Chapter 3:
Managing Taxes
Objectives
• Explain how taxes are administered and
classified.
• Describe the concept of the marginal tax
rate.
• Determine who should file an income tax
return.
Objectives
• Describe the two ways of paying taxes:
payroll withholding and estimated taxes.
• Identify the eight planning steps involved
in calculating federal income taxes.
• Understand planning strategies to legally
avoid overpayment of income taxes.
• Explain the basics of IRS audits.
What is Tax Management?
ATTENTION!
A PLANNING PROCESS FOR TAX:
• Reduction
• Deferment
• Elimination
Administration/Classification of Income Taxes
• Federal tax laws
• Marginal tax rate
• Progressive nature
of income tax
• Effective marginal
tax rate
• Regressive
• Average tax rate
2004 Filing Requirements for Most Taxpayers
IF your filing status is. . .
AND at the end of 2004 you were. . .
Single
Under 65
65 or older
$7,950
$9,150
Married filing jointly
Under 65 (both spouses
65 or older (one spouse)
65 or older (both spouses)
$15,900
$16,850
$17,800
Married filing separately
Any age
$3,100
Head of household
Under 65
65 or older
$10,250
$11,450
Qualifying widow(er) with dependent
child
Under 65
65 or older
$12,800
$13,750
Information taken from 2004 Publication 17.
THEN file a return if your gross
income was at least. . .
The Progressive Nature of the Federal Income
Tax
If your filing status is Single
If your taxable income is:
Over:
But not
over --
The tax is:
Of the
amount
over--
$0
$7,150
------------ 10%
$0
7,150
29,050
$715.00 + 15%
7,150
29,050
70,350
4,000.00 + 25%
29,050
70,350
146,750
14,325.00 + 28%
70,350
146,750
319,100
35,717.00 + 33%
146,750
319,100
----------
92,592.50 + 35%
319,100
The Tax Rate Schedule is shown so you can see the tax rate that applies to all levels of taxable income. It is not used to figure
ones’ taxes.
How Your Income is Really Taxed
Assumes a single individual with gross income of $57,700
$3,100 personal exemption is not taxed.
$4,850 standard deduction is not taxed.
First $7,150 of income is taxed at 10%.
Income
Tax
owed
$21,900 taxed at 15%.
$0
+
$0
+
$715
+
This individual’s marginal tax rate is 25%
This individual’s average tax rate is 15.9% (9,175/57,700)
$3,285
$20,700 taxed at 25%.
+
$5,175
= $57,700
= $9,175
Who Should File a Tax Return?
STUDENTS WITH:
• Earned income
• Unearned income
• Transfer payments