2009 Pearson Education, Inc. All rights reserved. 1 4 4 Introduction to Classes and Objects.
© 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.
-
Upload
job-barker -
Category
Documents
-
view
216 -
download
1
Transcript of © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.
![Page 1: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/1.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-1
Chapter 4
Tax Planning and Strategies
![Page 2: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/2.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-2
Introduction
• Most financial decisions are affected by taxes.
• Need to understand how taxes are imposed.
• What strategies are used to reduce taxes and what role does tax planning have in personal financial planning?
![Page 3: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/3.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-3
The Federal IncomeTax Structure
• Progressive or graduate tax
• Tax rates and tax brackets
• Personal exemption
• Itemized or standard deductions
• Taxable income
![Page 4: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/4.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-4
The Federal IncomeTax Structure
• Taxable income is a function of adjusted gross income (AGI), deductions, and exemptions.
• AGI = taxable income from all sources minus specific adjustments but before deducting standard or itemized deductions
![Page 5: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/5.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-5
Table 4.1 Tax Rates and Brackets
![Page 6: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/6.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-6
The Federal IncomeTax Structure
• Assume you are in the 15% tax bracket. Does that mean you pay 15% of your taxable income in taxes?
• The last dollar earned is taxed at 15%. Earlier income is taxed at the lower rate.
![Page 7: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/7.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-7
Marginal Versus Average Taxes
• Average Tax Rate—the average amount of your total income taken away in taxes
• Marginal Tax Rate (or marginal tax bracket)—the percentage of the last dollar earned that goes to pay taxes
• Tax-deferred—income on which the payment of taxes is postponed
![Page 8: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/8.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-8
Figure 4.1 Historical Top Marginal Income Tax Rate
![Page 9: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/9.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-9
Effective Marginal Tax Rate
• The rate you pay when all income taxes are combined (federal, state, city, Social Security taxes, etc.).
• Is greater than the marginal tax rate on federal income taxes.
![Page 10: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/10.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-10
Capital Gains andDividend Income
• Capital asset—an asset your own
• Capital gain—what you make if you sell a capital asset for a profit
• Capital loss—what you lose when you sell a capital asset for a loss
• Capital gains tax—tax you pay on your capital gains
![Page 11: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/11.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-11
Capital Gains andDividend Income
• Lower tax rate on both the long-term capital gains and on dividends.
• Long-term capital gains tax on profits from the sale of stocks and bonds, not gains from sale of collectibles.
• Capital gains are not claimed or taxed until the asset is sold.
![Page 12: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/12.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-12
Long-Term CapitalGains on Homes
• Capital gains taxes for most homeowners on sale of their homes
• Exemption up to $500,000 for couples filing jointly ($250,000) filing single on sale of principal residence
• Must have been occupied for 2 of the 5 years prior sale
![Page 13: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/13.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-13
Figure 4.3Calculating Your Taxes
![Page 14: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/14.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-14
Table 4.2 Comparison of Education Credits
![Page 15: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/15.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-15
Being Audited
• Audit—an examination of tax return by IRS
• Randomly selected—higher odds if itemized deductions are 44% of income.
• Asked to send additional information in mail or IRS face-to-face interview.
• Reexamine areas in question, get all data and records, appeal audit outcome if necessary.
![Page 16: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/16.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-16
Help in Preparing Taxes
• Handle taxes by yourself.
• Use IRS publications, IRS hotlines, & self-help publications and computer programs.
• Hire a tax specialist.
![Page 17: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/17.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-17
Tax Strategies to Lower Your Taxes
• Tax planning must be done ahead of time to minimize unnecessary tax payments.
• Tax strategies should supplement a solid investment strategy.
• There are five general tax strategies.
![Page 18: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/18.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-18
Look to Capital Gains and Dividend Income
• 15 percent is the maximum tax rate for long-term capital gains for taxpayers in tax brackets that exceed 15 percent.
• Don’t have to claim capital gains until asset is sold.
• Qualified dividends from corporations are taxed at same low rates as long-term capital gains.
![Page 19: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/19.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-19
Shift Income to Family Members in Lower Tax Brackets
• Can be complex and involve lawyers and establishment of trusts.
• Simpler way is to make gifts—recipients do not pay taxes on gifts either.
• Allowed $13,000 in total gifts per year.
• Gift some of your estate while still alive.
![Page 20: © 2013 Pearson Education, Inc. All rights reserved.4-1 Chapter 4 Tax Planning and Strategies.](https://reader036.fdocuments.net/reader036/viewer/2022062517/56649e875503460f94b8b1b1/html5/thumbnails/20.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 4-20
Defer Taxes to the Future
• Tax-deferred retirement plans allow your to defer tax payments to the future.
• Roth IRAs allows taxes to be paid on contributions and never again.
• Capital gains taxes are postponed until you sell the asset.