This Is A StickUp; Give Me All Your Tax Money!
"Things You Didn't Know About Your Taxes"...Be Prepared!
by Terry Clark
Table of Content
1. Your Filing Status Affects Your Taxes
2. Who are Qualified for the Child Tax Credit?
3. Where Do Your Taxes Go?
4. What You Need to Know About the New First-time Home Buyer Credit Tax
5. What Is Alternative Minimum Tax?
6. What Can You Deduct For Home Business?
7. What Are Tax Relief Checks?
8. What Are Tax Credits?
9. What Are Capital Assets?
10. Understanding Income Tax
11.Tips for Checking Your Tax Refund Status
12. The History of Tax Bracket in United States
13. The Carbon Tax Proposal for Climate Change Solution
14. Taxable Automobile Expenses
15. Tax Shelter: A Legal Means to Lower Your Tax Bill
16. Tax Deductions for Small Businesses
17. Tax Credits for environmentally friendly residential equipments
18. Tax Credits For Education
19. Tax Credits 101
20. Tax Credit Information for First-Time Homebuyers
21. Steps in Selecting the Best Tax Preparation Software
22. Smart Tips to Pay Less Taxes
23. Should You Do Taxes Yourself?
24. Self-Employment Taxes
25. Tax Planning: Reducing Your Taxes
26. Real Estate Property Taxes
27. Paying Estimated Taxes
28. Obsolete Taxes: A Characteristic of Old Civilization
29. Legal Tax Shelters Vs. Abusive Ones
30. Keeping Good Records
31. Income Tax Tips to Help You Save Money
32. How To Write Off Bad Debts
33. How to Prepare Your Income Tax Return
34. The History of Property Tax
35. Fat Tax: the Historic Struggle to be Proved Effective and Efficient
36. Energy Tax Credits
37. Deceased Tax Payer: What To Do?
38. Common Tax Problems
39. Choosing An Accounting Method (Cash vs. Accrual)
40. Good News For Parents: Child Tax Credit
41. Child Custody And Taxes
42. Can You Deduct Alimony?
43. Buy New Hybrid Cars and Avail the Tax Credit
44. Avoiding A Tax Audit
43. About Your IRA And Taxes
44. About Inheritance Taxes
45. About Deducting Moving Expenses
46. A Brief Overview of Inheritance Tax
#1. Your Filing Status Affects Your Taxes
Some people miss out on the fact that the right filing status can result in the lowest possible income tax payment. Officially, you only have one filing status.
This is determined whether you were considered married at the end of the year. An individual's filing status determines which standard deduction amounts apply to a specific tax return.
It means two people with the same amount of income could have different tax calculations resulting from the difference of their individual filing status.
The filing status is established by the persons marital status on the last day of the year. For tax collection purposes, people who are married during the year are considered married for the whole year.
On the other hand, people who become divorced or legally separated will be considered unmarried for the whole year. There are situations where married people can be considered unmarried for tax purposes even if they are not legally divorced or separated.
Single filing status
You are not married. (This includes people who are legally separated or divorced at the end of the year.) If you want to claim a dependent, check out if you qualify for the Head of Household filing status to avail of more tax benefits.
Head of household filing status
You are unmarried. You can claim a dependent and you have cared for a dependent for over half a year. Claimants to head of household (HOH) filing status have a higher standard deduction and lower tax rates. Not all single parents qualify for head of household status.
Qualifying widow/widower with dependent child filing status
Your spouse died within the last two years, you have cared for a dependent all year, and you have not remarried. Qualifying widows and widowers (QW) receive the same standard deduction and tax rates as those married filing jointly.
In the year of your spouse's death, you can file a joint return. Use the QW filing status for the next two years if you have a dependent. Afterwards, your filing status would be single or head of household.
Married filing jointly filing status
You are married, and you are filing a joint return with your spouse. You are considered married if you are legally married on the last day of the year. Married filing jointly (MFJ) provides more tax benefits than filing separate returns.
Married filing separately
You are married, but you and your spouse are filing separate tax returns. Married filing separately (MFS) taxpayers have the least beneficial tax treatment.
Reasons for MFS include (1) only one spouse wants to file taxes, (2) one spouse is self-employed, (3) one spouse owes taxes, the other has a refund, (4) and the spouses are separated but not yet divorced.
Have you found out now your tax filing status?
#2. Who are Qualified for the Child Tax Credit?
Here's good news for parent-taxpayers out there: you can decrease your tax bill by claiming a child tax credit.
Essentially, the child tax credit is a non-refundable tax relief that is directly applied against the income tax. This means the tax credit is not just deducted from your taxable income; rather, it is directly deducted from your actual taxes. The child tax credit reduces tax by $1,000 for every qualifying child (until 2010), as mandated by the Working Families Tax Relief Act of 2004.
To be able to claim the child tax credit, you have to meet several criteria. First, you must earn a minimum amount of $3,000 to qualify for the tax credit. The income includes the taxable earned income and the nontaxable combat pay.
Second, your child must be eligible for the tax credit. A qualifying child satisfies the following requirements:
* Under the age of 17 at the end of the tax year
* A citizen, alien, or resident alien of the United States (A legally adopted child from another country who lives with the parent qualifies for the tax credit.)
