Business Finance
Personal Finance case study USA Taxes!

Question Description

Minimum of 1200 word count with APA format and 3 scholarly references and in text citations. One is the book which will be uploaded. The case study this is referencing is on page 153 & 185 and the case study must be used, cited, and referenced. 3 questions each must have their own reference and citations.

Questions 3 & 6 requires that you access the Personal Financial Planner Worksheets. There are several worksheets in this packet. Find the ones titled Tax Planning Activities and Payment Account Comparison to answer the questions.

Kapoor, J., Dlabay, L., & Hughes, R., (2014). Personal Finance, (11th Ed.). McGraw-Hill/Irwin.

Case study 1 Taxes (p. 153)

1. Given her current situation, list some suggestion on what Shelby should do with a tax refund of $800.

2. Based on her current and future life situation, what tax planning strategies should she consider?

3. Describe how Shelby should use Personal Financial Planner sheet #22, “Tax Planning Activities” to help her tax situation.

Case Study 2: Banking Services (p. 185)

4. Provide some suggestions for Shelby to increase her emergency fund.

5. Identify other money management and financial planning activities that Shelby should consider.

6. Determine how Shelby should use Personal Financial Planner sheet #26, “Payment Account Comparison” and #28, “Checking Account Reconciliation”.

Unformatted Attachment Preview

Final PDF to printer chapter 4 Planning Your Tax Strategy F I N D L E Y , S A R A 1 1 3 6 T S kap61647_ch04_116-153.indd 116 17/10/13 5:27 PM Final PDF to printer 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. my life e F I N D L E Y , S A Taxes are often viewed as a confusing aspect of personal financial planning. However, with a R little effort, the basic elements of taxes can be understood. A THE MAIN FOCUS PAY ONLY YOUR FAIR SHARE The main focus when planning and paying your taxes is to pay your fair share based on current tax laws. What action do you commonly take regarding taxes? For each of the following 1 your personal response regarding these taxstatements, select “agree” or “disagree” to indicate planning activities: 1 3 1. I have a good knowledge of the various taxes paid in our society. 6 find needed 2. My tax records are organized to allow me to easily information. T 3. I am able to file my taxes on time each year. 4. My tax returns have never been questioned bySthe Internal Revenue Service. 5. I stay informed on proposed tax changes being considered for my 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. kap61647_ch04_116-153.indd 117 17/10/13 5:28 PM Final PDF to printer 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 pay their taxes. This financial obligation includes the many types of taxes discussed later in this F these taxes, common goals related to tax planning section. To help you cope with include I • Knowing the current taxNlaws and regulations that affect you. • Maintaining complete and D appropriate tax records. • Making purchase and investment decisions that can reduce your tax liability. L Target your tax planning efforts E toward paying your fair share of taxes while taking advantage of tax benefits appropriate to your personal and financial situation. The principal purpose of Y 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 products. Most people pay taxes in four major categories: taxes on purchases, taxes on property, taxes on wealth, and taxes S on earnings. A TAXES ON PURCHASES R excise tax A tax imposed on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel. You probably pay sales tax on Amany of your purchases. This state and local tax is added to the purchase price of products. 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,1 New Hampshire, and Oregon) have had a general sales tax. An excise tax is imposed by the federal and state governments on specific goods 1 and services, such as gasoline, cigarettes, alcoholic beverages, tires, air travel, and telephone service. 3 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 6 T TAXES ON PROPERTY S Real estate property tax is a major source of revenue for local governments. This tax is based on the value of land and buildings. The increasing amount of real 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. 17/10/13 5:28 PM Final PDF to printer Chapter 4 Planning Your Tax Strategy 119 TAXES ON WEALTH An estate tax is imposed on the value of a person’s property at the time of his or her death. This federal tax is based on the fair market value of the deceased individual’s 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 person, before his or her death, transfers to another person, because the action may have been intended to avoid estateFand inheritance taxes. estate tax A tax imposed on the value of a person’s property at the time of his or her death. inheritance tax A tax levied on the value of property bequeathed by a deceased person. I N TAXES ON EARNINGS D L The two main taxes on wages and salaries are Social Security and income taxes. The Federal Insurance Contributions Act E (FICA) created the Social Security tax to fund the old-age, surY 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. Income tax is a major financial planning factor for most people. Some workers are subject to federal, state, and S local income taxes. Currently, only seven states do not have a state A income tax. Throughout the year, your employer will withhold income R tax payments from your paycheck, or you may be required to make estimated tax payments if you own your own A business. Both types of payments are only estimates of your income taxes. You may need to pay an additional 1 amount, or you may get a tax refund. The following sections will assist you in preparing your federal income 1 tax return and planning your future tax strategies. 3 6 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? kap61647_ch04_116-153.indd 119 17/10/13 5:28 PM Final PDF to printer 120 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 ADJUSTED GROSS INCOME Taxable income is the net F amount of income, after allowable deductions, on which income tax is computed. Exhibit 4-1 presents the components of taxable income and the process used to compute it. I N TYPES OF INCOME D Most, but not all, income is subject to taxation. Your gross, or total, income can consist of three main components: L 1. Earned income is money received for personal effort. Earned income is usually in the form of wages, salary,E commission, fees, tips, or bonuses. Y referred to as portfolio income) is money received 2. Investment income (sometimes in the form of dividends, interest, or rent from investments. , 3. Passive income results from business activities in which you do not actively participate, such as a limited partnership. S Other types of income subject to federal income tax include alimony, awards, lottery winnings, and prizes. Cameron Clark once won $30,533 in prizes on the teleA vision game show Wheel of Fortune. In addition to paying California sales tax of R $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 the Toyota, Honda scooter, Gucci watches, and Australian vacation. 1 by exclusions. An exclusion is an amount not included Total income is also affected in gross income. For example, 1 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) of their incomes from federal3income taxes. Exclusions are also referred 6 to as tax-exempt income, or income that is not subject to tax. For example, interest earned on most state and city bonds is exempt from federal T is income that will be taxed at a later date. The earnincome tax. Tax-deferred income ings on an individual retirement S account (IRA) are an example of tax-deferred income. While these earnings are credited to the account now, you do not pay taxes on them until you withdraw them from the account. 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 17/10/13 5:28 PM Final PDF to printer 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 • Profits 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 . . . . . . F Equals: Adjusted gross income I N D Less: Standard deduction Less: Itemized deductions . . . . or . . . . and exemptions and exemptions L E Y Equals: Taxable income , Step 3: Calculating Taxes Owed . . . . . . . . . . . . . . . . . . .S ... A R A 1 1 3 6 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. 17/10/13 5:28 PM Final PDF to printer 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. Note: The 10 percent threshold is an increase in 2013 from the long-standing 7.5 percent threshold. The F 10 percent threshold will only apply to persons under 65 years old until 2017. I • Taxes—state 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 Dwhichever is larger—but not both. This deduction will of your state income tax, benefit taxpayers in theL seven states without a state income tax. • Interest—mortgage interest, home equity loan interest, and investment interest E expense up to an amount equal to investment income. • Contributions of cash orYproperty to qualified charitable organizations. Contribution totals greater , than 20 percent of adjusted gross income are subject to limitations. 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. • S A R A • Casualty and theft losses—financial 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. 1 1 3 6 T Job-related and other miscellaneous expenses such as unreimbursed job S continuing education, work clothes or uniforms, travel, union dues, required investment expenses, tax preparation fees, and safe deposit box rental (for storing investment documents). The total of these expenses must exceed 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 kap61647_ch04_116-153.indd 122 11/20/13 1:40 PM Final PDF to printer Financial Planning for Life’s Situations IS IT TAXABLE INCOME? IS IT DEDUCTIBLE? Is it taxable income? Yes No 1. Lottery winnings _____ _____ 2. Child support received _____ _____ 3. Worker’s compensation benefits _____ _____ F 4. Life insurance death _____ _____ I benefits N 5. Municipal bond interest _____ _____ D earnings L 6. Bartering income _____ _____ E Note: These taxable income items and deductions are based on Y the 2013 tax year and may change due to changes in the tax code. , Indicate whether each of the following items would or would not be deductible when you compute your federal income tax. Is it deductible? Yes No _____ _____ 8. Gym membership _____ _____ 9. Fees for traffic violations _____ _____ 10. Mileage for driving to volunteer work _____ _____ 11. An attorney’s fee for preparing a will _____ _____ 12. Income tax preparation fee _____ _____ 7. Life insurance premiums Answers: 1, 6, 10, 12—yes; 2, 3, 4, 5, 7, 8, 9, 11—no. 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. S A R your taxable income. In past years, pr ...
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Final Answer




