Solved: Agent Bond is standing on a bridge, 13 m above the

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