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Tax Preparation

Tax Preparation. Financial Literacy. Federal Income Tax Structure. The Federal income tax is a progressive tax The higher your income, the more you pay, both as a dollar amount and as a percentage. Tax Freedom Day Almost four months of your yearly income goes to pay various taxes (30%).

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Tax Preparation

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  1. Tax Preparation Financial Literacy

  2. Federal Income Tax Structure • The Federal income tax is a progressive tax • The higher your income, the more you pay, both as a dollar amount and as a percentage. • Tax Freedom Day • Almost four months of your yearly income goes to pay various taxes (30%)

  3. Tax Vocabulary • Tax Brackets: • Income ranges in which the same tax rates apply

  4. Tax Vocabulary • Personal Exemptions: • An allowed reduction in your income before taxes are computed • You get one for yourself, one for your spouse, and one for each dependent

  5. Tax Vocabulary, continued • Deductions are: • Expensesthat reduce taxable income, such as: • Some medical expenses • Mortgage interest paid • State and local income taxes • Charitable contributions • Itemized Deductions (expenses): • Deductions are calculated using Schedule A

  6. Tax Vocabulary, continued • Standard Deduction: • A set deduction allowed by the IRS regardless of your actual expenses • You can itemize deductions or take the standard deduction, but not both • Taxable Income: • Income subject to taxes after deductions and exemptions are subtracted from gross income

  7. Taxable Income Gross income – Exemptions – Deductions = Taxable Income Example Gross Income of $70,000 minus exemptions of $11,100 minus deductions of $9,477 = $49,423 This is the amount used to determine taxes

  8. Marginal Tax Rate This chart shows the highest tax rates charged for the highest incomes over the last 100 years. The highest tax rate now is 39.6% on the highest earners

  9. Average vs Marginal Tax Rates • Marginal tax rates are the percentage paid on your highest level of income (25% in our example) • Average tax rates are your actual taxes divided by your taxable income (will be lower than the marginal rate): • $6,564/$49,423 = 13.28% • Or by your gross income: • $6,564/$70,000 = 9.38%

  10. Filing Status • Single: • You are single at the end of the year with no dependents • Married filing jointly: • You and your spouse combine incomes • Married filing separately: • You and your spouse file separate returns • Head of Household: • You are unmarried but have at least one dependent child living with you

  11. Other Taxes You Pay • Social Security (FICA) • 6.2% for Social Security • 1.45% for Medicare • State and local income taxes • Excise taxes: • Sales taxes, gas taxes, property taxes, taxes on liquor, cigarettes, jewelry, air travel, etc. • Gift and estate taxes

  12. Who Has To File A Return? • If your income is greater than $20,900 • If it is less than that, you might not need to file, depending on your circumstances (check with your tax advisor) • However, if your income is less than that and if you had taxes withheld, you will not get a refund unless you file a return.

  13. Itemizing Deductions • The most common deductions are: • Medical and dental expenses exceed 7.5% of adjusted gross income • Tax expenses (state and local can be deducted, but not Federal, Social Security, or sales taxes) • Home mortgage interest • Charitable contributions • Casualty and theft losses • A deduction will lower your tax bill, but not dollar for dollar

  14. Standard Deduction • The standard deduction is the government’s best estimate on what the average person would be able to deduct by itemizing • Remember that you can take the standard deduction or you can itemize, but not both

  15. Exemptions • Personal • Take one for yourself and one for your spouse • Dependents: • Must have a qualifying relationship (child, grandchild, parents, stepparents, uncles, nieces, etc.) • The dependent can’t earn more than the exemption amountdoes not apply to children under 19 or to children under 24 if full-time students • Must provide more than half of dependent’s financial support

  16. Tax Formula Adjustments to gross income: tax-deductible expenses and retirement contributions (IRA, 401K), moving expenses, etc. Gross Income: Sum of Income from all sources Less Equals Adjusted Gross Income Less Equals Exemptions and deductions Taxable income

  17. Calculating Your Base Income Tax • For most taxpayers, this is calculated using tax tables (see page 109) • Tax tables have tax brackets built in • Once taxes have been calculated, credits can be deducted

  18. Common Income Tax Credits • Tax credits will lower your tax bill, dollar for dollar. Examples: • Child Tax Credit (this can become a refund for parents who don’t pay taxes) up to $1000 per child • American Opportunity Credit • Credit for tuition, up to $2500 of the first $4,000 of educational expenses • Child and dependent care credit • Credit for money paid for child or other dependent care • Earned income credit • For low-income families, may result in negative taxes paid

  19. Income Tax Due Base Income Tax Less Tax Credits Equals Total Income Tax Due

  20. Picking a Tax Form • Options: 1040EZ, 1040A, or 1040 • 1040EZ: • No dependents, taxable income less than $50,000, no itemizing deductions • 1040A: • No itemizing, alimony, capital gains, pension or Social Security benefits; income less than $50,000 • 1040: everyone else

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