Personal Finance
Institution Affiliation



What Shelby Should Do With the Tax Refund of $800
Given her situation, I would suggest Shelby to use her tax refund of $800 to settle her
student loan. She can also use the funds to pay her card debt. I can also recommend Shelby to the
investment the refund on the stock. However the stock market is perilous, but it has too many
chances of ripping great profits (Voss & Mohan, 2016). The reason why suggest that she takes
part in the stock market is that no effort is required. This means that, that the investment will not
need her for everyday activities or operations of the business. It implies that the new venture will
enable her to continue with other works without overworking while her profits are still counting.
She can further continue adding more money as the time moves with the aim of increasing the
benefits. The advantage of adding more money to the stock is just because the profits increase as
one increase the number of shares he/she has in the company (Voss & Mohan, 2016). One
method she can add more money is by cutting off some expenses and divert the funds to the
stock market.
Tax Planning Strategies the Shelby Should Consider
Tax planning strategy that Shelby should consider is to ensure that she deposits amount in
either savings or investments account. This money should be from her paycheck. Another plan
that is crucial for her to consider is by ensuring that she has filed her tax returns every single
period. The importance of filling her tax returns on time will be to minimize chances of fines by
the authorities which consequently will reduce her income hence savings. I would also advise her
to take advantage of tax credits. In this case, th...

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