GITMAN/ JOEHNK/ BILLINGSLEY
PFIN
4
3
Preparing
Your Taxes
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
LEARNING OUTCOMES
1 Discuss basic principles of income taxes and
determine your filing status
2 Describe the sources of gross income and
adjustments to income, differentiate between
standard and itemized deductions and
exemptions, and calculate taxable income
3 Prepare a basic tax return using the
appropriate tax forms and rate schedules
4 Explain who needs to pay estimated taxes,
when to file or amend your return, and how to
handle an audit
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
2
LEARNING OUTCOMES (continued)
5 Know where to get help with your taxes and
how software can make tax return
preparation easier
6 Implement an effective tax planning strategy
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
3
Taxes
• Dues paid for membership in a society
• Cost of living in a country
• Objective of tax planning
• Maximize the amount of money that one can
keep by legally minimizing the amount one pays
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
4
Income Taxes
• Type of tax levied on taxable income by the
federal, state, and local governments
• Progressive tax structure: Larger the
amount of taxable income higher the rate at
which it is taxed
• Marginal tax rate: Paid on the next dollar of
taxable income
• Average tax rate: Rate at which each dollar
of taxable income is taxed on average
• Calculated by dividing the tax liability by taxable
income
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
5
Categories of Filing Status
•
•
•
•
•
Single taxpayers
Married filing jointly
Married filing separately
Head of household
Qualifying widow or widower with
dependent child
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
6
Take-Home Pay
• Employer withholds a portion of income
every pay period and sends it to the IRS to
be credited to the tax account
• Employer withholds funds for federal
income taxes and for FICA (Social Security)
taxes
• Other payroll deductions
• Life and health insurance, savings plans,
retirement programs, professional or union
dues, and charitable contributions
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
7
Taxable Income
• Amount of income subject to taxes
• Gross income: Total of taxpayer’s income
subject to federal taxes that includes:
• Active income
• Portfolio income
• Passive income
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
8
Exhibit 3.2 Capital Gains Tax Categories as
of 2013
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
9
Adjustments to (Gross) Income
• Allowable deductions from gross income
• Educator expenses (limited), higher education
tuition costs (limited), IRA contributions
(limited), self-employment taxes paid, selfemployed health insurance payments
• Adjusted gross income (AGI)
• Amount of income that remains after
subtracting all allowable adjustments to income
from gross income
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
10
Deductions
Standard
• Blanket deduction that depends on the
taxpayer’s filing status, age, and vision
Itemized
• Personal expenditures that can be deducted
from AGI when determining taxable income
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
11
Exemptions
• Deductions from AGI based on the number
of persons supported by the taxpayer’s
income
• Can be claimed for oneself, his/her spouse, and
dependents
• Personal exemption can be claimed only once
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
12
Considerations for Calculating Taxable
Income
Tax rates
• Vary according to reported taxable income and filing
status
Tax credits
• Deductions from a taxpayer’s tax liability that directly
reduces his or her taxes due
Tax forms
• Required by taxpayers to file their returns
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
13
Exhibit 3.4 Taxable Income and the
Amount of Taxes Due (2013)
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
14
Filing Considerations
• Estimated taxes: Payments required on
income not subject to withholding that are
paid in four instalments
• Usual filing deadline is April 15
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
15
Filing Considerations
File extension
• Time beyond the usual April 15 deadline during which taxpayers
can file their returns without incurring penalties
Amended return
• Filed to adjust for information received after the filing date of
the taxpayer’s original return or to correct errors
Tax audit
• Examination by the IRS to validate the accuracy of a given tax
return
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
16
Tax Preparation Services
•
•
•
•
•
National and local tax services
Certified public accountants (CPAs)
Enrolled agents (EAs)
Tax attorneys
Computer-based tax returns
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
17
Effective Tax Planning
• Tax evasion: Illegal act of failing to
accurately report income or deductions
and failing to pay taxes
• Tax avoidance: Act of reducing taxes in
ways that are legal and compatible with
the intent of Congress
• Objectives of tax planning
• To reduce taxes
• To shift taxes
• To defer taxes
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
18
Tax Strategies
• Maximizing deductions - Bunch deductions
into one tax year if this allows you to itemize
rather than take the standard deduction
• Income shifting: Taxpayer shifts a portion of
income to relatives in lower tax brackets
• Tax-free and tax-deferred income
• Some investments like municipal bonds provide
tax-free income
• Tax deferred: income that is not subject to taxes
immediately but that will later be subject to
taxes
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH3
19
KEY TERMS
• Taxes
• Income taxes
• Progressive tax
structure
• Marginal tax rate
• Average tax rate
• Federal withholding
taxes
• Federal Insurance
Contributions Act
(FICA) or social security
tax
• Taxable income
• Gross income
• Adjustments to (gross)
income
• Adjusted gross income
(AGI)
• Standard deduction
• Itemized deductions
• Tax credits
• Estimated taxes
• Amended return
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
20
SUMMARY
• The objective of tax planning is to maximize
the amount of money that you can keep by
legally minimizing the amount of taxes you
pay
• Calculating income tax involves several steps
and many computations
• Tax income is calculated on the basis of tax
rates, tax credits, tax forms and schedules,
and the procedures for determining tax
liability
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH5
21