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Chapter 16. Individual Income Tax and Tax Planning. Federal Income Tax Law Objectives. Revenue-raising objectives Economic objectives Social objectives. Income Tax Planning. Data Collection and Risk Analysis Use a Client Questionnaire Gather prior income tax returns

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Presentation Transcript
chapter 16

Chapter 16

Individual Income Tax and Tax Planning

Chapter 16: Individual Income Tax and Tax Planning

federal income tax law objectives
Federal Income Tax Law Objectives
  • Revenue-raising objectives
  • Economic objectives
  • Social objectives

Chapter 16: Individual Income Tax and Tax Planning

income tax planning
Income Tax Planning
  • Data Collection and Risk Analysis
    • Use a Client Questionnaire
    • Gather prior income tax returns
    • Gather information returns
      • Form W-2
      • Form 1098
      • Form 1099

Chapter 16: Individual Income Tax and Tax Planning

individual income tax rates
Individual Income Tax Rates
  • Ordinary rates
  • Capital gain rates
    • Capital asset/Dividends
    • Sale or exchange
    • Long-term holding period
  • Alternative Minimum Tax (AMT) rates

Chapter 16: Individual Income Tax and Tax Planning

determining income tax liability taxable income
Determining Income Tax Liability – Taxable Income

Total Income

Less: exclusions from gross income

Gross Income

Less: deductions for Adjusted Gross Income

Adjusted Gross Income (AGI)

Less the larger of:

Standard Deduction or Itemized Deductions

Less: personal and dependency exemptions

Taxable Income

Chapter 16: Individual Income Tax and Tax Planning

deductions for agi
Deductions for AGI
  • Business expenses
  • Net capital losses ($3,000)
  • Self-employed expenses
  • Alimony paid
  • IRA contributions
  • Moving expenses
  • Education expenses

Chapter 16: Individual Income Tax and Tax Planning

itemized deductions
Itemized Deductions
  • Medical expenses (> 7.5% AGI)
  • State & local income taxes
  • Property taxes
  • Mortgage interest
  • Investment Expenses (< Investment Income)
  • Charitable contributions
  • Casualty/Theft losses (> 10% AGI + $100)
  • Miscellaneous (> 2% AGI)

Chapter 16: Individual Income Tax and Tax Planning

tax avoidance vs tax evasion
Tax Avoidance vs. Tax Evasion
  • Tax avoidance is the legal minimization of taxes
  • Tax evasion is any of the fraudulent methods by which a taxpayer may pay less than his or her proper tax liability

Chapter 16: Individual Income Tax and Tax Planning

the internal revenue service and its administrative issues
The Internal Revenue Service and Its Administrative Issues
  • The IRS
    • is part of the Treasury Department
    • is responsible for administering and enforcing federal tax laws
    • issues Revenue Rulings and Revenue Procedures as official interpretations of the tax laws

Chapter 16: Individual Income Tax and Tax Planning

irs guidance
IRS Guidance
  • Letter rulings
  • Determination letters
  • Revenue rulings
  • Private letter rulings
  • Revenue procedures
  • Technical advice memoranda

Chapter 16: Individual Income Tax and Tax Planning

the irs audit process
The IRS Audit Process
  • The Discriminant Index Function System
  • Types of Audits
    • Correspondence audit
    • Office audit
    • Field audit

Chapter 16: Individual Income Tax and Tax Planning

the irs audit process cont d
The IRS Audit Process (cont’d)
  • Outcomes of Audits
    • No change to return
    • Taxpayer agrees with examiner’s findings
    • Taxpayer does not agree with examiner’s findings
    • Taxpayer partially agrees with examiner’s findings
  • If a taxpayer exhausts all administrative remedies, the case may be brought to court

Chapter 16: Individual Income Tax and Tax Planning

the irs audit process cont d13
The IRS Audit Process (cont’d)
  • Penalties
    • Failure-to-file penalties
    • Failure-to-pay-tax penalties
    • Accuracy-related penalties
    • Fraud penalties

Chapter 16: Individual Income Tax and Tax Planning

payroll taxes
Payroll Taxes
  • FICA taxes for employers and employees
    • 6.2% OASDI on $87,900 (2004)
    • 1.45% Medicare
  • Self-employment tax
    • Double the employee’s rate
  • FUTA tax calculation

Chapter 16: Individual Income Tax and Tax Planning

tax advantaged investments
Tax-Advantaged Investments
  • Investment in tax-exempt securities
  • Tax shelters
  • Employee benefits
  • Acceleration of deductions
  • Deferral of tax gains
  • Exemption opportunities

Chapter 16: Individual Income Tax and Tax Planning

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