Basic Concept of Taxes

• Tally all income subject to taxes• Reduce the total by:

– adjustments– deductions– exemptions

• Choose the right filing status• Claim all proper credits

Who must file depends on

Amount of gross incomeMarital status

Age

Which form should you use?

1040 EZ1040 A (short form)

1040 (long form)

Choose a filing status

SingleMarried filing joint return

Married filing separate returnHead of household

Qualifying widow(er) with dependent child

Exemptions and Dependents

• W-4 Form - helps an employer determine how much to withhold from paycheck– More exemptions, lower your taxes– Allowed to claim one exemption for :self,

spouse if married, dependents– Dependents usually children– Others may qualify as a dependent

Taxable Income

Wages, Salaries, TipsInterest Income

DividendsAlimony Received

Separately Scheduled Income

• Business Income or Loss• Capital Gains and Losses• Pensions, etc.• Miscellaneous Taxable Income

Adjustments to Income

•Payments to IRA plans•Medical deductions•Moving expenses•Alimony paid

Total Income - Adjustments = Adjusted Gross Income

If true deductible expenses exceed the standard deduction

amount - ITEMIZE

Deductible Expenses

• Medical/Dental • Taxes

– real estate– personal property

• Interest• Contributions• Casualty/Theft losses

Deductible Expenses

• Depreciation

• Union dues

• Professional organization dues

• Work uniforms if paid out of own pocket

Non Deductible Expenses

• Commuting to/from work• Life insurance premiums• Property insurance premiums• Hobby expenses• Social Security taxes• Attorney fees

Non Deductible Expenses

• Attorney fees• Home-related expenses such as

children’s allowances, clothing, utility expenses

• Home repair and maintenance• Losses incurred on the sale of home

Tax Cutting Strategies

• Tax-exempt vs. tax deferred• Calculate allowances correctly on W-4

form• Year-end strategies:

– estimate tax liability for this year compared to next

– shift income– tax shelters

2001 Tax Law Overview

• Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 signed into law on June 7, 2001

• Provisions phase in from 2002 through 2010 (some delayed beyond 2002)

• “Sunset Provision” after 2010

• Biggest tax cut in 20 years

• 1.35 trillion federal tax cut

• Phased in over the next decade

Summary of Major Provisions

• Individual income tax rate reductions

• Child-related tax provisions

• “Marriage penalty” relief

• Education provisions

• Estate and gift tax reductions

• Pension and IRA provisions

Summary of Individual Income Tax Rate Reductions

Over ($) But not over ($) Marginal Tax Rate

0 6,000 10.0%6,000 27,050 15.0%27,050 65,550 27.0%65,550 136,750 30.0%136,750 297,350 35.0%297,350 38.6%

Example: Single Taxpayers

Summary of Child-Related Tax Provisions

• Before new law - $500 tax credit per child• Under new law, child tax credit is increased to

$1,000 phased in over 10 years, starting in 2001• 2001-2004 - $600.00 per child• 2005-2008 - $700.00 per child• 2009 - $800.00 per child• 2010 and after - $1,000.00 per child

Summary of Marriage Penalty Provisions

• Effective 2005

• Increases the basic standard deduction for joint filers to twice the basic standard deduction for an unmarried person filing a single return.

Summary of Education Provisions

• Increases annual limit to $2,000 (from $500)

• Includes grades K-12, tuition, uniforms, etc.

• Increases range for married taxpayers

• Can contribute to an Education IRA and state plan

Summary of Gift and Estate Taxes

• Increased from $675,000 to $1 million in 2002

• There will be no estate taxes 2010

• Will go back to 675,000 in 2011

• Able to give $10,000 per person without tax - created a $1 million lifetime gift bucket

• Will use this to get $ out of estate and into next generation

Summary of Pension and IRA Provisions

• Increased contributions to tax deferred plans

• Increased IRA contribution limits

• Offers catch-up IRA contributions for those over 50 years old

• Higher Keogh limits

• Expanded pension portability - rollovers

Summary

• Basic concept of taxes• Deductible/Non Deductible

Expenses• Tax cutting strategies• 2001 Tax Law Overview