chapter 4a overheads
TRANSCRIPT
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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.
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Taxes on Purchases
• State and local taxes are added to the purchase price of goods.
• Excise tax is imposed on specific goods and services– Gasoline– Cigarettes– Alcohol– Tires– Air travel– Telephone service
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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.
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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.
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Taxes on Earnings
• Social Security• Income Tax
– Federal tax– State tax in all but 7 states
• Alaska• Florida• Nevada• South Dakota• Texas• Washington• Wyoming
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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
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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
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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
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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.
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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.
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Tax Payments
• Payroll deductions-pay-as-you-go (W-4)
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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%
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New tax deductions for 2010
• Haiti relief
• Cash for clunkers
• First-time buyer
• Residential energy credits
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