COA 4131 1st Edition Lecture 3 Outline of Last Lecture I. MicroeconomicsII. Presidents and the Economy III. Financial Statements and BudgetsIV. Important Numbers ListV. Financial StatementsVI. The Personal Balance Sheet: Net WorthVII. How Solvent Are You?VIII. Selecting Financial AdvisorsOutline of Current Lecture I. TaxesII. Federal IncomeIII. OutlaysIV. Taxing Philosophies V. Average TaxesVI. Types of TaxesVII. Tax FilingVIII. Paying TaxesIX. Common FormsX. Paying TaxesXI. Avoid Common MistakesXII. Withholding and Prompt ReturnsXIII. AuditsXIV. SoftwareXV. Tax Preparation Current LectureA. Taxesa. The average American pays between 20-40 percent of earnings in taxesi. Depends on income level, size of family, and other factorsii. Florida does NOT have a state income taxb. Taxesi. Definition: payment of money to local, state, or federal governmentsii. Used to provide public goods and services1. Roads, bridges, public schools, state universities, public goodsiii. Failure to pay can lead to various penalties, including jail1. Jail is extremely rare; rather have money than send you to jailB. Federal Incomea. Biggest chunk is coming from individual income (48.1%)b. Next chunk is from social insurance/retirement (33.5%)C. Outlays a. Biggest chunk is from Social Security, Medicare, and other retirement (37%)i. Take money in and push it back out in terms of Social Security, ectb. National defense is next big chunk (18%)D. Taxing Philosophies a. Benefits-received philosophyi. Those who receive the benefits of a particular public expenditure should pay for it 1. If a bridge is built, every time you go over that bridge you would have to pay so much for it2. If I never go on the bridge, I don’t pay anything for it b. Ability to pay philosophy i. Those with higher incomes should pay proportionally more taxes than those with lower incomes1. The richer you are, the more you pay2. The less you make, the less you payc. Progressive taxesi. The more you earn, the more you payd. Regressive taxi. Takes a smaller percentage from those with high income than from those with lower income e. Sales taxi. Example of regressive taxes1. Hit lower income people harder than high income people2. Flat tag: everyone would pay the same percentage regardless of income, everyone pays the same, it’s equitable (Republicans likes this one)E. Average Taxesa. Taxes run around 20 to 40 percent of the average American’s income i. How much should people pay and what’s a good amountb. Tax Avoidancei. Use of legitimate methods to reduce one’s taxes 1. Give money to your kids so you don’t have to write it on your taxesc. Tax Evasioni. Use of illegal methods to reduce taxes 1. Putting money in a separate box, offshore accountd. Marginal Tax Ratei. Tax rate applied to the last dollar of earnings1. January you get a form to estimate your taxesF. Types of Taxesa. Exercise taxesi. Tax on specified goods and services 1. Cigarettes, alcohol, fireworks2. People will go to different states if it’s cheaper there3. Hits lower income people more4. Duty free items: liquor, cosmetics, purses, ectb. Homestead exemptionsi. Based on state to reduce property tax1. Sometimes you get it because you are a first time home buyer2. Senior citizen (different ages in different states)3. Legally blind or disabled c. Estate taxi. Tax imposed on the value of a deceased person’s net worth1. If someone dies, people who inherit it has to pay the taxes on itd. Inheritance Taxi. Taxes paid by the beneficiaries of an estate1. If you get a certain amount of money you have to pay tax on it, but it has to be a pretty large amount e. Gift taxi. Federal tax a giver of a sizable gift may have to pay1. Usually has to be given to family member2. Taxed if greater than $13- or $14,000G. Tax Filinga. Filing statusi. Marital or household status that affects tax rates b. Death of a taxpayeri. The taxpayers spouse or personal representative may have to file and signa return for that taxpayerH. Paying Taxes a. If someone cannot pay:i. Extensions given til Augustii. May be charged a little or nothing at alliii. Will work with you so you can pay it but you have to reach out to themb. Reaching the IRSi. http://www.irs.govI. Common Formsa. Form 1040i. Most used formii. All filled out onlineiii. Use if income is over $50,000b. Form 1040Ai. Simpler form than 1040ii. Less than $50,000 and not itemized deductionsiii. Form 1040EZ1. Often used by college studentsc. Tax deductioni. Items to reduce taxesd. Standard deductioni. Deduction set by the government based on filing statusJ. Paying Taxesa. Not paying on timei. File a 4648, application for Automatic Extension of time to File U.S. Individual Income Tax Returnii. Some people want to use money for April and August so people will want the extension on purposeiii. The longer you go, the more they will charge you for delayK. Avoid Common Mistakesa. Dependents, Alimony, and Child Supporti. IRS check for fraudulently claimed dependent exemptionsb. Alimonyi. An allowance for support made under a court order and usually given by a man to his wife after a divorce or legal separation1. Usually a man but can be the other way aroundL. Withholding and Prompt Returnsa. Withholdingi. Employer deducts federal income tax from your pay and sends it to the government1. Tax Withholding calculator (irs.gov)ii. W4 forms: withholding from employee, sign this form to agree to thisiii. Refund1. When too much is deducted and the government owes you money back2. Fill out W2 to report findings and should match up with W4M. Auditsa. Tax Auditsi. Detailed examination by the IRS of a tax returnb. Fewer than 1% of all individual tax returns are audited each yeari. Certain cities (New Orleans, Las Vegas) that are gambling hotspots and have a lot of hospitality and entertainment with cash are more likely to beauditedii. Medical doctors are more likely than school staff to be auditediii. If you are audited once, they will continue to follow youc. Random search: every 30 tax returns for random searches d. Three types of auditsi. Correspondence audits1. Minor mistakes: most common Is when people do not sign ita. If it is a joint husband and wife, both parties must sign2. Office auditsa. Need to visit IRS3. Field audits a. More complexN. Softwarea. Find one that is easy to use b. Websites such as Turbotax, Kiplinger, TaxCut, and IntuitO. Tax Preparationa. Average cost of hiring an outside tax preparer was $180 in 2009i. $200 in 2012b. Over 40
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