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– 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

• 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.

Tax Payments

• Payroll deductions-pay-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%

New tax deductions for 2010

• Haiti relief

• Cash for clunkers

• First-time buyer

• Residential energy credits