the rate at which it is taxed
Marginal tax rate: Paid on the next dollar of taxable income
Average tax rate: Rate at which each dollar of taxable income is taxed on average
Calculated by dividing the tax liability by taxable income
PFIN4 | CH3
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6. Categories of Filing Status
Single taxpayers
Married filing jointly
Married filing separately
Head of household
Qualifying widow or widower with dependent child
PFIN4 | CH3
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7. Other payroll deductions
Take-Home Pay
Employer withholds a portion of income every pay period and sends it to the IRS to be credited to the tax account
Employer withholds funds for federal income taxes and for FICA (Social Security) taxes
Other payroll deductions
Life and health insurance, savings plans, retirement programs, professional or union dues, and charitable contributions
PFIN4 | CH3
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8. Amount of income subject to taxes
Taxable Income
Amount of income subject to taxes
Gross income: Total of taxpayer’s income subject to federal taxes that includes:
Active income
Portfolio income
Passive income
PFIN4 | CH3
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9. Exhibit 3.2 Capital Gains Tax Categories as of 2013 PFIN4 | CH3
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10. Adjustments to (Gross) Income
Allowable deductions from gross income
Educator expenses (limited), higher education tuition costs (limited), IRA contributions (limited), self-employment taxes paid, self-employed health insurance payments
Adjusted gross income (AGI)
Amount of income that remains after subtracting all allowable adjustments to income from gross income
PFIN4 | CH3
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11. Deductions
Blanket deduction that depends on the taxpayer’s filing status, age, and vision
Standard
Personal expenditures that can be deducted from AGI when determining taxable income
Itemized
PFIN4 | CH3
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12. Exemptions
Deductions from AGI based on the number of persons supported by the taxpayer’s income
Can be claimed for oneself, his/her spouse, and dependents
Personal exemption can be claimed only once
PFIN4 | CH3
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13. Considerations for Calculating Taxable Income
Vary according to reported taxable income and filing status
Tax rates
Deductions from a taxpayer’s tax liability that directly reduces his or her taxes due
Tax credits
Required by taxpayers to file their returns
Tax forms
PFIN4 | CH3
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14. Exhibit 3.4 Taxable Income and the Amount of Taxes Due (2013)
PFIN4 | CH3
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15. Filing Considerations
Estimated taxes: Payments required on income not subject to withholding that are paid in four instalments
Usual filing deadline is April 15
PFIN4 | CH3
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16. Filing Considerations
Time beyond the usual April 15 deadline during which taxpayers can file their returns without incurring penalties
File extension
Filed to adjust for information received after the filing date of the taxpayer’s original return or to correct errors
Amended return
Examination by the IRS to validate the accuracy of a given tax return
Tax audit
PFIN4 | CH3
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17. Tax Preparation Services
National and local tax services
Certified public accountants (CPAs)
Enrolled agents (EAs)
Tax attorneys
Computer-based tax returns
PFIN4 | CH3
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18. Effective Tax Planning
Tax evasion: Illegal act of failing to accurately report income or deductions and failing to pay taxes
Tax avoidance: Act of reducing taxes in ways that are legal and compatible with the intent of Congress
Objectives of tax planning
To reduce taxes
To shift taxes
To defer taxes
PFIN4 | CH3
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19. Tax-free and tax-deferred income
Tax Strategies
Maximizing deductions - Bunch deductions into one tax year if this allows you to itemize rather than take the standard deduction
Income shifting: Taxpayer shifts a portion of income to relatives in lower tax brackets
Tax-free and tax-deferred income
Some investments like municipal bonds provide tax-free income
Tax deferred: income that is not subject to taxes immediately but that will later be subject to taxes
PFIN4 | CH3
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20. KEY TERMS Taxable income Taxes Gross income Income taxes
Progressive tax structure
Marginal tax rate
Average tax rate
Federal withholding taxes
Federal Insurance Contributions Act (FICA) or social security tax
Taxable income
Gross income
Adjustments to (gross) income
Adjusted gross income (AGI)
Standard deduction
Itemized deductions
Tax credits
Estimated taxes
Amended return
PFIN4 | CH5
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21. Calculating income tax involves several steps and many computations
SUMMARY
The objective of tax planning is to maximize the amount of money that you can keep by legally minimizing the amount of taxes you pay
Calculating income tax involves several steps and many computations
Tax income is calculated on the basis of tax rates, tax credits, tax forms and schedules, and the procedures for determining tax liability
Summary slide design.
PFIN4 | CH5
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