PF SMS icons PF SMS icons Income Tax Tips for Personal Finance Managers Working with Military Families learn.extension.org/events/3191 1 This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Military Family Readiness Policy, U.S. Department of Defense under Award Number 2015-48770-24368.
MFL FLN Intro Connecting military family service providers and Cooperative Extension professionals to research and to each other through engaging online learning opportunities militaryfamilies.extension.org Sign up for webinar email notifications at militaryfamilies.extension.org/webinars
Today’s Presenters Dr. Barbara O’Neill • Rutgers Coopera-ve Extension’s Specialist in Financial Resource Management • Outreach Coordinator for the Personal Finance concentra-on area of the Military Families Learning Network. Taylor Spangler • Family Consumer Science Extension Program Coordinator at the University of Florida. • Coordinator for the Florida Master Money Mentor, Volunteer Tax Assistance, Financial Ambassadors and the Florida Saves programs. 3
Webinar Objectives Present information on the following topics: • Federal Income Tax Background • Features of the Tax Cuts and Jobs Act • Resources about taxes and the Tax Cuts and Jobs Act • The tax filing process • Income tax filing errors and opportunities • Resources for income tax preparation • Income tax identity theft
Question 1: What are the most frequent tax questions that you get from clients?
Income Tax Background Photo by Barbara O’Neill
Background: Major Taxes Paid in the U.S. ΠTaxes on Purchases РSales tax and excise tax (e.g., gas, cigarettes) Taxes on Property РReal estate property tax РPersonal property tax Taxes on Wealth РFederal estate tax РState inheritance tax Taxes on Earnings РIncome tax and Social Security tax
Background: The Progressive Nature of Federal Income Tax • Progressive tax – Takes a larger percentage of income from high-income taxpayers than low-income taxpayers. – Federal income tax • Regressive tax – Takes a decreasing percentage of income as income increases. – State sales tax
Background: Marginal Tax Rate Is Applied to the Last Dollar Earned • Marginal Tax Bracket (MTB) – Income-range segments that are taxed at increasing rates as income goes up • Marginal Tax Rate – The tax rate applied to your last dollar of earnings • Established by Congress and change periodically 2018 Federal Marginal rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%
Background: Tax Credit Versus Tax Deduction $100 Tax Credit Reduces Your Taxes by $100 $100 Tax Deduction Amount Your Taxes are Reduced is Based on Your Tax Bracket Example: $5,000 x .22% mtb = $1,100 of tax savings; $3,900 net cost
Background: Types of Deductions Deduction = An amount subtracted from gross income to reduce the amount of income subject to tax. • Standard Deduction- Amount established each year by tax code; no need to itemize deductions; amount is based on a taxpayer's filing status, age, etc; no receipts needed • Itemized Deduction- Specific amounts spent on certain goods and services throughout the year; allowed deductions are outlined by the IRS and include such expenditures as mortgage interest and charitable donations www.investopedia.com/terms/i/itemizeddeduction.asp#ixzz1zxopAxpP www.money-zine.com/Calculators/Mortgage-Calculators/Mortgage-Tax- Deduction-Calculator/ (Mortgage tax deduction calculator) 11
Background: Itemizing Required for Charitable Gift Benefits • If you claim the standard deduction on your tax return, charitable gifts will not provide a tax benefit – Psychic benefits of giving to charity are another issue • You must itemize expenses on Schedule A to deduct charitable donations. • Donors' deductions are limited to 50% of adjusted gross income; rollover of excess for up to 5 years
Background: Refundable and Non-Refundable Tax Credits • Refundable: When tax credits are greater than the amount of tax you owe, the IRS sends you a tax refund for the difference – Example: Earned Income Tax Credit (EITC) • Non-Refundable: Credit can ’ t be used to increase your tax refund or to create a tax refund when you wouldn ’ t have already had one. In other words, your savings cannot exceed the amount of tax you owe. – Example: Child and Dependent Care Expenses Credit
