PFCH3

An advantage of investing in a 401(k) plan is the A. Ability to invest up to 25% of your annual income B. Opportunity to save $5,000 per year C. Possibility of receiving an employer match on your contributions D. Ability to pay taxes on distributions E. Ability to roll IRA contributions into a 401(k)

C. Possibility of receiving an employer match on your contributions.

Who is ultimately responsible for supplying accurate and complete information for the completing of a tax return? A. Professional tax preparer B. IRS enrolled agent C. Taxpayer D. Taxpayer's dependents E. Taxpayer's attorney

C. Taxpayer

At the end of the year, employees receive a ____ form that reports annual earnings and the amounts deducted for taxes from their employer. A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

C. W-2

Connie thinks that her salary and tax rate for next year will be lower than for this year. What step should she take to minimize her taxes in the current year? A. Accelerate receipt of income. B. Delay deductions. C. Practice tax evasion. D. Accelerate deductions. E. None of the above will allow her to minimize her taxes.

D. Accelerate deductions.

An IRS agent visited Henry's home to verify some information on his tax return. This visit was called a(n) A. Correspondence audit B. Office audit C. Home audit D. Field audit E. Detailed audit

D. Field audit

Total income (gross) includes A. Exclusions from income B. Tax deductions C. Tax-deferred income D. Passive income E. Tax-exempt income

D. Passive income

Which of the following is NOT a valid form for filing federal income taxes? A. 1040 EZ B. 1040A C. 1040 D. 1040X E. 1040Z

E. 1040Z

Tax resources include all except A. IRS publications B. Enrolled agents C. Accountants D. Attorneys E. All of the above are tax resources.

E. All of the above are tax resources

Evan wants to minimize his future taxes. Which of these would be the best for him to invest in today? A. Municipal bonds B. Tax-deferred annuity C. Section 529 savings plan D. 401(k) plan E. Roth IRA

E. Roth IRA

All of the following can reduce your taxes today except investing in A. Municipal bonds B. Tax-deferred annuity C. Section 529 savings plan D. 401(k) plan E. Roth IRA

E. Roth IRA Roth IRA deductions are not deductible.

Who Must File?

Every citizen or resident of U.S. and every U.S. citizen who is a resident of Puerto Rico is required to file income tax.

Tax-deferred Income

Income that will be taxed at a later time

Investment Income

Money received in the form of dividends, interest, or rent from investment; also called portfolio income.

Planning Your Tax Strategy

Start Planning for taxes...... - Know current tax laws as they affect you - Maintain complete and appropriate tax records - Make purchase and investment decisions that reduce your tax liability. Goal: Paying your fair share but still taking advantage of tax benefits.

Total Income Is Affected by...

1. Exclusions - Amounts excluded from gross income - Also referred to as Tax-exempt Income; income not subject to federal income tax - Example = interest on most state and city bonds 2. Tax-deferred income - Income that will be taxed at a later date, such as earnings from an traditional individual retirement account (IRA)

Gross income after certain reductions have been made is A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

A. Adjusted gross income

Annie was required to clarify or document minor questions of her tax form by mail. She participated in a(n) A. Correspondence audit B. Office audit C. Home audit D. Field audit E. Detailed audit

A. Correspondence audit

Average and Marginal Tax Rates

Average Tax Rate The total tax due divided by taxable income • Average tax rate < marginal tax rate Example: • Taxable income = $90,025 • Total tax bill = $14,219 • Average tax rate = 15.8% ($14,219 / $90,025)

At the end of the year, Walter received a form that showed his payments from independent contracting. That form is called _____ A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

B. 1099

Fees, tips, and bonuses are forms of A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

B. Earned income

Which of the following is NOT an action that can reduce your taxes? A. Owning a home. B. Taking out a consumer loan. C. Paying certain work expenses. D. Depositing money into a Flexible Spending Account (FSA). E. Investing in municipal bonds.

B. Taking out a consumer loan. Interest on home equity loans are deductible, not on consumer loans.

If Brenda wants to pay her fair share of taxes, no more and no less, she should practice A. Tax evasion B. Tax avoidance C. Tax elimination D. Tax maximization E. Tax acceleration

B. Tax avoidance

David thinks that his salary and tax rate for next year will be higher than for this year. What step should he take to minimize his taxes? A. Delay receipt of income. B. Delay filing taxes. C. Accelerate receipt of income. D. Accelerate deductions. E. None of the above will allow him to minimize his taxes.

