Bethel University Shelby Johnson Case Study Discussion Read attached case study and answer in 500 words the following using 2 sources in APA format 1. Bas
Bethel University Shelby Johnson Case Study Discussion Read attached case study and answer in 500 words the following using 2 sources in APA format
1. Based on her current and future life situation, what tax planning strategies should she consider?
2. Provide some suggestions for Shelby to increase her emergency fund.
3. Identify other money management and financial planning activities that Shelby should consider.
4. Determine how Shelby should use Personal Financial Planner sheet #26, Payment Account Comparison and #28, Checking Account Reconciliation. Final PDF to printer
chapter 4
Planning Your
Tax Strategy
B
E
N
N
E
T
T
,
B
A
R
B
A
R
A
2
8
8
2
T
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Learning Objectives
What will this mean for me?
LO4-1 Describe the importance of taxes for
personal financial planning.
Changing economic and political environments
often result in new tax regulations, some of which
may be favorable for you while others are not.
An important element of tax planning is your
refund. Each year, more than 90 million American
households receive an average tax refund of over
$2,700 for a total of over $230 billion. Invested
at 5 percent for a year, these refunds represent
over $11.5 billion in lost earnings. By having less
withheld and obtaining a smaller refund, you
can save and invest these funds for your benefit
during the year.
LO4-2 Calculate taxable income and the amount
owed for federal income tax.
LO4-3 Prepare a federal income tax return.
LO4-4 Identify tax assistance sources.
LO4-5 Select appropriate tax strategies for
various financial and personal situations.
B
E
N
N
E
T
T
,
my life
e
B
A
PAY ONLY YOUR FAIR SHARE
R
Taxes are often viewed as a confusing aspect of personal financial planning. However, with a
B
little effort, the basic elements of taxes can be understood.
A
THE MAIN FOCUS
Rtaxes is to pay your fair share based on curThe main focus when planning and paying your
rent tax laws. What action do you commonly take
A regarding taxes? For each of the following
statements, select agree or disagree to indicate your personal response regarding these taxplanning activities:
2
1. I have a good knowledge of the various taxes paid in our society.
8 find needed
2. My tax records are organized to allow me to easily
information.
8
3. I am able to file my taxes on time each year.
2
4. My tax returns have never been questioned by the Internal
Revenue Service.
T
5. I stay informed on proposed tax changes being considered for my
S
current tax filing status.
Agree
Disagree
Agree
Agree
Disagree
Disagree
Agree
Disagree
Agree
Disagree
As you study this chapter, you will encounter My Life boxes with additional information and
resources related to these items.
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118
Part 1
PLANNING YOUR PERSONAL FINANCES
Taxes and Financial Planning
LO4-1
Describe the importance of
taxes for personal financial
planning.
Taxes are an everyday financial fact of life. You pay some taxes every time you get a
paycheck or make a purchase. However, most people concern themselves with taxes
only in April. With about one-third of each dollar you earn going to taxes, an effective
tax strategy is vital for successful financial planning. Understanding tax rules and regulations can help you reduce your tax liability.
The U.S. Bureau of the Census reports that about two out of three American
households have no money left after paying for taxes and normal living expenses.
For most of us, taxes are a significant factor in financial planning. Each year, the Tax
Foundation determines how long the average person works to pay taxes. In recent
years, Tax Freedom Day came in Mid-April. This means that the time people
worked from January 1 until Mid-April represents the portion of the year worked to
B
pay their taxes.
This financial obligation E
includes the many types of taxes discussed later in this
section. To help you cope with these taxes, common goals related to tax planning
N
include
Knowing the current taxNlaws and regulations that affect you.
E appropriate tax records.
Maintaining complete and
Making purchase and investment
decisions that can reduce your tax liability.
T
Target your tax planning efforts
T toward paying your fair share of taxes while taking
advantage of tax benefits appropriate to your personal and financial situation.
,
The principal purpose of taxes is to finance government activities. As citizens, we
expect government to provide services such as police and fire protection, schools, road
maintenance, parks and libraries, and safety inspection of food, drugs, and other prodB
ucts. Most people pay taxes in four major categories: taxes on purchases, taxes on propA on earnings.
erty, taxes on wealth, and taxes
excise tax A tax imposed
on specific goods and
services, such as gasoline,
cigarettes, alcoholic beverages, tires, and air travel.
R
TAXES ON PURCHASES
B
Amany of your purchases. This state and local tax is added
You probably pay sales tax on
to the purchase price of products.
R Many states exempt food and drugs from sales tax to
reduce the economic burden of this tax on the poor. In recent years, all but five states
(Alaska, Delaware, Montana,ANew Hampshire, and Oregon) have had a general sales
tax. An excise tax is imposed by the federal and state governments on specific goods
and services, such as gasoline, cigarettes, alcoholic beverages, tires, air travel, and tele2
phone service.
DID YOU KNOW?
According to the Tax Foundation (www.taxfoundation.
org), Alaska, New Hampshire, Delaware, Tennessee,
and Alabama were the most tax-friendly states.
In contrast, Vermont, Maine, New York, Rhode
Island, and Ohio had the highest taxes as a
percentage of income.
kap61647_ch04_116-153.indd 118
8
8 TAXES ON PROPERTY
2 Real estate property tax is a major source of revenue
T for local governments. This tax is based on the value
of land and buildings. The increasing amount of real
S estate property taxes is a major concern of homeowners. Retired people with limited pension incomes may
encounter financial difficulties if local property taxes
increase rapidly.
Some areas also impose personal property taxes.
State and local governments may assess taxes on
the value of automobiles, boats, furniture, and farm
equipment.
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Chapter 4
Planning Your Tax Strategy
119
TAXES ON WEALTH
An estate tax is imposed on the value of a persons property at the time of his or her
death. This federal tax is based on the fair market value of the deceased individuals
investments, property, and bank accounts less allowable deductions and other taxes.
Estate taxes are discussed in greater detail in Chapter 19.
Money and property passed on to heirs may also be subject to a state tax. An inheritance tax is levied on the value of property bequeathed by a deceased person. This tax
is paid for the right to acquire the inherited property.
For 2013, individuals are allowed to give money or items valued at $14,000 or
less in a year to a person without being subject to taxes. Gift amounts greater than
$14,000 are subject to federal tax. Amounts given for the payment of tuition or medical expenses are not subject to federal
gift taxes. Some states impose a gift tax on amounts that a
B
person, before his or her death, transfers to another person,
because the action may have been intended to avoid estateEand
inheritance taxes.
N
estate tax A tax imposed
on the value of a persons
property at the time of his
or her death.
inheritance tax A tax
levied on the value of
property bequeathed by a
deceased person.
N
E
TAXES ON EARNINGS
T
The two main taxes on wages and salaries are Social Security
and income taxes. The Federal Insurance ContributionsTAct
(FICA) created the Social Security tax to fund the old-age, sur,
vivors, and disability insurance portion of the Social Security
system and the hospital insurance portion (Medicare). Chapters
11 and 18 discuss various aspects of Social Security.
B
Income tax is a major financial planning factor for most
people. Some workers are subject to federal, state, and A
local
income taxes. Currently, only seven states do not have a state
R
income tax.
B
Throughout the year, your employer will withhold income
tax payments from your paycheck, or you may be required
A
to make estimated tax payments if you own your own
business. Both types of payments are only estimates of R
your income taxes. You may need to pay an additional A
amount, or you may get a tax refund. The following sections will assist you in preparing your federal income
tax return and planning your future tax strategies.
2
8
8
2
T
S
Real estate property taxes are
the major revenue source for
local government.
my liffe 1
I have a good knowledge of the various
taxes paid in our society.
Prepare a list of the various taxes you pay in our
society. This list might include fees and charges
associated with various licenses and government
services.
PRACTICE QUIZ 4-1
1 How should you consider taxes in your financial planning?
2 What types of taxes do people frequently overlook when making financial
decisions?
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Part 1
PLANNING YOUR PERSONAL FINANCES
Income Tax Fundamentals
LO4-2
Calculate taxable income
and the amount owed for
federal income tax.
taxable income The net
amount of income, after
allowable deductions,
on which income tax is
computed.
earned income Money
received for personal
effort, such as wages,
salary, commission, fees,
tips, or bonuses.
investment income
Money received in
the form of dividends,
interest, or rent from
investments. Also called
portfolio income.
passive income Income
resulting from business
activities in which you do
not actively participate.
exclusion An amount not
included in gross income.
tax-exempt income Income
that is not subject to tax.
tax-deferred income
Income that will be taxed
at a later date.
adjusted gross income
(AGI) Gross income
reduced by certain adjustments, such as contributions to an individual
retirement account (IRA)
and alimony payments.
tax shelter An investment
that provides immediate
tax benefits and a reasonable expectation of a
future financial return.
kap61647_ch04_116-153.indd 120
The starting point for preparing your taxes is proper documentation. You are required to
keep records to document tax deductions. Maintaining an organized system that allows
you to quickly access this documentation is essential. Later, we will discuss how long
you should keep these documents and will recommend ways to create an organized
system.
Each year, millions of Americans are required to pay their share of income taxes to
the federal government. The process involves computing taxable income, determining
the amount of income tax owed, and comparing this amount with the income tax payments withheld or made during the year.
STEP 1: DETERMINING
B ADJUSTED GROSS INCOME
Taxable income is the net E
amount of income, after allowable deductions, on which
income tax is computed. Exhibit
N 4-1 presents the components of taxable income and the
process used to compute it.
N
TYPES OF INCOME E
Most, but not all, income is subject to taxation. Your gross,
or total, income can consist of three main components:
T
1. Earned income is money received for personal effort. Earned income is usually in
T
the form of wages, salary, commission, fees, tips, or bonuses.
,
2. Investment income (sometimes
referred to as portfolio income) is money received
in the form of dividends, interest, or rent from investments.
3. Passive income results from
B business activities in which you do not actively
participate, such as a limited partnership.
A
Other types of income subject to federal income tax include alimony, awards, lotR
tery winnings, and prizes. Cameron
Clark once won $30,533 in prizes on the television game show Wheel ofBFortune. In addition to paying California sales tax of
$1,154, Cameron had to sell the car stereo, ping-pong table, camping gear, water ski
equipment, bass guitar, andAart drawing table and chair he won to pay the federal
income tax. He did get to keep
R the Toyota, Honda scooter, Gucci watches, and Australian vacation.
A
Total income is also affected by exclusions. An exclusion is an amount not included
in gross income. For example, the foreign earned income exclusion allows U.S. citizens
working and living in another country to exclude a certain portion ($97,600, as of 2013)
2
of their incomes from federal income taxes.
8 to as tax-exempt income, or income that is not subject
Exclusions are also referred
to tax. For example, interest earned
8 on most state and city bonds is exempt from federal
income tax. Tax-deferred income is income that will be taxed at a later date. The earn2 account (IRA) are an example of tax-deferred income.
ings on an individual retirement
While these earnings are credited
T to the account now, you do not pay taxes on them
until you withdraw them from the account.
S
ADJUSTMENTS TO INCOME Adjusted gross income (AGI) is gross
income after certain reductions have been made. These reductions, called adjustments
to income, include contributions to an IRA or a Keogh retirement plan, penalties for
early withdrawal of savings, and alimony payments. Adjusted gross income is used as
the basis for computing various income tax deductions, such as medical expenses.
Certain adjustments to income, such as tax-deferred retirement plans, are a type of
tax shelter. Tax shelters are investments that provide immediate tax benefits and a reasonable expectation of a future financial return. In recent years, tax court rulings and
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Chapter 4
Exhibit 4-1
Planning Your Tax Strategy
121
Computing taxable income and your tax liability
Gross Income
Step 1: Determining Adjusted
Gross Income . . . . . . . . . . . . .
Wages and salaries
Pro?ts from business
or profession
Commissions, fees
Employee awards
Interest
Gains or losses
on sale of investments
Alimony
Royalties
Unemployment
compensation
Dividends
Property rental
Pensions
Tips, bonuses
Prizes, gambling
winnings
Less: Adjustments to income
Step 2:
Computing Taxable Income . . . . . .
B
E
N Equals: Adjusted gross income
N
E
Less: Standard deduction
Less: Itemized deductions
. . . . or . . . .
and exemptions
and exemptions
T
T
,
Equals: Taxable income
B
A
Step 3: Calculating Taxes Owed . . . . . . . . . . . . . . . . . . . . . .
R
B
A
R
A
2
8
8
2
T
S
Tax based on tax tables
or tax schedules
Less: Tax credits
Plus: Other taxes
Equals: Total tax due
changes in the tax code have disallowed various types of tax shelters that were considered excessive.
STEP 2: COMPUTING TAXABLE INCOME
DEDUCTIONS A tax deduction is an amount subtracted from adjusted gross
income to arrive at taxable income. Every taxpayer receives at least the standard
deduction, a set amount on which no taxes are paid. As of 2013, single people receive
kap61647_ch04_116-153.indd 121
tax deduction An amount
subtracted from adjusted
gross income to arrive at
taxable income.
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122
Part 1
PLANNING YOUR PERSONAL FINANCES
a standard deduction of $6,100 (married couples filing jointly receive $12,200). Blind
people and individuals 65 and older receive higher standard deductions.
Many people qualify for more than the standard deduction. Itemized deductions are
expenses a taxpayer is allowed to deduct from adjusted gross income. Common itemized deductions include the following:
Medical and dental expenses, including doctors fees, prescription medications,
hospital expenses, medical insurance premiums, hearing aids, eyeglasses, and
medical travel that has not been reimbursed or paid by others. This deduction is
equal to the amount by which the medical and dental expenses exceed 10 percent
(as of 2013) of adjusted gross income. If your AGI is $20,000, for example, you
must have more than $2,000 in unreimbursed medical and dental expenses before
you can claim this deduction. If your medical and dental bills amount to $2,600,
you qualify for a $600 deduction.
standard deduction A set
amount on which no taxes
are paid.
itemized deductions
Expenses that can be
deducted from adjusted
gross income, such as
medical expenses, real
estate property taxes,
home mortgage interest,
charitable contributions,
casualty losses, and certain
work-related expenses.
B
Note: The 10 percent threshold is an increase in 2013 from the long-standing
7.5 percent threshold. The E
10 percent threshold will only apply to persons under
65 years old until 2017.
N
Taxesstate and local income
N tax, real estate property tax, and state or local
personal property tax. You may also deduct an amount for state sales tax instead
E
of your state income tax, whichever is largerbut not both. This deduction will
benefit taxpayers in theT
seven states without a state income tax.
Interestmortgage interest,
T home equity loan interest, and investment interest
expense up to an amount equal to investment income.
,
Contributions of cash or property to qualified charitable organizations.
Contribution totals greater than 20 percent of adjusted gross income are
subject to limitations. B
DID YOU KNOW?
The most frequently overlooked tax deductions are
state sales taxes, reinvested dividends, out-of-pocket
charitable contributions, student loan interest paid
by parents, moving expense to take first job, military
reservists travel expenses, child care credit, estate
tax on income in respect of a decedent, state
tax you paid last spring, refinancing points,
and jury pay paid to employer.
A
R
B
A
R
A
Casualty and theft lossesfinancial losses resulting from natural disasters, accidents, or unlawful
acts. Deductions are for the amount exceeding
10 percent of AGI, less $100, for losses not
reimbursed by an insurance company or other
source. (California residents commonly report
casualty losses due to earthquake damage.)
Moving expenses when a change in residence is
associated with a new job that is at least 50 miles
farther from your former home than your old
main job location. Deductible moving expenses
include only the cost of transporting the taxpayer
and household members and the cost of moving
household goods and personal property.
2
8
8
Job-related and other miscellaneous expenses such as unreimbursed job
2 continuing education, work clothes or uniforms,
travel, union dues, required
investment expenses, tax T
preparation fees, and safe deposit box rental (for
storing investment documents). The total of these expenses must exceed
S
2 percent of adjusted gross income to qualify as a deduction. Such miscellaneous
expenses as gambling losses to the extent of gambling winnings and physical or mental disability expenses that limit employability are not subject to the
2 percent limit.
The standard deduction or total itemized deductions, along with the value of your
exemptions (see the next section), is subtracted from adjusted gross income to obtain
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Financial Planning for Lifes Situations
IS IT TAXABLE INCOME? IS IT DEDUCTIBLE?
Certain financial benefits individuals receive are not subject to federal income tax. Indicate whether each of the
following items would or would not be included in taxable income when you compute your federal income tax.
Yes
No
1. Lottery winnings
_____
_____
2. Child support received
_____
_____
3. Workers compensation
benefits
_____
_____
4. Life insurance death
benefits
_____
_____
5. Municipal bond interest
earnings
_____
_____
6. Bartering income
_____
_____
Note: These taxable income items and deductions are based on
the 2013 tax year and may change due to changes in the tax code.
Is it deductible?
Yes
No
_____
_____
8. Gym membership
_____
_____
9. Fees for traffic violations
_____
_____
10. Mileage for driving to volunteer work
_____
_____
11. An attorneys fee for preparing a will
_____
_____
12. Income tax preparation fee
_____
_____
7. Life insurance premiums
B
E
N
N
E
T
T
,
Answers: 1, 6, 10, 12yes; 2, 3, 4, 5, 7, 8, 9, 11no.
Is it taxable income?
Indicate whether each of the following items would
or would not be deductible when you compute your
federal inco…
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