Federal Income Taxes

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Expenses
Net Monthly Salary 4,391 Total Expenses
4,080 Available for Investments 311
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Federal Income TaxesC. Thomas Bates, CPA

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U S Income Tax System

• Raises revenue
• Influences economic and social behavior
• Progressive tax system

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Basic Concepts

• Calculation of taxes
• Progressive tax system
• Tax deductions vs Tax credits
• Payment of taxes

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Tax Calculation

• In simple terms taxes or refund due is figured
  by reducing income by deductions, calculating the
  tax liability on the net amount and comparing
  that liability against what you have paid in
  taxes during the year
• Basic tax form (Form 1040)

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Progressive Tax System

• Taxpayers income is taxed in progressively
  higher blocks called brackets
• Brackets range from 10 to 35
• Tax Table or calculation

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Tax Bracket Planning Strategies

• Time recognition of income and deductions near
  year end to maximize benefit of tax brackets
• Deduction may be worth more or less in different
  years

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Tax Deductions vs Tax Credits

• A tax deduction is an expense that is subtracted
  from the taxpayers income before tax is
  calculated on that amount
• A tax credit is an amount subtracted from the
  taxes owed
• Tax credits are generally more valuable in
  reducing tax than tax deductions

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Payment of Taxes

• Pay as you go system
• Employee withheld from wages
• Self-employed made in quarterly installments

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FICA Payroll Taxes

• FICA tax represents payments for Social Security
  and Medicare
• Employee withheld from wages at 7.65 and
  matched by employer
• Self-employed paid at 15.3 (IRS allows a
  deduction for half of the self-employment tax)

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Documentation and Records

• Why maintain records
• What records
• How to classify
• How long to retain records

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Why Maintain Records

• Prevents missing opportunities to deduct
  legitimate expenses
• Poor documentation increase amount of time and
  stress to prepare tax return
• Tracking expenses in an organized fashion
  eliminates need to amend tax returns if
  deductions are missed and found later
• Documents deductions if audited by the IRS

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What Records

• Income
• Mortgage/Home
• Utilities
• Medical
• Charitable donations
• Sales tax on large purchases

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What Records

• Unreimbursed business expenses
• College/post-secondary education expenses
• Dependent care expenses
• Car mileage log
• Everything else
• Student loan interest

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How to classify

• Folder or envelope system
• Personal financial software
• Quicken
• Microsoft Money

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How Long to Retain Records

• Seven years for most documentation
• Permanent records
• Income tax returns
• Investment records
• Real estate deeds an closing documents
• Retirement plan documents
• Insurance policies

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Before December 31

• Timing of year end expenses and income
• Charitable donations
• Donation of appreciated investments
• Withdraw required minimum distribution (RMD) from
  IRA own or inherited
• Consider Section 179 purchases for small business
  owners

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Before April 15

• Gather third party filing information
• Form W-2
• Form 1099
• Form K-1
• Form 1098
• IRS uses computerized system to match to tax
  return
• Contribute to traditional IRA, Roth IRA and
  Coverdell Education Savings Accounts

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Overlooked Deductions and Credits

• Child care tax credit
• State and local income taxes paid
• Sales tax on substantial purchases
• Mortgage points
• Job related moving costs

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Common Filing Mistakes

• Missed filing deadlines and extensions
• Tax returns are due April 15 (postmarked and in
  the mail)
• If April 15 is on the weekend the deadline is the
  following Monday
• IRS grants an automatic extension to October 15
  (Form 4868)
• Extension is to file return any tax due must be
  paid by April 15

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Common Filing Mistakes

• Forgetting the stamp
• Forgetting to sign
• Forgetting Social Security Numbers for taxpayer
  or dependents
• Using wrong annual limits, tax tables, etc
• Forgetting to attach required documentation (W-2)

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Avoiding Surprises

• Start early
• Identify missing documents
• Know amount owed early
• Receive refund sooner
• IRS assesses interest on unpaid balances and
  penalties on late filers
• IRS has longest reach of any creditor
• Garnish wages
• Seize assets

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Major IRS Penalties

• Failure to File 5 per month to a maximum of
  25
• Failure to Pay 0.5 per month up to 25
• Accuracy Penalty 20 of the under calculated
  amount
• Fraudulent Return Penalty 75 of the under
  calculated amount

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What If You Cannot Pay

• Offer in Compromise program settlement for less
  than total tax due based on ability to pay
  (winding down due to overuse)
• Installment agreement monthly installments of
  tax plus interest

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Current Applicable Topics

• IRS e-file system (2010 mandatory)
• Direct deposit of refunds
• Automatic withdrawal of payments
• Form 1040A Form 1040EZ
• IRS Website

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Questions