Module _ Taxes

Module _ TaxesI'm spending a year dead for tax reasons.-Douglas Adams (writer)Objectives:Learn how to calculate your taxable income.Learn how to prepare a federal income tax return. Learn what suitable tax strategies are for different life states and circumstances.

How Do You Calculate Taxable Income? Income -Adjustments Adjusted Gross Income (AGI)-Deductions (Standard or Itemized)-Exemptions Taxable Income (Use Tax Bracket Table to compute)-Credits Tax Refund or Tax Owed

Alternative Minimum Tax- Paid by taxpayers with high amounts of certain deductions and various types of income.Designed to ensure that those who receive tax breaks also pay their fair share of taxes.

How Do You Calculate Taxable Income?Step 1: Determine your Gross Income:a. Take your combined gross incomeb. Your gross income includes wages, investment earnings, passive income, lottery winnings, alimony, and more. http://www.investopedia.com/terms/g/grossincome.asp

How Do You Calculate Taxable Income?Step 2: Determining Adjusted Gross IncomeGross income is affected by exclusions (not counted towards AGI)US citizens working and living in another country may exclude up to $97,600 for 2013.And tax-exempt income (not taxed at all)Ex. Interest earned on many local and state bonds is excluded from taxation. AND tax-deferred income (taxed at a later date) A common example is a traditional individual retirement account (IRA).Now you have your AGI (Gross income- these adjustments). We can now compute how much you will really have to pay (taxable income).

How Do You Calculate Taxable Income?Step 3: Determine your deductionFirst, we must determine what kind of tax deductions (dollar amount subtracted from your AGI to figure your taxable income) we have. You can either take a standard or itemized deduction (whichever is more).Every citizen gets at least a standard deduction.For 2015 the standard deduction is $6,300 for single taxpayers and married taxpayers filing separately. The standard deduction is $12,600 for married couples filing jointly and $9,250 for heads of household.

How Do You Calculate Taxable Income?Most people qualify for more than the standard deductions. These itemized deductions can include:Medical & dental expenses (>7.5% of AGI)TaxesInterestContributions Casualty and theft losesMoving expensesJob-related and other miscellaneous expenseshttp://www.irs.gov/uac/Six-Facts-about-Choosing-the-Standard-or-Itemized-Deductionshttp://www.irs.gov/taxtopics/tc500.html

How Do You Calculate Taxable Income?We also must subtract our exemptions.These are deductions for yourself, your spouse, and your dependents. In 2015 the exemption amount per person is $4,000. (This will not apply to high income households.)http://www.bankrate.com/finance/taxes/tax-exemption-amounts.aspx

How Do You Calculate Taxable Income?http://www.investopedia.com/video/play/how-to-calculate-how-much-tax-you-owe/https://www.youtube.com/watch?v=E3D2kPB95o8

How Do You Calculate Taxable Income?This is 2015 IRS Tax Bracket. We use this to calculate the actual amount of taxes we will pay each year. The rates on this table are called the marginal tax rates (rate used to calculate tax on the next dollar of income). The marginal tax rates do not tell us how much we will really pay.After getting our AGI, a person in the 25% tax bracket pays 25 cents for every dollar of income in that bracket. Single Filer has AGI of $75,000; his/her income tax before credits is $14,544 (calculate it on your own)How Do You Calculate Taxable Income?Tax credit (A dollar amount directly subtracted from the taxes you owe).Examples:Earned income creditsForeign tax creditsChild and dependent care creditsRetirement tax creditsAdoption tax creditsHope Scholarship and Lifetime Learning creditshttp://www.investopedia.com/video/play/tax-deduction-versus-tax-credit/

Question Cluster 1Types of tax forms you will likely use:Every citizen and resident of U.S. is required to file income tax.

