Federal Income Taxes
Federal Income Taxes AAEC 2104
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This 4 page Class Notes was uploaded by Jennifer Cartwright on Saturday March 19, 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 20 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: 03/19/16
Chapter 4: Federal Income Taxes Why do we pay income taxes? o Help fund national, state, and local efforts Running the government Roads, bridges, schools, libraries National defense Police/fire departments Government programs o Want to maximize you after tax income Marginal vs Average Tax rates o US uses a progressive tax system Tax rate goes up as income goes up o Everyone starts out paying the same rate o Marginal tax rate = taxes owed on the next dollar earned o Average tax rate = total taxes/ taxable income Take-home pay o Gross income minus Federal income taxes withheld State income taxes withheld FICA:7.65% o Filling out a W-4 form More exemptions you list, less income tax withheld Fill out when you start job Make changes later General Info o Determine if you have to file: Single, not dependent (gross income is over 10,300) Dependent (unearned income greater than 1,00 or earned income greater than 6.300) o Determine which file to use 1040EZ, 1040A, 1040 The “Theory” of Income taxes o Look at IRS Form 1040 Address and personal info Filing status Exemptions Income Adjustments to income Taxes and tax credits Other taxes Payments Refunds/ amount owed Address and Personal Info o Use IRS labels if possible o Name and Address o SSN o State income tax forms Filing Status o Single o Married, filing jointly o Married, filing separately o Head of household with dependents o Qualifying widower with dependent children Exemptions o An allowance for you and your dependents 4,000 per exemption o Claim yourself Unless you’re a dependent under your parents o Claim your spouse and dependents Dependents are qualifying child or relative Under 19; under 24 AND full time student Any age if permanently disabled Didn’t pay more than ½ of own support for the year Lived with you for at least ½ the year (time at college counts) Income o List your gross income for the year by source Support with w-2 o Wages, salaries, tips o Interest earned- taxable and tax- exempt Schedule b o Dividends- ordinary, qualified Schedule b o Business or farm income Schedule c or f o Capital gain/loss from sale of assets Schedule d o IRA distributions, pensions, unemployment o Other income Adjustments o Reduce total income Total Income – Adjustments = Adjusted Gross Income AGI o Main adjustments for students/ graduates Moving expenses (job-related) Self – employment items ½ SE tax, retirement contributions, health ins premiums Traditional IRA contributions Student loan interest payments (up to 2500) Tuition and fees deductions (up to 4000) Tax and credits o Standard deduction vs itemized deduction Reduces taxable income Use larger of the two o Standard deduction = 6,300 for singles 12,600 for married/joint o Itemized deductions Use Schedule A o Itemizable Expenses Medical and dental expenses (only amount over 10% AGI) State and Local income taxes or sales tax Real estate and personal property taxes Interest paid Gifts to charity Casualty and theft losses Unreimbursed job expenses o Deductions for exemptions 4,000 per exemption o Taxable income o Tax o Alternative Minimum Tax o Tax Credits Directly reduce your tax liability o Child/elder care o Education credits American Opportunity Credit Up to 2500 per students Only for the first 4 years of higher education Lifetime up to 2,00 per return Can’t use if you claim tuition/fee adjustment Can’t use if you’re a dependent Other taxes o Primarily self-employment taxes Schedule SE o Add to your income taxes to get Total Tax Payments o All tax payments made during the year o Income tax withheld (w-2) o Estimated tax payments Primarily for businesses o Earned income credit For low-income family o Add to get total payments Refund/Amount Owed o If Total Payments > Total Tax means Refund Otherwise you owe more income taxes o Can receive refund directly into bank account Legally Reducing Your Taxes o Reduce your taxable income Make retirement contributions o Increase your adjustments Make traditional IRA contributions Roth for students Student loan interest, moving expenses, etc. o Standard vs Itemized deductions Take the larger of the two For most students use standards o Increase itemized deductions House-related deductions Mortgage interest, property taxes Incure medical expenses in the same year All elective surgeries in the same year Increase charitable donations o Use any tax credits that might help Education credits, child/elder care, etc o Qualified dividends Hold stocks at least 60 days o Tax-exepmt ncome Municipal bonds
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