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Income Taxes Financial Planning for Women February 2008 Garman/Forgue Personal Finance 9th ed. Presented by Danielle Walker Objectives - be able to : Calculate your marginal tax rate & apply in tax planning Reduce your taxable income

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income taxes

Income Taxes

Financial Planning for Women

February 2008

Garman/Forgue Personal Finance 9th ed.

Presented by Danielle Walker

objectives be able to
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 < gross
  • Adjust W-4 withholding
  • Avoid instant refund schemes
  • Know Utah has 2 tax systems
  • Tax Planning: Seeking legal ways to reduce, eliminate, or defer income taxes.
  • Taxable Income: the income upon which income taxes are levied
progressive vs regressive
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 person’s income.
    • State sales tax
marginal tax bracket and rate
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
find mtb
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
marginal tax rate and financial decisions
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 deductions> standard deduction
filing status tax rates
Filing Status & Tax Rates
  • IRS 2007 tax rate schedules
    • Single
    • Married, filing jointly or qualifying widower
    • Married, filing separately
    • Head of household
8 steps in calculating your income taxes
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
8 steps to calculating your income taxes
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

adjusted gross income agi
Income (just a few)

Wages and Salaries


Tips Earned

Gambling and Lottery Winnings

Capital Gains and Losses



Inherited money or property

Income from a carpool

Federal income tax refunds

Child support payments

Adjusted Gross Income (AGI)

*AGI- gross income less any exclusions and adjustments

personal exemptions and standard deductions
Personal Exemptions and Standard Deductions
  • Personal Exemptions- $3400 x number of people that taxpayer’s income supports
  • Standard Deduction- amount that all tax payers may subtract from their AGI
    • Amount depends on filing status
    • Deduct itemized deductions if > SD
  • You only pay fed. taxes on income > your personal exemption(s) + standard or itemized deductions. (taxable income)
personal exemptions
Personal Exemptions
  • Based on the number of people supported by the taxpayer’s 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
itemized deductions
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
tax credits
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!
tax credits18
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

Tax Credits
retirement savings tax credit
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
reduce taxes through proper planning
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
reduce taxable income via your employer
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
tax terminology
Tax Terminology
  • Taxable
  • Tax-deferred
  • Tax-free (tax-exempt)
  • Tax Sheltered
tax sheltered investments
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
after tax yield
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)
after tax yield25
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!
  • 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
top 3 financial missteps
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
hiring a tax preparer
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
hiring a tax preparer29
Hiring a Tax Preparer
  • Free file - AGI needs to be $54,000 or less
  • 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 []
    • The VITA lab will not be open March 8th, 12th, 15th, or 29th
tax changes for 2007
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.
utah changes for 2007
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.
utah changes for 200732
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.
utah changes for 200733
Utah Changes for 2007
    • Refundable Commercial Energy System Tax Credit: A new refundable credit is available for a commercial energy system.
  • For more information -
receiving your refund
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.
a word of caution
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
a word of caution rapidtax com
A Word of Caution:
  • 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 AmountSBBT Fee
    • $300 - $35003%
    • $3501 - $4500$105
    • In addition to the fees stated above,there is an account handling fee of $30.95.
on a lighter note
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 -
march 5 2007
March 5, 2007!!
  • Investment Planning
    • Note that it is the FIRST Wednesday due to Spring Break!!
    • Remember to bring a friend!