Ch 4 Planning your Tax Strategy
Monday, February 16, 2026 9:50 AM
Taxes & Financial Planning
- Common goals related to tax planning include:
○ Knowing the current tax laws & regulations that affect you
○ Maintaining complete tax records
○ Making purchase & investment decisions that can reduce tax liability
- Taxes are paid for in four major categories:
○ Purchases
○ Property
○ Wealth
○ Earnings
Taxes on purchases
- Sales Tax
○ Added to the price of purchased products
- Excise Tax
○ Imposed by the sate & federal govt on specific goods & services
§ Gasoline, cigarettes, alcohol, tires, air travel & phone services
Taxes on property
- Real Estate Property Tax
○ A major source of revenue for local govts, is based on the value of the land & buildings
- Personal Property Tax
○ When state & local govts assess taxes on other the things like cars , boats, furniture &
farm equipment
Taxes on Wealth
- Estate Tax
○ Enforces the value of a persons property at time of death, based on fair market value
of the deceased persons investments, property & bank accounts
- Inheritance Tax
○ The value of the property left by the deceased person
§ Gift amounts greater than 15,000 or less in a year are not subject to federal tax,
if higher than 15,000 you are then required to pay federal taxes unless used for
school or medical expenses
○ Some states force a gift tax before death to another person as well in the event that
they attempt to avoid estate & inheritance tax
Taxes on Earnings
- The main sources taxed are wages & Social Security
○ (FICA) The Federal Insurance Contributions Act was created by Social Security to fund
elders, survivors & the insurance of disability portion of the social security system
along w/ hospital insurance (Medicare)
- Some workers are subject to federal, state & local income taxes, only 9 states are not
required to pay income tax
Income Tax Fundamentals
- The Tax Cuts & Jobs Act (TCJA) Law
○ Reductions in tax rates for individuals, standard deductions for all tax payers & limited
other commonly used deductions
§ I.E. Mortgages, interest rates, state & local taxes
Step 1: Determining Adjusted Gross Income
- Taxable income
○ Your net income after deductions is how it is calculated
- Types of income
○ Earned income
§ Money received for personal efforts in the form of wages, salary, commission,
fees, tips and/or bonuses
○ Investment Income
§ AKA portfolio income; money received in the form of dividends, interest or rent
from investments
○ Passive Income
§ From business activities where you don’t actively participate like limited
partnerships
○ Exclusions
§ An amount not included in gross income
○ Tax - Exempt income
§ Income that is not subject to be taxed
○ Tax-deferred income
§ Income that will be taxed at a later date
Adjustment Income
- Adjusted Gross Income
• Gross income after certain additions & reductions have been made
- Reductions
• AKA Adjustment to income, including contributions to the IRA (retirement plan) -
penalties for early withdrawal of savings are considered alimony payments if applicable
- Tax Shelters
• Investments that provide immediate tax benefits & reasonable expectations of future
financial returns
Step 2: Computing Tax Deductions
- Tax Deductions
• An amount subtracted from adjusted gross income
- Standard Deduction
• A set amount where taxes are paid
- Itemized Deductions
• Expenses a taxpayer is allowed to deduct from income such as:
§ Medical & Dental expenses
□ Doctors fee’s, prescription medications, hospital expenses, medical
insurance premiums, hearing aids, glasses & medical related travel
□ This expense is equal to the amount of medical & dental expenses but
can’t exceed 7.5% of adjusted gross income
§ Taxes
□ Both state & local income tax, real estate property & state/personal
property tax, this deduction is limited to $10,000
□ You may either deduct an amount for sales tax or state income tax
whichever is larger in amount but not both
§ Interest
□ A mortgage, home equity loan and/or investment interest expense can
go up in amount equal to the investment income amount
§ Contributions
□ Totals that are greater than 20% of adjusted income are subject to
limitations
§ Casualty & Theft Losses
□ Financial Losses resulting from federally declared natural disasters
□ Deductions exceeding 10% or less than $100 for loss will NOT be
reimbursed by insurance companies or any other sources
§ Moving expenses
□ Only available to active duty military who have a permanent change in
duty for the year 2018 & beyond
□ Moving expenses include the cost of transportation, transporting the
taxpayer, household members, household goods & property
§ Job related & MISC expenses
□ Job travel, union dues, continued education, work clothes/uniforms,
investment expenses, tax prep fees & safe deposit box rental
- Exemptions