* Related to you in any of these ways: biological child, legally adopted child, stepchild, foster child, grandchild, sibling, stepsibling, niece, or nephew
* Lives with you for more than half of the taxable year
* Dependent on more than half of your support
Now, if you are sure that you are eligible for a child tax credit, you can claim it by filing the Form 1040 or Form 1040-A. Claiming the child tax credit is not allowed on Form 1040-EZ since it is intended only for single taxpayers or those who have no dependents.
If you have three eligible children, you are qualified for a $3,000 deduction from your taxes. But if your tax is only $2,000, the credit will only apply for the tax owned, which is $2,000. Although you are not allowed to claim a tax credit whose amount is higher than your income tax, you are allowed to ask for a refund of the difference between your child tax credit and your income tax, provided that you meet certain requirements. You may qualify for an additional child tax credit, which is equal to the lost credit (In the above-mentioned example, it's $1,000). To claim the additional child tax credit, you will need to fill out and file Form 8812.
Given the hard financial times, all a family needs is a breather from the burdens of tax. A child tax credit provides a welcome financial relief for parents who are struggling to make both ends meet.
#3. Where Do Your Taxes Go?
"In life, only death and taxes are certain," as the old clich‚ goes. As a citizen and an automatic taxpayer, you might wonder where your taxes actually went.
As a general knowledge, we all know that governments need taxes for the system to function. It pays for the services it is obligated to spend on the people. On a piecemeal basis, just how was the federal tax dollar spent? (Let us take on the 2008 budget.)
In 2008, the federal government spent $3 trillion which is 21% of the country's GDP (gross domestic product). More than $2.5 trillion was financed by the federal tax revenues and the remaining $459 billion was from borrowed money. This amount will ultimately be paid by future taxpayers.
21% of the 2008 budget ($625 billion) was spent for defense and security-related international activities. This includes the cost of supporting operations in Iraq and Afghanistan which was appropriated by Congress for approximately $188 billion. (This was funding, not actual spending.)
Another 21% ($617 billion) was given to Social Security for the retirement benefits of some 35 million retired workers and their dependents.
Social security also gave survivors benefits to 9.1 million disabled workers.
Medicare, Medicaid, and Children's Health Insurance Program
Medicare, Medicaid, and the Children's Health Insurance Program (CHIP) together accounted for 20% of the budget ($599 billion) spent.
$391 billion went to Medicare which provided health coverage to around 45 million over 65 years old or with disabilities. Medicaid and CHIP provided care to 55 million low-income children, elderly people and people with disabilities, funded by the remainder of their appropriations.
Both the Medicaid and CHIP spending required matching payments from the states.
Safety net programs
Another 11% of the budget ($313 billion) was used to support programs that provided aid (different from health insurance or Social Security benefits) to persons and families who were hard up.
These programs included the refundable portion of the earned-income and child tax credits. They had assisted low and moderate-income families through the tax code. There were other programs that provided cash payments to eligible individuals or households including the Supplemental Security Income for the elderly and the disabled poor and unemployment insurance, among the many other assistance and various programs for the underprivileged.
(These programs have been shown to have lifted approximately 15 million Americans out of poverty in 2005 and reduced the depth of poverty for another 29 million people.)
In 2008, interest payments for past borrowed money had reached $253 billion or equivalent to some 8% of the budget.
That is a bird's eye view on where your taxes went for the year 2008. The story for 2009 was a completely different story caused by the world-wide economic downturn.
#4. What You Need to Know About the New First-time Home Buyer Credit Tax
The first-time homebuyer credit is extended and expanded in the Worker, Homeownership and Business Assistance Act of 2009, signed on November 6.
This newly signed law states that an eligible taxpayer must purchase or enter into a binding contract to buy a principal residence on or before April 30, 2010 and closes the home by June 30, 2010. To qualify for purchases in 2010, they have the option to claim credit on either their 2009 or 2010 return.
In addition, the law also authorizes the credit for long-time homeowners who buy new principal residences. It also raises the limitations on income for homeowners who claim the credit. From $75,000 income limits for single taxpayers and $150,000 for married taxpayers, it is now $125,000 for single and $225 for married couples filing joint returns.
There are new benefits given only to Foreign Service and intelligence community serving outside the United States.
Also, worth noting are factors and aspects that do not qualify for tax credit. For example, the people a taxpayer claims as dependents do not qualify for a tax credit. This includes anyone under the age of 18. A home purchase from relatives of both the taxpayer and his or her spouse is invalid for tax credit. This includes a taxpayers ancestors such as parents and grandparents, lineal descendants such as child or children and grandchildren, and spouses.
If one of the married couple has earlier owned a home, either of the two is not eligible to claim a first-time home buyer tax credit. However, they can still apply for the repeat home buyer tax credit up to $6,500. Repeat home buyers are taxpayers who have owned a home for five consecutive years aside from the prior eight years. It is applied to houses sold after November 6, 2009 and on or before April 30, 2010. If a binding sales contract is signed by April 30, 2010, any home being completely bought by June 30, 2010 will qualify.
Moreover, neither the first-time home buyer tax credit nor the repeat home buyer tax credit have to be repaid unless the home is sold or ceases to be used as the buyers principal residence within three years after the initial purchase.
Another thing to remember is that taxpayers should submit a copy of the HUD-1 statement and IRS Form 5405 in claiming first-time home buyer tax credit or repeat home buyer tax credit.
#5. What Is Alternative Minimum Tax?
A lot of people, especially those that are planning on starting their own business, should start learning about taxes, especially since they will be required to pay Federal income tax, which is basically a system of the United States. One particular tax that you should learn about is called the alternative minimum tax.