C. Accelerate receipt of income.

This tax is a major financial planning factor for most people because it is sometimes imposed at the federal, state, and local levels. A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Sales tax

C. Income tax

Lauren owns her own business and is thinking about saving for retirement. She wants to invest up to 25% of her annual income. Which plan should she use? A. Roth IRA B. 401(k) C. Keogh plan D. FSA E. Traditional IRA

C. Keogh plan

Individuals can deduct expenses only in excess of 7.5 percent of adjusted gross income for A. Contributions to charitable organizations B. Mortgage interest C. Medical and dental expenses D. Miscellaneous expenses E. Taxes

C. Medical and dental expenses

Inheritance Tax

A tax levied on the value of property bequeathed by a deceased person

If you expect next year a higher tax rate next year

- Then this year you should delay deductions Because greater benefit. - Then this year you should accelerate income Because taxed at lower rate

Main Components of Gross Income

1. Earned income - Money received for personal effort, Usually includes wages, salary, commissions, fees, tips, and bonuses. 2. Investment income - Money received in the form of dividends, interest, or rent from investments; also called Portfolio Income. 3. Passive income - Results from business activities in which you do not directly participate, such as a limited partnership. 4. Other income - Alimony, awards, lottery winnings, and prizes.

Completing the Federal Income Tax Return

1. Filing status and exemptions 2. Income 3. Adjustments to income 4. Tax computation 5. Tax credits 6. Other taxes (such as from self-employment) 7. Payments (total withholding and other payments) 8. Refund or amount you owe - Refunds can be directly deposited to your bank account - Payments may be directly debited from your bank account 9. Your signature = Most common filing error

Tax Records-Keeping System

1. Tax Forms and Filing Information Income Records • Current tax forms and instruction booklets. • Reference books on current tax laws and tax-saving techniques. • Social Security numbers of households members. • Copies of federal tax returns from previous years. 2. Income Records • W-2 forms reporting salary, wages, and taxes withheld. • W-2P forms reporting pension income. • 1099 forms reporting interest, dividends, and capital gains and losses from savings and investments. • 1099 forms for self-employment income, royalty income, and lump-sum payments from pension or retirement plans. 3. Expense Records • Receipts for medical, dependent care, charitable donations, and job-related expenses. • Mortgage interest (Form 1098) and other deductible interest • Business, investment, and rental-property expense documents

What are the 4 major types of taxes?

1. Taxes on purchases - Sales Tax and Excise Tax (Tax on specific goods and services. examples: gasoline, tires, air travel). 2. Taxes on property - Real estate property tax. - Personal property tax (cars, boats, farm equipment, furniture). 3. Taxes on wealth - Federal estate tax (imposed on value of person's property at the time of death). - State Inheritance tax(tax levied on value of property bequeathed by a deceases person) 4. Taxes on earnings - Income tax and social security

Taxes on Earnings

1. The Federal Insurance Contributions Act (FICA) created the Social Security Tax to fund the old-age, survivors, and disability Insurance portion of the Social Security system and the hospital insurance portion (Medicare). 2. Income Tax - Workers are subject yo federal, state, and local income taxes. - Currently, only a few states don't have state income tax. - If you own your own business you me be required to make estimated tax payments.

The tax designed to ensure that those who receive tax breaks also pay their fair share of taxes is called A. AMT B. Average tax rate C. Income tax rate D. Marginal tax rate E. Total tax rate

A. AMT The Alternative Minimum Tax (AMT) is designed to ensure that those who receive tax breaks also pay their fair share of taxes. The AMT was originally designed to prevent those whit high incomes from using special tax breaks to pay little in taxes.

A tax imposed on the value of a person's property at the time of death is called a(n) A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Sales tax

A. Estate tax

The amount owed on property received from a deceased person is A. Estate tax B. Excise tax C. Social Security tax D. Real estate tax E. Sales tax

A. Estate tax Estate Tax is a Tax imposed on the value of a person's property at the time of death.

Tax Credits

Amount subtracted directly from the amount of taxes owed. • Certain qualified amounts are subtracted. • For $100 in tax credit, you may have to spend $500+ in that category • Eligible Examples: ◦ Earned income credits ◦ Foreign tax credits ◦ Child and dependent care credits ◦ Savers credit (formerly retirement tax credits) ◦ Adoption tax credits ◦ Education credits to offset college education expenses

Exclusion

An amount not included in gross income

Tax deduction

An amount subtracted from adjusted gross income to arrive at taxable income.

