Understanding Federal Tax Return and Tax Planning Strategies

School: St. Francis Xavier University - Course: BSAD 345 - Subject: Accounting

BSAD 345 Chapter 3 Concept Check 3-2 1.What are the five sections of the federal tax return? The five major sections are (1) Income (2) Deductions (3) Other deductions such as capital gains deductions and losses carried over from other years (4) Tax credits (5) Other tax credits such as political donations and labour-sponsored funds 2. What information is needed to compute net income? Net income is the result of subtracting expenses from revenues that is then reduced by certain deductions. 3.What information is needed to compute taxable income? Taxable income is the result of subtracting deductions and exemptions from total income. (See Exhibit 3-1). 5.How does a tax credit affect the amount owed for federal income tax? A tax credit is a direct (dollar-for-dollar) reduction in the amount owed in taxes. One example of a tax credit is child and dependent care expenses. Concept Check 3-3 2.What common tax-planning strategies are available to most individuals and households? Common tax planning strategies include owning a home, making purchases that may be deducted as job-related expenses, selecting tax-deferred and tax-exempt investments, owning your own business, and participating in a tax-deferred retirement plan. Concept Check 3-4 2.What actions can reduce the chances of an audit? The following are the top ten filing errors that may lead to an audit: a.Mathematical errors, such as adding or subtracting amounts incorrectly. b.Forgetting to reduce income by identifying workers' compensation, social assistance payments, and net federal supplements. c.Calculating and claiming provincial tax credits incorrectly. d.Not including pension adjustments, which affect RRSP contribution room for the coming year. e.Claiming GST/HST credits incorrectly by using incorrect spousal income amounts. f.Entering the wrong amount on lines referring to Canada Pension Plan, Quebec Pension Plan, and Employment Insurance contributions and overpayments. g.Claiming incorrect amounts as RRSP contributions. h.Forgetting to claim the basic personal amount. i.Claiming the spousal amount incorrectly. j.Forgetting to claim the age amount, or claiming it incorrectly.

FINANCIAL PLANNING PROBLEMS Franklin Stewart arrived at the following tax information: Gross salary, $47,780 Interest earnings, $225 Eligible dividend income, $100 Basic personal amount, $12,069 Union dues, $3,890 Moving expense (50 km for employment), $1,150 What amount should Franklin report as taxable income? LO1 Franklin would have a taxable income of $43,103 resulting from $47,780 + $225 + $100(1.38) - $3,890 - $1,150. Note: Dividend incomefrom eligible dividends using 2019 rates is grossed-up by 38 percent to compute taxable dividends. Dividends are paid to shareholders from profit after taxes of the company, so the government gives dividend tax credit for 'eligible' dividends (i.e. the dividend is grossed up when calculating taxable income, then the tax credit will be applied to offset the amount of taxes needed to pay). Basic personal amount(BPA) is the amount that a person can earn without paying income tax. The basic personal amount tax credit is calculated by multiplying the BPA to the lowest tax bracket rate). This is used to calculate tax credit, so it is not included in the calculation of taxable income. 2.What is the average tax rate for a person who paid taxes of $4,864.14 on total taxable income of $39,870? LO2 The average tax rate would be 12.2 percent ($4,864.14/ 39,870). 3.What is a tax credit? Distinguish between the two types of tax credits. LO2 Tax credit is an amount subtracted directly from the amount of taxes owing. The two types of tax credits are the non-refundable tax credits and the refundable tax credits. Non-refundable tax credits, which are more common, are subtracted from the amount of taxes owed but can never reduce net federal tax below zero. Refundable tax credits, which are very few at the federal level, are sums that are refunded to individuals, if they qualify, even if their tax liability is zero. 4.Based of the following data, will Ann Wilton receive a federal tax refund or owe additional taxes in 2019? LO2