What is AMT?
Alternative minimum tax, or AMT, is a tax system that is part of the United States Federal income tax system, and is basically used for those people and corporations who owe personal income tax and corporate income tax respectively. Basically, this tax is considered to be an extra tax since you will still need to pay this tax aside from the regular income tax that you need to pay. As the name suggests, you are actually subject to a different set of rules, thereby giving you an alternative way of calculating your income tax. In theory, you are supposed to be paying a certain minimum amount for your income tax. If you are already paying that same amount through your regular income tax, then paying AMT should no longer be an option. However, if your income tax falls short of the minimum, then you would be required to pay off the difference through AMT.
What Is The Purpose Of AMT?
AMT was actually created for the purpose of preventing people who have very high incomes from abusing special benefits in paying their taxes, thereby greatly reducing the amount of income tax that need to pay. These high-income households use certain types of deductions to bring their tax down to a certain minimum. Unfortunately, AMT has already widened its range, and can now include even those people who do not have a very high income, or even those that do not necessarily claim a lot of deductions and special benefits, which means that almost anybody that fits within criteria set for AMT can be have AMT liability.
What Can Cause AMT Liability?
You can have AMT liability through a number of possible ways. It can be taken from a big item in your tax return, or it could be made up by a combination of small items, whichever one could cause or contribute to your AMT liability. Claiming a lot of personal exemptions can contribute to your AMT liability. The more you claim, the greater the chance of you becoming liable. Standard deductions in your income tax return, state and local taxes, medical expenses, even interests on second mortgages could all lead to AMT liability.
How Do You Calculate Your AMT?
In order for you to better understand AMT liability, you need to understand first how that particular type of tax is calculated. What you do is basically calculate first the alternate tax by taking note of all the various tax benefits that can be taken under the regular tax so that you can reduce it in your calculation. Also factor in the AMT exemption, which is a special deduction that applies to people who have low to modest income. Then, you calculate the tax by adding the 26% to 28% AMT rates, especially to those who have higher income levels. Once you have done this, you then calculate the difference between this tax with your regular tax. If your regular tax is lower than the AMT tax, then it will be added to your regular income tax, and you will be required to pay the difference between the two. If, however, your regular income tax is higher, then you don't have to pay any AMT tax.
Why Do People Want To Repeal AMT?
A lot of people want AMT tax to be repealed because AMT tax is not just targeting people with very high incomes anymore, but can also include those who have modest incomes as well. This means that almost anyone can become a potential target for AMT tax.
Can You Get AMT Credit?
There is a possibility that you can actually claim special AMT credit, but only through certain terms and conditions. One condition is that paying AMT for specific timing items, like incentive stock options, will let you get credit for those specific items only in the future.
#6. What Can You Deduct For Home Business?
If you have your own home business, or if you are working in a home business company, then you are in luck. If you do not already know, owning or working for a home business can subject you to certain tax deductions, just as long as the deductions are within the specified terms and requirements for it to be considered. A percentage of the space in your home, more specifically the area used for the purpose of business in your house, including some of the expenses related to your home business, can be deducted from your total tax income.
What Are The Requirements?
In order for you to become eligible for this particular tax deduction, you need to do certain checks to make sure that you are indeed qualified for the deduction. The IRS has certain requirements that need to be satisfied. One of the first requirements is that the home business space that you have at home should be the only work space that you have, or is provided by your employer. If you are simply choosing to work at home for your convenience, even if you have a regular office space provided for by your employer, then you actually do not qualify for the tax deduction.
The office or work space that you have at home should also be used primarily for your business only. It can be a place for you to meet up with your clients, or your main office work space. If you use it for another purpose other than for business, then it may not qualify for the tax deduction. The office space, including all of the business-related expenses that you might have incurred, can all be tax deductible.
One of the kinds of business-related expenses that you can include in your list of tax deductible items is what you call direct expenses. As the name implies, these direct expenses that you might incur would include all expenses that are directly caused by running your home business. It could be any equipment that you might have bought or used for the benefit of your business, such as a phone line, fax line, office supplies, and could even include maintenance and repairs.
Indirect expenses are another business-related expense that you can deduct from your total tax income. It may not necessarily be caused by running the business, but this type of expense can actually influence the cost of running and operating your business. These expenses are those that are crucial in running and operating your business, but cannot be completely deducted from your total tax income. Examples of this type of expense are your electric bills, water bills, heat, home mortgages, real estate taxes, and even waste removal costs. Although all these cannot be completely deducted since all of these are included in your living expenses, you can, deduct portions of it.
Can A Home-Based Employee Also Get Deductions?
Employees of home-based businesses can benefit from certain tax deductions that can be gained from working in a home office. As long as the employee also meet the same standards for a home office as those who actually owns the business. However, unlike the standard set for self-employed taxpayers, you can actually use the home office work space simply for the convenience of your employer and still benefit from tax deductions.
Where Can You Claim Home Business Deductions?
As soon as you are finished calculating how much space in your home you actually use for your home business, and what other expenses you have incurred in running and operating your home business, then you simply need to fill up Form 8829 to help you make a calculation as to how much deduction you would get and report this to Schedule C. If you are an employee, however, you need to use the IRS Publication 587 work sheet, to help you make a calculation as to how much allowable expenses can you deduct. This should be reported on Schedule A.
