This document provides information about teaching a webinar on income taxes. It discusses the webinar's objectives of increasing knowledge about the tax filing process, providing updates on recent tax law changes, and helping participants save money on taxes. The webinar topics include tax rates, deductions and credits, the filing process, tax avoidance vs evasion, record keeping, common errors, and resources. It also covers 2014 tax issues, the types of taxes in the US, the progressive nature of income tax, marginal vs average tax rates, deductions, credits, and other tax-related topics.

1. Income Tax
Basics
Dr. Barbara O’Neill, CFP®
Rutgers Cooperative Extension
oneill@aesop.rutgers.edu

2. Webinar Objectives
• Increase participants’ knowledge about
income tax filing process
• Provide update of 2014 and 2015 tax law
changes
• Provide information about income tax
resources
• Help participants save money on income
taxes

3. Question
Do you teach about income
taxes? If yes, where?

4. Webinar Topics
• Federal income tax rates
• Tax deductions and credits
• Tax filing process
• Tax avoidance vs. tax evasion
• Tax record-keeping
• Common tax errors
• Tax planning resources

5. 2014 Income Tax “Issues”
• Impact of incorrect ACA law credits on tax refunds
• Tax identity theft (expanded IRS efforts; 1.6 million affected in
early 2013)
– http://www.irs.gov/uac/Newsroom/IRS-Combats-Identity-Theft-and-Refund-Fraud-on-
Many-Fronts-2014
– http://www.bostonglobe.com/news/nation/2014/02/16/identity-theft-taxpayer-
information-major-problem-for-irs/7SC0BarZMDvy07bbhDXwvN/story.html
• Higher tax bills for wealthy taxpayers due to
“backdoor” taxes (e.g., reduced exemptions and itemized
deductions)
• Net investment-income tax of 3.8% (higher incomes)
• $500 unused FSA carry-over to 3/15 of next year

6. Major Type of Taxes in the
United States
 Taxes on Purchases
– Sales tax and excise tax (e.g., gas, cigarettes)
 Taxes on Property
– Real estate property tax
– Personal property tax
 Taxes on Wealth
– Federal estate tax
– State inheritance tax
 Taxes on Earnings
– Income tax and Social Security/Medicare (FICA) tax

7. The Progressive Nature of
the 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

8. Marginal Tax Rate Is Applied
to the Last Dollar Earned
• Marginal Tax Bracket (MTB) – One of six 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
– Effective Marginal Tax Rate – Describes a person’s true
marginal tax rate on income after including federal, state,
and local income taxes, as well as FICA tax (Social Security
and Medicare); often 40% + for middle-income earners

9. Federal Marginal Income
Tax Rates
• Established by Congress and change periodically
• Based on many things including:
• Amount and type of income
• Filing status - e.g. married, joint, single
Marginal rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
• Tax rate on last dollar of income earned
• Beginning in tax year 2013, 39.6% rate was added for highest income
individuals
• Rutgers fact sheet: http://njaes.rutgers.edu/money/taxinfo/

10. Tax Rate Schedules
Figure 1. 2014 Tax Rate Schedules
Single-Schedule X
Taxable Income Over But Not Over Marginal Tax Rate
$0 $9,075 10%
9,075 36,900 15%
36,900 89,350 25%
89,350 186,350 28%
186,350 405,100 33%
405,100 406,750 35%
406,750 --- 39.6%Head of household-Schedule Z
Taxable Income Over But Not Over Marginal Tax Rate
$0 $12,950 10%
12,950 49,400 15%
49,400 127,550 25%
127,550 206,600 28%
206,600 405,100 33%
405,100 432,200 35%
432,200 --- 39.6%Married filing jointly or Qualifying widow(er) -
Schedule Y-1
Taxable Income Over But Not Over Marginal Tax Rate
$0 $18,150 10%
18,150 73,800 15%
73,800 148,850 25%
148,850 226,850 28%
226,850 405,100 33%
405,100 457,600 35%
457,600 --- 39.6%Married filing separately - Schedule Y-2
Taxable Income Over But Not Over Marginal Tax Rate
$0 $9,075 10%
9,075 36,900 15%
36,900 74,425 25%
74,425 113,425 28%
113,425 202,550 33%
202,550 228,800 35%
228,800 --- 39.6%
Single-Schedule X
Head of Household-Schedule Z
Married Filing Jointly or
Qualifying Widow(er) - Schedule
Y-1
Married Filing Separately -
Schedule Y-2

