Chapter 4 Lecture 4

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Chapter 4Lecture 4

• Tax Planning and Strategies

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Individual Income Tax Formula

• Total Income (everything received)
• - Exclusions/Tax-exempt Income_______________
• Gross income (GI)
• - Adjustments______________________________
  
• Adjusted Gross Income (AGI)
• - Greater of Standard or Itemized deductions
• - Personal and dependency Exemptions
  _________________________________
• Taxable income (TI)
• Tax rates 10-35______________________
• Tax liability
• - Tax credits
• - Tax prepayments___________________________
• Tax due or refund

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Tax Credits

• Tax credits are subtracted directly from taxes
  due on a dollar-for-dollar basis.

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Deduction vs. Tax Credit

• A deduction reduces the amount of income that is
  taxed.
• Deductions are subtracted from AGI before you
  calculate income taxes due.
• A credit reduces the tax.
• The amount of the credit is subtracted from
  income taxes due.

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Types of Tax Credits

• Child Credit.
• Hope Scholarship Tax Credit.
• Lifetime Learning Credit.
• Child and dependent care credit.
• Earned income credit.
• Adoption credit.

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Paying Your Income Taxes

• W-4 Form -- provides your employer information
  about your marital status and number of
  exemptions you wish to claim.
• Withholding -- is the amount of tax that is paid
  each time you receive a paycheck. This is why
  there is a difference between your gross pay and
  your take-home pay.
• Estimated tax payments.

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Tax Formula Example
Bob Stone needs help with his tax return. In
2005, he received a 38,000 salary, 200 in bank
interest, and 1,500 in lottery winnings. He
paid 1,500 in medical expenses, 3,000 to a
Traditional IRA, 7,000 in mortgage interest,
3,000 in federal income taxes withheld, 1,500
in state income taxes, and 500 in charitable
contributions. He also a has a 200 federal
income tax credit. He files as single with no
qualifying dependents. What is Bobs taxable
income, gross tax and tax due for 2005?
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SOLUTION
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Late and Amended Returns

• Filing late.
• Must request an extension of time (Form 4868)
  from the IRS.
• 4-month extension is automatic.
• You must pay the estimated tax due by April 15th
  (or will be charged interest and penalties).
• Amending your return.
• File Form 1040X.
• Limitation - 3 years.
• Amend state and local returns.

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Reasons for Being Audited

• Random.
• Previous errors.
• High income level.
• Filing a Schedule C.
• Audits allow the IRS to conduct spot checks of
  returns to ensure compliance to the tax laws and
  regulations.

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Preparing for an Audit

• Reexamine the areas in question.
• Gather all supporting data.
• Anticipate questions.
• Hire a tax accountant or attorney (if necessary).
• The best way to win an audit is to keep excellent
  records and take supported tax positions.

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Appealing an Audit Outcome

• Appeal with the auditor.
• Appeal with the auditors manager.
• File a formal appeal.
• Go to court.

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Tax Strategies to Lower Taxes

• Maximize deductions.
• Use tax-deferred retirement programs.
• Use your home as a tax shelter.
• Look to capital gains and dividend income.
• Shift income to family members in lower tax
  brackets.
• Receive tax-exempt income.
• Defer taxes to the future.