HDFS 357 1st Edition Lecture 6 Outline of Last Lecture I II The Federal Reserve Payment Methods Outline of Current Lecture I II III IV Taxes and Financial Planning Four Types of Taxes Income Tax Fundamentals Computing Your Tax Liability Current Lecture LECTURE 6 2 9 15 Chapter 4 Planning Your Tax Strategy Taxes and Financial Planning o Tax planning take advantage of tax benefits whole paying your fair share of taxes o About 1 3 of each dollar you earn goes to pay taxes Four Types of Taxes o 1 Taxes on purchases Sales tax and excise tax tax on gas and cigarettes o 2 Taxes on property Real estate and personal property tax o 3 Taxes on wealth Federal estate tax state inheritance taxes o 4 Taxes on earnings Income Social Security taxes Income Tax Fundamentals o 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 Liability o 1 Determine Gross Income Add together all sources of income o 2 Determine Adjusted Gross Income Subtract adjustments from Gross Income Ex Contributions to Traditional IRA Some Retirement Plans o 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 deductions o 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 of dependent s support Dependent must reside in home or be specified relative o 5 Find Taxable Income rate using Tax Table Determine amount owed based on Tab Table o 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 Credit