Chapter 3: Managing Taxes

Objectives

• Explain how taxes are administered and classified.

• Describe the concept of the marginal tax rate.

• Determine who should file an income tax return.

Objectives

• Describe the two ways of paying taxes: payroll withholding and estimated taxes.

• Identify the eight planning steps involved in calculating federal income taxes.

• Understand planning strategies to legally avoid overpayment of income taxes.

• Explain the basics of IRS audits.

What is Tax Management?

• Reduction

• Deferment

• Elimination

ATTENTION!

A PLANNING PROCESS FOR TAX:

• Federal tax laws

• Progressive nature of income tax

• Regressive

• Marginal tax rate

• Effective marginal tax rate

• Average tax rate

Administration/Classification of Income Taxes

2004 Filing Requirements for Most Taxpayers

IF your filing status is. . . AND at the end of 2004 you were. . . THEN file a return if your gross income was at least. . .

Single Under 6565 or older

$7,950$9,150

Married filing jointly Under 65 (both spouses65 or older (one spouse)65 or older (both spouses)

$15,900$16,850$17,800

Married filing separately Any age $3,100

Head of household Under 6565 or older

$10,250$11,450

Qualifying widow(er) with dependent child

Under 6565 or older

$12,800$13,750

Information taken from 2004 Publication 17.

The Progressive Nature of the Federal Income Tax

If your taxable income is:Over:

But notover -- The tax is:

Of theamountover--

$0 $7,150 ------------ 10% $0

7,150 29,050 $715.00 + 15% 7,150

29,050 70,350 4,000.00 + 25% 29,050

70,350 146,750 14,325.00 + 28% 70,350

146,750 319,100 35,717.00 + 33% 146,750

319,100 ---------- 92,592.50 + 35% 319,100

If your filing status is Single

The Tax Rate Schedule is shown so you can see the tax rate that applies to all levels of taxable income. It is not used to figure ones’ taxes.

How Your Income is Really Taxed

$3,100 personal exemption is not taxed.

$4,850 standard deduction is not taxed.

First $7,150 of income is taxed at 10%.

$21,900 taxed at 15%. $20,700 taxed at 25%.

$0 + $0 + $715 + $3,285 + $5,175 = $9,175

= $57,700Income

Tax owed

Assumes a single individual with gross income of $57,700

This individual’s marginal tax rate is 25%

This individual’s average tax rate is 15.9% (9,175/57,700)

• Earned income

• Unearned income

• Transfer payments

Who Should File a Tax Return?

STUDENTS WITH: