Income Tax Basics-04-15
-
Upload
oneill-barbara -
Category
Economy & Finance
-
view
275 -
download
0
Transcript of Income Tax Basics-04-15
![Page 1: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/1.jpg)
Income Tax Basics
Dr. Barbara O’Neill, CFP® Rutgers Cooperative Extension
![Page 2: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/2.jpg)
Webinar Objectives
• Increase participants’ knowledge about income tax filing process
• Provide update of 2014 and 2015 tax law changes
• Provide information about income tax resources
• Help participants save money on income taxes
![Page 3: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/3.jpg)
Question Do you teach about income taxes? If yes, where?
![Page 4: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/4.jpg)
Webinar Topics • Federal income tax rates
• Tax deductions and credits
• Tax filing process
• Tax avoidance vs. tax evasion
• Tax record-keeping
• Common tax errors
• Tax planning resources
![Page 5: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/5.jpg)
2014 Income Tax “Issues” • Impact of incorrect ACA law credits on tax refunds
• Tax identity theft (expanded IRS efforts; 1.6 million affected in early 2013)
– http://www.irs.gov/uac/Newsroom/IRS-Combats-Identity-Theft-and-Refund-Fraud-on-Many-Fronts-2014
– http://www.bostonglobe.com/news/nation/2014/02/16/identity-theft-taxpayer-information-major-problem-for-irs/7SC0BarZMDvy07bbhDXwvN/story.html
• Higher tax bills for wealthy taxpayers due to “backdoor” taxes (e.g., reduced exemptions and itemized deductions)
• Net investment-income tax of 3.8% (higher incomes)
• $500 unused FSA carry-over to 3/15 of next year
![Page 6: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/6.jpg)
Major Type of Taxes in the United States Taxes on Purchases
– Sales tax and excise tax (e.g., gas, cigarettes)
Taxes on Property – Real estate property tax – Personal property tax
Taxes on Wealth – Federal estate tax – State inheritance tax
Taxes on Earnings – Income tax and Social Security/Medicare (FICA) tax
![Page 7: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/7.jpg)
The Progressive Nature of the Federal Income Tax
• Progressive tax – Takes a larger percentage of income from high-income taxpayers than low-income taxpayers.
– Federal income tax
• Regressive tax – Takes a decreasing percentage of income as income increases. – State sales tax
![Page 8: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/8.jpg)
Marginal Tax Rate Is Applied to the Last Dollar Earned
• Marginal Tax Bracket (MTB) – One of six income-range segments that are taxed at increasing rates as income goes up
• Marginal Tax Rate – The tax rate applied to your last dollar of earnings
– Effective Marginal Tax Rate – Describes a person’s true marginal tax rate on income after including federal, state, and local income taxes, as well as FICA tax (Social Security and Medicare); often 40% + for middle-income earners
![Page 9: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/9.jpg)
Federal Marginal Income Tax Rates • Established by Congress and change periodically
• Based on many things including:
• Amount and type of income
• Filing status - e.g. married, joint, single
Marginal rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
• Tax rate on last dollar of income earned
• Beginning in tax year 2013, 39.6% rate was added for highest income individuals
• Rutgers fact sheet: http://njaes.rutgers.edu/money/taxinfo/
![Page 10: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/10.jpg)
Tax Rate Schedules Figure 1. 2014 Tax Rate Schedules Single-Schedule X
Taxable Income Over But Not Over Marginal Tax Rate
$0 $9,075 10%
9,075 36,900 15%
36,900 89,350 25%
89,350 186,350 28%
186,350 405,100 33%
405,100 406,750 35%
406,750 --- 39.6%Head of household-Schedule Z
Taxable Income Over But Not Over Marginal Tax Rate
$0 $12,950 10%
12,950 49,400 15%
49,400 127,550 25%
127,550 206,600 28%
206,600 405,100 33%
405,100 432,200 35%
432,200 --- 39.6%Married filing jointly or Qualifying widow(er) - Schedule Y-1
Taxable Income Over But Not Over Marginal Tax Rate
$0 $18,150 10%
18,150 73,800 15%
73,800 148,850 25%
148,850 226,850 28%
226,850 405,100 33%
405,100 457,600 35%
