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LECTURE 6 2-9-15Chapter 4: Planning Your Tax StrategyTaxes and Financial PlanningTax planning- take advantage of tax benefits whole paying your fair share of taxesAbout 1/3 of each dollar you earn goes to pay taxesFour Types of Taxes1. Taxes on purchasesSales tax and excise tax (tax on gas and cigarettes)2. Taxes on propertyReal estate and personal property tax3. Taxes on wealthFederal estate tax, state inheritance taxes4. Taxes on earningsIncome, Social Security taxesIncome Tax FundamentalsDetermining adjusted gross incomeTypes of income subject to taxation include:Earned income- includes wages, salary, commissions, fees, tips or bonusesInvestment income- money from dividends, interest, or rent from investmentsOther income- alimony (payments made to previous spouse), awards, lottery winnings and prizesComputing Your Tax Liability1. Determine Gross IncomeAdd together all sources of income2. Determine Adjusted Gross IncomeSubtract adjustments from Gross IncomeEx: Contributions to Traditional IRA/Some Retirement Plans3. Decide Standard or Itemized Deduction and SubtractTax Deduction is an amount subtracted from adjusted gross income to arrive at taxable incomeStandard: set amount on which no taxes are paidItemized: expenses taxpayer is allowed to deductMedical Expenses (some), interest paid (mortgage), charitable donations, job related expenses, etc.Need to maintain records to document these deductions4. Subtract Exemptions to Determine Taxable IncomeDeduction from adjusted gross income for yourself, spouse and qualified dependentsDependents:Must not earn more than a set amount unless under age 19 or full-time students under age 24Taxpayer must provide more than ½ of dependent’s supportDependent must reside in home or be specified relative5. Find Taxable Income rate using Tax TableDetermine amount owed based on Tab Table6. Subtract Tax CreditsAmount subtracted directly from the amount of taxes owedEx: Child care and dependent tax credit, earned income tax credit, adoption tax credit, energy savings tax creditSome credits are refundable, other credits are nonrefundableTax Liability – Tax Credit=_________HDFS 357 1st Edition Lecture 6Outline of Last LectureI. The Federal ReserveII. Payment MethodsOutline of Current LectureI. Taxes and Financial PlanningII. Four Types of TaxesIII. Income Tax FundamentalsIV. Computing Your Tax Liability Current Lecture LECTURE 6 2-9-15 Chapter 4: Planning Your Tax Strategy- Taxes and Financial Planningo Tax planning- take advantage of tax benefits whole paying your fair share of taxeso About 1/3 of each dollar you earn goes to pay taxes- Four Types of Taxeso 1. Taxes on purchases Sales tax and excise tax (tax on gas and cigarettes)o 2. Taxes on property Real estate and personal property taxo 3. Taxes on wealth Federal estate tax, state inheritance taxeso 4. Taxes on earnings Income, Social Security taxes- Income Tax Fundamentalso Determining adjusted gross income Types of income subject to taxation include: Earned income- includes wages, salary, commissions, fees, tips or bonuses Investment income- money from dividends, interest, or rent from investments Other income- alimony (payments made to previous spouse), awards, lottery winnings and prizes- Computing Your Tax Liabilityo 1. Determine Gross Income Add together all sources of incomeo 2. Determine Adjusted Gross Income Subtract adjustments from Gross Income Ex: Contributions to Traditional IRA/Some Retirement Planso 3. Decide Standard or Itemized Deduction and Subtract Tax Deduction is an amount subtracted from adjusted gross income to arrive at taxable income Standard: set amount on which no taxes are paid Itemized: expenses taxpayer is allowed to deduct Medical Expenses (some), interest paid (mortgage), charitable donations, job related expenses, etc. Need to maintain records to document these deductionso 4. Subtract Exemptions to Determine Taxable Income Deduction from adjusted gross income for yourself, spouse and qualified dependents  Dependents: Must not earn more than a set amount unless under age 19 or full-time students under age 24 Taxpayer must provide more than ½ of dependent’s support Dependent must reside in home or be specified relativeo 5. Find Taxable Income rate using Tax Table Determine amount owed based on Tab Tableo 6. Subtract Tax Credits Amount subtracted directly from the amount of taxes owed Ex: Child care and dependent tax credit, earned income tax credit, adoption tax credit, energy savings tax credit Some credits are refundable, other credits are nonrefundable  Tax Liability – Tax


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