TOPIC 5 TAX PLANNING

LEARNING OBJECTIVES
LO4-1Describe the importance of taxes for personal financial planning.
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.
TAXES AND FINANCIAL PLANNING
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.

Common goals related to tax planning include:

▪Knowing the current tax laws and regulations that affect you.
▪Maintaining complete and appropriate tax records.
▪Making purchase and investment decisions that can reduce your tax liability.
MAJOR CATEGORIES
•TAXES ON PURCHASES
•TAXES ON PROPERTY
•TAXES ON WEALTH
•TAXES ON EARNINGS
INCOME TAX FUNDAMENTALS
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.
How long you should keep these documents and will recommend ways to create an organized
system.
INCOME TAX PAYING PROCESS
STEP 1: DETERMINING ADJUSTED GROSS INCOME
Taxable income is the net amount of income, after allowable deductions, on which income
tax is computed

TYPES OF INCOME
1. Earned income is money received for personal effort. Earned income is usually in the
form of wages, salary, commission, fees, tips, or bonuses
2. Investment income (sometimes referred to as portfolio income) is money received 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.
INCOME TAX PAYING PROCESS
STEP 2: COMPUTING TAXABLE INCOME
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.

Some people qualify for more than the standard deduction. Itemized deductions are
expensing a taxpayer is allowed to deduct from adjusted gross income.

Itemized deductions is expenses that can be deducted from adjusted gross income.
INCOME TAX PAYING PROCESS
STEP 3: CALCULATING TAXES OWED
Use your taxable income in conjunction with the appropriate tax table or tax schedule

The 1, 3, 8, 13, 21, and 24 percent rate are referred to as marginal tax rates.
These rates are used to calculate tax on the last (and next) year) ringgit of taxable income. After
deductions and exemptions, a person in the 13 percent tax bracket pays 13 cents for every ringgit income
in that bracket.
INCOME TAX PAYING PROCESS
The tax owed may be reduced by a tax credit, an amount subtracted directly from
the amount of taxes owed.

Example
Tax credit given for childcare and dependent care expenses. This amount lowers the
tax owed by an individual or a couple. A tax credit differs from a deduction in that a
tax credit has a full dollar effect in lowering taxes, whereas a deduction reduces the
taxable income on which the tax liability is computed.
MAKING TAX PAYMENTS
WITHHOLDING
The pay-as-you-go system requires an employer to deduct federal income tax from your pay
and send it to the government. The withheld amount is based on the number of exemptions and
the expected deductions claimed on the W-4 form.

After the end of the year, you will receive a W-2 form (EA FORM) (see Next slide), which
reports your annual earnings and the amounts that have been deducted for federal income
tax, Social Security, and, if applicable, state income tax.

A copy of the W-2 form is filed with your tax return to document your earnings and the
amount you have paid in taxes. The difference between the amount withheld and the tax
owed is either the additional amount you must pay or the refund you will receive
MAKING TAX PAYMENTS
Am I taxable?
An individual who earns an annual employment income of RM25,501 (after EPF
deduction) has to register a tax file.
With effect year 2010 an individual who earns an annual employment income of
RM26,501 (after EPF deduction) has to register a tax file.
With effect year 2013 an individual who earns an annual employment income of
RM30,667 (after EPF deduction) has to register a tax file.
Nevertheless, with effect year 2015 an individual who earns an annual employment
income of RM34,000 (after EPF deduction) has to register a tax file.
PENALTIES
Type Of Offences Provisions Amount Of Fine (RM)
Under ITA
1967
Make an incorrect tax return by omitting or
understating any income. 1,000.00 to 10,000.00 and 200% of tax
113(1)(a)
undercharged

Give any incorrect information in matters affecting

1,000.00 to 10,000.00 and 200% of tax
the tax liability of a taxpayer or any other person. 113(1)(b)
undercharged

200.00 to 20,000.00 / Imprisonment for a term

Attempt to leave the country without payment of tax. 115(1)
not exceeding 6 months / Both
Fails (without reasonable excuse) to comply with an
300.00 to 10,000.00 / Imprisonment for a term
order to keep proper records and documentation. 119A
not exceeding 1 year / Both

Fails (without reasonable excuse) to comply with a

notice asking for certain information as required by 200.00 to 20,000.00 / Imprisonment for a term
120(1)
IRBM. not exceeding 6 months / Both
 FILING YOUR FEDERAL INCOME TAX RETURN
Your filing status is affected by such factors as marital status and dependents. The five filing
status categories are as follows:
oSingle—never-married, divorced, or legally separated individuals with no dependents.
oMarried, filing joint return—combines the income of a couple.
oMarried, filing separate returns—each spouse is responsible for his or her own tax. Under certain
conditions, a married couple can benefit from this filing status.
oHead of household —an unmarried individual or a surviving spouse who maintains a household
(paying for more than half of the costs) for a child or a dependent relative.
oQualifying widow or widower —an individual whose spouse died within the past two years and
who has a dependent; this status is limited to two years after the death of the spouse.
In some situations, you may have a choice of filing status. In such cases, compute your taxes
under the available alternatives to determine the most advantageous filing status.
LHDNM E-FILING GUIDE (EXRACTED FROM TAX EDUCATION DIVISION LHDNM)
TAX AUDIT
The Internal Revenue Service reviews all returns for completeness and accuracy. If you make an error, your
tax is automatically refigured, and you receive either a bill or a refund. If you make an entry that is not
allowed, you will be notified by mail. A tax audit is a detailed examination of your tax return by the IRS. In
most audits, the IRS requests more information to support the entries on your tax return. Be sure to keep
accurate records to support your return. Keep receipts, canceled checks, and other evidence to prove amounts
that you claim.
The simplest and most common type of audit is the correspondence audit. This mail inquiry requires you to
clarify or document minor questions about your tax return. You usually have 30 days to provide the requested
information.
The office audit requires you to visit an IRS office to clarify some aspect of your tax return. This type of audit
usually takes an hour or two.
The field audit is more complex. An IRS agent will visit you to have access to your records. A field audit may
be done to verify whether an individual has an office in the home as claimed.
The IRS also conducts more detailed audits for about 50,000 taxpayers. These range from random requests
to document various tax return items to line-by-line reviews by IRS employees.
TAX AUDIT
AUDIT RIGHTS
When you receive an audit notice, you have the right to request time to prepare.
Also, you can ask the IRS for clarification of items being questioned. When you are
audited, use the following suggestions.
Decide whether you will bring your tax preparer, accountant, or lawyer.
Be on time for your appointment; bring only relevant documents.
Present tax records and receipts in a logical, calm, and confident manner; maintain a
positive attitude.
TAX PLANNING STRATEGIES
Select appropriate tax strategies for various financial and personal situations.
I. If you expect to have the same or a lower tax rate next year, accelerate deductions into the current
year. Pay real estate property taxes or make your January mortgage payment in December. Make
charitable donations by December 31.
II. If you expect to have a lower or the same tax rate next year, delay the receipt of income until next
year. This means income will be taxed at a lower rate or at a later date.
III. If you expect to have a higher tax rate next year, consider delaying deductions, since they will have
a greater benefit. A $1,000 deduction at 24 percent lowers your taxes $240; at 32 percent, your
taxes are lowered $320.
IV. If you expect to have a higher tax rate next year, accelerate the receipt of income to have it taxed
at the current lower rate.