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Learning Objectives
1. Identify and understand the major federal income tax features that affect all taxpayers.
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Learning Objectives
4. Choose the tax form thats right for you, file and survive an audit if necessary.
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Introduction
Most financial decisions are affected by taxes. Need to understand how taxes are imposed. What strategies are used to reduce taxes and what role does tax planning have in personal financial planning?
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Table 4.1
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Figure 4.1
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Filing Status
Single Married Filing Jointly and Surviving Spouses Married Filing Separately Head of Household
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Other Taxes
Income-Based Taxes:
Social Security or FICA State and local income taxes
Non-income-based taxes
Excise taxes Property taxes
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business
Portfolio or investment income--securities Passive incomeactivities in which the taxpayer does not actively participate
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itemizing deduction.
Standard deductiongovernments best estimate of what the average person would deduct if itemizing.
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Figure 4.3
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Step 5: Calculating Your Taxable Income, and From That, Calculating Your Base Income Tax
Taxable incomesubtract deductions and
and taxable income in the federal income tax tables. greater than $100,000).
Use tax rate schedules for taxable income Alternative minimum tax (ATM) ensures that
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Figure 4.4
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Figure 4.5
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Table 4.2
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Table 4.3
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Being Audited
Auditan examination of tax return by IRS Randomly selectedhigher odds if itemized deductions are 44% of income. Asked to send additional information in mail or IRS face-to-face interview.
Reexamine areas in question, get all data and records, appeal audit outcome if necessary.
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Figure 4.6
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Figure 4.7
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term capital gains for taxpayers in tax brackets that exceed 15%.
Dont have to claim capital gains until asset is sold. Qualified dividends from corporations are taxed at same low rates as long-term capital gains.
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Summary
Taxable income is a function of AGI, deductions and exemptions. Apart from federal income tax, there are Social Security and Medicare taxes, state and local taxes, excise, sales, property, and gift and estate taxes.
To calculate taxes, determine total income, adjusted gross income, taxable income, then the taxes your owe.
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Summary
It is important to know if you must file a return, when to file, use the right form, and the information needed for the return. Obtain the help you need for filing returns from the IRS, self-help tax books and computer programs and tax specialists.
There are five general strategies that can be used to reduce taxes to a minmum.
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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