Transcript Slide 1
FIN 200:
Personal Finance
Topic 6-Taxes
Lawrence Schrenk, Instructor
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Learning Objectives
1.
2.
3.
Discuss the structure of personal taxes in
the United States. ▪
Explain the role that tax considerations
should play in financial decision-making
Describe recent changes and new trends in
Taxation.
NOTE: Completing complicated tax forms is
NOT a learning objective. ▪
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Tax Preparation
Recommendations
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Limitations and Warnings
One chapter in a book and one lecture do not
make you a tax expert.
Know what you do not know.
Our goal cannot be for you to have all the
skills necessary to complete complicated tax
forms with multiple schedules.
If you want to do it yourself...become an
accountant.
Changes in tax codes.
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Goal
Our goal is to make you aware of the tax
implications of financial decision-making.
How can you make financial decisions in
calendar year that will minimize your taxes
come April?
What do you need to do before you go to
your tax preparer?
Avoiding ‘Opps!’ moments
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What Forms Can You Do?
1040EZ ▪
1040 without Schedules
You should be able to do this one after the
course, but it’s so simple that you also could
probably do it without this course.
You might want to attempt this if you are not
itemizing or your deductions are very simple.
1040 with Schedules
Go to an expert (suggestions). ▪
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1040EZ
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Tax Preparation Software
TurboTax, etc.
General Consensus:
Reviews, More Reviews, and yet More Reviews
TurboTax is one of the best
And one of the most expensive. ▪
Comments
Does one suit your needs?
Go with a major software firm.
Preview versions of software ▪
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The Range of Taxes
Federal
State
Income
Sales Tax
County
Income Tax
FICA (Federal Insurance Contributions Act)
Medicaid
Property Tax
City
Income Tax
Commuter Tax
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Tax Types
Progressive
Increases with Income
Inflation and Tax ‘Creep’
Federal Income Tax
Shifts tax to higher ability-to-pay
Regressive
Uniform Tax
Social Security Taxes
Value-added tax or other sales tax
Shifts tax to lower ability-to-pay
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Federal Tax Rate
Taxable Income
(Single Rate 2008)
40%
35%
30%
25%
20%
15%
10%
5%
0%
$0-$8,025
$8,025$32,550
$32,550$78,850
$78,850$164,550
164550357700
$357,700
and over
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Marginal versus Average Tax
Average tax rate is the average rate you pay
on your entire income.
Marginal tax rate is the rate you will pay on
your next dollar of income.
If marginal tax rate > average tax rate, it is
progressive.
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Tax Implications of
Financial Decision-Making
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Minimize Income
Know what does not count:
Proceeds of life insurance contracts payable by reason of
death,
Child support payments,
Welfare benefits,
Money contributed to retirement accounts,
Gifts,
Return of invested capital.
For every detail (if fact of every federal law) you can
search the US Code Collection. Just be prepared for
the ‘legalese’.
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Maximize Deductions
Taxes (such as local income, state, real estate,
foreign, and personal property taxes)
Medical and dental expenses
Interest expenses on mortgages, home equity loans,
and real estate
Charitable work or contributions to tax-exempt
organizations
Casualty and theft losses
Job expenses
Impairment-related expenses for persons with
disabilities
Educational expenses
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Maximize Credits
Earned Income Tax Credit
Child Tax Credit
Child and Dependent Care Credit
State Tax Credits
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End of Year Strategies
Extra mortgage payment
Pay property taxes early
Charitable donations
Realize investment losses
Increases retirement savings
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Recent Changes and
Trends
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Recent Changes (since 2000)
Lower Tax Rates
Increased Child Credit
Expanded Retirement Savings
More Educational Benefits
Estate Tax Phased Out
Reduced Capital Gains and Dividend Taxes
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Sunset 2011
Rates Revert
$500 Child Credit
Retirement Savings Decreased
Educational Benefits
Estate Tax Back
Dividends Taxed as Ordinary Income
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Online Sources of More Information
Tax Policy Center
Tax Guide for Investors
Urban Institute
Brooking Institution
Fairmark.com
IRS
WebPages for Individuals
Online Tools
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Project Notes
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Ethical Dilemma
The IRS Code allows for the deduction of expenses incurred in
traveling to a job interview. Fritz, Erica, and their two children
have used this deduction to fund their vacations for the last eight
years. They each apply for several jobs for which they are
qualified. Any interviews are scheduled during their vacation.
They deduct only those expenses allowed under the IRS Tax
Code. This plan has resulted in between $300 and $500 in
allowable tax deductions each year. If the perfect job offer
presents itself, they would give it serious consideration.
a. Discuss whether you think Fritz and Erica are being ethical in
using the IRS Code to fund
b. Do you see other areas of the tax code discussed in this
chapter that could be subject to abuses?
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