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Chapter 4
Chapter 4
TAX PLANNING AND STRATEGIES
ACCCKKKKKKKKKKTAXES!
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Income-Based Taxes:
Social Security or FICA
State and local income taxes
Capital gains
Non-income-based taxes
Sales tax
Gas tax
Property taxes
Gift and estate taxes
Excise taxes
Business taxes
Payday
Omnipotent Heroes, Inc
123 Dreary Lane Earning Statement
Sherwood, OR 97140 Period Beginning: 10/1/2016
Period Ending: 10/15/2016
Taxable Marital Status: Single Pay Date: 10/31/2016
Exemptions: Advice number: 123456789
Frieda
Federal: 0 Frankenstein
State: 1
123 Zombie Lane
Sherwood, OR
Earnings 97140Hours
Rate This Year to
Period date
Pillaging $10.00 22.5 $225.00 $5000.00
Village
Gross Pay $225.00
Deductio Statutory
ns
Social Security -13.95 $310.00
Tax
Medicare Tax -3.26 $72.44
FICA - Federal Insurance Contributions Act
6
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Social Security Tax and Medicare Tax
a.k.a Payroll tax
Medicare 2.9%
Employer pays , unless self employed
Additional 0.9% on high income (> $225,000)
State Income Tax Rates
The Federal Income Tax Structure 8
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Progressive or graduate tax- tax rates increase
for higher incomes
Nixon 70%
The New Deal
63%-79%
Regan 50%
Bush 35%
1
Marginal Tax Rate Table 0
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2016 Taxable Income Brackets and Rates
Rate Single Filers Married Joint Filers
10% $0 to $9,275 $0 to $18,550
15% $9,276 to $37,650 $18,551 to $75,300
25% $37,651 to $91,150 $75,301 to $151,900
28% $91,151 to $190,150 $151,901 to $231,450
$190,151to
33% $231,451 to $413,350
$413,350
$413,351 to
35% $413,351 to $466,950
$415,050
39.6% >$415,050 >$466,950+
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Marginal vs Effective rate 2
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Hypothetical example
If your taxable income is: The tax is:
Over ---- But not over Amount Plus Of the amount
over
$0 $50,000 $0 10% $0
50,000 $100,000 $5000 20% $50000
100,000 -- $15,000 30% $100,000
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Hypothetical example
If your taxable income is: The tax is:
Over ---- But not over Amount Plus Of the amount
over
$0 $50,000 $0 10% $0
50,000 $100,000 $5000 20% $50000
100,000 -- $10,000 30% $100,000
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Reduce your taxable income
Deductions
Credits
Reducing your taxes by 1
reducing your taxable 5
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income
Contributions to retirement programs
401k
Traditional IRAs (income limits apply)
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Reduces your taxable income by the greater of:
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Credits are the best because they reduces the tax owed
Education credits
Child tax credits
Child care expenses
Residential energy credits
E.g. solar on the roof
Comparison of Education Credits
Criteria American Opportunity Tax Lifetime Learning Credit Tuition and Fees Deduction
Credit
Maximum credit or Up to $2,500 credit per Up to $2,000 credit per Up to $4,000 taxable income
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benefit eligible student return reduction per return
Refundable or 40% of credit Not refundable Does not apply
nonrefundable
Limit on Modified $90,000 /$180,000 $64,000 / $128,000 $80,000 / $160,000
Adjusted Gross Income -
single / MFJ
Only if student hasn't All years of post secondary All years of post secondary
Number of years of post-
completed 4 years of post education education
secondary education
secondary education before
available
2014
Number of tax years 4 tax years per eligible Unlimited Unlimited
credit available student
Student must be pursuing a Student does not need to be Student must be enrolled at
degree or other recognized pursuing a degree or other eligible educational institution
Type of program required
education credential recognized education for one or more courses
credential
Student must be enrolled at Available for one or more Available for one or more
least half time for at least courses courses at eligible educational
Number of courses
one academic period institution
beginning in 2014
Tuition, required enrollment Tuition and fees required for Tuition and fees required for
Qualified expenses fees and course materials enrollment or attendance enrollment or attendance
needed for course of study
If you are a dependent on someone elses taxes, and they are paying your college expenses
they can apply the credit to their taxes. Credit can only be claimed on one tax return!
Capital loss the amount you lose when you sell a capital
asset for less than you bought it
Only applies to investment assets, not personal property
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3
2
Help in Preparing Taxes 4
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Handle taxes by yourself.
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16, had a gross annual income of $68,000.00 for 2014. Determine their
standard deduction, exemption, and child tax credit amounts, as well as
their marginal and average tax rates assuming their filing status is
married filing jointly.
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Taxable income = Gross income Adjustments Deductions Exemptions
= $68,000 - $12,400 - $15,800
= $39,800
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Determining your marginal tax bracket and
average tax rate.