TAX PLANNING

Presented by

Dr. AA Neidermeyer

TAXING SITUATIONS

Earning incomeEnjoying portfolio incomeBeing a passive participant

ANNUAL POOLING OF INCOME

Annually, each taxpayer is required to “pool” his/her income items into an active, portfolio or passive pool.

Correct categorization is necessary for the proper tax treatment of the resultant income/loss.

TAX QUESTIONS

What is your personal tax situation?– E.g. Are your paying taxes on income,

purchases, property and/or wealth?

TAXES ON INCOME

What are the tax laws where you live and where you earn your income?

– E.g. Are your responsible for paying federal, state and local income taxes?

TAXES ON PURCHASES

How and where to you acquire the items of your everyday living?

– Tax laws in place where you buy govern the amount of taxes you pay if “nexus” has been successfully established.

TAXES ON PROPERTY

What property you own and the location of that property determine the amount, if any, of property taxes which you will be assessed.

TAXES ON WEALTH

If you’re considering transferring and/or receiving wealth, you should determine the governing tax laws at both the Federal and local levels that might cause a tax to be levied when the transfer is made.

IMPORTANCE OF TAX PLANNING

You’re spending 25-40% of your income on taxes; do NOT spend anymore than the necessary amount.

COMMON TAX JARGON

IncomeExclusionsGross IncomeDeductions for Adjusted Gross IncomeAdjusted Gross IncomeDeductions from Adjusted Gross IncomeTaxable Income

INCOME (BROAD CONCEPT)

For individual taxpayers, income is any value enhancement received or placed under the individual taxpayer’s control during the period 1/1 through 12/31 of any year.

The key term here is “realization.”

EXCLUSION(S)

Exclusions are items of value received which the current tax code states do not have to be included in taxable income.

Examples of exclusions:– Perquisites– Life insurance proceeds– Gifts

GROSS INCOME

Gross Income is the result of offsetting exclusions from your formulated income (broadly conceived) dollar amount.

“FOR” DEDUCTIONS

These deductions are individual-specific.

Representative items include– Student loan interest– Alimony– Moving expenses– Contributions to a traditional IRA

ADJUSTED GROSS INCOME

AGI is the benchmark figure on a tax return. This figure serves as a reference point to determine the magnitude of the deduction for subsequent items.

“FROM” DEDUCTIONS

Two categories of potential deductions occur:

1. The greater of an individual’s standard deduction or itemized deductions.

2. The number of personal/dependency exemptions to which the individual is entitled.

TAXABLE INCOME

The reference point to which current tax rates are applied to determine the required tax payments for the individual.

SATISFACTION OF YOUR LIABILITY

Pay-As-You-Go WithholdingEstimated PaymentsRollover from previous yearsTax credits

PAY-AS-YOU-GO

Employers are required to withhold a portion of each employee’s annual income tax liability through the payroll withholding program.

The magnitude of the withholding is determined by the W-4 form completed by each employee.

ESTIMATED PAYMENTS

If any individual is not subject to withholding through an employer’s system, he/she has the individual responsibility to make estimated payments of their annual liability during the tax period.

ESTIMATED TAX PAYMENTS

In order for timely deposits to be made, a taxpayer should deposit sufficient monies so that 90% of the current year liability or 100% of the prior year’s tax liability is covered.

ROLLOVER FROM PRIOR YEAR

Depending on the tax computation(s) from a prior year, the taxpayer may have a rollover credit to be used against future taxes.

Correct monitoring of this situation will permit the taxpayer to adjust his/her current payments of any tax liability.

TAX CREDITS

The most important item to be reviewed would be “tax credits.” These items constitute dollar-for-dollar offset against any tax liability which may be assessed against the taxpayer.

Available credits will vary by the individual situation.