• A deduction from adjusted gross income for yourself, your spouse & qualified
dependents that are no longer allowed
- Qualified Business Income
• To provide business to small business owners, a provision called section 199A gives
them sole proprietorship
§ Partnerships of up to 20% of income is earned by the businesses from their
individual return from taxable income
Step 3: Calculating Taxes owed
- Tax Rates
• Marginal Tax Rate
§ The rate used to calculate tax on the last & next dollar of taxable income
• Calculating your tax
§ Each tax rate represents a range of income levels referred to as brackets
Calculating your Tax
- The Average Tax
• Is based on the total tax due divided by taxable income
- The Alternative Tax Minimum (ATM)
• Designed to ensure those who receive a tax break pay their share in taxes
Certain Tax breaks that can Include paying a high ATM rate are:
- High level deductions of state & local interest
- Interest on a 2nd mortgage
- Incentive Stock options
- Long term capital gains
- Tax exempt interest
- The taxpayer must start w/ gross income but may exclude many of the tax breaks
Tax Credits
- An amount subtracted from the amount of taxes owed
• One example of a tax credit is given for child care & dependent care expenses
- Tax Credit
• Has a full dollar effect in lowering taxes
- Deductions
• Reduce taxable incomes where liability is calculated
- Earned Income Credit (EIC)
• A federal tax regulation for working parents w/ taxable income under a certain amount
• Families who do not earn enough to owe federal taxes are also eligible for EIC
- Other Tax Credits Include
• Foreign tax credit to avoid double taxation on income paid to other countries
• Child/dependent care expense credit to cover qualifying expenses for someone else to
care for your dependent child aged 13 or other dependents who can’t care for
themselves
§ Disabled child, spouse and/or parent who can’t care for themselves
• Savers tax credit to encourage investment contributions to individual & employer
sponsored retirement plans by low & middle income taxpayers
• Adoption tax to cover qualifying expenses when adopting a child
• American Opportunity & Lifetime Learning Tax credits to help offset college expenses
• Residential energy-savings tax credit when purchasing energy efficient products or
renewable home systems
• Elderly & disabled tax credit to assist low income people ages 65 & up and/or 65 &
under retired w/ a permanent disability & taxable disability income
• Premium Tax credit for low to moderate households that bought health insurance
through health insurance market place
• Alternative Motor Vehicles & qualified plug in electric drive tax credit for qualified fuel
cell & plug in cars
Making Tax Payments
- You will make payment of income tax to the federal govt in one of two forms:
• Payroll withholding
§ The withheld amount is based on your filling status & other optional
adjustments claimed to the W-4 Form
• Estimated Tax Payments
§ These payments are based on the persons estimate of taxes due at the end of
the year
§ Failure to make these payments leads to penalties & interest charges
Deadlines & Penalties
- Most people are required to complete their taxes by April 15th, if not a Form 4868 is
required to be given a 6mo extension
• This extension doesn’t delay payment liability, you pay taxes owed plus Form 4868 by
April 15th, failure to do so can lead to a penalty of 5%
- People who make quarterly deposits must submit their payments by April 15th, June 15th &
Sept 15th of the current year
- If you don’t pay the whole amount of your due’s you will be taxed with interest fee’s
• If your underpayment of taxes continue due to negligence or fraud this can lead to a
penalty of 50-75%
Filing your Federal Income Tax Return
- Who must File?
• Every citizen of the US & Puerto Rico if there gross income exceeded $12,400
• Single people over 65 if there gross income exceeded $14,050
• Payments can also vary based on marital status
§ Single - never married, divorced or legally separated w/ no dependents
§ Married, filing jointly - Combines the income of the couple
§ Married, filing separate - Each spouse files separately, a married couple may
find other benefits after filling together
§ Head of Household - An unmarried individual or a surviving spouse who
maintains the home by paying for more than half of the costs and/or a
child/dependent relative
§ Qualifying Window or Widower - An individual whose spouse has died within
the past two years & has a dependent
□ Note that this is limited to two years after the death of a spouse
§ The Marriage Penalty
□ When couples have similar amounts of income, the penalty is the
amount of additional tax they will pay by filing married/jointly vs single
□ A marriage bonus can also can also occur if income levels are very
different
Which Tax Forms & Schedules should you use?
- The Tax Cuts & Jobs Act (TCJA) simplifies the basic forms used when filing your taxes
• Form 1040 - Used to report your income
§ Form 1040-SR is for senior citizens and in large print
Completing the Federal Income Tax Return
- The major sections of form 1040
• Filing Status
§ Your rate determined by filing status as single, married and your dependents
• Income
§ Earnings from your employment (as reported on your W2) and other income
such as saving & investments
• Adjusted Income
§ If you qualify, you deduct contributions to an individual retirement account
(IRA) or other qualified retirement programs
• Taxable income
§ Your adjusted growth income reduced by your itemized deductions to
determine you tax amount
• Other Taxes
§ Any special taxes such as self employment tax are included
• Tax Credits
§ Any taxes where you qualify are subtracted
• Payments
§ Your total withholding amount & other payments indicated in this sections
• Refund amount or amount you owe
§ If payments exceed the amounts of income tax owed, your are entitled to a
refund
§ If payments made don’t cover income taxes owed, you must pay the additional
amount
• Your signature
§ Forgetting to sign a tax return is a common filing error
Correcting The Federal Return
- Sometimes you’ll find that your income or additional deductions that you are entitled to
were correctly reported
• You’ll need to file a Form 1040X to either additional tax or receive a refund
§ This form will correct the previously filed tax forms
Filing State Income Tax Returns
- All U.S. states except for nine have income tax, they range from 1-10% & some are based on
your federal income tax return
• I.E. Adjusted income or Taxable Income
Tax Assistance & The Audit Process
- Tax information Sources
• Through the IRS
§ Publications
□ The IRS offers free info via
® booklets & pamphlets
® By mail or phone call
◊ calling 1-800-TAX-FORM
® Online at www.irs.gov
® By fax 703-368-9694
§ Phone Hotline
□ 1-800-829-0140
§ Walk in service
§ Interactive Tax Assistance (ITA)
§ IRS2GO App
Tax Publications
- Every year several guides are offered for sale to purchase online or in store
Online Resources
- Sites you can visit for more information are
• The International Revenue Services www.irs.gov
• Kiplinger’s Personal Finance
• CNBC cnbc.com/personal-finance CNBC Personal Finance
Tax Prep Software
- Some services include H&R Block & Turbo Tax that allow you to complete needed tax forms
via mail or online
• Using these services can save you hours, but be sure to consider the following:
1. Your personal Situation - Are you employed or operate a business?
2. Special Tax situations w/ regards to diff types of incomes, unusual deductions &
various tax credits
3. Features in softwares like “audit check”, future tax planning, filing federal &
state tax forms online
4. Technical aspects like hardware & operating system requirements & online
support that is provided
Tax Preparation Services
- Over 40 million tax payers pay someone else to do their taxes, fee’s can range from $50 a
tax prep for a return to over $2,000 for a certified accountant for a complicated return
• Types Of Tax Services
§ Local one person operations
§ National Firms (I.E. H&R Block)
§ Enrolled Agents
□ Govt approved experts that prepare returns & tax advice
§ A CPA (Certified Public Accountant)
§ Attorneys usually help when there is a tax related transaction or your opinions
differ w/ payment to the IRS
Evaluating Tax Services
- Consider the following factors:
• What training & experience does the professional have?
• How will the fee be determined? (Avoid someone who earns a percentage of your
return)
• Does your preparer suggest various deductions that could be questioned?
• Will they represent you if your return is being audited?
• Is tax prep the main business activity? Or do they also sell financial products &
services?
Tax Service Warnings
- As a tax preparer your responsible for supplying accurate & complete information
• Be weary of tax preparers that offer you a return in advance, they tend to have very
high interest rates
What if your return is audited?
- A tax audit is a detailed examination of your tax return by the IRS
- Most audits done by the IRS require additional info
- Keep accurate records for your tax returns & avoid common filing mistakes
Who gets Audited?
