Question

Discuss the steps to establish........ and the issues that you perceive will happen to you........ when you determine your Total Tax Liability using the terms Adjusted Gross Income and Taxable Income.. If you don't do your own taxes, discuss  what questions you can ask your tax consultant to clarify his/her actions, or to possibly find a better return for you, or maybe what you can do next year to make things easier for you financially.

In our class discussion, what are some of the variables to calculate these values for you? What are some of the most important values or adjustments to you as an individual. How have you interpreted this info in the past, as an example, what is the difference between a tax table and tax schedule. Will this info help you and how??   Please don't give me an outlined definition of each term In Exhibit 3.1.

Review the Financial Planning exercises for Chapter 3. These are the type of tax questions that may need to be solved by you in your financial life. Just comment to each other about your tax experiences and plans. .... transfer the concepts of this chapter to the tax issues constantly reviewed by the financial news as it occurs daily.

Answer 1

Gross Income

According to the U.S. Internal Revenue Service (IRS), your gross income is the total of all of your earnings and income sources throughout the course of any given year. If you are not self-employed, your gross income includes wages and salary from a W-2 position as well as the commissions or bonuses paid out from an employer. If you are a business owner or you are self-employed, your gross income includes total earnings from the business minus any business-related expenses, also known as net business income. For the purpose of tax accounting, your gross income also includes any investment earnings, which could include gains from stock sales or dividends paid out over the year, rental property income, taxable withdrawals from retirement accounts, and Social Security income or disability benefits.

Taxable Income

Once you have determined your gross income from all sources, you can then calculate your taxable income. Your taxable income differs from your gross income in that it counts allowable deductions, exemptions and other subtractions for which you may be eligible. This figure can be drastically smaller than your gross income depending on the number of deductions that you take or exemptions that you can apply. Although items such as child support may be included in your gross income calculation, this is not considered to be a part of your taxable income.

Getting to Taxable Income from Gross Income

For most individuals, the purpose of tax accounting is to reduce gross income down to the lowest possible amount of true taxable income for each year. The most common way to complete this task is to itemize your deductions on a tax return, especially if you are self-employed. You may also take a standard deduction determined by the IRS each year to reduce your gross income down to the total taxable amount when there are not enough deductions available for you to itemize. Despite what your gross income may be, you should be the most concerned with the taxable income calculation on your annual tax return.

Understanding the difference between certain tax terms including gross income and taxable income allows for a much smoother tax accounting process each year, and may also ensure that individuals and business owners are only paying what is owed based on taxable income alone.

Don’t Skip Filing Your Taxes

When you see that you owe, say $1,500, your first thought may be to stop the process altogether and not file your return. This is a big mistake and one that every tax expert will tell you not to make.

“You’re so much better off sending the return in or filing a valid extension. Let’s say you owe $20,000 and you usually get a refund,” says Cari Weston of the American Institute of Certified Public Accountants. “Don’t think to yourself, ‘I don’t have the time.’”

The repercussions for not filing are steep. You’re better off filing and not paying than not filing at all. Not only will you have to pay the amount you owe, but you’ll also be slapped with a penalty. Furthermore, penalties begin to accrue interest starting on April 19. What are the financial ramifications?

“Well, you end up paying a penalty on the amount you owe at 5% per month (4.5 % for not filing and 0.5% for not paying),” explains Stephanie Morrow of LegalZoom. “The total penalty for failure to file and pay can eventually add up to 47.5% (22.5% late filing, 25% late payment) of the tax owed. Interest, compounded daily, is also charged on any unpaid tax from the due date of the return until the date of payment.”

The moral of the story? Even if you can’t pay the amount you owe, it’s still important that you file your return.

Make Sure You Actually Owe the Money

Once you file your tax return and have that out of the way, it’s important that you do your due diligence and make sure you actually owe the money. This is especially true if you filed your own taxes. It’s easy to make mistakes, add the same income twice, or forget to take an obvious deduction.