One of the more important things that you need to do when operating your own home business is that you must have a system of keeping all of your records and necessary and important documents that could help you prove your claim, that you are indeed eligible, and are working and operating in a home-based office space. Just make sure that you keep at least three years worth of records and documents from the date of filing.
#7. What Are Tax Relief Checks?
When the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed, tax relief became a way of reducing the taxes weight on the taxpayers. The government started sending $300 checks for singles, while couples receive $600 checks in 2001. This was a major tax relief effort by the United States government for the last two decades.
What are these checks?
* Tax relief checks could be a form of refund. Since Americans would be paying their taxes in advance, taxpayers may overpay. In other places, this could be called a refund check. To reiterate, this is not a refund from a previous rebate. This is an advance refund for the future taxes that are yet to be filed.
* When the government change the tax rates, they would be sending out relief checks to help taxpayers adjust with the old and new rate.
* The government could also send tax relief checks to help consumers boost the market.
The amount sent by the government varies, just like in the case of summer 2001, when singles and couples received different amounts. It could be based on the income of the taxpayer. These checks could be standard with everybody receiving the same amount.
Those who would receive the taxes are chosen randomly. It could be based on their Social Security number or government identity. Aside from easing the tax burden, it signaled the changing of the tax rate. It brought down the 15% tax rate to 10%. Those who belong in low and moderate income families are the top priority.
If you want to know if you are qualified or you will be getting a relief check, then you could check the IRS site for you status. Before you can get a relief check, you would need to file your taxes. The IRS would provide information on when the check would be available and how to apply or find it.
To get a relief check, you should have a valid Social Security number and have an individual or combine qualifying income. Aside from that, you or your family should not be dependent or eligible to be dependent on others federal tax return.
To track your relief check, you could call the IRS or state taxation department. The IRS or the taxation department would inform you what type of check, is available. You could even trace it online, in the IRS website or in some cases, some websites of federal states.
#8. What Are Tax Credits?
Tax credits actually relate to two concepts, the first one involves the amount of partial payments made to the taxes that you have due, and the other defines it as a benefit paid by the state through the tax system. They can be considered as payments from the government back to the tax payer. This can greatly reduce your tax liability to the government. Not a lot of people understand tax credits and how they work. Hopefully, after you read this article, you would have a much better understanding as to what it is, and how you can benefit from it.
Tax Credits Definition
Basically, tax credits are a way that you can reduce the level and amount of your tax liability dollar-for-dollar, but it will not reduce it beyond zero. This reduction will be made on your gross tax liability, which is actually the amount of tax that you need to pay before any reduction is made. If your tax liability already reaches zero, then any tax credit that will be imposed on your tax liability will no longer be useful. Most tax credits are actually non-refundable, but there are some that are still refundable, and can still be refunded to you even after the excess tax credits have already expired. The only times that you can get the refundable tax credits are through the additional child tax credit and earned income tax credit.
Who Can Get Tax Credits?
One of the very first things that people ask themselves when it comes to tax credits is if whether everybody can avail of this type of state benefit or not. Tax credit can be given to a number of different people, depending on which category they would belong. But the most basic way that you can determine if you are eligible for tax credit would all depend on your age, if you have children under your care, and if you have invested some money on a retirement savings account.
There are some other forms of tax credit that can be given to you depending on your current situation, like a working tax credit for example, wherein you and your partner can avail of it when both of you are working for a certain number of hours within a week but are still earning low incomes. You don't necessarily need to have children in order for you to qualify for this type of tax credit. You can either be self-employed, or if you are working for someone else.
How Much Tax Credit Do You Get?
Depending on which type of tax credit, you get different computations for each type of tax credit. Majority of these tax credits will depend a lot on whether you are qualified to get them or not, and will depend on your total gross tax liability, which is the actual total of your tax liability without the credits and deductions. To find out how much you actually owe in your tax liability, you simply need to check your net tax liability, which will show how much your total tax liability really is, including all of the deductions and credits that have already been applied. You can this information on your tax form.
Is Tax Credit Better Than Tax Deduction?
Contrary to how they sound, tax credits can actually be a whole lot better than tax deductions mainly because tax credits can decrease or lower your tax directly, as compared to tax deductions which only reduces the amount of taxable income, which means that the amount of tax reduced from your total tax is not that much, but only a fraction of the amount.
How To Apply For Tax Credit?
There are a couple of steps that you need to take in order for you to properly apply for tax credit. As soon as you figured out that you are eligible for certain tax credits, then you simply need to prepare and organize all of the necessary documents that will show and prove that you are actually eligible for tax credits, and so that you can check if the computation done to calculate your tax credit is correct. Get the necessary forms that you need to fill out, and
How Are Tax Credits Paid?
Benefits and tax credits are actually paid by direct transfer into an account that you have set up. Once you have an account set up under your name, then you can get your tax credit directly transferred into that account as soon as the application you filed has been approved.
What Are Capital Assets?
In every business, investments are sure to be made in order for that business to succeed. It could be in the form of vehicles, major equipment, furniture, machinery, land, building, franchise rights and even patents, or anything that might be crucial for the business to operate. If these assets are used in your business for a duration that exceed a year, then they are considered to be capital assets of your business.
#9. Capital Asset Definition
Capital assets can be described as any property that is owned by the person paying taxes for it, however, not all properties owned by that taxpayer is necessarily considered a capital asset. Basically, capital assets are those properties procured by taxpayer for useful or investment purposes. These types of properties are tangible properties that cannot be easily converted into cash, which is why these properties are held by the taxpayer for a long period of time.
