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CHAPTER 4 MANAGING INCOME TAXES

Learn about progressive income taxes, marginal tax rates, and steps to calculate federal income taxes. Discover strategies to avoid overpayment of taxes.

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CHAPTER 4 MANAGING INCOME TAXES

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  1. CHAPTER 4MANAGING INCOME TAXES FIN 235 FALL 2012

  2. MANAGING INCOME TAXES • LEARNING OBJECTIVES • Explain the nature of progressive income taxes and the marginal tax rate. • Differentiate among the eight steps involved in calculating your federal income taxes. • Use appropriate strategies to avoid overpayment of income taxes.

  3. MANAGING INCOME TAXES • PROGRESSIVE INCOME TAXES AND THE MARGINAL TAX RATE • Federal income tax is taxed progressively, making individuals pay more and at a higher percentage rate on higher incomes. Figure 4-1 illustrates how income is taxed (page 107) • The marginal tax rate is the rate applied to the last dollar earned. Table 4-1 shows the tax brackets (page 107) • The marginal tax rate affects many financial decisions. • Your effective marginal tax rate includes state income and Social Security taxes. • Your average tax rate is much lower than your marginal tax rate.

  4. MANAGING INCOME TAXES • CALCULATING YOUR FEDERAL INCOME TAXES • Selecting a tax Form: 1040EZ, 1040A, 1040 (see page 121) • General Steps • Determine total income • Subtract exclusions and adjustments • Subtract deductions (Schedule A) and personal exemptions • Determine tax liability (see instructions on IRS form or tax tables) • Subtract credits (typically amounts withheld from paychecks by employer) • Calculate amount owed or refund due • Filing electronically gets you a quick refund if due.

  5. MANAGING INCOME TAXES • STRATEGIES TO REDUCE TAX BURDEN • Contributions to [IRS] qualified employer retirement plans • Tax sheltered investments (avoids tax liability on gains until withdrawn) • Other tax preference plans: e.g. FSA • Managed real estate investments (income producing properties) • HOMEWORK • Do the Math: 1, 3, 4

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