11. Average Tax Rate
Average tax rate = total tax due divided by
taxable income
Average tax rate < marginal tax rate
Example:
– Taxable income = $40,000
– Total tax bill = $6,344
– Average tax rate = 15.9%
» ($6,344 / $40,000)

12. $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 .25 (25%tax bracket) = $1,250 of tax savings; $3,750 net cost

13. Types of Deductions
Deduction = 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, state
and local taxes, charitable donations
www.investopedia.com/terms/i/itemizeddeduction.asp#ixzz1zxopAxpP

14. Itemizing Required for
Charitable Gift Tax Benefits
• You can give thousands of dollars, but if you claim
the standard deduction on your tax return, charitable
gifts will do you no tax good.
• 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
http://www.bankrate.com/finance/taxes/get-a-tax-
deduction-for-charitable-giving-1.aspx

15. Who Itemizes Deductions?
• The percentage of tax filers who itemize increases as
we move up the income scale
• The value of deductions depend on a taxpayer’s tax
bracket. Example: a $1,000 deduction is worth $150
in the 15% bracket, and $396 for someone in the top
39.6% bracket.
Overall, only about a
third of taxpayers
itemize deductions
http://www.irs.com/arti
cles/it-worth-it-itemize-
your-taxes

16. 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

17. Earned Income Tax
Credit (EITC)
• A special subsidy credit paid to low-income
workers with qualifying child(ren), or in some
cases, workers with no children
• Maximum EITC credit (2014) is
– $490 for a family with no children
– $3,305 for a family with one qualifying child
– $5,460 for a family with two qualifying children
– $6,143 with 3+ qualifying children

18. EITC Income Limits (2014)
Adjusted gross income (AGI) must be less than:
• $46,997 ($52,427 married filing jointly) with three or
more qualifying children
• $43,756 ($49,186 married filing jointly) with two
qualifying children
• $38,511 ($43,941 married filing jointly) with one
qualifying child
• $14,590 ($20,020 married filing jointly) with no
qualifying children

19. Child and Dependent
Care Credit
• Available for workers who pay employment-related
expenses for the care of their child(ren) while they
are working, seeking work, or in school full time; non-
refundable (i.e., can use up to amount of tax owed)
• 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)

20. Child Tax Credit
• A $1,000 credit is available for each qualifying
child under the age of 17 (at the end of 2014)
claimed as a dependent
• The Child Tax Credit is non-refundable
http://www.irs.gov/uac/Newsroom/The-Child-
Tax-Credit-May-Cut-Your-Tax

21. Retirement Savings Credit
(Saver’s Tax Credit)
• Singles with adjusted gross incomes of
$30,000 or less and joint filers earning
$60,000 or less can claim this credit (in 2014)
• Credit is 10%, 20%, or 50% of every dollar
contributed to an IRA or employer-sponsored
retirement savings plan, up to $2,000,
depending on income range
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-
Retirement-Savings-Contributions-Credit-(Saver%E2%80%99s-Credit)

22. Recommended
Resource
“The Bible”:
Annual Limits Relating to Financial
Planning (College for Financial Planning):
http://www.cffpinfo.com/annual-limits/

23. Determining
Your Tax
Liability
Source: Kapoor, Dlabay, & Hughes
(2013). Focus on Personal Finance

24. Key 2014 Tax
Numbers
• Personal exemption: $3,950
• Standard deduction: $6,200- single; $12,400- mfj
• Exemption and itemized deduction AGI phase-out
ranges: $254,200-$376,700- single; $305,050-
$427,550- mfj
• SS earnings limit below FRA: $15,480