In order for you to understand more what capital assets are, we should discuss and enumerate their different types.
Types Of Capital Assets
Although most of the properties that a business possesses can be considered as their capital assets, there are actually certain properties that cannot be considered as such. Properties like trade and stock inventory, properties primarily held for sale by the taxpayer to the customers of his particular trade or business, depreciable properties that are used in the taxpayer's business, and even certain memorabilia, letters, compositions and copyrights. To simply put it, majority of the assets that are not used in business can be classified as capital assets, and those that are used in business are considered as capital assets as well, just as long as they are not held for sale or depreciable.
Although all of these things are considered as capital assets, each one can actually result into different capital gains, which could mean that each capital gain will be taxed based on the types of capital assets used. Here are some examples.
Certain assets in that will be used in your business can be considered fixed assets, and will not be taxed as capital gains, but ordinary gains. These business assets are actually the equipment and machineries used in your business, including the chairs, tables, computers, and even the furniture in your office or place of business will be considered as such.
Real estate property refers to the land and building that you might have procured and used for your business. This type of asset can be taxed in a number of ways, all of which would depend on how you actually made use of the property. It can be taxed as a short-term or long-term capital gain, or as an ordinary gain. For those pieces of real estate that you have used as your place of residence, you can actually get a special exclusion on your capital gain as long as you have gained profits off on that piece of real estate. If, however, the real estate property only serves as your second home and not your primary place of residence, then the property will only be treated as either a short-term or long-term capital gain, all depending on the duration that you have lived and owned the said property.
Small Business Stock
With this type of asset, you could actually get a preferential tax treatment based on the losses or capital gains that you would procure from your small business stock. Losses can become ordinary losses, and gains from small business stock could be excluded partially.
Collectibles are, as the name implies, those properties or pieces of assets that are collected by the taxpayer and are considered by him as investments. Some examples of said collectibles are coins, stamps, fine art, antiques, precious gems and metals, and even alcoholic beverages such as wines. There are, however, some precious bullions and coins that cannot be considered as collectibles since they are deemed to be regular investment assets, which means that they are not taxed in the same way as other collectibles are taxed.
They are basically taxed depending on whether they are long-term investments or short-term investments. Long-term investments are taxed at 28%, while short-term capital gains are used to tax short-term investments.
#10. Understanding Income Tax
Income tax is a kind of tax paid by those who are employed and self-employed which is based on their income. Income coming from pension or savings can also be covered by income tax. Personal income tax is often filed at the end of the year. Usually a taxpayer would have to prepare two forms: for those who have not paid enough and for those who have exceeded the amount to pay.
Aside from employment salaries, other sources of income which are subject to tax are individual salaries coming from investments, property, and trade. An individual's income tax would rise along with persons reported income, making it a progressive tax. A progressive tax refers to a tax rate that increases when the taxable base increase.
To calculate your income tax, gather all possible sources of income, not only from earnings as an employee. Do not include housing benefits, tax credits, maternity or disabled living allowances, and if applicable, lottery winnings. You could always check with IRS, their website or the local taxation department about what income are tax-free and taxable.
When the gross income is already calculated then you could deduct retirement plan payments, interest on early withdrawal from savings, education loan and similar payments which are called adjustments. The amount would be called the adjusted gross income.
Tax deductions should be removed from the adjusted gross income. It could be the standard deduction or itemized deductions. You could use whichever has higher deductions. Itemized deductions would include medical expenses, contributions made for charitable institutions, casualty loss, etc.
After the deductions, you could still check if you are still covered by personal exemptions or allowances. When all the possible deductions and benefits are already removed from the gross income, what you will have is the taxable income. This taxable income is then multiplied with the tax rate. Tax rate depends on the income and marital status.
It is common for employees or wage earners to receive a paycheck with tax deduction. Tax will be deducted from their salaries based on their marital and dependency status. Towards to end of the year or during the tax season, employers would be sending their employees, forms containing their wage earnings for the entire year and how much taxes were deducted from their salaries. IRS will then compute the taxes taken out of the employees paychecks. If an employee had overpaid their taxes, a check will be sent in a few weeks after filing the form or in some cases, directly deposited in her or his bank account.
The United States is known to have one of the most complex tax systems in the world. And it can get more complex. There are different proposals that could simplify or make the taxation system more complicated. Since taxes concern us, we have to know more about it.
#11. Tips for Checking Your Tax Refund Status
So, you have already paid your taxes, and it turned out the government owes you a certain amount. That means you will have a tax refund!
Wondering when exactly you will receive your tax refund check? You will need to know if your tax refund has already been processed by the Internal Revenue Service (IRS). The time it takes to process your refund depends on how you filed your federal income tax return. If you file your return through mail, processing of refund usually takes four to six weeks. If you filed your tax return using tax preparation software, it will take about one week to process your refund. It is possible to check the status of your refund; however, you can start doing it when your tax return is processed.
If you file your tax return before the yearly tax deadline (April 15), you may check the status of your tax refund at the IRS website (www.irs.gov). The site has a section named "Where's My Refund?" where you may check your tax refund status regardless of the method you used for filing your income tax return. You need to provide your Social Security number, your tax filing status, and the precise amount of your tax refund to be able to see the status of your refund.
According to the IRS, tax refund checks should reach the recipient within three weeks since the mailing date indicated on the site. If your check has not been delivered by that time, you can request the IRS to track your refund online. You can also request for a change of address online if your refund did not arrive because of a problem with the mailing address you used.
