1 (of 29) FIN 200: Personal Finance Topic 6-Taxes Lawrence Schrenk, Instructor

2 (of 29) Learning Objectives 1. Discuss the structure of personal taxes in the United States. ▪ 2. Explain the role that tax considerations should play in financial decision-making 3. Describe recent changes and new trends in Taxation. NOTE: Completing complicated tax forms is NOT a learning objective. ▪

3 (of 29) Tax Preparation Recommendations

4 (of 29) Limitations and Warnings One chapter in a book and one lecture do not make you a tax expert.  Know what you do not know. Our goal cannot be for you to have all the skills necessary to complete complicated tax forms with multiple schedules. If you want to do it yourself...become an accountant. Changes in tax codes.

5 (of 29) Goal Our goal is to make you aware of the tax implications of financial decision-making. How can you make financial decisions in calendar year that will minimize your taxes come April? What do you need to do before you go to your tax preparer? Avoiding ‘Opps!’ moments

6 (of 29) What Forms Can You Do? 1040EZ ▪  You should be able to do this one after the course, but it’s so simple that you also could probably do it without this course without Schedules  You might want to attempt this if you are not itemizing or your deductions are very simple with Schedules  Go to an expert (suggestions). ▪suggestions

7 (of 29) 1040EZ

8 (of 29) Tax Preparation Software TurboTax, etc.  Reviews, More Reviews, and yet More Reviews ReviewsMore Reviewsand yet More Reviews General Consensus:  TurboTax is one of the best  And one of the most expensive. ▪ Comments  Does one suit your needs?  Go with a major software firm.  Preview versions of software ▪

9 (of 29) The Range of Taxes Federal  Income Tax  FICA (Federal Insurance Contributions Act)  Medicaid State  Income  Sales Tax County  Property Tax City  Income Tax  Commuter Tax

10 (of 29) Tax Types Progressive  Increases with Income  Inflation and Tax ‘Creep’  Federal Income Tax  Shifts tax to higher ability-to-pay Regressive  Uniform Tax  Social Security Taxes  Value-added tax or other sales tax  Shifts tax to lower ability-to-pay

11 (of 29) Federal Tax Rate

12 (of 29) Marginal versus Average Tax Average tax rate is the average rate you pay on your entire income. Marginal tax rate is the rate you will pay on your next dollar of income. If marginal tax rate > average tax rate, it is progressive.

13 (of 29) Tax Implications of Financial Decision-Making

14 (of 29) Minimize Income Know what does not count:  Proceeds of life insurance contracts payable by reason of death,  Child support payments,  Welfare benefits,  Money contributed to retirement accounts,  Gifts,  Return of invested capital. For every detail (if fact of every federal law) you can search the US Code Collection. Just be prepared for the ‘legalese’.US Code Collection

15 (of 29) Maximize Deductions Taxes (such as local income, state, real estate, foreign, and personal property taxes) Medical and dental expenses Interest expenses on mortgages, home equity loans, and real estate Charitable work or contributions to tax-exempt organizations Casualty and theft losses Job expenses Impairment-related expenses for persons with disabilities Educational expenses

16 (of 29) Maximize Credits Earned Income Tax Credit Child Tax Credit Child and Dependent Care Credit State Tax Credits

17 (of 29) End of Year Strategies Extra mortgage payment Pay property taxes early Charitable donations Realize investment losses Increases retirement savings

18 (of 29) Recent Changes and Trends

19 (of 29) Recent Changes (since 2000) Lower Tax Rates Increased Child Credit Expanded Retirement Savings More Educational Benefits Estate Tax Phased Out Reduced Capital Gains and Dividend Taxes

20 (of 29) Sunset 2011 Rates Revert $500 Child Credit Retirement Savings Decreased Educational Benefits Estate Tax Back Dividends Taxed as Ordinary Income

21 (of 29) Online Sources of More Information Tax Policy Center  Urban Institute  Brooking Institution Tax Guide for Investors  Fairmark.com IRS  WebPages for Individuals WebPages for Individuals  Online Tools Online Tools

Project Notes 22 (of 29)

23 (of 29) Ethical Dilemma The IRS Code allows for the deduction of expenses incurred in traveling to a job interview. Fritz, Erica, and their two children have used this deduction to fund their vacations for the last eight years. They each apply for several jobs for which they are qualified. Any interviews are scheduled during their vacation. They deduct only those expenses allowed under the IRS Tax Code. This plan has resulted in between $300 and $500 in allowable tax deductions each year. If the perfect job offer presents itself, they would give it serious consideration. a. Discuss whether you think Fritz and Erica are being ethical in using the IRS Code to fund b. Do you see other areas of the tax code discussed in this chapter that could be subject to abuses?