pfin 4 preparing your taxes 3 copyright ©2016 cengage learning. all rights reserved. may not be...
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PFIN 4
Preparing Your Taxes
3
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GITMAN/ JOEHNK/ BILLINGSLEY
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2Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 Discuss basic principles of income taxes and determine your filing status
2 Describe the sources of gross income and adjustments to income, differentiate between standard and itemized deductions and exemptions, and calculate taxable income
3 Prepare a basic tax return using the appropriate tax forms and rate schedules
4 Explain who needs to pay estimated taxes, when to file or amend your return, and how to handle an audit
LEARNING OUTCOMES
PFIN4 | CH3
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3Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5 Know where to get help with your taxes and how software can make tax return preparation easier
6 Implement an effective tax planning strategy
LEARNING OUTCOMES (continued)
PFIN4 | CH3
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Taxes
4Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• Dues paid for membership in a society• Cost of living in a country
• Objective of tax planning • Maximize the amount of money that one can
keep by legally minimizing the amount one pays
PFIN4 | CH3
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Income Taxes
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• Type of tax levied on taxable income by the federal, state, and local governments
• Progressive tax structure: Larger the amount of taxable income higher the rate at which it is taxed
• Marginal tax rate: Paid on the next dollar of taxable income
• Average tax rate: Rate at which each dollar of taxable income is taxed on average• Calculated by dividing the tax liability by
taxable incomePFIN4 | CH3
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Categories of Filing Status
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• Single taxpayers• Married filing jointly• Married filing separately• Head of household• Qualifying widow or widower with
dependent child
PFIN4 | CH3
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Take-Home Pay
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• Employer withholds a portion of income every pay period and sends it to the IRS to be credited to the tax account
• Employer withholds funds for federal income taxes and for FICA (Social Security) taxes
• Other payroll deductions• Life and health insurance, savings plans,
retirement programs, professional or union dues, and charitable contributions
PFIN4 | CH3
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Taxable Income
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• Amount of income subject to taxes• Gross income: Total of taxpayer’s income
subject to federal taxes that includes:• Active income• Portfolio income• Passive income
PFIN4 | CH3
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Exhibit 3.2
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Capital Gains Tax Categories as of 2013
PFIN4 | CH3
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Adjustments to (Gross) Income
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• Allowable deductions from gross income• Educator expenses (limited), higher education
tuition costs (limited), IRA contributions (limited), self-employment taxes paid, self-employed health insurance payments
• Adjusted gross income (AGI)• Amount of income that remains after
subtracting all allowable adjustments to income from gross income
PFIN4 | CH3
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Deductions
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Exemptions
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• Deductions from AGI based on the number of persons supported by the taxpayer’s income• Can be claimed for oneself, his/her spouse,
and dependents• Personal exemption can be claimed only once
PFIN4 | CH3
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Considerations for Calculating Taxable Income
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Exhibit 3.4
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Taxable Income and the Amount of Taxes Due (2013)
PFIN4 | CH3
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Filing Considerations
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• Estimated taxes: Payments required on income not subject to withholding that are paid in four instalments
• Usual filing deadline is April 15
PFIN4 | CH3
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Filing Considerations
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• Time beyond the usual April 15 deadline during which taxpayers can file their returns without incurring penalties
File extension
• Filed to adjust for information received after the filing date of the taxpayer’s original return or to correct errors
Amended return
• Examination by the IRS to validate the accuracy of a given tax return
Tax audit
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Tax Preparation Services
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• National and local tax services• Certified public accountants (CPAs)• Enrolled agents (EAs)• Tax attorneys• Computer-based tax returns
PFIN4 | CH3
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Effective Tax Planning
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• Tax evasion: Illegal act of failing to accurately report income or deductions and failing to pay taxes
• Tax avoidance: Act of reducing taxes in ways that are legal and compatible with the intent of Congress
• Objectives of tax planning• To reduce taxes• To shift taxes• To defer taxes
PFIN4 | CH3
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Tax Strategies
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• Maximizing deductions - Bunch deductions into one tax year if this allows you to itemize rather than take the standard deduction
• Income shifting: Taxpayer shifts a portion of income to relatives in lower tax brackets
• Tax-free and tax-deferred income• Some investments like municipal bonds
provide tax-free income• Tax deferred: income that is not subject to
taxes immediately but that will later be subject to taxes PFIN4 | CH3
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20Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• Taxes • Income taxes• Progressive tax
structure• Marginal tax rate• Average tax rate• Federal withholding
taxes• Federal Insurance
Contributions Act (FICA) or social security tax
KEY TERMS
• Taxable income• Gross income• Adjustments to
(gross) income• Adjusted gross
income (AGI)• Standard deduction• Itemized deductions• Tax credits• Estimated taxes• Amended return
PFIN4 | CH5
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21Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
SUMMARY
• The objective of tax planning is to maximize the amount of money that you can keep by legally minimizing the amount of taxes you pay
• Calculating income tax involves several steps and many computations
• Tax income is calculated on the basis of tax rates, tax credits, tax forms and schedules, and the procedures for determining tax liability
PFIN4 | CH5
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