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Taxes

Someone once said that the only things certain in life are death and taxes. Taxes are a burden we all must carry for the rest of our lives. Most of us only worry about taxes when getting close to April 15 th. The facts are we pay taxes every time we get a paycheck. Take a good look at your paycheck and you’ll see federal, state, and social security coming out of your check. We have all heard that we have to work from January until May each year just to pay our taxes. It is up to us to try to ease the burden taxes place on us.

We must maintain complete and appropriate tax records. Your goal should be to reduce or protect yourself by taking advantage of tax benefits. Make decisions on investments and purchases in an effort to reduce your tax liability.

There are four major forms of taxes.

• Taxes on Purchases
• Taxes on Property
• Taxes on Wealth
• Taxes on Earnings

Taxes on Purchases come in many forms. Some states have a general sales tax on everything. The state of Texas had a luxury tax on goods not considered a necessity. Taxes on purchases are normally referred to as excise taxes and they are imposed by the federal and state governments on such items as gasoline cigarettes, alcohol, tires, travel, and telephones.

Taxes on Property comes sometime in the form of personal property taxes on automobiles, boats, furniture, and farm equipment. Real estate taxes are a large portion of taxes for local governments. Real estate tax is based on the value of land and buildings.

Taxes on Wealth are normally in the form of estate and inheritance taxes. The value of our property at death is the basis for the estate taxes. It is a Federal tax based on the fair market value of the property. If you receive property from someone after death then you’ll pay inheritance taxes on the value of that property. This tax gives you the right to claim ownership of the inherited property.

As an individual you can give someone up to $12,000 a year without that person having to pay the taxes on the money. Over that amount and they’ll pay the taxes. Money given for tuition or medical expenses is not subject to gift taxes.

Taxes on Earnings include Social Security (FICA) and income taxes. Social Security was created to fund income payments for the elderly, survivors, and people on Medicare. Income tax must be figured when doing your financial planning. Most employees pay Federal and state income taxes, but seven states do not have a state tax.

Your tax withholding is an estimate of what you will owe. Since it is an estimate you may have to pay more at the end of the year. In that case you might want to have a little extra taken out each payday to ensure you cover your tax obligation. If it turns out your taxes were lower than estimated then you will get that money back in a refund plus any extra money you paid during the year.

Basics of Federal Income Tax

Every year we have to pay our income taxes to the Government. There several things we have to do to determine our taxable income.

• Determine adjusted gross income – this includes all income of any kind like wages, interest earned, awards, dividends, and prizes to name a few.
• Computing taxable income – subtract from your gross income any standard exemptions and deductions to get your taxable income. Many people can qualify for more deductions by itemizing them. An exemption is money you can deduct for yourself, your spouse and children under the age of 19. Other deductions you might have would include money for which is tax deferred for retirement.
• Calculating taxes owed – once you have determined your taxable income find that amount in your tax table or schedule. The amount of tax will vary based on your filing as a single person, married, or head of household.
• Making tax payments – you pay your taxes by payroll deduction or by estimating your tax payments. Payroll deductions are the responsibility of your employer based on the number of exemptions you claim on a W-4 form filed by your employer. You may want to make estimated tax payments if you get income using a Form 1099. You may have to make several tax payments during the year.
• Watching deadlines and avoiding penalties - you have to pay your taxes by April 15 th every year without penalty. If you are late on your payment will have to pay extra for being late. You can get a four month extension on paying your taxes by filling out a form 4868.

There are three basic tax forms you will use to file your taxes

• 1040EZ – can be used if you are single or married filing jointly and you are under the age of 65. Your taxable income has to be less than $100,000 and you can not itemize deductions. Your interest income can not be more than $1,500.
• 1040A – the difference between the 1040A and the 1040E is that with the 1040A you can deduct retirement contributions and can get tax credits for child and dependant care.
• 1040 – an expanded version of the 1040A form. You can itemize deductions for medical, mortgage interest, and real estate property taxes to name a few. There are a lot of possible adjustments to income that you should become familiar with when using this form.

Tips from the IRS

Check the “individuals” section of the IRS Web site at IRS.gov or consult the instructions for form 1040, 1040A or 1040EZ for specific details that may affect your need to file a tax return with IRS this year.

Even if you do not have to file, you should file to get money back if Federal Income Tax was withheld from your pay, or you qualify for a refundable credit that may give you a refund even if you do not owe any tax. Refundable credits include:

• Earned Income Tax Credit. The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, and may be returned in the form of a refund.
• Additional Child Tax Credit. This credit may be available to you if you have at least one qualifying child and you did not use the full amount of your Child Tax Credit
• Health Coverage Tax Credit.  Limited to certain individuals who are receiving certain Trade Adjustment Assistance, Alternative Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation.

