1. Chapter 4: Managing Taxes

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

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

4. Taxes on Purchases
State and local taxes are added to the purchase price of goods.
Excise tax is imposed on specific goods and services
Gasoline
Cigarettes
Alcohol
Tires
Air travel
Telephone service

5. Taxes on Property
Real estate property tax is based on the value of land and buildings.
Personal property taxes on the value of automobiles, boats, furniture, and farm equipment are imposed in some areas.

6. New Math

7. Taxes on Wealth
Estate tax-federal tax imposed on the value of an individual’s property at the time of death.
Inheritance tax-state tax levied on the value of property bequeathed by a deceased individual.

8. 3 Steps in Determining Taxes
Determining Adjusted Gross Income
Computing Taxable Income
Calculating Taxes Owed

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

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

12. Step 1: Determining Adjusted Gross Income (AGI)
Earned Income-money received by personal effort.
Investment Income-money received in the form of dividends, interest, or rent
Passive Income-activities in which you do not actively participate.
Other Income-Alimony, awards, lottery winning, prizes

13. Other Items That Impact Income
Exclusion-amount not included in gross income.
Tax Exempt Income-another name for exclusions-Qualified scholarships and fellowships where money is used for tuition, fees, supplies, and equipment, VA payments
Tax Deferred Income-income that will be taxed at a later date
Adjusted Gross Income (AGI)-gross income after certain reductions have been made
Tax Shelters-immediate tax benefits and a reasonable expectation of a future financial return (IRA’s Keogh’s)

14. Taxes on Earnings Social Security Income Tax Federal tax
State tax in all but 7 states
Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming

15. The Marginal Tax Rate Affects Your Final Decision
$3,650 personal exemption is not taxed
$5,700 standard deduction is not taxed
Next $8,350 of income is taxed at 10%
Remaining $16,700 of income is taxed at 25%
Next $25,600 of income is taxed at 15%
$ $3, $4,175
Gross Income = $60,000
Taxes = $8,850
Marginal Tax Rate = 25%

16. Eight Steps in Calculating Your Income Taxes
Total Income
Subtract exclusions
Step 2
Gross Income
Subtract adjustments to income.
Step 3
Adjusted Gross Income
Subtract standard deduction or total itemized deductions.
Step 4
Subtotal
Step 5
Taxable Income
Subtract value of exemptions
Apply tax table or tax-rate schedule to determine liability.
Step 6
Step 7
Final tax liability
Subtract tax credits
Calculate balance owed or refund.
Step 8

18. Step 2: Computing Taxable Income
Deduction-an amount subtracted from AGI to arrive at taxable income.
Standard deduction ($5,700/single in 2010)
Itemized deduction
Exemption-a deduction from AGI for yourself, your spouse, and qualified dependents ($3,650 in 2010)

19. Step 3: Calculating Taxes Owed
Use your taxable income in conjunction with the appropriate tax table or tax schedule.
Marginal tax rate-the tax on the last dollar of income.
Average tax rate-total tax due divided ty your taxable income.
Tax credit-amounts subtracted from the amount of tax owed.

20. The Progressive Nature of the Federal Income Tax-2010
If your filing status is Single
If your taxable income is:
Over:
But not
over --
The tax is:
Of the
amount
over-- $0
$8,350 %
8,350
33,950
$ %
82,250
4, %
171,550
16, %
372,950
41, %
372,9650
108, %
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.

22. Tax Credit Versus Tax Deduction
$100 tax credit reduces your taxes by $100
$100 tax deduction reduces taxes by your tax bracket. For instance, if a person is in the 25% tax bracket it would reduce your taxes by 25%

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

32. Is it Taxable Income? Is it Deductible?
Yes No
Lottery Winnings
Child Support Received
Worker’s Compensation Benefits
Life Insurance Death Benefits
Municipal Bond Interest Earnings
Bartering Income
Is it Deductible?
Yes No
Life Insurance Premiums
Cosmetic Surgery for Improved Looks
Fees for Traffic Violations
Mileage for Driving to Volunteer Work
An Attorney’s Fee for Preparing Will
Income Tax Preparation