25. Completing the Federal
Income Tax Return
 Filing status and exemptions
 Income
 Adjustments to income
 Tax computation
 Tax credits
 Other taxes (such as from self-employment)
 Payments (total withholding and other 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)

26. Tax-Rate Schedules
and Tax Tables
• Tax-Rate Schedules – Used by persons 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 in a table organized according to tax
filing status and income range

27. Federal
Income
Tax Table
Filing Status
Taxable Income
Tax
Liability

28. 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

29. 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)
– Decisions related to purchasing, investing, and retirement
planning are heavily affected by tax laws (e.g., home, IRAs)
– Keep good tax records (W-2s, 1099s, receipts, copies)
Tax Evasion
– Illegally not paying taxes you owe, such as not reporting all
income or overstating deductions

30. Taxable vs. Tax-
Deferred Investing27,600
31,300
48,300
58,600
75,800
98,800
112,200
157,900
160,300
244,700
$0
$50,000
$100,000
$150,000
$200,000
$250,000
10yrs 15yrs 20yrs 25yrs 30yrs
Garman/Forgue, PERSONAL FINANCE, Fifth Edition, Tax-Sheltered Returns are Greater than Taxable
Returns (Illustration: 8% Annual Return and $2,000 Annual Contribution)
Calculator: http://www.calcxml.com/do/inv07

31. W-4 Form Determines
Taxes Withheld
• Typically completed on first day of job
• Employer uses information on W-4 to determine how
much tax to withhold
• Recommended practice: review number of
withholding allowances each year
• Can add “extra” tax withholding amounts through
employer to cover “marriage tax penalty” and/or
investment, unemployment, or consulting income

33. Impact of W4 Form 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)

34. Is it a good idea to get a big tax
refund ($500 +)?
Cons:
 Taxpayer is not earning interest on the money
 Government has had an interest-free loan
Pros:
 Some people see it as discipline to save a large lump sum
BIGGEST ISSUE: High incidence of tax refund identity theft:
https://www.youtube.com/watch?v=Ensq6NRtzpk
Tax Refunds

35. Question
What is your opinion about
income tax over-withholding?

36. IRS Time Limitations on
Tax-Related Actions
According to IRS, IF YOU Limitation
Owe additional tax
3 years
Do not report income that you should and it
is more than 25% of the gross income
shown on your return 6 years
File a fraudulent return
No limit
Do not file a return
No limit
File a claim for credit or refund after you
filed your return
The later of 3
years or 2
years after tax
was paid

37. Record Retention
• How Long to Keep Financial Records (Bankrate)
– http://www.bankrate.com/finance/personal-
finance/how-long-to-keep-financial-records.aspx
• Keep investment records to document capital gains
and the tax basis of the investments (length of
investment ownership + at least 6 years)

38. Strategy: Keep Tax
Records a Long Time
• Never discard records relating to
– Home purchases
– Contributions to retirement accounts
– Retirement account rollovers and conversions
• When in doubt about keeping a tax record, do
NOT throw it out!
– Save paper copy or scan and store electronically

39. Common Tax Errors
• Claiming wrong number of dependents
• Failing to itemize deductions
• Forgetting charitable gifts made via payroll
deduction and phone texting
• Overlooking medical expenses
• Reporting an erroneous investment cost basis
• Not including previous year’s state tax refund
• Not signing the tax return (if paper filed)

40. Tax Deduction Timing
• Donations and payments for deductible expenses
must be made by end of the tax year to claim a
deduction
• If you put a check dated Dec. 31 in the mail by that
day, you are OK
• Donations and payments charged by year's end to a
credit card are also OK, even if you don't actually
pay until the next year
• You can make a contribution to IRAs for the prior
year by the tax filing deadline (typically April 15)

41. General Tax Planning
Strategies to Minimize Taxes
If you expect Then you should Because
The same or a
lower tax rate next
year
Accelerate
deductions into this
year
Greater benefit to
higher rate
The same tax rate
next year
Delay income into
next year
Delay paying taxes
A higher tax rate
next year
Delay deductions Greater benefit
Accelerate income Taxed at lower rate

42. Comments?
Questions?
Experiences?