Taxes and Financial Planning

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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
  individuals 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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