Types of tax forms you will likely use:1040EZ1040A1040How to chose a form:

Types of filing status categories:Types of filing status categories:Single - individualMarried - filing separatelyMarried - filing jointlyHead of household - Must be unmarried and pay more than half the costs of maintaining a house with at least one dependent residing in it.Widow/Widower - spouse must have passed away within the past two years and be supporting a dependent.

http://www.irs.gov/uac/Eight-Facts-About-Filing-Status

The type of form you choose to use will depend on your:Amount of income Type of incomeTax situations complexityAmount of deductionsMost tax software programs will assist you in picking the most appropriate form for your particular situation.http://www.irs.gov/taxtopics/tc352.html

Question Cluster 2Steps taken to complete income tax return:Enter your filing status and any exemptionsFilling out your marriage status and dependents can affect your tax rateYou get an exemption for you and each dependent (a dependent must not claim him/herself on his/her own return). Report your income - State any income from employment, savings, investments, or other forms. List deductions and other adjustments - Reporting contributions to a retirement account can allow you to make additional deductions.

Steps taken to complete income tax return:Subtract any additional itemized or standardized deductions along with your exemptions - After subtracting these deductions and exemptions you are able to obtain your taxable income.

Subtract tax credits - they will reduce your tax liability.Add special taxes - For example self-employment tax should be added at this point.Steps taken to complete income tax return:Indicate your total withholdings and other payments Determination of your refund or amount owed - If your payments towards taxes exceed the total amount you owe you receive a refund. If the opposite is true you owe on your taxes and need to make additional payments.Sign the form - The most common filing error is forgetting to sign the return.

Question Cluster 3Consider the fact that:In the end you are responsible for providing accurate and complete information about your income.Even if you hire a professional to file your taxes if there are any mistakes made you are still responsible for paying the correct portion as well as any interest or penalties. You should be cautious of tax preparers that offer tax refunds up front.Some refund anticipation loans can charge up to 300% in interest.

Audits0.06% of all returns are auditedYou are more likely to be audited if you claim unusual or large deductions.

The three types of audits include:Field audit: an agent visits your home or office (most complex) Correspondence audit: minor questionsOffice audit: meeting in an IRS office

http://on.aol.com/video/what-are-tax-audits--turbotax-tax-tips-video-517257668Selecting Appropriate Tax StrategiesPractice tax avoidance:It is the method of reducing the amount of taxes to be paid in a legal manner.(Example: Taking advantage of tax credits and deductions.)Do not practice tax evasion:It is the illegal process of not paying all the taxes you owe. (Example: Not reporting all income; make sure the taxpreparer you hire follows the Code and doesn't just tell youwhat you want to hear - don't be afraid to ask questions ifin doubt.)http://www.investopedia.com/video/play/tax-avoidance-vs-tax-evasion/

The difference between tax avoidance and tax evasion is the thickness of a prison wall. -Denis Healey (Secretary of State)

Tax-Planning Strategies: PurchasesHome ownership:Can be used as a tax shelter as it can reduce your taxable income.Example: Property taxes and interest on the mortgage are tax deductible.Job-related expenses can be used as deductions:Example: job search costsHealth care expenses: Using flexible spending accounts for your health care costs allow you to reduce your taxable income when paying for health care.

Tax planning strategies for investments:Municipal bond interest is exempt from federal as well as some state taxes.Annuities, IRAs, 401ks, Keogh, and section 529 education savings plans are all tax deferred investments. Long-term capital gains (profits from stocks, bonds, real estate) that are held for more than a year are taxed at a lower rate.The tax filings procedures and code are modified every year, therefore you need to be aware of these changes so that you can take advantage of them for your own personal financial planning.

Tax Planning Strategies: Minimizing Taxes* You can do this by accelerating mortgage payments (for the interest deduction), property tax payments, and/or charitable contributions.

If your tax rate is expected to be:Then you should:The same or lowerAccelerate deductions into this year* or postpone income into next yearHigherDelay deductions or accelerate incomeQuestion Cluster 4