PFIN 3 4 Preparing Your Taxes GITMAN/ JOEHNK/ BILLINGSLEY Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Categories of Filing Status Single taxpayers Married filing jointly Married filing separately Head of household Qualifying widow or widower with dependent child PFIN4 | CH3 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exhibit 3.2 Capital Gains Tax Categories as of 2013 PFIN4 | CH3 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exhibit 3.4 Taxable Income and the Amount of Taxes Due (2013) PFIN4 | CH3 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Tax Preparation Services National and local tax services Certified public accountants (CPAs) Enrolled agents (EAs) Tax attorneys Computer-based tax returns PFIN4 | CH3 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.