Income Taxes

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Income Taxes

• Financial Planning for Women
• February 2008
• Garman/Forgue Personal Finance 9th ed.
• Presented by Danielle Walker

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Objectives - be able to

• Calculate your marginal tax rate apply in tax
  planning
• Reduce your taxable income
• Differentiate between adjustments, deductions,
  credits
• Recognize taxable income lt gross
• Adjust W-4 withholding
• Avoid instant refund schemes
• Know Utah has 2 tax systems

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Introduction

• Tax Planning Seeking legal ways to reduce,
  eliminate, or defer income taxes.
• Taxable Income the income upon which income
  taxes are levied

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Progressive vs. Regressive

• Progressive tax- tax rate increases as taxable
  income increases.
• U.S. income tax
• Regressive tax- as income rises, the tax demands
  a decreasing proportion of a persons income.
• State sales tax

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Marginal Tax Bracket and Rate

• Marginal Tax Bracket (MTB)- one of the 6 income
  ranges that are taxed at increasing rates as
  income goes up
• Marginal Tax Rate- the rate at which one is taxed
  in each bracket
• Tax brackets are adjusted each year for inflation

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Find MTB

• Use IRS tables or
• On tax table find
• Taxable income tax due
• Add 100 to taxable income and find tax due
• The difference MTB
• 10, 15, 25, 28, 33 or 35
• Most taxpayers are in 10 or 15 MTB

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Progressive Nature of Income Tax
Single filers
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Marginal Tax Rate and Financial Decisions

• Need to know MTB for investment decisions
• Other financial decisions affect taxes
• Example-
• 25 MTB
• Give 100 to charity (tax-deductible)
• Essentially you give 75 to charity and the
  government gives 25!!
• Only if itemized deductionsgt standard deduction

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Filing Status Tax Rates

• IRS 2007 tax rate schedules
• http//www.irs.gov/formspubs/article/0,,id164272,
  00.html
• Single
• Married, filing jointly or qualifying widower
• Married, filing separately
• Head of household

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8 Steps in Calculating Your Income Taxes

• Determine your total income
• Determine and report your gross income after
  subtracting exclusions
• Subtract adjustments to income
• Subtract either the standard deduction or
  itemized deductions
• Subtract the value of your personal exemptions

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8 Steps to Calculating Your Income Taxes

• 6. Determine your preliminary tax liability
• 7. Subtract tax credits for which you qualify
• 8. Calculate the balance due the IRS or the
  amount of your refund

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Adjusted Gross Income (AGI)

• Income (just a few)
• Wages and Salaries
• Commissions
• Tips Earned
• Gambling and Lottery Winnings
• Capital Gains and Losses

• Exclusions/Adjustments
• Gifts
• Inherited money or property
• Income from a carpool
• Federal income tax refunds
• Child support payments

AGI- gross income less any exclusions and
adjustments
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Personal Exemptions and Standard Deductions

• Personal Exemptions- 3400 x number of people
  that taxpayers income supports
• Standard Deduction- amount that all tax payers
  may subtract from their AGI
• Amount depends on filing status
• Deduct itemized deductions if gt SD
• You only pay fed. taxes on income gt your personal
  exemption(s) standard or itemized deductions.
  (taxable income)

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Personal Exemptions

• Based on the number of people supported by the
  taxpayers income
• Spouse, children, parents, etc.
• Must provide more than half of financial support
• For 2007 each exemption reduces taxable income by
  3,400
• Adjusted yearly for inflation

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Standard Deductions
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Itemized Deductions

• Medical and Dental Expenses
• Taxes You Paid
• Mortgage Interest You Paid
• Gifts to Charity
• Casualty and Theft Losses
• Job Expenses and Most Other Misc. Deductions

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Tax Credits

• After PE and SD you determine your Tax Liability
• Subtract tax credits
• Tax Credit- dollar-for-dollar decrease in tax
  liability
• Refundable or Nonrefundable
• Refundable- can get paid even if you do not owe
  income taxes! Must file to collect!

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Tax Credits

• Hope Scholarship Credit
• Lifetime Learning Credit
• Earned Income Credit
• Child Tax Credit
• Child and Dependant Care Credit

• Adoption Credit
• Mortgage Interest Credit
• Retirement Savings Contribution Credit
• Elderly or Disabled Tax Credit
• Energy-Savings Tax Credit

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Retirement Savings Tax Credit

• 50 (1,000 credit for 2,000 savings)
• AGI Singles 15,000 MFJ 30,000
• 20 (400 credit for 2,000 savings)
• AGI Singles 16,250 MFJ 32,500
• 10 (200 credit for 2,000 savings)
• AGI Singles 25,000 MFJ-50,000

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Reduce Taxes Through Proper Planning

• Practice legal tax avoidance, not tax evasion.
• A dollar saved from taxes is really two dollars -
  or more
• Opportunity cost
• Earning another dollar to replace one paid to the
  IRS
• Earnings on a dollar not paid to the IRS

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Reduce Taxable Income Via Your Employer

• Premium only Plan
• Transportation reimbursement plan
• Flexible Spending Accounts (FSA)
• Defined-Contribution Retirement Plan
• 401(k) Retirement Plan
• Matching Employer Contributions