Even if you’ve hired an accountant to file your return for you, they’re anything but perfect. Accounts often work 12-plus hours per day, seven days a week during tax season. They’re tired and mistake-prone. Double-check their work and don’t be hesitant to ask for clarification before signing the return. If a mistake is made, it ultimately comes back to you – not them. Stand up for yourself; nobody else will.

Ask for Leniency

If you failed to follow the advice in the first step and owe a penalty, you may be able to get out of it by asking for leniency.

“If you have a history of paying on time, you can ask if you can please waive the penalty,” Weston says. “The IRS will look at your history, and if you haven’t previously had a penalty, they have to waive the penalty the first time you ask. They won’t tell you that.”

Even if you don’t qualify for this waiver, you may ask for the penalty to be dropped based on probable cause. This won’t always work, but it’s worth a try.

Set Up a Payment Plan

If you owe less than $50,000 to the IRS in individual income tax, or less than $25,000 in payroll taxes (for businesses), then you may qualify for a payment plan or installment agreement that allows you to gradually pay off your tax debt over a number of months.

“The IRS is often willing to grant installment payment plans (starting at just $25 a month), and applying for one can help you avoid more serious consequences like liens and levies,” E-File.com explains. “Installments accrue both interest and contain setup fees so it is not without cost.”

Make sure you review all of the details on payment plans and installment agreements and consult a tax advisor or IRS specialist before going this route. Because of the aforementioned interest and fees, it doesn’t always make sense.

Negotiate With the IRS

Believe it or not, you can actually negotiate with the IRS. Whether or not they budge is up to them, but it’s definitely a realistic option worth pursuing if you’re in dire straits.

The negotiation tactic the IRS typically uses is an Offer in Compromise (OIC). The problem with an OIC is that you usually have to offer at least as much as your net worth (everything you own minus your outstanding debts). The problem is that this is a lot like bankruptcy and should only be used if you have no other options.

Pay the Right Way

So, let’s say that you’ve exhausted all of your options and you end up owing a chunk of change to the IRS. Now comes the time when you have to decide how you’ll pay. Word of caution: be extra careful here. The last thing you want to do is exacerbate the problem.

If you don’t have any money in the bank, it can be tempting to just put your tax bill on the credit card. This is a huge mistake and will haunt you for years to come. Don’t do it! Other options you may consider include borrowing against your home equity, taking out a second mortgage, or picking up some other type of loan. Again, not good ideas.

It’s best to sell things you own (such as a car), increase your income, or pick up a second job/overtime to make some more money. The last thing you want to do is put yourself in more debt – and that’s exactly what one of these high-interest loan vehicles will do.

Create a Plan for Next Year

While it won’t help much with the tax debt you currently owe, now is a great time to create a plan for next year. By updating your W-4 or running projections for accurate estimated taxes, you can get much closer to the zero-point where you don’t owe anything and the IRS doesn’t owe you anything, either. This is the ideal place to be.

If you’re an employee for a company, this means revisiting your W-4 and reducing the number of allowances you take. If you’re self-employed, this means increasing the amount you pay each quarter to account for last year’s deficit and any pay increase you’ll receive this year. (You need to know what tax bracket you’re in to do this more accurately).

The main difference between two is;

* A tax bracket is a range of income to which a specific tax rate applies.

* Your effective tax rate is the percentage of your income that you actually pay in tax.

Another way to think about it is that, not every dollar is taxed at the same rate.

* Your tax bracket shows the rate of tax on the last dollar you made during the tax year.

* Your effective tax rate reflects the actual amount you paid on all your taxable income.

For example, if you're single and in the 25% bracket for 2016. That means your taxable income is between $37,650 and $91,150.

Yet the tax you pay is less than 25% of your income. Why? Because the 25% tax rate only applies to the amount of taxable income within the 25% bracket. The tax on income below $37,650 is calculated using the rate that applies to income in the 10% and 15% brackets.

So, if your 2016 taxable income is $40,000, only $2,350 is taxed at 25%. The remainder is taxed at 10% and 15%, leading to a "blended" overall rate. The result: a tax bracket of 25%, and an effective tax rate of less than that.