Income Taxes. A. Understanding. 1. To know

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1 Income Taxes A. Understanding 1. To know There is a direct correlation between income and income taxes due Tax reduction is a legitimate goal Tax reduction should never be the tail that wags the dog Inability to pay taxes due is symptomatic of poor planning Tax reduction and debt reduction are in direct conflict with one another Ultimately all income from whatever source is taxed Tax avoidance and tax evasion are two entirely different things There are no free tax deductions Disagreeing with the Government is not a legitimate reason to not pay taxes 2. To Believe Paying income taxes is not a bad thing Integrated tax planning is critical to long term financial success Income taxes should be planned for several years in advance Income tax planning requires highly specialized expertise 1

2 Getting a large refund check can be a sign of poor stewardship 3. To Do-Behavior To personally plan for your income taxes at least one year in advance To be able to lead clients to a proper and Biblical perspective on taxes To be able to illustrate no free tax deduction To be able to illustrate that all debt is repaid with after tax dollars B. Cultural Perspective Cheating by the other guy is normal Paying taxes is largely a non productive use of money I shouldn t have to support an irresponsible Government C. Biblical Wisdom "And He said to them, 'Then render to Caesar the things that are Caesar's, and to God the things that are God's." LUKE 20:25 Render to all what is due them: tax to whom tax is due; custom to whom custom; honor to whom honor. Romans 13:7 2

3 "He who is faithful in a very little thing is faithful also in much; and he who is unrighteous in a very little thing is unrighteous also in much." LUKE 16:10 "Rather, we have renounced secret and shameful ways; we do not use deception, nor do we distort the Word of God. On the contrary, by setting forth the truth plainly we command ourselves to every man's conscience in the sight of God." II CORINTHIANS 4:2 "Dishonest money dwindles away, but he who gathers money little by little makes it grow." PROVERBS 13:11 "Oh, Lord, my heart is not proud or my eyes haughty; nor do I involve myself in great matters, or in things too difficult for me." PSALM 131:1 D. Types of Taxes Income-federal, state, city, county Sales-state and local Intangibles-state Use-federal, state, and local Estate-federal Inheritance-state and local Gift-federal Property-local Social security and employment-federal 3

4 E. Tax Rates 1. Marginal The next dollar of taxable income is taxed at x% The tax savings resulting from another $ of tax deduction My tax bracket The maximum marginal tax today is 35% federal on taxable incomes over $326,450 (2005 rates for married filing jointly) 2. Effective The actual taxes paid divided by total income o Federal income taxes o State income taxes o All forms of social security and Medicare taxes The real measure of the tax bite F. Tax Planning Strategies 1. Timing Reducing taxes by changing the year in which income is received or deductions taken The general rule is to defer income and accelerate deductible expenses Beware of the doctrine of constructive receipt 4

5 2. Shifting Reducing taxes by shifting income to someone in a lower tax bracket From parents to children To a corporation Gifting Etc. 3. Investing Using investments to reduce taxes Tax exempt \ Tax free Municipal bonds Roth IRA Tax deferred Most retirement plans Tax favored Oil and gas Fully taxable Interest Dividends 4. Taking advantage of all tax law provisions Use of tax law provisions Adjustments to income o IRA s, Exemptions, Alimony, Student loan interest, etc. 5

6 Itemized deductions o Medical, local taxes, investment interest, etc. Tax credits o Dependent child care, adoption, low income Special provisions o Sale of principal residence, exemption for dependents. Etc. Special opportunity o Charitable gift of appreciated property G. Personal Convictions Income taxes should never be the source of cash flow problems. They may be a symptom of other issues such as lifestyle, debt, poor planning, etc. The tax tail should never wag the family dog. Income taxes are an indicator of God s blessings. H. What Does the Client Need A Growing Understanding of God s Purpose in their Lives A Relationship with Someone they can Trust Sound Biblical Counsel and Leadership A Clear Sense of Direction including where they are, where they are going, and how they are going to get there Regular Accountability 6

7 I. Client Counsel Objective Simplify Long term perspective All debt is repaid with after tax dollars Taxes are a result of having income 7