Background: Earned Income Tax Credit • Credit paid to low- and moderate-income workers with qualifying child(ren) or, in some cases, no children • Maximum EITC credit on 2017 tax returns is – $510 with no children – $3,400 with one qualifying child – $5,616 with two qualifying children – $6,318 with 3+ qualifying children http://www.eitcoutreach.org/blog/how-much-are-the-eitc-and-ctc-worth-in-2018/
EITC Income Limits (2018) Adjusted gross income (AGI) must each be less than: • $49,298 ($54,998 married filing jointly) with three or more qualifying children • $45,898 ($51,598 married filing jointly) with two qualifying children • $40,402 ($46,102 married filing jointly) with one qualifying child • $15,310 ($21,000 married filing jointly) with no qualifying children https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc- income-limits-maximum-credit-amounts-next-year
Background: Child Tax Credit • A $1,000 credit is available for each qualifying child under the age of 17 claimed as a dependent (2017) – The Child Tax Credit is non-refundable • The Child Tax Credit will rise to $2,000 per qualifying child in 2018 – Up to $1,400 per child is refundable
Background: Child and Dependent Care Credit • Available for workers who pay employment-related expenses for the care of children or other qualified individuals (e.g., incapacitated spouse) while they are working, seeking work, or in school full time • The total expenses that may be used to calculate the credit are capped at $3,000 (for one qualifying individual) or at $6,000 (for 2+ qualifying individuals) https://www.irs.gov/taxtopics/tc602
Background: Saver’s Credit (Retirement Plan Savings) https://www.irs.gov/retirement- plans/plan-participant- employee/retirement-savings- contributions-savers-credit
Background: Completing the Federal Income Tax Return Filing status Income Adjustments to income Tax computation Tax credits Other taxes (such as from self-employment) Payments (e.g., withholding and estimated payments) Refund or amount you owe • Refunds can be directly deposited to a bank account • Payments may be directly debited from a bank account Signature (most common filing error)
Background: Tax-Rate Schedules and Tax Tables • Tax-Rate Schedules – Used by filers with a taxable income of $100,000 or more; requires a mathematical computation to determine tax liability • Tax Tables – Used to look up one’s tax liability according to tax filing status and income range
Federal Income Tax Table Filing Status Taxable Income Tax Liability
Background: Tax Withholding
Background: Impact of W-4 Form Decisions on Net Pay 0 allowances = max taxes deducted* = Smaller take home pay = Larger tax refund + allowances = less taxes deducted = Larger take home pay = Smaller tax refund NOTE: Taxpayers can add extra withholding beyond “0” allowances; e.g., +$50 more
2018 Tax Withholding
General Tax Planning Strategies to Minimize Taxes If you expect Then you should Because The same or a Accelerate Greater benefit to lower tax rate next deductions into this higher rate year year The same tax rate Delay income into Delay paying taxes next year next year Delay deductions Greater benefit A higher tax rate next year Accelerate income Taxed at lower rate
Background: Alternative Minimum Tax (AMT) – Paid by taxpayers with high amounts of certain deductions and various types of income – Designed to ensure that those who receive tax breaks also pay their fair share of taxes – Has increasingly been affecting less affluent taxpayers, especially in high-tax states (e.g., NJ) – A high proportion of long-term capital gains to ordinary income can trigger the AMT
Background: Tax Avoidance and Tax Evasion Tax Avoidance (Minimization) – Legitimate methods to reduce your tax obligation to your fair share but no more (e.g., deductions, credits, tax-deferred/tax-free investing) Tax Evasion – Illegally not paying taxes you owe, such as not reporting all income or overstating deductions
Question 2: What questions/comments are you getting about the new tax law (TCJA)?
Federal Marginal Tax Rates: 2017 and 2018
Tax Cuts and Jobs Act Photo by Barbara O’Neill The Tax Cuts and Jobs Act was passed by the U.S. Senate and House of Representatives in late December 2017 and signed by President Trump on December 22, 2017. This law will impact individual taxpayers and businesses on a scale that has not been seen in over 30 years.
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