Chapter 16

1. Chapter 16 Individual Income Tax and Tax Planning Chapter 16: Individual Income Tax and Tax Planning

2. Federal Income Tax Law Objectives • Revenue-raising objectives • Economic objectives • Social objectives Chapter 16: Individual Income Tax and Tax Planning

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. IRS Guidance • Letter rulings • Determination letters • Revenue rulings • Private letter rulings • Revenue procedures • Technical advice memoranda Chapter 16: Individual Income Tax and Tax Planning

11. 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

12. 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

13. 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

14. 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

15. 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