Another way to follow up on your tax refund status is to call the IRS. It has a toll-free hotline, which can be found at the IRS site. Make sure you have a copy of your tax return so that you have all the information ready (i.e. Social Security number, refund amount, and tax filing status) when the IRS staff asks for it.
Did you use a professional tax preparation service in filing your tax return? You can call or email the service to know when your return was filed and what forms were used in filing it. You can also ask the person who prepared your tax return if your return has been processed already.
#12. The History of Tax Bracket in United States
One of the components of a progressive income tax is the tax bracket where taxes increase proportionally as income increases.
This is different from flat tax. A system levies on every taxpayer at the same rate. For example, both taxpayer A's and B's income will be taxed at the same rate, say, 10 percent even if taxpayer A's income is $100,000 and taxpayer B's income is $2 million.
The underpinning idea for tax bracket is a socialized taxing where high-income taxpayers should pay more than the low-income ones. In this way, low-income taxpayers will have more money to spend on basic services than spending on tax payment.
A tax bracket can mean marginal tax rate, which is the tax levied for every additional income. Such additional income is called the "last dollar," which is the part of an income that does not go beyond the upper limit of certain bracket. The bracket is a range of incomes taxed at a specific rate.
Tax bracket was first implemented in 1862 during the first income tax. The first income tax was created in the Revenue Act of 1861. The creation of income tax was aimed to help the Union raise money to fight the Civil war. Starting from the $8,000 earners and up, income tax was levied at a rate of three percent. A higher tax bracket was five percent for income more than $10,000. This income tax was repealed in 1872.
Only in 1913 that the 16th Amendment to the Constitution provided the power to collect income tax regardless of state population. This marked the beginning of federal income tax. During this time, the tax brackets range from one percent on income of $0-$20,000 to seven percent on income of $500,000 and higher.
The Revenue Act in 1916 increased the tax bracket rates from two percent to 15. After a year, the War Revenue Act increased the tax bracket rates from two percent on income of $0-$2,000 to 67 percent on income of $2 million and higher.
In 1930's, there was a big leap in rates because Great Depression. The highest rate became 79 percent. Again, the tax bracket rates increased during the World War II to fund the war. This time the lowest rate reached 23 percent for income $2,000 or less.
In 1981, the highest tax rate drops to 50 percent because of the Economic Recovery Tax Cut. The Tax Reform Act of 1986 reduced rates and cut the number of brackets until in 1987, there were five. Since then, tax bracket rates have fluctuated.
#13. The Carbon Tax Proposal for Climate Change Solution
The popularity of campaign against climate change has driven several lawmakers, civil movements, and experts to design steps in fighting the climate crisis. This includes reducing the use of fossil fuel and of course the economics of it.
In the recent climate negotiation, attended by North and South country representatives, parties, and social movements, the proposals on ways to reduce the use of fossil fuels gained much controversy. While most politicians and businesspersons prefer cap-and-trade schemes, several, but not all, economists and consumers push for carbon tax. Cap-and-trade emission schemes and carbon tax are the two major market-based choices, both receiving varied amount of criticism.
What is carbon tax? Why do most economists and consumers choose it over cap-and-trade emission scheme?
Carbon tax charges on the production, distribution, or use of fossil fuels, which emits carbon dioxide that worsens global warming. The environmental fee is based on the amount of carbon being emitted. Hence, it is called a price instrument because it sets price for the emissions.
The foundation of this policy is the economic theory on negative externality. This is the adverse effect on consumers, who are not directly involved in the transaction, resulting to a market failure. Thus, economists and theorists proposed taxing goods to address the negative externality. In the case of global warming, the negative externality caused by carbon dioxide emissions fossil fuels are the source of global warming, thus deserve to be taxed.
For example, United Kingdom's Climate Change Levy (CCL) is a direct carbon tax. It levies fee on the energy delivered to business consumers in United Kingdom. This policy aimed to encourage the use of alternative energy resources and reduce carbon emissions. However, critics call for its replacement with a proper carbon tax.
Indeed, carbon tax is expected to create incentives on energy conservation. In addition, the collected tax can help subsidize environmental policies and programs. Because prices of fossil fuels would continue rising, a carbon tax would put renewable energy source on a competitive footing. This will stimulate growth, not to mention increase in the use of clean energy. Renewable resources include wind, solar, and geothermal.
Because carbon tax poses a predictable business environment unlike cap-and-trade schemes that fluctuate according to economic conditions, it is appealing to businesspersons and economists even if it lacks political support.
Nevertheless, the most important is a regulated policy incentive on the use of clean energy.
#14. Taxable Automobile Expenses
Unbeknownst to some people, you can actually deduct your automobile expenses on your tax, which is why it is important to keep some of the documents that could help you get the tax deductions that you want for your automobile expenses. This article will help you understand more about taxable automobile expenses so that you can avail of it.
When Can You Avail Of Taxable Automobile Expenses?
Although simply driving and operating an automobile, whether it be a car or a truck, is not always taxable, there are certain provisions and terms that will allow for some of your automobile expenses to be deducted from your total tax. The only times that the cost of operating your automobile will become deductible is when you use the car or truck for business purposes, medical purposes, charitable services, and when you are moving or relocating. It is through these different purposes and conditions that you can deduct the operational cost of your automobile to your total tax.