At the end of the year, Yvonne received a form from her bank that reports income from her savings. That form is called _____ A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

B. 1099

How long should you generally keep tax records? A. Until you file your returns B. 3 years C. 5 years D. 10 years E. 15 years

B. 3 years

The taxes based on the total tax due divided by taxable income is called A. AMT B. Average tax rate C. Income tax rate D. Marginal tax rate E. Total tax rate

B. Average tax rate

Which of the following is NOT a tax credit? A. Adoption tax credit B. Domestic tax credit C. Earned-income credit D. Foreign tax credit E. Hope Scholarship tax credit

B. Domestic tax credit

Tanya is a single low-income working parent and Fred is a single high-income working parent. Because of her status, Tanya, but not Fred, may be eligible for the A. Alternative minimum tax B. Earned-income credit C. Itemized deduction credit D. Student deduction E. Withholding credit

B. Earned-income credit

A tax due on the purchase of gasoline is called a(n) A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Inheritance tax

B. Excise tax Excise Tax is the Tax imposed on specific goods and services, such as gas, alcoholic drinks, cigarettes, etc.

Which of the following is NOT a tax that most people pay? A. Federal taxes on earnings B. Federal taxes on possessions C. Federal taxes on wealth D. Local taxes on property E. State taxes on purchases

B. Federal taxes on possessions

Nancy is married to Jerry and needs to complete her tax form. They both earn about the same amount of money each year. What filing status would be best for Nancy? A. Single B. Married, filing joint return C. Head of household D. Qualifying widow or widower E. Married, but filing individually

B. Married, filing joint return

Joseph needs to complete his income taxes for the year. He has already calculated his adjusted gross income. What does he need to do next? A. Add his tax-exempt income B. Subtract his itemized deductions C. Add his tax credits D. Subtract his tax-exempt income E. Add his tax exemptions

B. Subtract his itemized deductions

Amanda and Jack are working on their taxes and need to determine which form to file. They had wages, interest, and dividends. In addition they bought a house this past year and are thinking of itemizing their deductions. Which form should he use? A. 1040 EZ B. 1040A C. 1040 D. 1040X E. 1040Z

C. 1040

Penny knows that she needs to file her taxes, but is unable to do so by April 15. What form does she need to complete to obtain an automatic six-month extension? A. 1040 B. 1099 C. 4868 D. W-2 E. W-4

C. 4868

Fred has been completing his own tax returns for years. The IRS has recently contacted him with questions about some of his prior returns. How many years back is he responsible for providing documentation? A. Until he files his returns B. 3 years C. 5 years D. 7-10 years E. 15 years

C. 7-10 years

Payroll deductions for federal government retirement benefits (such as old-age, survivor, and disability) are called A. Estate taxes B. Excise taxes C. Social Security taxes D. Real estate taxes E. Sales taxes

C. Social Security taxes

Peter filed his federal income taxes, but needs to make a correction to his income. Which form should he use? A. 1040 EZ B. 1040A C. 1040 D. 1040X E. 1040Z

D. 1040X

When calculating federal income taxes, "income" includes all of the following categories except A. Earned income B. Alimony C. Investment income D. Active income E. Passive income

D. Active income

When calculating federal income taxes, what increases "income"? A. Exclusions B. Tax-exempt income C. Tax-deferred income D. Alimony E. Tax deductions

D. Alimony

Recent tax credit include all except A. Earned-income credit B. Foreign tax credit C. Lifetime Learning tax credit D. Graduate learning tax credit E. Retirement tax credit

D. Graduate learning tax credit

The tax due on the next dollar of income is referred to as the A. AMT B. Average tax rate C. Income tax rate D. Marginal tax rate E. Total tax rate

D. Marginal tax rate Marginal Tax Rate is the rate used to calculate tax on the last (and next) dollar of taxable income.