For more information about filing requirements and your eligibility to receive tax credits, visit the IRS Web site at IRS.gov.

Remember that for the genuine IRS Web site be sure to use .gov.  Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

• Forms and Publications
• Earned Income Tax Credit
• Health Coverage Tax Credit.
• 1040 Central

Tax services

If you don’t want to do your own taxes there are a lot of options open for you. In the Navy you have your VITA representatives who can help you do your taxes. Since they are Navy too you might feel more comfortable with them. Doing your own taxes may not be desirable if you have lots of things to itemize. You might want to go to some of the national services like H & R Block to have your taxes done. There are also Certified Public Accountants (CPAs) who will do your taxes for you. The nice thing about professional services is that they take responsibility for your taxes being correct. In the case of an audit of your taxes they will go with you. Remember even if you have a professional do your taxes you are still responsible for supplying them with all the correct documents and paperwork. With the professional tax person comes a higher fee for doing your taxes.

Tax planning strategies

The use of legitimate methods to lower your taxes is called tax avoidance. To minimize your taxes there are some guidelines.

• If you want the same or lower taxes next year increase you deductions this year
• You can also delay the receipt of income until next year so it doesn’t count on the current year
• If you think you’ll pay higher taxes next year try delaying your deductions until next year
• You can also move the receipt of income this year instead of waiting until next year

When considering your decisions in relation to your taxes remember purchasing, investing, and retirement are the areas most heavily affected by tax laws. Buying most directly affected by taxes are residences, credit, and job-related expenses.

The best tax shelter you can have is to own a home. Both the real estate taxes and interest on your mortgage are deductible. Home owners can even borrow on your property and deduct the interest on the loan secured by that property.

Certain work expenses may be allowable deductions. These deductions could include union dues, uniforms, some travel, and education. These expenses may be included as part of your itemized deductions.

Workers are allowed to put pre-tax dollars aside for medical expenses or child care. This if called a flex plan and are offered by a lot of companies. Since this money is taken out pre-tax it lowers your taxable income.

Investments are another way you can save on taxes. Interest income for a municipal bond, issued by a state or local government are tax exempt and not subject to Federal tax. Tax-deferred investments are also pre-tax dollars, but you will pay taxes on the money at a later date when you start collecting on the investment.

Tax-deferred IRAs give a benefit to workers for retirement.

• The traditional IRA is only available if you don’t participate in a company retirement plan.
• A Roth IRA is not tax deductible, but the earnings are tax free after five years.
• An education IRA assists parents saving for college. The deduction is not tax deductible and is limited by income. As with the Roth IRA the earnings are tax free.
• A Keogh plan may be for you if you are self-employed and own your own business. This is a retirement plan that combines a profit-sharing plan and a pension plan.
• A 401(k) is something that everyone has heard of. This plan allows you to contribute more tax-deferred money than an IRA plan. Some companies limit the amount of your contribution, but will offer a matching contribution to your plan.

Be aware of the fact that taxes change every year. Even the forms and filing procedures change. You need to stay abreast of these changes so you’ll know how to best take advantage of them for your personal financial planning. Carefully consider your own financial situation and your income level because they will also have a bearing on your financial planning strategy.

Assistance

Counseling

• Army - E-mail
  
  Anthony Powell – Ft. Bliss, TX
  Wk Ph:  915-568-4453,
  DSN:  978-4453
  Email:  anthony.powell1@us.army.mil

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• Navy - E-mail
  
  Mike Kempf – Pensacola, FL
  Wk Ph:  850-452-3228,
  DSN:  922-3228
  Email:  mikekempf@bellsouth.net

More information

• Important changes to credit reports for 2008
• Links to more information
• mysdcc.sdccd.edu

New Links 10-21-2008

• Boston.com
• The News Service
• mymoney.gov

Calculators

• Savings
• Monthly Cash Flow
• 401(k) Value
• Hidden Expense
• Life Insurance
• Loan Amortization
• Net Worth
• Retirement Planning
• Taxed and Non-Taxed Compounding

Glossary

• Common terms in financial planning

General Information

• SDCC has articulated the Navy PFM course for one college credit. Navy personnel who have graduated from the Navy PFM course qualify. Typically, it can be difficult to apply one credit and meet the requirements of a three credit semester long course at most colleges and universities. With that in mind, we have taken the initiative of developing a two credit online course that will be available upon completion of the Navy PFM course. Sailors who have completed the requirements of both the Navy PFM course and the online PFM course will be given credit for completing the three credit Consumer Studies 110 course offered by San Diego City College and Mesa College and transferable to any Servicemembers Opportunity College (SOC).

• For additional information or to see if you qualify contact a PFM counselor.