- Less than 1% of tax filers
• 1 out of every 220 people
- People who claim large or unusual deductions increase their chances of an audit
- Tax advisor suggest keeping reciepts for deductions that may be questioned
Types of Audits
- Correspondence Audit
• A mail inquiry that requires you to clarify/document questions about your taxes
- Office Audit
• Requires you visit the IRS office to clarify your tax return
- Field Audit
• An IRS agent will visit you at home, business and/or office of your accountant, to verify
if your home office has been claimed
- Detailed Audits
• Also known as Taxpayer Compliance Measurement Program (TCMP) can range from
requesting documents of various tax returns to line by line paper work review by an IRS
employee
Your Audit Rights
- You have the right to request time to prepare
- Ask for clarification on what items are being audited
- It’s also suggested that you:
• Decide if you need a tax preparer, accountant or lawyer
• Be on time for your appointment & bring relevant paperwork
• Present tax records & receipts in a logical, calm & confident manner
• Be sure the information that you have is consistent w/ the law
• Keep answers aimed for auditors Q’s & be brief
- Tax avoidance
• The use of legitimate methods to reduce one’s taxes
- Tax Evasion
• Use of illegal actions to reduce one’s taxes
• If you expect to have the same/lower tax rate for this yr & the following, make your
payments before the end of the year & charitable donations by Dec 31st
• If you expect a higher tax rate, consider delaying deductions; the percentage will lower
your rate in dollar amounts i.e. 24%=240
• If you expect a higher tax rate, accelerate the receipt of income to have it taxed at a
lower rate
Consumer Purchasing
- Place of Residence
• Both real estate property taxes & interest on a mortgage are deductible
Consumer Debt
- Current laws allow homeowners to borrow for consumer purchases, make deductions up to
$100,000 secured by your primary or secondary home as high as the actual dollar amount
you have
Health Care Expenses
- (FSA) Flexible Spending Account
• A type of health savings account that allows you to reduce your taxable income when
paying for medical expenses or child care costs
• You are allowed to put pre-taxed dollars into these employee-sponsored programs,
these “deposits” lead to lower income tax
• A potential draw back of the FSA is the amount can be left in the account each year is
limited, exceeding amounts will be forfeited
- (HSA) Health Savings Accounts
• Allows you to reduce your taxable income when paying for medical expenses
• No limits to the amount that can be carried over each year
• Amounts can be taken out tax free for any reason after the age of 65
Investment Decisions
- Tax Exempt Investments
• Interest investment from municipal bonds (debt securities issued by the state & local
govts)
• While municipal bond has lower rates the after tax maybe higher
Tax Deferred Investments
- Income to be taxed at a later date, are less beneficial than tax-exempt investments
- Paying a dollar in the future instead of today gives you the opportunity to invest(spend) it
now
- Examples include:
• Tax deferred annuities issued by insurance companies
• Section 529 savings plans that are ran by the state, tax plans set aside money for
children’s education, similar to a child’s education to cover future educational costs
• Retirement Plans (IRA’S)
- Capitol Gains
• Profits from sale of a capital asset like stocks, bonds or real estate
• Long Term capital gains will be taxed at the rate that is lower than ordinary income
based on taxable income amounts
Self Employment
- Self employed persons have to deduct expenses like health & life insurance as business costs
Children’s Investments
- Parents who make investments on their children’s behalf w/ the child listed as the owner,
this is known as Income shifting
• Income shifting is the attempt to reduce taxable income to parents by shifting the
ownership of investments to children in a lower tax bracket
Retirement & Education Plans
- Traditional IRA
• Contributions to these accounts are not taxed until they are withdrawn
• Deductions are available only to people who don’t participate in employer-sponsored
retirement plans or have a adjusted income under a certain amount
• A 10% penalty is added if withdrawing form your retirement before age 59 1/2, unless
the funds were used for a medical or higher education expense
- Variations IRA
• The Simplified Employee Pension (SEP)
• Savings Incentive Match Plan for Employees (SIMPLE)
§ Both plans are for people who are either self employed and/or business owners
Roth IRA
- As of 2021, this account allows for a $6,000 annual contribution that is not tax deductible,
the earning on this type of account are free after 5yrs
- Funds may be withdrawn by age 59 1/2 if the owner is disabled or for the purchase of a first
home valued over $10,000
- Deductibles provide tax relief up front as contributions reduce from current taxes, however
they must be paid back when withdrawals are made from the IRA deductible
• Roth IRA’s are the opposite, they are exempt from federal & state taxes
Coverdell Education Savings Account
- An educational savings account designed to assist parents to save for their children’s future
education
- Annual contributions limited to $2,000 is not tax deductible as a Roth IRA however the
earnings accumulate tax free
529 Plan
- Another type of educational saving account for future college education
- There is no federal tax deduction & earnings grow tax free
• There are no withdrawal fees or taxes when money is used for qualified educational
expenses
- You don’t have to invest in this plan in your home state, but there are advantages to doing
so
• Some states allow deduction contribution to their plan at a specific maxed amount
Keogh Plan
- A retirement plan known as a HR10 may combine profit sharing pensions & other
investments purchased by the employee
• 25% of your annual income is contributed at the max of $58,000
401K plan
- Authorizes a tax deferred retirement plan sponsored by an employer
- Most companies contribute 15% of your salary
- Most financial advisers suggest the following
• The increased value of your investments accumulate on a tax free basis until
withdrawn (leave them alone)
• Contributions reduce your adjusted gross income for current tax liabilities
Monday, February 16, 2026 9:50 AM
Taxes & Financial Planning
- Common goals related to tax planning include:
○ Knowing the current tax laws & regulations that affect you
○ Maintaining complete tax records
○ Making purchase & investment decisions that can reduce tax liability
- Taxes are paid for in four major categories:
○ Purchases
○ Property
○ Wealth
○ Earnings
Taxes on purchases
- Sales Tax
○ Added to the price of purchased products
- Excise Tax
○ Imposed by the sate & federal govt on specific goods & services
§ Gasoline, cigarettes, alcohol, tires, air travel & phone services
Taxes on property
- Real Estate Property Tax
○ A major source of revenue for local govts, is based on the value of the land & buildings
- Personal Property Tax
○ When state & local govts assess taxes on other the things like cars , boats, furniture &
farm equipment
Taxes on Wealth
- Estate Tax
○ Enforces the value of a persons property at time of death, based on fair market value
of the deceased persons investments, property & bank accounts
- Inheritance Tax
○ The value of the property left by the deceased person
§ Gift amounts greater than 15,000 or less in a year are not subject to federal tax,
if higher than 15,000 you are then required to pay federal taxes unless used for
school or medical expenses
○ Some states force a gift tax before death to another person as well in the event that
they attempt to avoid estate & inheritance tax
Taxes on Earnings
- The main sources taxed are wages & Social Security
○ (FICA) The Federal Insurance Contributions Act was created by Social Security to fund
elders, survivors & the insurance of disability portion of the social security system
along w/ hospital insurance (Medicare)
- Some workers are subject to federal, state & local income taxes, only 9 states are not
required to pay income tax
Income Tax Fundamentals
- The Tax Cuts & Jobs Act (TCJA) Law
○ Reductions in tax rates for individuals, standard deductions for all tax payers & limited
other commonly used deductions
§ I.E. Mortgages, interest rates, state & local taxes
Step 1: Determining Adjusted Gross Income
- Taxable income
○ Your net income after deductions is how it is calculated
- Types of income
○ Earned income
§ Money received for personal efforts in the form of wages, salary, commission,
fees, tips and/or bonuses
○ Investment Income
§ AKA portfolio income; money received in the form of dividends, interest or rent
from investments
○ Passive Income
§ From business activities where you don’t actively participate like limited
partnerships
○ Exclusions
§ An amount not included in gross income
○ Tax - Exempt income
§ Income that is not subject to be taxed
○ Tax-deferred income
§ Income that will be taxed at a later date
Adjustment Income
- Adjusted Gross Income
• Gross income after certain additions & reductions have been made
- Reductions
• AKA Adjustment to income, including contributions to the IRA (retirement plan) -
penalties for early withdrawal of savings are considered alimony payments if applicable
- Tax Shelters
• Investments that provide immediate tax benefits & reasonable expectations of future
financial returns
Step 2: Computing Tax Deductions
- Tax Deductions
• An amount subtracted from adjusted gross income
- Standard Deduction
• A set amount where taxes are paid
- Itemized Deductions
• Expenses a taxpayer is allowed to deduct from income such as:
§ Medical & Dental expenses
□ Doctors fee’s, prescription medications, hospital expenses, medical
insurance premiums, hearing aids, glasses & medical related travel
□ This expense is equal to the amount of medical & dental expenses but
can’t exceed 7.5% of adjusted gross income
§ Taxes
□ Both state & local income tax, real estate property & state/personal
property tax, this deduction is limited to $10,000
□ You may either deduct an amount for sales tax or state income tax
whichever is larger in amount but not both
§ Interest
□ A mortgage, home equity loan and/or investment interest expense can
go up in amount equal to the investment income amount
§ Contributions
□ Totals that are greater than 20% of adjusted income are subject to
limitations
§ Casualty & Theft Losses
□ Financial Losses resulting from federally declared natural disasters
□ Deductions exceeding 10% or less than $100 for loss will NOT be