Shannon is working on her federal income tax form and wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is an acceptable deduction? A. $10,000 gift to her cousin B. Credit card interest C. Medical and dental expenses less than 7.5% of AGI D. Miscellaneous expenses in excess of 2% of AGI E. Moving expenses for a new job that is at least 25 miles from her old home

D. Miscellaneous expenses in excess of 2% of AGI

Athena wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is NOT a proper deduction? A. Contributions to charitable organizations B. Mortgage interest C. Medical and dental expenses in excess of 7.5% of AGI D. Miscellaneous expenses less than 2% of AGI E. State income taxes

D. Miscellaneous expenses less than 2% of AGI

A worker's primary goal should be to A. Pay his or her taxes using estimates for income and deductions B. Pay no income taxes C. Pay the average tax rate for people working in his or her industry D. Pay his or her fair share of taxes while taking advantage of appropriate tax benefits E. Pay no taxes of any type

D. Pay his or her fair share of taxes while taking advantage of appropriate tax benefits

Bob was married to Sandy and they have a 12 year old son. Sandy passed away last year. Bob needs to complete his federal income taxes for the year. What filing status could he use because of his marital status? A. Single B. Married, filing joint return C. Head of household D. Qualifying widow or widower E. Married, but filing individually

D. Qualifying widow or widower

The tax that is a major source of revenue for local governments is called a(n) A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Sales tax

D. Real estate tax

Adjustments to income include all except A. Alimony payments B. Contributions to a Keogh retirement plan C. Traditional IRA contributions D. Roth IRA contributions E. Penalties for early withdrawal of savings

D. Roth IRA contributions

Income that is taxed at a later date is A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

D. Tax-deferred income

You may be required to make estimated tax payments if: A. You receive a paycheck with taxes withheld B. You do not have interest income C. You are married D. You own your own business E. None of the above are correct

D. You own your own business

The major sections of Form 1040 include all except A. Filing status and exemptions B. Adjustments to income (AGI) C. Tax credits D. Signature E. All are sections of Form 1040

E. All are sections of Form 1040

Individuals can file their federal taxes using A. Tax software B. E-file C. Electronic filing D. Telephone E. All of the above

E. All of the above

When Paul completes his taxes, he can include all of the following as exemptions except A. His 12 year old son B. Himself C. His 22 year old daughter who is a full-time student D. His wife E. His 20 year old son who is working full-time and living in an apartment

E. His 20 year old son who is working full-time and living in an apartment Children must be under 19 or full-time students under the age of 24.

Income that is never subject to tax is called A. Adjusted gross income B. Earned income C. Foreign income D. Tax-deferred income E. Tax-exempt income

E. Tax-exempt income

Itemized Deductions

Expenses that can be deducted from adjusted gross income, such as: • Medical/dental expenses (deduction amount is the amount of such expenses that exceed 10% of AGI). • Taxes (state/local income tax, property tax, etc.) • Interest - Mortgage interest, home equity loan interest, investment interest, etc. • Contributions - Donations. Totals >20% of AGI are subject to limitations. • Casualty and theft loses - financial loses resulting from natural disasters, accidents, or unlawful acts. • Moving expenses - Associated with new job at least 50 miles farther than your old job was from your than former home. • Job-related and other miscellaneous expenses, includes work clothes, uniforms, tax preparation fees, unreimbursed work travel, union dues, etc. (expenses that exceed >2% of AGI)

A common filing error is signing the return. True or False?

FALSE A common error is NOT signing the return.

The Adjusted Gross Income is increased by the itemized or standard deduction. True or False?

FALSE AGI is reduced by these.

Determining Adjusted Gross Income is the final step in calculating federal income tax. True or False?

FALSE Adjusted Gross Income (AGI) is a step in the tax calculation, but it is not the final step to calculate income taxes.

All citizens of the United States are required to file a federal income tax return if their income falls below a certain level. True or False?

FALSE Citizens whose income is above a certain level are required to file.

Tom needs to complete his taxes. He should be able to find a tax preparation service to complete his tax forms for as little as $15. True or False?

FALSE Fees typically range from $40 for a tax preparation service.

Federal income tax returns must be filed by April 1 of each year. True or False?

FALSE Forms must be filed by April 15.

When Tom calculates his taxable income, he should subtract his tax credits from adjusted gross income. True or False?

FALSE He should subtract his tax deductions, not his tax credits. Tax credits are subtracted directly from the amount of taxes owed.

Interest paid on a home equity loan is not deductible. True or False?

FALSE Home equity interest (on loans up to $100,000) are deductible

If your taxes due are greater than the amount you had withheld for the year, then you should expect a refund after you complete your federal income taxes. True or False?

