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Week 12 Income Tax Planning

Income tax planning

MPU 3353
Personal Financial Planning in

Taxes: The Governments

Share of Your Rewards

Taxes represent a significant expense for individuals.
There are many taxes such as income tax, payroll tax,
sales tax, excise tax, property tax, estate tax, as well as
other taxes.
Good financial planning requires good tax
Therefore, it is necessary for individuals to have a
basic understanding of the income tax laws.

Chapter Objectives
1. To understand the basic approach used by the
Internal Revenue Service to determine your yearly
income tax liability
2. To be able to calculate your yearly income tax
liability following directions and guidelines
provided by the Internal Revenue Service
3. To recognize the role the Internal Revenue Service
plays in enforcing the income tax law and to know
when to seek professional help in income tax
Chapter Objectives
1. To understand and use important strategies that help
you save or defer federal income taxes
2. To identify other important taxes that you currently
pay or will pay in future years

Topic Outline

Determining Your Income Tax

Other Aspects of the Income Tax
Planning to Reduce Your Income Taxes
Other Important Taxes
Death and Transfer Taxes

Figure 4.2 Income Tax Formula

Gross Income

{ Adjustments to Gross Income

Adjusted Gross Income
Less personal and dependency
{ deductions
{ Less itemized or standard deductions

Taxable Income
Figure 4.2 Income Tax Formula
Taxable Income
Determine taxes based upon
{taxable income and family
Taxes Before Credits and Other Taxes

{ Less tax credits plus other


Taxes Before Credits and Other Taxes

{ Less taxes withheld and

estimated taxes paid

Tax Refund or Taxes Due

Gross Income Items
These are defined as sources of income that are
subject to the income tax.
There are items that are income but are nontaxable.
An example is the interest paid on government bonds.
The primary sources of gross income are:
wages and salaries alimony interest
capital gains dividends pensions
business income rentals royalties

Adjustments to Income
There are certain items that can be deducted from
gross income.
These adjustments reduce the income that will be
Adjusted gross income (AGI) = gross income minus
these adjustments.
Examples of these possible adjustments are:
IRA contributions Moving expenses
Alimony paid Self-employed health insurance

Taxable Income
Taxable income represents the income that is
subject to income tax.
Taxable income =
adjusted gross income (AGI)
- personal and dependency exemptions
- personal deductible expenses (or standard
Example, For 2015, the personal and dependency
exemption is $9,000 for every adult and dependent
supported by this income.

1 Self and Dependent 9000
2 Medical expenses for parents) 5000 (limited)
3 Education Fees (Individual) 5000
4. Purchase of books, journals, magazines and publication 1000
5. Purchase of personal computer (once in every 3 years) 3000
6 Each unmarried child of 18 years and above who is 1000
receiving full-time education ("A-Level", certificate,
matriculation or preparatory courses).
7 Life insurance dan EPF 6000
8 Deferred Annuity and Private Retirement Scheme (PRS) - with 3000
effect from year assessment 2012 until year assessment 2021
The Standard Deduction
Taxpayers are allowed to reduce their income for
certain personal expenses.
The taxpayer can choose between the standard
deduction or itemizing their personal expenses.

Tax Credits
A tax credit is a direct reduction against your tax
It provides a dollar-for-dollar offset to your tax
liability. Therefore, tax credits are preferable to
deductions or exemptions in terms of tax planning.
Some examples of possible tax credits are:
Earned income credit
Child and dependent care expenses credit
Credit for elderly (including disability credit)
Education credit

Tax Credits

Tax Rate Measures
Average tax rate
Total tax liability divided by total income
Gives taxpayers an indication of the percentage of their
income that went to federal income tax
Marginal tax rate
The tax rate on an additional dollar of income
Additional tax liability divided by additional income
This is the rate that is the most relevant for tax planning and
investment decisions

Marginal Tax Rate

Marginal Tax Rate (Cont)
Capital Gains and Losses
These are defined as gains or losses resulting from the
sale of a capital asset.
A capital asset is an asset held for personal or
Capital gains and losses receive special tax treatment
and are also taxed at different rates.
Gains on the sale of capital assets must be reported
and any applicable tax paid.
Losses on the sale of capital assets may not be
deducted against other income.

Taxes on Capital Assets
The length of time that an asset is owned will
determine the tax rate on the sale of capital assets.

The sale of your home (primary residence) may be

eligible for special tax treatment if it was sold for a
gain. Some or all of the gain may not be taxed under
specific circumstances.

Taxes on Capital Gains

RPGT had undergone a couple of revisions since

introduced in 1976, and the last revision was done in
2014. In this revision, with effect starting from 1st
Jan 2014, the RPGT rates have been increased from
0% to 15% to the new rates of 0% to 30%.

The reason for the reason increase is to curb property

speculation & sudden surge in property price, which
affect the affordability of people to buy a property.
As per Schedule 4 of the Real Property Gains Tax Act
1976 individual can obtain RPGT exemption base on the
1) Disposal of one residential property once in a lifetime.
2)Transfer as gifts in between family members. This
exemption is only applicable for transfer in between
husband and wife, parent and child, grandparent and
grandchild. Take notes that transfer between sibling,
brothers or sisters are not applicable.
3)10% of profits OR RM10,000 per transaction
(whichever is higher) is not taxable

RPGT is only payable once the property sold off. The

payment has to be paid at Inland Revenue Board
(LHDN) within 60 days.

Normally, lawyer whom you engage to handle the

transaction will do it for you by submitting the
relevant CHKTK from. It is wise to check they
already do this to avoid any misunderstanding
Each person should have tax management strategies
in place to minimize taxes paid.
We need to understand how the following taxes
impact our financial plans: income, payroll, sales,
excise, property, estate, as well as other taxes.
It is important to maintain adequate tax records in
financial planning.
A basic understanding of income tax laws is necessary
for wise money control.

Tutorial Questions
1) Discuss the Malaysian Real Property Gain Tax (RPGT) and its exemptions
2) Discuss the importance of tax planning
3) En. Daud, age 45, is married with four children. He comes to you for advice on how to
compute his personal tax liability for year 2014. He provides you with the following
His salary RM50,000
Dividend received by him 1,000
Purchase of computer 4,300
Children education 9,000
Life insurance 2,000
Children education policies 1,000
EPF 5,500
Approved donation 500
Zakat 750
3 of his children are in secondary school and one studies in University Malaya 1 st year in
Business study.

Compute the tax liability of En Daud .