reimbursed by insurance companies or any other sources
§ Moving expenses
□ Only available to active duty military who have a permanent change in
duty for the year 2018 & beyond
□ Moving expenses include the cost of transportation, transporting the
taxpayer, household members, household goods & property
§ Job related & MISC expenses
□ Job travel, union dues, continued education, work clothes/uniforms,
investment expenses, tax prep fees & safe deposit box rental
- Exemptions
• A deduction from adjusted gross income for yourself, your spouse & qualified
dependents that are no longer allowed
- Qualified Business Income
• To provide business to small business owners, a provision called section 199A gives
them sole proprietorship
§ Partnerships of up to 20% of income is earned by the businesses from their
individual return from taxable income
Step 3: Calculating Taxes owed
- Tax Rates
• Marginal Tax Rate
§ The rate used to calculate tax on the last & next dollar of taxable income
• Calculating your tax
§ Each tax rate represents a range of income levels referred to as brackets
Calculating your Tax
- The Average Tax
• Is based on the total tax due divided by taxable income
- The Alternative Tax Minimum (ATM)
• Designed to ensure those who receive a tax break pay their share in taxes
Certain Tax breaks that can Include paying a high ATM rate are:
- High level deductions of state & local interest
- Interest on a 2nd mortgage
- Incentive Stock options
- Long term capital gains
- Tax exempt interest
- The taxpayer must start w/ gross income but may exclude many of the tax breaks
Tax Credits
- An amount subtracted from the amount of taxes owed
• One example of a tax credit is given for child care & dependent care expenses
- Tax Credit
• Has a full dollar effect in lowering taxes
- Deductions
• Reduce taxable incomes where liability is calculated
- Earned Income Credit (EIC)
• A federal tax regulation for working parents w/ taxable income under a certain amount
• Families who do not earn enough to owe federal taxes are also eligible for EIC
- Other Tax Credits Include
• Foreign tax credit to avoid double taxation on income paid to other countries
• Child/dependent care expense credit to cover qualifying expenses for someone else to
care for your dependent child aged 13 or other dependents who can’t care for
themselves
§ Disabled child, spouse and/or parent who can’t care for themselves
• Savers tax credit to encourage investment contributions to individual & employer
sponsored retirement plans by low & middle income taxpayers
• Adoption tax to cover qualifying expenses when adopting a child
• American Opportunity & Lifetime Learning Tax credits to help offset college expenses
• Residential energy-savings tax credit when purchasing energy efficient products or
renewable home systems
• Elderly & disabled tax credit to assist low income people ages 65 & up and/or 65 &
under retired w/ a permanent disability & taxable disability income
• Premium Tax credit for low to moderate households that bought health insurance
through health insurance market place
• Alternative Motor Vehicles & qualified plug in electric drive tax credit for qualified fuel
cell & plug in cars
Making Tax Payments
- You will make payment of income tax to the federal govt in one of two forms:
• Payroll withholding
§ The withheld amount is based on your filling status & other optional
adjustments claimed to the W-4 Form
• Estimated Tax Payments
§ These payments are based on the persons estimate of taxes due at the end of
the year
§ Failure to make these payments leads to penalties & interest charges
Deadlines & Penalties
- Most people are required to complete their taxes by April 15th, if not a Form 4868 is
required to be given a 6mo extension
• This extension doesn’t delay payment liability, you pay taxes owed plus Form 4868 by
April 15th, failure to do so can lead to a penalty of 5%
- People who make quarterly deposits must submit their payments by April 15th, June 15th &
Sept 15th of the current year
- If you don’t pay the whole amount of your due’s you will be taxed with interest fee’s
• If your underpayment of taxes continue due to negligence or fraud this can lead to a
penalty of 50-75%
Filing your Federal Income Tax Return
- Who must File?
• Every citizen of the US & Puerto Rico if there gross income exceeded $12,400
• Single people over 65 if there gross income exceeded $14,050
• Payments can also vary based on marital status
§ Single - never married, divorced or legally separated w/ no dependents
§ Married, filing jointly - Combines the income of the couple
§ Married, filing separate - Each spouse files separately, a married couple may
find other benefits after filling together
§ Head of Household - An unmarried individual or a surviving spouse who
maintains the home by paying for more than half of the costs and/or a
child/dependent relative
§ Qualifying Window or Widower - An individual whose spouse has died within
the past two years & has a dependent
□ Note that this is limited to two years after the death of a spouse
§ The Marriage Penalty
□ When couples have similar amounts of income, the penalty is the
amount of additional tax they will pay by filing married/jointly vs single
□ A marriage bonus can also can also occur if income levels are very
different
Which Tax Forms & Schedules should you use?
