HACE 3200 1st Edition Lecture 10Outline of Last Lecture I. Cash or Liquid Asset ManagementII. On-Line Banking and “Net” banksIII. Money Market Mutual FundsOutline of Current Lecture I. Income tax structureII. Social Security III. State and Income TaxesIV. Standard DeductionsChapter 4: Tax Planning and Strategies- Importance of Tax Planningo In 1913, the 16th Amendment gave Congress the right to impose the first income taxo The average American Works more than 4 months just to pay his/her taxes- Income Tax Structureo Income Tax—progressive tax meaning that the more you earn the more you payo Tax brackets -- income ranges for which the same marginal tax rate applies 10%- 39.5%- Income Tax Structure (cont’d)o Average Tax rate—average amount of every dollar you earned that was paid for federal income taxeso Effective Marginal tax rate—average amount of every dollar you earned that paid for all local, state, federal income taxes( largest, has more in it)- Paying Your Income Taxeso Withholdings --tax payment from each paycheck, determined on the basis of income and W-4 formo Quarterly estimated paymentsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Payments with the tax return( the dreaded April 15th)o Withholdings from stock, retirement funds, and prize or gambling winnings- Social Security (OASDI) & Federal Insurance Contributions Act (FICA)o Old Age, Survivors and Disability Insurance (OASID) tax( aka Social Security)o Social Security- a mandatory insurance program administered by the federal government that provides support in the event of death, disability, health problems, or retiremento Tax rate of 6.20% of gross salary up to $117,000…. in 2014, there is NO social security taken out after this maximum- Social Security of FICA(cont’d)o Medicare—a health care insurance program for elderly and disabledo Tax rate of 1.45% of gross salary with no annual cap- State and Local Income Taxeso Most states impose an income tax; however, some, like Texas, do noto Local income taxes are uncommon; but some larger cities, for example, New YorkCity, impose such a tax- Other Non-Income- Based Taxes That You Faceo Excise “sin taxes” and state sales taxes—imposed when goods are purchasedo Real estate and property taxes—imposed annually or semi-annually on assets ownedo Gift and Estate Taxes—imposed when assets are transferred from one owner or another- 1) Who has to file an Income Tax Return in 2014?o Single-- $10,000o Head of Household (single person who has a dependent, child or foster child or even parent. Someone that is financially dependent on you)- $12,850o Married Filing Jointly- $20,000o Married Filing Separately-- $3,900o Qualifying Widower (with dependent child)- $16,100- Filing Status Classificationso Singleo Married Filing Jointlyo Married filing separatelyo Head of Household- 2) Sources of Taxable (Gross) Incomeo Wages, salaries, and tipso Capital gains, dividends, and interesto Alimonyo Pension funds and IRA distributionso Business and Farm Incomeo Rental and Royalty incomeo Social Security and unemployment benefits- Sources of Tax-Exempt Incomeo Roth IRA earningso State and local municipal bond interesto Gifts and inheritanceso Child support paymentso Federal income tax refundso Veterans’ and welfare benefits- 3) Gross Income minus adjustments= adjusted gross income (AGI)o Alimony paymentso Selected IRA and other retirement contributionso 50% for Social Security and Medicare (self-employed only)o Student loan interest, with limitations- 4) Subtracting Deductions from Adjusted Gross Income (AGI)o Two Methods Itemized deductions Standard deductions- IRS Limits on Itemized Deductionso Medical and dental expenses—must exceed 7.5% of AGIo Home Mortgage and investment interest paymentso Gifts to charity—keep good records, but must have receipt if the gift is more than$250- Other Giftingo You can gift another person $14,000 per year tax deductible- Standard Deductions (2013/2014)o Single-- $6,100 (2013) $6,200( 2014)o Married filing jointly --$12,200/ 12,400o Head of Household-- $8,950/9,100o Widow/ Widower-- $12,200/ 12,400- 5) Claiming Your Exemptionso Exemptions are meant to provide everyone with some untaxed income, provided you don’t earn too mucho $3,900(2013) $3,950(2014)o Personal Exemptions—(blind, over 65)o Dependency Exemptions- 6) Calculating Your Base Income Tax on Taxable Incomeo Tax tables in the bookleto Tax rate schedules—must be used if income exceeds $100,000- 7) Determining Your Creditso Child credit o American Opportunity Tax Credit(your first 2 yrs in college)o Lifetime Learning credit( each year after first 2)o Child and dependent care credito Earned income credit( EIC) (check this one out)- EICo Can be up to $6,044(2013)o $6,143(2014) for qualifying family with children- 8) Determine final tax liabilityo 1. Total source of incomeo 2. Adjustments off Gross incomeo 3. Deductions off Adjusted Gross Income 1.itemized or standard ($1 here is worth your tax bracket percentage: 15%, 28% 35%)- 8) Determine final tax liability cont’do 4. Exemptions( elderly, blind)o 5. Arrive at taxable income—figure tax owedo 6. Deduct credits off tax amount( $1 credit= $1 off tax)o Final Amount you owe