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Federal Income Taxes


... withheld from wages Self-employed made in quarterly installments FICA Payroll Taxes FICA tax represents payments for Social Security and Medicare Employee ... – PowerPoint PPT presentation

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Title: Federal Income Taxes

Net Monthly Salary 4,391 Total Expenses
4,080 Available for Investments 311
Federal Income TaxesC. Thomas Bates, CPA

U S Income Tax System
  • Raises revenue
  • Influences economic and social behavior
  • Progressive tax system

Basic Concepts
  • Calculation of taxes
  • Progressive tax system
  • Tax deductions vs Tax credits
  • Payment of taxes

Tax Calculation
  • In simple terms taxes or refund due is figured
    by reducing income by deductions, calculating the
    tax liability on the net amount and comparing
    that liability against what you have paid in
    taxes during the year
  • Basic tax form (Form 1040)

Progressive Tax System
  • Taxpayers income is taxed in progressively
    higher blocks called brackets
  • Brackets range from 10 to 35
  • Tax Table or calculation

Tax Bracket Planning Strategies
  • Time recognition of income and deductions near
    year end to maximize benefit of tax brackets
  • Deduction may be worth more or less in different

Tax Deductions vs Tax Credits
  • A tax deduction is an expense that is subtracted
    from the taxpayers income before tax is
    calculated on that amount
  • A tax credit is an amount subtracted from the
    taxes owed
  • Tax credits are generally more valuable in
    reducing tax than tax deductions

Payment of Taxes
  • Pay as you go system
  • Employee withheld from wages
  • Self-employed made in quarterly installments

FICA Payroll Taxes
  • FICA tax represents payments for Social Security
    and Medicare
  • Employee withheld from wages at 7.65 and
    matched by employer
  • Self-employed paid at 15.3 (IRS allows a
    deduction for half of the self-employment tax)

Documentation and Records
  • Why maintain records
  • What records
  • How to classify
  • How long to retain records

Why Maintain Records
  • Prevents missing opportunities to deduct
    legitimate expenses
  • Poor documentation increase amount of time and
    stress to prepare tax return
  • Tracking expenses in an organized fashion
    eliminates need to amend tax returns if
    deductions are missed and found later
  • Documents deductions if audited by the IRS

What Records
  • Income
  • Mortgage/Home
  • Utilities
  • Medical
  • Charitable donations
  • Sales tax on large purchases

What Records
  • Unreimbursed business expenses
  • College/post-secondary education expenses
  • Dependent care expenses
  • Car mileage log
  • Everything else
  • Student loan interest

How to classify
  • Folder or envelope system
  • Personal financial software
  • Quicken
  • Microsoft Money

How Long to Retain Records
  • Seven years for most documentation
  • Permanent records
  • Income tax returns
  • Investment records
  • Real estate deeds an closing documents
  • Retirement plan documents
  • Insurance policies

Before December 31
  • Timing of year end expenses and income
  • Charitable donations
  • Donation of appreciated investments
  • Withdraw required minimum distribution (RMD) from
    IRA own or inherited
  • Consider Section 179 purchases for small business

Before April 15
  • Gather third party filing information
  • Form W-2
  • Form 1099
  • Form K-1
  • Form 1098
  • IRS uses computerized system to match to tax
  • Contribute to traditional IRA, Roth IRA and
    Coverdell Education Savings Accounts

Overlooked Deductions and Credits
  • Child care tax credit
  • State and local income taxes paid
  • Sales tax on substantial purchases
  • Mortgage points
  • Job related moving costs

Common Filing Mistakes
  • Missed filing deadlines and extensions
  • Tax returns are due April 15 (postmarked and in
    the mail)
  • If April 15 is on the weekend the deadline is the
    following Monday
  • IRS grants an automatic extension to October 15
    (Form 4868)
  • Extension is to file return any tax due must be
    paid by April 15

Common Filing Mistakes
  • Forgetting the stamp
  • Forgetting to sign
  • Forgetting Social Security Numbers for taxpayer
    or dependents
  • Using wrong annual limits, tax tables, etc
  • Forgetting to attach required documentation (W-2)

Avoiding Surprises
  • Start early
  • Identify missing documents
  • Know amount owed early
  • Receive refund sooner
  • IRS assesses interest on unpaid balances and
    penalties on late filers
  • IRS has longest reach of any creditor
  • Garnish wages
  • Seize assets

Major IRS Penalties
  • Failure to File 5 per month to a maximum of
  • Failure to Pay 0.5 per month up to 25
  • Accuracy Penalty 20 of the under calculated
  • Fraudulent Return Penalty 75 of the under
    calculated amount

What If You Cannot Pay
  • Offer in Compromise program settlement for less
    than total tax due based on ability to pay
    (winding down due to overuse)
  • Installment agreement monthly installments of
    tax plus interest

Current Applicable Topics
  • IRS e-file system (2010 mandatory)
  • Direct deposit of refunds
  • Automatic withdrawal of payments
  • Form 1040A Form 1040EZ
  • IRS Website

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