Taxes and Financial Planning
•Common goals related to tax
planning:
–Know current tax laws
–Maintain complete records
–Make financial decisions that
can reduce tax liability
•Principal purpose of taxes is to
finance government activities.
•About 1/3 of your earnings go to
pay taxes.
Taxes on Purchases
• State and local taxes are added to the purchase
price of goods.
• Excise tax is imposed on specific goods and
services
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Gasoline
Cigarettes
Alcohol
Tires
Air travel
Telephone service
Taxes on Property
• Real estate property tax is based on the
value of land and buildings.
• Personal property taxes on the value of
automobiles, boats, furniture, and farm
equipment are imposed in some areas.
Taxes on Wealth
• Estate tax-imposed on the value of an
individual’s property at the time of death.
• Inheritance tax-levied on the value of
property bequeathed by a deceased
individual.
• Gift amount greater than $13,000 are
subject to federal tax.
Taxes on Earnings
• Social Security
• Income Tax
– Federal tax
– State tax in all but 7 states
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Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming
Determining Adjusted Gross
Income (AGI)
• Taxable income-net income after deductions, on
which income tax is computed
• Types of income subject to taxation:
– Earned income-wages, salaries, commissions, fees,
tips, bonuses
– Investment income-dividends, interest, rent
– Passive income-business activities that you do not
direectly participate-limited partnership
– Alimony, awards, lottery winnings, prizes
Taxable Income
• Total income is affected by exclusions
– Exclusions are amounts not included in gross
income
– Exclusions can also be tax-exempt income
• Total income is affected by tax deferred
income
Computing Taxable Income
• Adjusted Gross Income-income after
certain deductions including:
– Contributions to a traditional IRA or Keogh
– Alimony payments
– Student loan interest, tuition and fee
deductions
– Tax-deferred retirement plans
Taxable Income
• Deduction-an amount subtracted from AGI
to arrive at taxable income.
– Standard deduction
– Itemized deduction
Exemption-a deduction from AGI for yourself,
your spouse, and qualified dependents.
Taxes Owed
• Use your taxable income in conjunction
with the appropriate tax table or tax
schedule.
• Marginal tax rate-the tax on the last dollar
of income.
• Average tax rate-total tax due divided ty
your taxable income.
• Tax credit-amounts subtracted from the
amount of tax owed.
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.
Tax Payments
• Payroll deductionspay-as-you-go (W-4)
Tax Credit Versus Tax Deduction
• $100 tax credit reduces your taxes by $100
• $100 tax deduction reduces taxes by your
tax bracket. For instance, if a person is in
the 25% tax bracket it would reduce your
taxes by 25%