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PF CH4: Tax Planning
Transcript of PF CH4: Tax Planning
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Income Tax Fundamentals
Tax Planning Strategies
Calculating taxes owed
Target: Pay fair share
The principal purpose of taxes is to finance government activities
As Citizens, we expect government to provide services such as police and fire protection, schools, road maintenance, parks and libraries, and safety protection of food, drugs, and other products.
Most People pay taxes on four major categories:
Sales tax. This can be state and local tax
based on the value of land and buildings
Estate Tax & Inheritance Tax
Social Security Tax & Income Taxes
Not all income is created equal
Income taxable income
Casualty and theft loss
Job related and other misc. expenses
Types of Income:
: money received for personal effort. ie. Salary, Commission, tips, and bonuses. (Money placed into retirement account must be earned income).
Un-earned Income (Investment Income)
: money received in the form of dividends, interest from savings accounts, social security income, unemployment benefits, alimony, child support, lottery winnings,gifts.
: results from business activities in which you do not actively participate but earn income such as a landlord receiving rents or investing in a company but not providing hands on direction.
Deductions: amount substracted from Annual Gross Income to arrive at
—government’s best estimate of what the average person would deduct if itemizing (2016):
Single: $6,300.00 (same as 2015)
Married: $12,600.00 (same as 2015)
Blind / >65 yrs old: Add $1,300.00 (same as 2015)
—list of deductible expenses: medical expenses, tax expenses, mortgage interest payments, etc.
NOTE: You take the greater deduction between standard and itemized deduction
AGI -Standard or Itemized Deductions
Includes doctors' fees, prescription medications, hospital expenses, medical premiums, hearing aids, eye glasses, and medical travel that has not been reimbursed or paid by others. The amount of this deduction is the medical and dental expenses that exceed 10% (2015) of AGI.
If AGI =$20,000.00 * 10% = $2,000.00
If your medical/dental expenses = $3,000.00 you qualify for a $1,000.00 deduction.
Taxes: ie. real estate property tax
Interest: ie. mortage or home equity interest paid.
Casualty/theft loss: financial losses resulting from a natural disaster. Deductions are for amounts over 10% of AGI.
Moving expenses: new job at least 50 miles further from your former home. Costs of transportation for the taxpayer (& immediate family) and moving household goods and personal property)
Tentative Tax Liabilty =
Taxable income x tax rate
1: Making Payments
Pays as you go system requires an employer to deduct Federal Income Tax from your pay and send to the government. Form W2. Employer must provide to employee by January 31st.
2: Estimated Payments
People with income from savings, investments, independent contractors, retirement plan pensions may not have income tax witheld. However, earnings are still reported to the Federal Government (Form 1099)
3: Who must file?
Every citizen or resident of the U.S. and every U.S. Citizen who is a resident of Puerto Rico if income is above a certain amount.
4: Filing Tax Returns
All but 7 States (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) have state income tax. 1-12% range.
Is a dollar for dollar reduction in the amount of taxes owed. $100 taxcredit = $100 reduction in taxes owed.
Earned Income Credit (EIC) allow tax credit to low income workers
such as an itemized deduction for medical expenses, mortgage interest, or charitable contributions and only reduce your taxable income (on which your taxes are based). $100 tax deduction = $15 (15% tax bracket)
About 1% of all tax filers
Office (you visit IRS office)
Field Audit (IRS visits you)
Know your Audit Rights
Who gets audited...
If you disagree:
(a) request time to prepare
(b) ask IRS for clarification
Foreign Income Exclusion
: If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. For FY2016 $101,300 (2015: $100,800) per qualifying person. Must live outside of the US 330 days.
Exclusions are also referred as
(income not subject to tax). ie. most interest earned on most state and city bonds are exempt from federal income tax.
– is income that will be taxed at a later date. The earnings on an Individual Retirement Account (IRA) are an example. These earnings are credited to the account now, you do not pay taxes on these earnings until you withdraw them from the account.