FALSE If taxes withheld are greater than the amount due, then you will receive a refund.

One of the best tax shelters is owning a car. True or False?

FALSE One of the best shelters is owning a home.

Most states do not require state income taxes. True or False ?

FALSE Only seven states do not have a state income tax.

Tax software can save taxpayers 25 hours or more when preparing Form 1040. True or False?

FALSE Tax software can save 10 or more hours.

Tax tables list average tax rates. True or False?

FALSE Tax tables show marginal tax rates.

All individuals with taxable income need to complete the AMT calculation. True or False?

FALSE The AMT is an alternative tax calculation designed to ensure that those who receive tax breaks also pay their fair share of taxes.

A tax credit reduces the taxable income on which the tax liability is computed. True or False?

FALSE The definition is for a tax deduction. A tax credit reduces the amount of taxes owed dollar for dollar.

Form 4868 allows a taxpayer to obtain a six-month extension on filing and paying federal taxes without penalty. True or False?

FALSE The extension does not delay the payment liability.

The average tax rate is the taxes paid on the next dollar of income. True or False?

FALSE The marginal tax rate fits this definition. The average tax rate is calculated by dividing the total tax due by taxable income.

Contributions to a Keogh or 401(k) are tax-exempt. True or False?

FALSE These are tax-deferred contributions.

The itemized deduction allowed for an individual 65 and older is higher than the itemized deduction for a younger taxpayer. True or False?

FALSE This would be true IF the statement said standard deduction instead of itemized deduction.

How many Filing Status categories exist?

Five filing status categories: ◦ Single or legally separated ◦ Married, filing jointly ◦ Married, filing separately ◦ Head of household - Unmarried individual or surviving spouse who has a child or dependent relative ◦ Qualifying widow or widower with a dependent (two years after the death of the spouse)

Tax Evasion

Illegally not paying all the taxes you owe, such as not reporting all income

Passive Income

Income resulting from business activities in which you do not actively participate.

Tax-exempt Income

Income that is not subject to tax

If you expect next year the same tax rate

Then this year you should delay income into next year. Because delay paying taxes

Tax Freedom Day

This mean that the time elapsed form January 1 until mid-April represents the portion of the year people work to pay their taxes.

Calculate Taxable Income and the Amount Owed for Federal Income Tax

Step 1 : Determine AGI Remember, Adjusted Gross Income (AGI) is gross income minus certain reductions. Step 2: Computing Taxable Income 1. Deductions. • Tax deduction - Amount subtracted from adjusted gross income (AGI) to arrive at taxable income. • Standard deduction - A set amount on which no taxes are paid. Example on 2014, a single people receive a standard deduction of $6,200 and Married couple filing jointly, $12,400. • Itemized deductions - Expenses a taxpayer is allowed to deduct from adjusted gross income. 2. Exemptions • Exemptions subtracted from AGI • An exemption = a deduction from Adjustment Gross Income for yourself, your spouse, or qualified dependents. • The amount of the exemption for the 2014 tax year is $3,950 per person. • After deducting exemptions, you have your taxable income. Step 3: Calculating taxes owed • Tax Table Rates = Marginal Rates. The Tax rate used to calculate tax on the last (or next) dollar of taxable income. • Example: - After deductions and exemptions, a person in the 35% tax bracket pays 35 cents in taxes for every dollar of taxable income in that bracket. - Marginal Tax Rates= 10, 15, 25, 28, 33, 25, 29.6 percent. Step 4. Making Tax Payments • Payment Withholding - Base on the number of exemptions and the expected deductions claimed - Pay-as-you-go system - W-2 form which reports you annual earnings and the amount deducted for taxes - "Forced savings" • Estimated Quarterly Payment - Estimated tax payments made throughout the year based on income made during the year and reported on Form 1099 (4/15, 6/15, 9/15, 1/15-following year). - Income form savings, investments, independent contracting, royalties, pension payments. Step 5. Deadlines and Penalties • Form 4868 an automatic six-month extension - Submit estimated tax amount due with Form 4868 by April 15 - Does not delay your payment liability - Even being one day late is considered late. • Penalties & Interest - Underpayment of quarterly estimated taxes may require paying interest on the amount owed - Underpayment due to negligence or fraud can result in penalties of 50 to 75 percent - If you claim refund months later (up to 3 years from filing), IRS will pay you interest.

A tax credit has a full dollar effect in lowering taxes. True or False?

