Taxes and Insurance

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Taxes and Insurance

BA250 - Personal Finance

Week 5

Tax Planning Objective

Maximize amount of money you keep

Minimize amount of money paid in taxes

Economics of Income Taxes

Progressive tax structure

  • The larger the taxable income, the higher the tax rate
  • As taxable income moves to a higher tax bracket, the higher rate applies only to the additional taxable income

Your Take-Home Pay

Taxes due on a pay-as-you-go basis

Employer withholds taxes all year

Self-employed deduct and pay taxes

Taxes include:

Federal, State, & Local income taxes

FICA and other withholding taxes

It's Taxable Income That Matters

Taxable Income

the amount of income subject to taxes

Deductions:
Standard or Itemized

Standard deduction – a fixed amount that depends on filing status

  • filing status
  • age
  • vision

Deductions:
Standard or Itemized

Itemized deductions

  • specific personal expenditures
  • itemize if expenses are greater than standard deduction

Medical, dental expenses

State, local income taxes

Property taxes

Mortgage interest

Charitable contributions

Tax Credits

Subtracted from amount of taxes owed

Credits include

Child & dependent care expenses

Adoption credit

Foreign tax credit

Qualified electric car

Tax Credits versus Tax Deductions

Which results in lower taxes?

Credits

directly reduce amount of taxes owed

Deductions

subtracted from AGI and reduce taxable income

VS

Effective Tax Planning

Tax avoidance is legal - tax evasion is not!

  • Reduce taxes
  • Maximize deductions, credits
  • Shift taxes
  • Use gifts or trusts
  • Defer taxes
  • Postpone to future through IRA or annuity

Basic Insurance Concepts

Basic purposes of insurance

  • Protect you and dependents from losing your acquired assets
  • Shield you and your family from an interruption in earnings

Benefits of Life Insurance

  • Financial protection for dependents
  • Protection from creditors
  • Tax benefits
  • Vehicle for savings

Key Features of Various Types of Life Insurance

Importance of Health Insurance

  • Protect against economic loss in the event of serious accidents or illnesses

  • Protect against rising cost of health care
  • which is outpacing other costs

Long-Term Care Insurance

Provides for delivery of medical and personal care, other than hospitalization, to persons with chronic medical conditions in nursing home, assisted living community, or patient’s home

Disability Income Insurance

Provides families with weekly or monthly payments to replace income lost when insured is unable to work due to an illness, injury or disease

Property Insurance Basics

Property insurance

  • protects real and personal property from losses from various perils

Liability insurance

protects against financial consequences from insured's responsibility to others

  • Policy states conditions (perils) under which it will pay
  • Stipulate property covered and extent of coverage

Peril—a cause of loss such as fire, lightning, windstorm

Homeowner's Insurance

Renter’s Insurance

  • Personal furnishings and belongings are not covered although the building may be fully insured

  • Purchase a special type of homeowners policy

*

Building’s insurance policy

Deductibles keep insurance costs down by eliminating frequent small loss claims that are proportionately more expensive to administer

Deductible - amount paid out of pocket on covered losses

Deductibles

Homeowner Premiums

  • Differ from company to company
  • Depend on structure type, property location, or property hazards
  • Discounts offered
  • non-smokers
  • security systems

Types of Automobile Insurance Coverage

  • Part A – Liability coverage
  • Part B – Medical Payments coverage
  • Part C – Uninsured motorists coverage
  • Part D – Coverage for damage to your vehicle

Part A: Liability Coverage

  • Required in most states
  • Pays injury and property damages to others when you are responsible for the loss
  • Covers costs of settling or defending claims for damages
  • Reimbursement for medical expenses resulting from an accident
  • Covers insured, family members, and passengers in covered autos
  • Covers injuries sustained as a pedestrian or while riding a bicycle

Part B: Medical Payments

  • Pays when other driver has no insurance or if hit-and-run
  • Usually pays for bodily injuries, not property damage
  • Additional coverage available to protect against underinsured motorists

Must meet criteria:

Another driver at fault

Other motorist uninsured

Damages were incurred

Part C: Uninsured Motorists

Part D: Physical Damage to a Vehicle

Collision

Pays the actual cash value of the damage minus deductibles

Pays no matter who is at fault

Required for financed cars to protect the investment

  • Protects against loss to insured auto caused by perils other than collision
  • hail, fire, theft, falling objects

Comprehensive

Part D: Physical Damage to a Vehicle

Factors Affecting Premiums

  • Rating territory
  • Use of automobile
  • Driver’s personal characteristics
  • Type of automobile
  • Driving record

Supplemental Property Insurance Coverage

  • Earthquake & flood - not included in standard homeowner's policies

  • Other forms of transportation - mobile homes, RVs, boats, etc.

Personal liability umbrella - additional liability coverage for homeowner and auto insurance

References

Gitman, L. J., Joehnk, M. D., & Billingsley, R. S. (2011). PFIN. Mason, OH: South-Western Cengage Learning.