HDFS 357 1st Edition Lecture 7 Outline of Last Lecture I II III IV Taxes and Financial Planning Four Types of Taxes Income Tax Fundamentals Computing Your Tax Liability Outline of Current Lecture I II III IV V VI VII Clarification and Recap of last class Computing Your Liability Cont Filing You Federal Income Tax Return Tax Preparation Electronic Filing The Audit Process Tax Filing Strategies Current Lecture LECTURE 7 2 11 15 Clarification on refundable and nonrefundable o Nonrefundable credit savings cannot exceed the amount of tax you owe For example if the only credit you re eligible for is a 500 nonrefundable credit and the tax you owe is only 200 the 300 excess is nonrefundable This means that the credit will eliminate the entire 200 of tax but you don t receive a tax refund for the remaining 300 o Refundable if the credit you qualify for is more than you owe in taxes you get the additional amount back Computing Your Tax Liability Cont o 7 Add any other taxes owed to determine Tax Liability W 2 shows withholding o 8 Determining Tax Payment Compare withheld amount on W 2 to Tax Liability Refund If withholding is higher than tax liability Balance Owed If tax liability is higher than withholding Filing Your Federal Income Tax Return o There are five filing status categories 1 Single or legally separated 2 Married filing jointly 3 Married filing separately 4 Head of Household Unmarried individual who maintains a household for a child or dependent relative 5 Widow or Widower for 2 years after death Surviving spouses receive the same standard deduction and tax rates as taxpayers who are married filing jointly Tax Preparation o Range from a one person office to large firms o Software programs o If your professional tax preparer or software makes a mistake you are still responsible for paying the correct amount Plus any interest and penalties Electronic Filing o Free e filing for federal tax returns o Refunds are generally received within three weeks The Audit Process About 1 of all returns are audited If you claim large are unusual deductions are you more likely to be audited There are three types of audits o 1 Correspondence for minor questions o 2 Office audit takes place at an IRS office o 3 Field is the most complex with an IRS agent visiting you at home business or your accountant s office You have audit rights o Time to prepare for the audit o Clarification o Representation e g accountant lawyer etc Tax Planning Strategies Practice Tax Avoidance o Legitimate methods to reduce your tax obligation to you fair share but no more Not Tax Evasion o Illegally not paying all the taxes you owe such as not reporting all income