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Tax Terminology

• Taxable
• Tax-deferred
• Tax-free (tax-exempt)
• Tax Sheltered

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Tax Sheltered Investments

• Investments that yield returns that are tax
  advantaged
• IRAs, Traditional and Roth
• Coverdell Education Savings Account
• 529 College Savings Plans
• Government Savings Bonds
• Municipal Bonds
• Capital Gains on Housing

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After-Tax Yield

• Because of tax-exempt status of some investments
  they may provide lower than average returns
• Determine the after-tax yield to see if it is
  worth it.
• After-tax yield taxable yield x (1- federal
  marginal tax rate)

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After-Tax Yield

• Example-
• 35 combined federal and sate marginal tax rate
• Municipal bond 3.5 yield
• Taxable corporate bond 5.7 yield
• 5.7 x (1- 0.35) 3.71
• The 5.7 taxable bond is the way to go!

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Overwithholding

• When employees have their employers withhold more
  in estimated taxes than the tax liability
  ultimately due.
• A poor strategy of forced savings
• Opportunity cost- what could have been
  done/earned with that money???
• File a new W4 to decrease your withholding and
  automatically invest or payoff debt
• http//www.irs.gov/individuals/article/0,,id96196
  ,00.html

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Top 3 Financial Missteps

• Turn all your income tax planning over to someone
  else
• Overwithhold too much income to receive a refund
  next year
• Ignore the impact of income taxes in your
  personal financial planning

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Hiring a Tax Preparer

• Anyone can be a tax preparer!!
• Make sure to do your research
• What qualifications do they have?
• How qualified do I need them to be?
• What do they charge?
• Do I want tax advise all year round?
• Make sure to check out agencies as well as
  individuals

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Hiring a Tax Preparer

• Free file - AGI needs to be 54,000 or less
• http//www.irs.gov/efile/article/0,,id118986,00.h
  tml
• USU Accounting students provide VITA assistance
  in basement of USU Business building
• Open Wednesdays 5-9 pm Saturdays 9 am-1 pm
  February 13th - April 5th.
• For more info Joe Fail failing21_at_yahoo.com
• The VITA lab will not be open March 8th, 12th,
  15th, or 29th

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Tax Changes for 2007

• Deduction for mortgage insurance premiums is
  phased out for taxpayers with adjusted gross
  incomes exceeding 100,000 (50,000, if married
  filing separately).
• To deduct any charitable donation, taxpayers must
  have a bank record or a written communication
  from the recipient showing the name of the
  organization and the date and amount of the
  contribution.

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Utah Changes for 2007

• What's New for 2007 Tax Year
• Dual Income Tax System The Utah individual tax
  law was changed for 2007 to allow you to
  calculate your Utah tax liability two ways and
  then pay the lower amount.
• Utah Educational Savings Plan (529) Deduction
  Expanded The deduction for an investment in a
  Utah Educational Savings Plan has been increased
  for 2007.

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Utah Changes for 2007

• Utah Educational Savings Plan Credit An
  investment in a 529 may be taken as a deduction
  (Part 3 of TC-40S) under the traditional tax
  system. It may also be used as a credit under the
  single rate tax system when calculating the tax
  on line 13 of TC-40.
• Nonrefundable Residential Energy System Tax
  Credit a new credit is available for a system
  installed on a residential unit that supplies all
  or part of the energy required.

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Utah Changes for 2007

• Refundable Commercial Energy System Tax Credit A
  new refundable credit is available for a
  commercial energy system.
• For more information - http//incometax.utah.gov/n
  ew.php

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Receiving Your Refund

• Split refunds among up to three accounts
• banks, mutual funds, brokerage firms or credit
  unions
• To encourage savings
• Direct deposit to one account
• Paper check through the mail.
• IRS will process electronically filed returns in
  as little as 10 days but paper refunds will take
  4-6 weeks.

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A Word of Caution

• Beware of Tax Refund Anticipation Loans (aka
  rapid refund)
• Very costly
• Similar to a payday loan!!
• File electronically and it is almost as fast

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A Word of Caution RapidTax.com

• Rapid Access Loan (1-2 Day Refund)Get a loan in
  the amount of your refund in as little as 1-2
  business days after IRS acknowledgment. Loan must
  be approved and fees will be deducted from the
  loan. Available again in January, 2008. 29.99
• See below for additional fees charged by SBBT
  bank.
• Refund Amount SBBT Fee
• 300 - 3500 3
• 3501 - 4500 105
• In addition to the fees stated above,there is an
  account handling fee of 30.95.

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On a Lighter Note

• The guy who said that truth never hurts never had
  to fill out a Form 1040.
• Another difference between death and taxes is
  that death is frequently painless.
• Children may be deductible, but they are still
  taxing.
• Tax Humor (page 1)?From Tom Antion Associates -
  http//www.antion.com/humor/speakerhumor/taxes.htm

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March 5, 2007!!

• Investment Planning
• Note that it is the FIRST Wednesday due to Spring
  Break!!
• Remember to bring a friend!