FIN 2081 Chapter Notes - Chapter 3: Adjusted Gross Income, Tax Avoidance, Tax Deduction
Chapter 3 - Taxes in Your Financial Planning
Planning Your Tax Strategy
Tax planning starts with knowing current tax laws, next maintaining complete and appropriate tax records, then
making purchase and investment decisions that can reduce your tax liability.
Primary goal is to pay fair share of taxes and take advantage of appropriate tax benefits.
Types of Tax
4 major categories: taxes on purchases, taxes on property, taxes on wealth, taxes on earnings.
Taxes on Purchases
Excise Tax - a tax imposed on specific goods and services.
Eg. gas, cigarettes, alcohol, tires, air travels, hotels, phone service.
Taxes on Property
Real Estate property tax is a major source of revenue for local governments.
This tax is based on the value of land and buildings.
Some areas impose personal property tax on the value of automobiles, boats, furniture, and farm equipment.
Taxes on Wealth
An estate tax is imposed on the value of a person's property at the time of death.
Money and propert passed on to heirs may be a subject to a state tax
An inheritance tax is levied on the value of property bequeathed by a deceased person.
This tax is paid for the right to acquire the inherited property.
Taxes on Earnings
There are two main taxes on wages and salaries are Social Security and income taxes.
Determining Adjusted Gross Income
Your gross, or total, income can consist of three main components:
Earned Income - is usually in the form of wages, salary, commissions, fees, tips, or bonuses.
Investment Income - sometimes reffered as portfolio income, is money received in the form of dividents,
interest or rent from investments.
Passive Income - results from business activities in which you do not actively participate, such as limited
partnership.
Adjustments to income
Adjusted gross income (AGI) - is gross income after certain reduction have been made.
These reductions are called adjustmnets to income, include contribution to an IRA or a Keogh retirement plan,
penalties for early withdrawal of savings, and alimony payments.
Tax shelter are investments that provide immediate tax benefits and a reasonable expectation of a future
financial return.
Computing Taxable Income
A tax deduction is an amount subtracted from adjusted gross income to arrive at a taxable income.
Itemized deductions are expenses a taxpayer is allowed to deduct from adjusted gross income.
Eg. medical costs
Tax Credit - an amount subtracted directly from the amlunt of taxes owed.
Calculating Taxes Owed
Tax rates use your taxable income in conjuction with the appropriate tax tabel or tax schedule.
Exemptions is a deduction from adjusted gross income for yourself, spouse, qualified dependents.
Marginal Tax Rate - the rate used to calculate tax on the last (and next) dollar of taxable income.
Average tax rate - total tax due divided by taxable income.
Making Tax Payments
You pay federal income taxes through either payroll withholding or estimated tax payments.
Document Summary
Chapter 3 - taxes in your financial planning. Tax planning starts with knowing current tax laws, next maintaining complete and appropriate tax records, then making purchase and investment decisions that can reduce your tax liability. Primary goal is to pay fair share of taxes and take advantage of appropriate tax bene ts. 4 major categories: taxes on purchases, taxes on property, taxes on wealth, taxes on earnings. Excise tax - a tax imposed on speci c goods and services. Eg. gas, cigarettes, alcohol, tires, air travels, hotels, phone service. Real estate property tax is a major source of revenue for local governments. This tax is based on the value of land and buildings. Some areas impose personal property tax on the value of automobiles, boats, furniture, and farm equipment. An estate tax is imposed on the value of a person"s property at the time of death.