When driving or using your car for business purposes, it basically involves driving the vehicle from your work place to another work site, or to go to business meetings. Driving from your home to your place of work cannot be included for this purpose. Medical purpose involves driving yourself or your dependents to a hospital in order to get medical care. Moving or relocating costs that you might incur when moving to a new place of residence can also be part of your deductibles. Using your vehicle to provide services for charitable organizations can also be taxable.
What Can Be Considered As Automobile Expenses?
In order for you to be able to deduct automobile expenses on your tax, you need to know first which of the things you can consider as taxable automobile expenses. There are a couple of things that are included in the list of taxable automobile expenses, such as repairs (which could include tire changes, routine maintenance, and oil changes), registration fees of your vehicle, parking fees, toll fees, gasoline and fuel, personal property tax, interests on your car loan, rental expenses, lease expenses, and depreciation of your vehicle.
There are, some things that are not deductible from your tax, and those items are parking tickets, as well as tickets and fines.
Another way that you can calculate the taxable automobile expenses is by simply calculating the mileage rate of the vehicle instead of just tallying up all of your actual automobile expenses. You simply calculate the mileage that your car has incurred when you used it for business purposes, medical purposes, charitable services and relocation and deduct it from your total mileage.
Which Is Better?
There is actually no better way of determining your taxable automobile expenses. Simply figure out which process is more convenient for you. If you have used the automobile for different purposes and you don't want to spend all that time searching for the necessary documents and paperwork that will show your actual automobile expenses, then using the standard mileage rate might be better for you.
Where Can You Claim Your Taxable Automobile Expenses?
There are actually different ways and processes that you need to go through in order for you to claim your taxable automobile expenses. For employee business expenses, it should be reported on form 2106. For when the automobile was used for medical purposes, as well as for charitable services, these should be reported on schedule A. For self-employed taxpayers, on the other hand, their automobile expenses should be reported on schedule C.
How To Prove Your Eligibility?
In order for you to prove and claim your eligibility on your taxable automobile expenses, you need to keep logs of all the necessary documents that could be used to prove all the possible deductibles from your tax. Keeping a mileage log is also a good idea, as this can help show how you used your vehicle and for what purpose. You simply take down all the necessary information, such as the date that the tax-deductible trip was taken, as well as the number of miles that it took for you to achieve that purpose, and for whatever purpose you used the vehicle for. It should all fall under the categories mentioned above in order for it to become a legitimate taxable automobile expense.
#15. Tax Shelter: A Legal Means to Lower Your Tax Bill
If you want to decrease your tax liability and have more cash in your pocket, you can take refuge in a tax shelter.
What is a tax shelter?
It is a valid method that decreases taxable income, thus helping individual and corporate taxpayers minimize the tax they pay to the federal government. Ever heard of the 401k plan sponsored by companies to their employees? That is one example of a tax shelter. Some tax shelters can be in the form of activities that reduce taxable income (e.g. charitable donations, CSR or corporate social responsibility, etc.) and investments or deposits in accounts (e.g. individual retirement accounts) that offer an attractive tax treatment.
Other legitimate types of tax shelter available to taxpayers include the following:
* Real estate investment - Real estate investors enjoy tax incentives from the Internal Revenue Service (IRS) when they buy properties, thus giving them substantial tax savings. The available deductions for most real estate investments include property taxes, maintenance expenses, mortgage loan interest, and insurance premiums.
* Municipal bonds - The interest earned from municipal bonds, which are used to finance public works projects, are not taxable.
* Setting up your own side business - When you allot a certain amount from your primary income to start and fund your side business, you shelter yourself from federal income tax. You can decrease your taxable income by deducting your business expenses such as supply and equipment costs from your income tax.
* Retirement plans - These legal tax shelters include individual retirement accounts and pension plans such as 401(k) and 403(b).
* Company-sponsored life insurance, health insurance, and education benefits - These and other benefits sponsored by your employer are not taxable. So take advantage of such opportunities to lower your taxable income, which is done by spending part of your income for the benefit before your tax withholding is computed.
In essence, when you use a legitimate tax shelter, you are avoiding payment of a certain amount as tax. Tax avoidance or tax mitigation, however, should not be confused with tax evasion, which refers to the unlawful practice of not paying taxes. The key difference between these two practices is the financial benefit of the shelter. Legal tax shelters typically involve income generation while illegal ones do not. The presence of abusive tax shelters explains why the IRS monitors closely the use of tax shelters. Make sure that you pay your taxes properly by making sure that all your tax shelters are legitimate.
#16. Tax Deductions for Small Businesses
Different forms of tax deductions are of course the most after-sought methods of taxpayers especially for business owners. The Internal Revenue Service (IRS) is actually offering a number of tax deductions.
An example of this is the education deductions. This is strictly for work-related education. Employers can take away an employee's educational expenditures if the courses improve other job-related skills or if the employee needs the education to perform his or her tasks. Self-employed people can also apply education deductions, which include transportation to and from the school.
There is an entertainment deduction, which can abstract 50 percent of entertainment expenditures for the unreimbursed business assemblies. However, the taxpayer should prove that meetings are purely for business purposes and set at business areas like conference and forums. Rest and recreation are allowed as long as it is followed with business meetings.
The unreimbursed travel expenses can also be deducted. Tax-deductible travel expenses include airfare, lodging, some food, and dry cleaning to name a few. The expenses of the business associates traveling with the taxpayer can also be deducted, as well as, family members or friends. Only the employees are not included in the tax-deductible expenses.