457,600 --- 39.6%Married filing separately - Schedule Y-2
Taxable Income Over But Not Over Marginal Tax Rate
$0 $9,075 10%
9,075 36,900 15%
36,900 74,425 25%
74,425 113,425 28%
113,425 202,550 33%
202,550 228,800 35%
228,800 --- 39.6%
Single-Schedule X Head of Household-Schedule Z Married Filing Jointly or Qualifying Widow(er) - Schedule Y-1 Married Filing Separately - Schedule Y-2
![Page 11: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/11.jpg)
Average Tax Rate Average tax rate = total tax due divided by
taxable income
Average tax rate < marginal tax rate
Example: – Taxable income = $40,000
– Total tax bill = $6,344
– Average tax rate = 15.9%
» ($6,344 / $40,000)
![Page 12: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/12.jpg)
$100 Tax Credit Reduces Your Taxes by $100
$100 Tax Deduction Amount Your Taxes are Reduced
is Based on Your Tax Bracket Example: $5,000 x .25 (25%tax bracket) = $1,250 of tax savings; $3,750 net cost
![Page 13: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/13.jpg)
Types of Deductions Deduction = Amount subtracted from gross income to reduce the amount of income subject to tax. • Standard Deduction- Amount established each year
by tax code; no need to itemize deductions; amount is based on a taxpayer's filing status, age, etc; no receipts needed
• Itemized Deduction- Specific amounts spent on certain goods and services throughout the year; allowed deductions are outlined by the IRS and include such expenditures as mortgage interest, state and local taxes, charitable donations
www.investopedia.com/terms/i/itemizeddeduction.asp#ixzz1zxopAxpP
![Page 14: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/14.jpg)
Itemizing Required for Charitable Gift Tax Benefits • You can give thousands of dollars, but if you claim
the standard deduction on your tax return, charitable gifts will do you no tax good.
• You must itemize expenses on Schedule A to deduct charitable donations.
• Donors' deductions are limited to 50% of adjusted gross income; rollover of excess for up to 5 years
http://www.bankrate.com/finance/taxes/get-a-tax-deduction-for-charitable-giving-1.aspx
![Page 15: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/15.jpg)
Who Itemizes Deductions? • The percentage of tax filers who itemize increases as
we move up the income scale • The value of deductions depend on a taxpayer’s tax
bracket. Example: a $1,000 deduction is worth $150 in the 15% bracket, and $396 for someone in the top 39.6% bracket.
Overall, only about a third of taxpayers itemize deductions http://www.irs.com/articles/it-worth-it-itemize-your-taxes
![Page 16: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/16.jpg)
Refundable and Non-Refundable Tax Credits
• Refundable: When tax credits are greater than the amount of tax you owe, the IRS sends you a tax refund for the difference – Example: Earned Income Tax Credit (EITC)
• Non-Refundable: Credit can’t be used to increase your tax refund or to create a tax refund when you wouldn’t have already had one. In other words, your savings cannot exceed the amount of tax you owe. – Example: Child and Dependent Care Expenses Credit
![Page 17: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/17.jpg)
Earned Income Tax Credit (EITC)
• A special subsidy credit paid to low-income workers with qualifying child(ren), or in some cases, workers with no children
• Maximum EITC credit (2014) is – $490 for a family with no children
– $3,305 for a family with one qualifying child
– $5,460 for a family with two qualifying children
– $6,143 with 3+ qualifying children
![Page 18: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/18.jpg)
EITC Income Limits (2014) Adjusted gross income (AGI) must be less than:
• $46,997 ($52,427 married filing jointly) with three or more qualifying children
• $43,756 ($49,186 married filing jointly) with two qualifying children
• $38,511 ($43,941 married filing jointly) with one qualifying child
• $14,590 ($20,020 married filing jointly) with no qualifying children
![Page 19: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/19.jpg)
Child and Dependent Care Credit
