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AAEC 2104, Week 6 Notes: Income Taxes

by: Mara DePena

AAEC 2104, Week 6 Notes: Income Taxes AAEC 2104

Mara DePena
Virginia Tech
GPA 3.62

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About this Document

These notes cover general information about income taxes and what the different aspects of a 1040 mean. They also include tips on how to legally reduce your taxes.
Personal Financial Planning
Dr. White
Class Notes
Personal, finance, tax, Income, income taxes, 1040, W4, form, refund, gross income
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This 4 page Class Notes was uploaded by Mara DePena on Friday February 26, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Spring 2016. Since its upload, it has received 29 views. For similar materials see Personal Financial Planning in Agricultural & Resource Econ at Virginia Polytechnic Institute and State University.

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Date Created: 02/26/16
AAEC 2104 INCOME TAXES WHY DO WE PAY TAXES?  Help fund national, state, local efforts o Cost of running the government o Infrastructure (bridges, roads, etc) o National defense o Police/fire protection o Government programs  Your goal should be to maximize your after-tax income MARGINAL VS. AVERAGE TAX RATES  US uses a progressive tax system o Tax rate increases with income  Everyone starts out paying the same rate  Marginal tax rate=taxes owed on the next dollar you earn  Average tax rate=total taxes/taxable income o Somewhere around 17% TAKE-HOME PAY  Gross income minus… o Federal income taxes withheld o State income taxes withheld o FICA (Social Security and Medicare) – 7.65%  Filling out a W4 form o The more exemptions you list, the less income tax they withhold o Fill out when you start a job o Can make changes later AL’S TAX TIPS  You can easily do your own taxes  Get the instruction book and read the instructions  Use for specific questions  Some tax software is okay  Round off to the nearest dollar  Document numbers  Check math  When in doubt, read the instructions  Keep copies of calculations GENERAL INFO  Determine if you have to file o Single, not a dependent  Gross income > ~$10,300 o As a dependent  Unearned income > $1050 or earned income > $6300  Determine which form to use o 1040 o 1040EZ o 1040A THE THEORY OF INCOME TAXES  Look at IRS Form 1040 o Address and Personal Info  Use IRS label if possible  Name and address  SSN  Presidential election campaign ($3) o Doesn’t change your tax or refund!  State income tax forms o Filing status  Choose the appropriate one! o Exemptions  Allowance for you and dependents o $4000 each  Claim yourself o Unless you are a dependent  Claim spouse and dependents o Dependents= qualifying child or relative  Under 19; under 24 AND a full time student  Any age if permanently disabled  Didn’t pay more than half of their own support for the year  Lived with you for at least half the year o Income  List your gross income for the year by source.  Wages, salaries, tips  Interest earned, taxable and tax-exempt  Dividends, ordinary, qualified  Business or farm income o Schedule C or F  Capital gain/loss from sale of assets o Schedule D  IRA distributions, pensions, unemployment o Including Social Security benefits  Other income (line 21) o Income from “odd jobs,” gambling, etc. o Adjustments  These reduce your total income  Main adjustments for students/graduates o Moving expenses o Self-employment items o Traditional IRA contributions o Student loan interest payments (up to $2,500, if you are not a dependent) o Tuition and fees deduction o Tax and credits  Standard v itemized deduction o Reduces your taxable income o Use the larger of the two  Itemizable expenses o Medical and dental o State/local income taxes OR sales tax o Real estate, personal property taxes o Interest paid o Gifts to charity o Casualty and theft losses o Unreimbursed job expenses  Deductions for exemptions o $4000 per exemption  Taxable income  Tax (using tax tables or brackets)  Alternative minimum tax (AMT)  Tax credits o Directly reduce your tax liability (dollar for dollar)  Child/elder care  Education credits o Payments  All tax payments made during the year  Income tax withheld  Estimated tax payments o Primarily for businesses  Earned income credit o For low income families  Add to get total payments o Refund/Amount Owed  Total payments > total tax  refund LEGALLY REDUCING YOUR TAXES  Reduce taxable income o Make 401k and 403b retirement contributions  Increase adjustments o Make traditional IRA contributions  Not recommended for most students. o Student loan interest, moving expenses, etc.  Standard v. itemized deductions o Take the larger of the two o For most students, use standard  Increase itemized deductions  Use any tax credits that might help  Qualified dividends o Hold your stocks at least 60 days  Tax-exempt income o Municipal bonds MORE ADVICE  Don’t make decisions strictly on tax consequences.


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