- The Tax Cuts & Jobs Act (TCJA) simplifies the basic forms used when filing your taxes
• Form 1040 - Used to report your income
§ Form 1040-SR is for senior citizens and in large print
Completing the Federal Income Tax Return
- The major sections of form 1040
• Filing Status
§ Your rate determined by filing status as single, married and your dependents
• Income
§ Earnings from your employment (as reported on your W2) and other income
such as saving & investments
• Adjusted Income
§ If you qualify, you deduct contributions to an individual retirement account
(IRA) or other qualified retirement programs
• Taxable income
§ Your adjusted growth income reduced by your itemized deductions to
determine you tax amount
• Other Taxes
§ Any special taxes such as self employment tax are included
• Tax Credits
§ Any taxes where you qualify are subtracted
• Payments
§ Your total withholding amount & other payments indicated in this sections
• Refund amount or amount you owe
§ If payments exceed the amounts of income tax owed, your are entitled to a
refund
§ If payments made don’t cover income taxes owed, you must pay the additional
amount
• Your signature
§ Forgetting to sign a tax return is a common filing error
Correcting The Federal Return
- Sometimes you’ll find that your income or additional deductions that you are entitled to
were correctly reported
• You’ll need to file a Form 1040X to either additional tax or receive a refund
§ This form will correct the previously filed tax forms
Filing State Income Tax Returns
- All U.S. states except for nine have income tax, they range from 1-10% & some are based on
your federal income tax return
• I.E. Adjusted income or Taxable Income
Tax Assistance & The Audit Process
- Tax information Sources
• Through the IRS
§ Publications
□ The IRS offers free info via
® booklets & pamphlets
® By mail or phone call
◊ calling 1-800-TAX-FORM
® Online at www.irs.gov
® By fax 703-368-9694
§ Phone Hotline
□ 1-800-829-0140
§ Walk in service
§ Interactive Tax Assistance (ITA)
§ IRS2GO App
Tax Publications
- Every year several guides are offered for sale to purchase online or in store
Online Resources
- Sites you can visit for more information are
• The International Revenue Services www.irs.gov
• Kiplinger’s Personal Finance
• CNBC cnbc.com/personal-finance CNBC Personal Finance
Tax Prep Software
- Some services include H&R Block & Turbo Tax that allow you to complete needed tax forms
via mail or online
• Using these services can save you hours, but be sure to consider the following:
1. Your personal Situation - Are you employed or operate a business?
2. Special Tax situations w/ regards to diff types of incomes, unusual deductions &
various tax credits
3. Features in softwares like “audit check”, future tax planning, filing federal &
state tax forms online
4. Technical aspects like hardware & operating system requirements & online
support that is provided
Tax Preparation Services
- Over 40 million tax payers pay someone else to do their taxes, fee’s can range from $50 a
tax prep for a return to over $2,000 for a certified accountant for a complicated return
• Types Of Tax Services
§ Local one person operations
§ National Firms (I.E. H&R Block)
§ Enrolled Agents
□ Govt approved experts that prepare returns & tax advice
§ A CPA (Certified Public Accountant)
§ Attorneys usually help when there is a tax related transaction or your opinions
differ w/ payment to the IRS
Evaluating Tax Services
- Consider the following factors:
• What training & experience does the professional have?
• How will the fee be determined? (Avoid someone who earns a percentage of your
return)
• Does your preparer suggest various deductions that could be questioned?
• Will they represent you if your return is being audited?
• Is tax prep the main business activity? Or do they also sell financial products &
services?
Tax Service Warnings
- As a tax preparer your responsible for supplying accurate & complete information
• Be weary of tax preparers that offer you a return in advance, they tend to have very
high interest rates
What if your return is audited?
- A tax audit is a detailed examination of your tax return by the IRS
- Most audits done by the IRS require additional info
- Keep accurate records for your tax returns & avoid common filing mistakes
Who gets Audited?
- Less than 1% of tax filers
• 1 out of every 220 people
- People who claim large or unusual deductions increase their chances of an audit
- Tax advisor suggest keeping reciepts for deductions that may be questioned
Types of Audits
- Correspondence Audit
• A mail inquiry that requires you to clarify/document questions about your taxes
- Office Audit
• Requires you visit the IRS office to clarify your tax return
- Field Audit
• An IRS agent will visit you at home, business and/or office of your accountant, to verify
if your home office has been claimed
- Detailed Audits
• Also known as Taxpayer Compliance Measurement Program (TCMP) can range from
requesting documents of various tax returns to line by line paper work review by an IRS
employee
Your Audit Rights
- You have the right to request time to prepare
- Ask for clarification on what items are being audited
- It’s also suggested that you:
• Decide if you need a tax preparer, accountant or lawyer
• Be on time for your appointment & bring relevant paperwork
• Present tax records & receipts in a logical, calm & confident manner
• Be sure the information that you have is consistent w/ the law
• Keep answers aimed for auditors Q’s & be brief
- Tax avoidance
• The use of legitimate methods to reduce one’s taxes
- Tax Evasion
• Use of illegal actions to reduce one’s taxes
• If you expect to have the same/lower tax rate for this yr & the following, make your
payments before the end of the year & charitable donations by Dec 31st
• If you expect a higher tax rate, consider delaying deductions; the percentage will lower
your rate in dollar amounts i.e. 24%=240
• If you expect a higher tax rate, accelerate the receipt of income to have it taxed at a
lower rate
Consumer Purchasing
- Place of Residence
• Both real estate property taxes & interest on a mortgage are deductible
Consumer Debt
- Current laws allow homeowners to borrow for consumer purchases, make deductions up to
$100,000 secured by your primary or secondary home as high as the actual dollar amount
you have
Health Care Expenses
- (FSA) Flexible Spending Account
• A type of health savings account that allows you to reduce your taxable income when
paying for medical expenses or child care costs
• You are allowed to put pre-taxed dollars into these employee-sponsored programs,
these “deposits” lead to lower income tax
• A potential draw back of the FSA is the amount can be left in the account each year is
limited, exceeding amounts will be forfeited
- (HSA) Health Savings Accounts
• Allows you to reduce your taxable income when paying for medical expenses
• No limits to the amount that can be carried over each year
• Amounts can be taken out tax free for any reason after the age of 65
Investment Decisions
- Tax Exempt Investments
• Interest investment from municipal bonds (debt securities issued by the state & local
govts)
• While municipal bond has lower rates the after tax maybe higher
Tax Deferred Investments
- Income to be taxed at a later date, are less beneficial than tax-exempt investments
- Paying a dollar in the future instead of today gives you the opportunity to invest(spend) it
now
- Examples include:
• Tax deferred annuities issued by insurance companies
• Section 529 savings plans that are ran by the state, tax plans set aside money for
children’s education, similar to a child’s education to cover future educational costs
• Retirement Plans (IRA’S)
- Capitol Gains
• Profits from sale of a capital asset like stocks, bonds or real estate
• Long Term capital gains will be taxed at the rate that is lower than ordinary income
based on taxable income amounts
Self Employment
- Self employed persons have to deduct expenses like health & life insurance as business costs
Children’s Investments
- Parents who make investments on their children’s behalf w/ the child listed as the owner,
this is known as Income shifting
• Income shifting is the attempt to reduce taxable income to parents by shifting the
ownership of investments to children in a lower tax bracket
Retirement & Education Plans
- Traditional IRA
• Contributions to these accounts are not taxed until they are withdrawn
• Deductions are available only to people who don’t participate in employer-sponsored
retirement plans or have a adjusted income under a certain amount
• A 10% penalty is added if withdrawing form your retirement before age 59 1/2, unless
the funds were used for a medical or higher education expense
- Variations IRA
• The Simplified Employee Pension (SEP)
• Savings Incentive Match Plan for Employees (SIMPLE)
§ Both plans are for people who are either self employed and/or business owners
Roth IRA
- As of 2021, this account allows for a $6,000 annual contribution that is not tax deductible,
the earning on this type of account are free after 5yrs
- Funds may be withdrawn by age 59 1/2 if the owner is disabled or for the purchase of a first
home valued over $10,000
- Deductibles provide tax relief up front as contributions reduce from current taxes, however
they must be paid back when withdrawals are made from the IRA deductible
• Roth IRA’s are the opposite, they are exempt from federal & state taxes
Coverdell Education Savings Account
- An educational savings account designed to assist parents to save for their children’s future
education
- Annual contributions limited to $2,000 is not tax deductible as a Roth IRA however the
earnings accumulate tax free
529 Plan
- Another type of educational saving account for future college education
- There is no federal tax deduction & earnings grow tax free
• There are no withdrawal fees or taxes when money is used for qualified educational
expenses
- You don’t have to invest in this plan in your home state, but there are advantages to doing
so
• Some states allow deduction contribution to their plan at a specific maxed amount
Keogh Plan
- A retirement plan known as a HR10 may combine profit sharing pensions & other
investments purchased by the employee
• 25% of your annual income is contributed at the max of $58,000
401K plan
- Authorizes a tax deferred retirement plan sponsored by an employer
- Most companies contribute 15% of your salary
- Most financial advisers suggest the following
• The increased value of your investments accumulate on a tax free basis until
withdrawn (leave them alone)
• Contributions reduce your adjusted gross income for current tax liabilities