• Available for workers who pay employment-related expenses for the care of their child(ren) while they are working, seeking work, or in school full time; non-refundable (i.e., can use up to amount of tax owed)
• Total expenses that may be used to calculate the credit are capped at $3,000 (for one qualifying individual) or at $6,000 (for 2+ qualifying individuals)
![Page 20: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/20.jpg)
Child Tax Credit • A $1,000 credit is available for each qualifying
child under the age of 17 (at the end of 2014) claimed as a dependent
• The Child Tax Credit is non-refundable
http://www.irs.gov/uac/Newsroom/The-Child-Tax-Credit-May-Cut-Your-Tax
![Page 21: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/21.jpg)
Retirement Savings Credit (Saver’s Tax Credit)
• Singles with adjusted gross incomes of $30,000 or less and joint filers earning $60,000 or less can claim this credit (in 2014)
• Credit is 10%, 20%, or 50% of every dollar contributed to an IRA or employer-sponsored retirement savings plan, up to $2,000, depending on income range
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-(Saver%E2%80%99s-Credit)
![Page 22: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/22.jpg)
Recommended Resource
“The Bible”: Annual Limits Relating to Financial Planning (College for Financial Planning): http://www.cffpinfo.com/annual-limits/
![Page 23: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/23.jpg)
Determining
Your Tax Liability
Source: Kapoor, Dlabay, & Hughes (2013). Focus on Personal Finance
![Page 24: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/24.jpg)
Key 2014 Tax Numbers
• Personal exemption: $3,950 • Standard deduction: $6,200- single; $12,400- mfj • Exemption and itemized deduction AGI phase-out
ranges: $254,200-$376,700- single; $305,050-$427,550- mfj
• SS earnings limit below FRA: $15,480
![Page 25: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/25.jpg)
Completing the Federal Income Tax Return
Filing status and exemptions Income Adjustments to income Tax computation Tax credits Other taxes (such as from self-employment) Payments (total withholding and other payments) Refund or amount you owe
• Refunds can be directly deposited to a bank account • Payments may be directly debited from a bank account
Signature (most common filing error)
![Page 26: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/26.jpg)
Tax-Rate Schedules and Tax Tables
• Tax-Rate Schedules – Used by persons with a taxable income of $100,000 or more; requires a mathematical computation to determine tax liability
• Tax Tables – Used to look up one’s tax liability in a table organized according to tax filing status and income range
![Page 27: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/27.jpg)
Federal Income
Tax Table Filing Status
Taxable Income Tax Liability
![Page 28: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/28.jpg)
Alternative Minimum Tax (AMT)
– Paid by taxpayers with high amounts of certain deductions and various types of income
– Designed to ensure that those who receive tax breaks also pay their fair share of taxes
– Has increasingly been affecting less affluent taxpayers, especially in high-tax states (e.g., NJ)
– A high proportion of long-term capital gains to ordinary income can trigger the AMT
![Page 29: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/29.jpg)
Tax Avoidance and Tax Evasion
Tax Avoidance (Minimization) – Legitimate methods to reduce your tax obligation to your fair
share but no more (e.g., deductions, credits, tax-deferred/tax-free investing) – Decisions related to purchasing, investing, and retirement
planning are heavily affected by tax laws (e.g., home, IRAs) – Keep good tax records (W-2s, 1099s, receipts, copies)
Tax Evasion – Illegally not paying taxes you owe, such as not reporting all
income or overstating deductions
![Page 30: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/30.jpg)
Taxable vs. Tax-Deferred Investing
27,6
00
31,3
00
48,3
00
58,6
00 75,8
00 98,8
00
112,
200
157,
900
160,
300
244,
700
$0
$50,000
$100,000
$150,000
$200,000
$250,000
10yrs 15yrs 20yrs 25yrs 30yrs
Garman/Forgue, PERSONAL FINANCE, Fifth Edition, Tax-Sheltered Returns are Greater than Taxable Returns (Illustration: 8% Annual Return and $2,000 Annual Contribution)