TRUE

Individuals who have high income reported on Form 1099 may be required to pay estimated tax payments. True or False?

TRUE

Some tax disputes have been escalated to the U.S. Supreme Court. True or False?

TRUE

Tax Freedom Day represents the day that the average person works until to pay their taxes each year. True or False?

TRUE

The IRS has made online filing free for millions of taxpayers through the Free File Alliance. True or False?

TRUE

When Marissa completes her taxes, she can include her children, her husband, and herself as exemptions. True or False?

TRUE

Taxable Income

The net amount of income, after allowable deductions, on which income tax is computed.

If you expect next year the same or a lower tax rate

Then this year you should accelerate deductions into this year. Because greater benefit to higher rate

Tax Credit Vs. Tax Deductions

• $100 Tax Credit reduces your Taxes by $100. • $100 Tax Deduction reduces taxable income by that amount. Amount of Reduction is based on Tax Bracket

How Do I File My State Tax Return?

• All but Seven states have a state income tax • Most states' tax rates range from 1 to 10 percent • States usually require income tax returns to be filed when the federal income tax return is due (copy attached)

Education Plans & Retirement Plans

• Coverdell Education Savings Account ◦ Educational uses for kindergarten through college-age. ◦ Annual contribution limited, not tax-deductible, limited to taxpayers with an AGI under a certain amount. • 529 Plan (Educational Savings) ◦ Qualified educational expenses. ◦ No federal tax deduction, but the earnings grow tax-free and no taxes when the money is taken out for qualified expenses. • Keogh Plan (Tax-deferred retirement plan) ◦ Self-employed retirement plan ◦ Can contribute up to 25% of annual income ◦ Increased value grows tax free until withdrawn • 401(K) Plan (Tax-deferred retirement plan) ◦ Sponsored by Employer, annual limits ◦ Over age of 50, catch up contributions ◦ Increased value grows tax free until withdrawn ◦ Contributions reduce your AGI

Adjusted Gross Income (AGI)

• Gross income reduced by certain adjustments, described below. • Adjustments (reductions) to income - Reduces Adjusted Gross Income (AGI) - Contributions to a traditional IRA or Keogh - Alimony payments • Tax Shelter - An investment that provides immediate tax benefits • Tax Deduction- Amount subtracted from adjusted gross income to arrive at taxable income.

Tax-Planning Strategies Consumer Purchasing

• Home ownership ◦ One of the best tax shelters ◦ Deduct mortgage loan interest and property taxes ◦ Reduces your taxable income • Use home equity line of credit to buy a car or consolidate debt. ◦ Interest deductible • Job-related expenses may be allowed as itemized deductions ◦ Union dues ◦ Business tools ◦ Job search costs • Health care expenses like FSA's (Flexible Spending Accounts) allow you to reduce your taxable income when paying for health related expenses.

Alternative Minimum Tax (AMT)

• Paid by taxpayers with high amounts of certain deductions and various types of income (e.g. incentive stock options, long-term capital gains, tax-exempt interest, etc.) • Designed to ensure that those who receive tax breaks also pay their fair share of taxes. • www.irs.gov

Tax-Planning Strategies Investment Decisions

• Tax Exempt Investments ◦ Interest income from municipal bonds are exempt from federal and some state taxes • Tax Deferred Investments ◦ Tax deferred annuities ◦ Section 529 education savings plans ◦ Retirement Plans - IRA, Keogh or 401(k) A type of tax shelter • Capital Gains ◦ Profits from the sale of stocks, bonds or real estate ◦ Long-term capital gains (held more than one year) taxed at a lower rate. • Self Employment ◦ Advantage: Owning your own business can have tax advantages ◦ Disadvantage: Business owners have to pay additional taxes • Children's Investments ◦ Children under 18 or a full-time student under 24 with investment income of more than $2,000 is taxed at parents' top rate ◦ Under $2,000 qualifies for a $1,000 deduction, with remainder taxed at child's rate • Retirement and Education Plans ◦ Traditional IRA - Roth IRA - Education IRA ◦ Keogh Plan - 401(K) Plan

Retirement Plans

• Traditional IRA ◦ Available to people who are not participating in an employer sponsored program. ◦ Amounts withdrawn are included in gross income. • Roth IRA ◦ Contributions not tax deductible. ◦ Amounts withdrawn are not included in gross income.