Chapter 4 Lecture 2

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Chapter 4Lecture 2

• Tax Planning and Strategies

2
Calculating Your Taxes

• Who has to file an income tax return.
• Choosing a tax form.
• Determining gross or total income.
• Calculating adjusted gross income (AGI).
• Subtracting deductions.
• Claiming exemptions.
• Calculating taxable income.
• Subtract credits.
• Determine taxes due.

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Filing Status Classifications

• Single.
• Married filing jointly.
• Married filing separately.
• Head of household.
• Surviving spouse.

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Who Has to File an Income Tax Return

• Single (under 65) and income is at least 8,200.
• Single Dependent.
• Unearned income is at least 800.
• Earned income is at least 5,000.
• Married filing jointly and income is at least
  16,400.
• Note All thresholds are adjusted annually for
  inflation.

5
Choosing a Tax Form

• Form 1040EZ.
• Taxable income is less than 100,000.
• Cannot itemize deductions.
• Form 1040A.
• Taxable income is less than 100,000.
• Allows for more sources of income.
• Cannot itemize deductions.
• Form 1040 (long form).
• Use for more complicated transactions.
• Only form that allows you to itemize deductions.

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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
• - Exemptions claimed
• __________________________________
• Taxable income (TI)
• Tax rates 10-35______________________
• Tax liability
• - Tax credits
• - Tax prepayments___________________________
• Tax due or refund

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Gross Income

• Gross (or total) income is the sum of all taxable
  income.
• 3 types of income
• Active income.
• Investment (or portfolio) income.
• Passive income.
• Not all income is taxable.

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Exclusions/Tax Exempt Income

• Loans.
• Gifts and inheritances.
• Scholarships and grants.
• Workers compensation (but not unemployment
  benefits).
• Child support payments (but not alimony).
• Life insurance proceeds.
• Municipal bond interest.
• Roth IRA earnings (but not traditional IRA
  earnings).
• 250,000 gain on sale of personal residence.

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Exclusions vs. Deferrals

• Exclusions and tax exempt income.
• Never taxed.
• Deferred income.
• Not taxed currently but will be taxed in the
  future.
• Retirement contributions.
• Traditional IRA earnings.

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Taxable Amounts included inGross Income

• Wages, salaries, and tips.
• Capital gains, dividends, and interest.
• Alimony received.
• Pension funds and IRA distributions.
• Business income (SE).
• Rental income.
• Unemployment benefits.
• Gambling, lottery, and prizes.

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Capital Gains

• Capital Asset.
• Personal use (gain but no loss).
• Held for investment (stock).
• Held for gt 1 year.
• 15 tax rate in 2006.
• 3,000 reduction of ordinary income if capital
  losses exceed capital gains.
• Personal residence-250,000 exemption.

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Employee Stock Options

• Incentive stock options (ISOs)
• Grant no tax consequences.
• Exercise--no tax consequences except for AMT.
• Disposition--lt 1 year--ordinary gt1 year--capital
  gain.
• Non-qualified stock options.
• Grantno tax consequences if no readily
  ascertainable FMV.
• Exercise--ordinary income.

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Nontaxable Employee Fringe Benefits

• Value of child and dependent care services paid
  for by the employer and incurred to enable the
  employee to work.
• Value of the use of a gym or other athletic
  facility (must be on employers premises).
• Employer-provided educational assistance.