Appeal to Regional Appeals Office
U.S. Tax Court, U.S. Claims Court, U.S. Disctrict Court, U.S. Supreme Court.
2% at 55
Pay Fair share: no more no less
Expect same or lower tax rate next year?
Accelerate deductions: pay real estate taxes, make January mortage payment in December.
Expect higher tax rate next year?
delay deductions or accelerate the receipt of income this year at the current tax rate.
Place of residence: own a home?
Consumer Debt: Line of credit
Job related expenses that meet the specified limits
Health Care Expenses
Investments & Retirement
How do you get from
Is a deduction from AGI for yourself, your spouse,and qualified dependents
You can deduct $4,050 as a personal exemption for 2016 (only if not a dependant)
Example: Taxable Income
(wages, profits,dividends, interes, other income)
Adjustments to income (retirement plan contributions)
Above the line deductions
Adjusted Gross Income (
Exemptions & Standard or Itemized Deductions
EQUALS: TAXABLE INCOME
The basis for computing the amount of taxes you owe.
Don't have excessive withholding
Don't use refund for impulse purchases
Don't leave the amount of refund in checking acct
Place money in savings acct.
Use it to pay credit card debt
Make contributions to retirement accts.
May be required to make payments during the year (every three months). Underpayment or failure to pay these estimated payments can result in
penalties and interest charges.
W2 or 1099, most people are required to file their Federal Tax Return each April 15th. If not able to file on time you can use Form 4868 to obtain a six month extension. Tax liability must be paid however on or before April 15th.
If single and under 65: if you earn $10,000 or more
Single: never married, divorced, or legally separated with no dependents.
Married filing jointly: combines income of husband and wife
Married filing separately: each spouse is responsible for his or her own tax.
Head of Household: unmarried individual or a surviving spouse (paying for more than half the costs) for a child or dependent relative.
Qualifying Widow or widower: an individual whose spouse died within the past two years and who has a dependent.
about 500 federal tax forms exist:
20%: 1040 EZ or 1040A; 60% Form 1040;
2017 Tax season: 153 million returns are expected
70% will receive a tax return. The average return: $2,860 (2015)
Deadline: April 17th. Extensions: Oct. 16th, 2017
80% returns will be filed electronically
Beginning in 2017, taxpayers using a tax filing software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity
IRS Software for free (income equal to or less than $64,000)
Tax preparation Services (local, enrolled agents, accountants (CPA's) with specialialized tax training). IRS website: Choose a tax preparer
Practice Tax Avoidance
: Use of legitimate methods to reduce one's taxes.
DO NOT practice Tax Evasion: Use of illegal actions to reduce one's taxes.
Investments: Tax exempt /Tax deferred: capital gains /children investments
Retirement: Traditional IRA, Roth IRA, Educational Savings Accounts, Keogh Plan, 401(k) Plan
someone once said: "death and taxes
are the only certainties in life."
Take advantage of tax credits for which you qualify
Consider tax exempt investments like municipal bonds
Maximize contributions to tax-deferred retirement plans
Search out all possible itemized deductions
Different rates based on
Increased income is taxed at increased rates (tax brackets)
Designed to create equity among citizens
“Robin Hood” tax
Difficult on lower income earners than higher income earners
Progressive or Graduated Tax
Adjusted gross income (AGI)
—must choose standard or itemized
deduction based on filing status (2015)
deductions – qualified expenses that can be deducted
State and local taxes
Personal property taxes
Casualty and theft losses
Job-related and school expenses
NOT ALL OF YOUR INCOME IS TAXED:
IRS allows exclusions, personal exemptions, deductions
= Gross Income (earned, unearned, passive) less any allowable tax deductions and exemptions.
GROSS INCOME MINUS TAX DEDUCTION (CONTRIBUTION TO RETIREMENT ACCOUNT)
Tentative Tax Liability - Tax Credit = Final Tax Liability