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Lecture Personal financial planning – Chapter 14: Tax planning

The goals of this chapter are: Discuss the widespread role of taxation in PFP, develop a knowledge of key tax planning strategies, compare the tax benefits of major investment vehicles, understand and complete a tax return. | Lecture Personal financial planning Chapter 14 Tax planning Chapter 14 Tax Planning 1 Chapter Goals Discuss the widespread role of taxation in PFP. Develop a knowledge of key tax planning strategies. Compare the tax benefits of major investment vehicles. Understand and complete a tax return. 2 Income Taxation Income taxes are a nondiscretionary cost in household operations with the outlay dependent on both revenues and expenses. Decision making in most household activities is influenced by taxes. On the following slide we consider a brief example of the tax impact in each area of the financial plan. 3 Income Taxation cont. Examples of tax impact on financial plan Cash Flow Planning Taxes influence the timing of transactions and preparation for payment of sums due. Investments The calculation of returns is often done on an after-tax basis. Financing The calculation of the cost of borrowing is done on an after-tax basis. Risk Management There is often a clear preference for tax-deductible employee health and life insurance. Retirement Planning There is a substantial benefit when saving through qualified retirement pension vehicles. Estate Planning Tax minimization comprises a large part of estate planning activities. 4 Income Tax Format Income earners are taxed on an individual basis except for married couples whose income is generally combined for income tax purposes. The income tax return resembles a household cash flow statement in form. Adjustments are made for certain expenses. The net is the adjusted income figure called adjusted gross income AGI . Deductions follow based on fairness popularity and society s goals and exemptions allowed based on the number of people in the household and other factors. The result is the amount available to be taxed called taxable income. 5 Income Tax Format cont. We can summarize the individual income tax return IRS Form 1040 as follows Income Wages Dividends and Interest Capital Gains Other Income Adjustments 401 k IRA .