Calculator: http://www.calcxml.com/do/inv07
![Page 31: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/31.jpg)
W-4 Form Determines Taxes Withheld
• Typically completed on first day of job
• Employer uses information on W-4 to determine how much tax to withhold
• Recommended practice: review number of withholding allowances each year
• Can add “extra” tax withholding amounts through employer to cover “marriage tax penalty” and/or investment, unemployment, or consulting income
![Page 32: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/32.jpg)
![Page 33: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/33.jpg)
Impact of W4 Form on Net Pay 0 allowances = max taxes deducted* =
Smaller take home pay =
Larger tax refund
+ allowances = less taxes deducted =
Larger take home pay = Smaller tax refund
NOTE: Taxpayers can add extra withholding beyond “0” allowances; e.g., +$50 more)
![Page 34: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/34.jpg)
Is it a good idea to get a big tax refund ($500 +)? Cons:
Taxpayer is not earning interest on the money
Government has had an interest-free loan
Pros:
Some people see it as discipline to save a large lump sum
BIGGEST ISSUE: High incidence of tax refund identity theft: https://www.youtube.com/watch?v=Ensq6NRtzpk
Tax Refunds
![Page 35: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/35.jpg)
Question What is your opinion about income tax over-withholding?
![Page 36: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/36.jpg)
IRS Time Limitations on Tax-Related Actions
According to IRS, IF YOU Limitation
Owe additional tax 3 years
Do not report income that you should and it is more than 25% of the gross income shown on your return 6 years
File a fraudulent return No limit
Do not file a return No limit
File a claim for credit or refund after you filed your return
The later of 3 years or 2 years after tax was paid
![Page 37: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/37.jpg)
Record Retention • How Long to Keep Financial Records (Bankrate)
– http://www.bankrate.com/finance/personal-finance/how-long-to-keep-financial-records.aspx
• Keep investment records to document capital gains
and the tax basis of the investments (length of investment ownership + at least 6 years)
![Page 38: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/38.jpg)
Strategy: Keep Tax Records a Long Time
• Never discard records relating to
– Home purchases
– Contributions to retirement accounts
– Retirement account rollovers and conversions
• When in doubt about keeping a tax record, do NOT throw it out!
– Save paper copy or scan and store electronically
![Page 39: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/39.jpg)
Common Tax Errors • Claiming wrong number of dependents
• Failing to itemize deductions
• Forgetting charitable gifts made via payroll deduction and phone texting
• Overlooking medical expenses
• Reporting an erroneous investment cost basis
• Not including previous year’s state tax refund
• Not signing the tax return (if paper filed)
![Page 40: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/40.jpg)
Tax Deduction Timing • Donations and payments for deductible expenses
must be made by end of the tax year to claim a deduction
• If you put a check dated Dec. 31 in the mail by that day, you are OK
• Donations and payments charged by year's end to a credit card are also OK, even if you don't actually pay until the next year
• You can make a contribution to IRAs for the prior year by the tax filing deadline (typically April 15)
![Page 41: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/41.jpg)
General Tax Planning Strategies to Minimize Taxes
If you expect Then you should Because The same or a
lower tax rate next year
Accelerate deductions into this
year
Greater benefit to higher rate
The same tax rate next year
Delay income into next year
Delay paying taxes
A higher tax rate
next year
Delay deductions Greater benefit
Accelerate income Taxed at lower rate
![Page 42: Income Tax Basics-04-15](https://reader031.fdocuments.us/reader031/viewer/2022032216/55a608c31a28ab2c638b4581/html5/thumbnails/42.jpg)
Comments? Questions?
Experiences?