1. Bennie D Waller, Longwood University Personal Finance Bennie Waller wallerbd@longwood.edu 434-395-2046 Longwood University 201 High Street Farmville, VA 23901

2. Bennie D Waller, Longwood University Tax Planning

3. Bennie D Waller, Longwood University The three factors that affect taxable income are:  Adjusted gross income (gross income minus allowable expenses)  Deductions (standard deduction amount established by the IRS or itemized deductions)  Exemptions (IRS-allowed reduction for the earner and each dependent) The tax rate is applied to the taxable income or the difference between income and deductions. Taxes

4. Bennie D Waller, Longwood University Taxes Federal Income Tax Structure  Progressive tax – As you earn more, you will pay a higher tax rate  Tax rates and tax brackets  Personal exemption -  Deductions –mortgage interest

5. Bennie D Waller, Longwood University Tax rates and Brackets

6. Bennie D Waller, Longwood University Illustration of Progressive Taxes If you are in the 25% tax bracket, does this mean that you pay 25% on all of your taxable income?

7. Bennie D Waller, Longwood University Taxes Average Tax Rate—calculated as taxes paid divided by adjusted gross income (income after deductions). Marginal Tax Rate (or marginal tax bracket)— the percentage of the last dollar earned that goes to pay taxes

8. Bennie D Waller, Longwood University Capital Gains  Capital gain/loss—the gain or loss on the sale of a capital asset.  Capital gains tax rate –  Capital gain taxes are not owed until the asset is sold.  Capital gains taxes for most homeowners on sale of their principal residence ($250,000/500,000)

9. Bennie D Waller, Longwood University Non-Income Taxes  Excise (sin) taxes—imposed on certain items and sometimes used to control consumption (e.g., alcohol, tobacco, and gasoline).  Sales taxes—state taxes are imposed on most purchases and are flat taxes in relation to the sales value.  Property taxes—taxes based on assessed value (e.g., real estate and automobiles).  Gift and estate taxes— taxes on the transfer of money or property from one taxpayer to another. Gift tax and estate tax are both progressive, meaning that as the value of the gift increases the tax rate also increases.

10. Bennie D Waller, Longwood University Other taxes  The federal government also collects Social Security and Medicare taxes.  FICA taxes (7.65%)  Social Security taxes (6.2%)  Medicare taxes (1.45%)

11. Bennie D Waller, Longwood University Filing status  The date of determination for appropriate tax filing status is the last day of the year for which the taxes are being filed.  Single (unmarried with no dependents)  Married (filing jointly)  Married (filing separately)  Head of household (unmarried with dependent)

12. Bennie D Waller, Longwood University Collection of taxes The primary method for the collection of income tax is “pay-as- you-go.”  This means that the taxes are paid as you earn the money rather than once at the end of the year. This is done to keep the public from “feeling the bite” if the taxes were collected all at once.  The three other methods are (1) quarterly tax payments, (2) withholdings from investment earnings, and (3) withholdings of gambling or prize winnings.

13. Bennie D Waller, Longwood University Deductions  Medical —health insurance premiums, medical treatment, hospital care, and prescription drugs are tax deductible given that the amount exceeds 7.5 percent of AGI.  Tax expenses—state and local income taxes, real estate and personal property taxes are deductible.  Interest expenses—interest paid on mortgages, home equity loans, and investment loans are tax deductible. However, the tax deduction is limited to home equity loans up to $100,000.  Charitable gifts—charitable gifts to qualified organizations are tax deductible. Gifts over $250 require verification.

14. Bennie D Waller, Longwood University Being Audited An Audit is when the IRS closely examines a tax return. Returns that are most likley to be audited include:  Tax payers that were previously audited.  Income over $100,000.  Deductions in excess of 44 percent of income.  Those reporting self-employment income.

15. Bennie D Waller, Longwood University Strategies to reduce taxes General tax reduction strategies include:  Maximizing deductions using tax-deferred retirement programs and use your home as a tax shelter  Taking advantage of reduced tax rates on long term capital gains  Shift income from a family member in higher tax brackets to those in lower marginal tax bracket

16. Bennie D Waller, Longwood University Sources for preparing taxes  The IRS (www.irs.gov)  Self-help tax publications or computer programs (Intuit’s Turbo Tax).  Hire tax specialists (accountant)

17. Bennie D Waller, Longwood University Thank You