Chapter 3: Managing Taxes. Objectives Explain how taxes are administered and classified. Describe the concept of the marginal tax rate. Determine who.

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Presentation transcript:

Chapter 3: Managing Taxes

Objectives Explain how taxes are administered and classified. Describe the concept of the marginal tax rate. Determine who should file an income tax return.

Objectives Describe the two ways of paying taxes: payroll withholding and estimated taxes. Identify the eight planning steps involved in calculating federal income taxes. Understand planning strategies to legally avoid overpayment of income taxes. Explain the basics of IRS audits.

What is Tax Management? Reduction Deferment Elimination ATTENTION! A PLANNING PROCESS FOR TAX:

Federal tax laws Progressive nature of income tax Regressive Marginal tax rate Effective marginal tax rate Average tax rate Administration/Classification of Income Taxes

2004 Filing Requirements for Most Taxpayers IF your filing status is...AND at the end of 2004 you were...THEN file a return if your gross income was at least... SingleUnder or older $7,950 $9,150 Married filing jointlyUnder 65 (both spouses 65 or older (one spouse) 65 or older (both spouses) $15,900 $16,850 $17,800 Married filing separatelyAny age$3,100 Head of householdUnder or older $10,250 $11,450 Qualifying widow(er) with dependent child Under or older $12,800 $13,750 Information taken from 2004 Publication 17.

The Progressive Nature of the Federal Income Tax If your taxable income is: Over: But not over --The tax is: Of the amount over-- $0$7, %$0 7,15029,050$ %7,150 29,05070,3504, %29,050 70,350146,75014, %70, ,750319,10035, %146, , , %319,100 If your filing status is Single The Tax Rate Schedule is shown so you can see the tax rate that applies to all levels of taxable income. It is not used to figure ones’ taxes.

How Your Income is Really Taxed $3,100 personal exemption is not taxed. $4,850 standard deduction is not taxed. First $7,150 of income is taxed at 10%. $21,900 taxed at 15%.$20,700 taxed at 25%. $0 + $0 + $715 + $3,285 + $5,175 = $9,175 = $57,700Income Tax owed Assumes a single individual with gross income of $57,700 This individual’s marginal tax rate is 25% This individual’s average tax rate is 15.9% (9,175/57,700)

Earned income Unearned income Transfer payments Who Should File a Tax Return? STUDENTS WITH: