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Chapter 3: Managing Taxes

Chapter 3: Managing Taxes. Explain how taxes are administered and classified. Describe the concept of the marginal tax rate. Determine who should file an income tax return. Objectives. Describe the two ways of paying taxes: payroll withholding and estimated taxes.

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Chapter 3: Managing Taxes

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  1. Chapter 3: Managing Taxes

  2. Explain how taxes are administered and classified. Describe the concept of the marginal tax rate. Determine who should file an income tax return. Objectives

  3. Describe the two ways of paying taxes: payroll withholding and estimated taxes. Identify the eight planning steps involved in calculating federal income taxes. Understand planning strategies to legally avoid overpayment of income taxes. Explain the basics of IRS audits. Objectives

  4. Reduction Deferment Elimination What is Tax Management? • ATTENTION! • A PLANNING PROCESS FOR TAX:

  5. Administration/Classification of Income Taxes • Federal tax laws • Progressive nature of income tax • Regressive • Marginal tax rate • Effective marginal tax rate • Average tax rate

  6. 2004 Filing Requirements for Most Taxpayers Information taken from 2004 Publication 17.

  7. The Progressive Nature of the Federal Income Tax If your filing status is Single The Tax Rate Schedule is shown so you can see the tax rate that applies to all levels of taxable income. It is not used to figure ones’ taxes.

  8. How Your Income is Really Taxed Assumes a single individual with gross income of $57,700 $3,100 personal exemption is not taxed. $4,850 standard deduction is not taxed. First $7,150 of income is taxed at 10%. Income $21,900 taxed at 15%. $20,700 taxed at 25%. = $57,700 Tax owed $0 + $0 + $715 + $3,285 + $5,175 = $9,175 This individual’s marginal tax rate is 25% This individual’s average tax rate is 15.9% (9,175/57,700)

  9. Who Should File a Tax Return? • Earned income • Unearned income • Transfer payments • STUDENTS WITH:

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