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PF CH4: Tax Planning

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Silviana Falcon

on 26 September 2016

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Transcript of PF CH4: Tax Planning

Why Should I
Listen To This?

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
Total income exclusions
Money Matters
Casualty and theft loss
Moving expenses
Job related and other misc. expenses
Taxable Income:
function of three numbers: Adjusted Gross Income (AGI), deductions and exemptions.

Types of Income:
Earned Income
: money received for personal effort. ie. Salary, Commission, tips, and bonuses.
Investment Income
: money received in the form of dividends, interest, or rent from investments.
Passive Income
: results from business activities in which you do not actively participate but earn income (limited partnership)
Deductions: amount substracted from Annual Gross Income to arrive at
taxable income

Take greater deduction between standard and itemized deduction

Itemize deductions—list of deductible expenses: medical expenses, tax expenses, mortgage interest payments, etc.

Standard deduction—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)
STEP 3: Tax 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)
Taxable Income
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. 1-10% range.
Tax Credit?
Tax Deduction?
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 (1.4m)
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
: amount not included in gross income. ie: foreign income exclusion. For FY2016 $101,300 (2015: $100,800) per qualifying person.

Exclusions are also referred as
Tax-exempt income

(income not subject to tax). ie. most interest earned on most state and city bonds are exempt from federal income tax.

Tax-deferred income

– 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.
What does
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
Consumer Purchasing:
Investments & Retirement
How do you get from
Financial Planning

Is a deduction from AGI for yourself, your spouse,and qualified dependents
You can deduct $3,950.00 for each exemption you claim in 2014
Example: Taxable Income
1. Gross income
(wages, profits,dividends, interes, other income)
2. LESS: Adjustments to income (retirement plan contributions)
$ 4,600.00
3. EQUALS: Adjusted Gross Income (AGI)
4. LESS: Standard or Itemized Deductions & Exemptions
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;
www.irs.gov (publications and guidance for free)
Tax publications for sale (Ernst & Young Tax Guide, U.S. Master Tax Guide)
Tax preparation Services (local, enrolled agents, accountants (CPA's) with specialialized tax training)
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
Regressive Tax
Difficult on lower income earners than higher income earners
Progressive or Graduated Tax
Adjusted gross income (AGI)
Gross income



—must choose standard or itemized
deduction based on filing status (2015)
Married $12,600.00
Single $6,300.00
deductions – qualified expenses that can be deducted
Mortgage interest
State and local taxes
Personal property taxes
Charitable contributions
Medical expenses
Casualty and theft losses
Job-related and school expenses
NOT ALL INCOME IS TAXED: personal exemptions, deductions (itemized or standard)
Full transcript