If there are tax-deductible travel expenses, of course a taxpayer can write off his charitable donations. This is applicable to businesses that are partnerships, corporations, or limited liability in nature. These businesses can deduct up to 10 percent of their taxable income. Even the individuals can deduct between 30 percent and 50 percent of their adjusted gross income to qualifying charities and foundations.
Software, advertising and promotions are tax-deductable. As long as software is used more than one year, a taxpayer can write it off. Meanwhile, all expenditures for advertising and promotions, which is relate to the taxpayers business, can be deducted as miscellaneous expenses.
In addition, legal and other professional fees such as accountant are tax-deductable in some way. Business owners can deduct it from tax professions.
Of course, a taxpayer must not forget that he or she can deduct up to $5,000 in start-up and $5,000 in organizational costs for the first year of his or her business. Expenses include market research, advertising, employee training and legal advising to name a few. However, rules are different before October 22, 2004 or if the costs exceed $50,000. If you were unable to deduct the expenses, it can be amortized over a 180-month period or 15 years.
#17. Tax Credits for environmentally friendly residential equipments
Climate change has affected the economy enough that lawmakers are force to take steps in this climate crisis. One way is to reduce the cause of climate change: emission of carbon dioxide. Therefore, the government resorted to the common effective method using the tax system. This new tax structure provides tax credits to consumers to be able to encourage them to purchase energy efficient materials.
Either increases your tax refund or decrease the amount of your tax payment, tax credit basically increases your money and reduces what you give to the government. One way to avail these tax credits is purchasing and installing qualifying energy-efficient properties such as vehicles and renewable energy resources. Even home improvements are qualified too. This tax credit covers purchased materials in the years 2006, 2007, and 2009. Energy-efficient equipments should be installed for at least five years.
Worth noting is home improvements made anytime during 2008 is not eligible for energy credit. Home improvements that are eligible for tax credits are exterior doors and windows, storm windows, skylights, metal roofs, insulation, central air conditioning and heating, geothermal heat pumps, hot water boilers, advanced main air circulating fans, asphalt roofs with cooling granules, and biomass fuel stoves with a thermal efficiency rating of 75 percent or more.
For home improvements, also known as non-business energy property credit, a person can avail a 10 percent tax credit of the purchase price of energy-efficient products. These products must meet the 2000 International Energy Conservation Code. In addition, it must be installed in taxpayers home in the United States. This tax credit is limited to $500, which applies to the sum credit claimed in a year.
Taxpayers can use a tax credit when he purchases solar panels or fuel cell power plants. This is called the residential energy efficient property credit. These include the installation of solar panels and solar water heating equipment in the taxpayers home in the United States. Taxpayers are given one credit equivalent to 30 percent of the qualified investment in a solar panel. They can avail a maximum credit of $2,000.
Not only solar panels and fuel cell power plants are eligible. Tax credit can be availed when a taxpayer purchased a wind and geothermal powered systems. The tax credit for wind energy facilities is worth 30 percent of the cost of the equipment with a maximum credit of $4,000. Meanwhile, geothermal heat pumps get a credit of 30 percent of the cost with a maximum credit of $ 2,000 too.
#18. Tax Credits For Education
Getting a higher education, whether it is a college degree or a graduate diploma, would take your career in a different gear. But according to surveys by the College Board's Trends in College Pricing in 2009, a private four-year college education would cost an average of $26,273 for tuition in fees. For public four-year courses, it would cost about &7,020. Both figures have an increase from the 2008 data.
With education costly and increasing over the year, how could it be possible for you to achieve your dream?
To answer and ease the taxpayers' burden, the government started offering educational tax deductions and credits. These credits were expanded for 2009-2010 to significantly ease the weight of paying for tuition and fees in college. Here are some of the educational credits which can be taken advantage of.
* American Opportunity Credit
This credit is only available for the years 2009 and 2010. This education credit includes families and taxpayers who belong in higher income ranges and do not own any tax. Maximum credit is about $2,500 for each student.
Individuals with an adjusted gross income of $80,000 or less are entitled to full credit. Married couples who have joint income of $160,000 are entitled to the credit. Those who have higher income than this are not qualified for the education credit.
* Hope Credit
Hope credit helps parents and students in paying their first two years of their post-secondary education tuition fee. Those who can avail of the Hope credit are those who pay qualified education expenses for their own tuition, or their spouses or dependents tuition fees. Those who are qualified are those who are at least enrolled half-time.
Hope credit is non-refundable. They can zero-out your tax liability. But if you are getting more than the tax you owe, the excess would not be refunded. Education credit and deduction for tuition fees cannot be used for the same student in the same year.
* Lifetime Learning Credit
This credit is for any person who is taking college courses or classes. It could provide as much as $2,000 for the first $10,000 of college tuition and fees. There is not limit for the number of years the credit can be claimed. But it could not be claimed along with other educational credit for the same student in the same year.
Aside from credits, students and parents could also apply for student loan interest deduction, employer tuition assistance and other deduction for tuition and fees. Employer tuition assistance could provide as much as $5,250 in assistance for undergraduate and graduate courses.
All colleges, universities, vocational schools and other educational institutions offering post-secondary education are covered by the credit. These tax credits could be claimed of parents who have their sons and daughter declared as dependent. If not, then they could apply for it, when they file their return. A person who is not related to somebody but paying for their tuition cannot claim the credit. A married couple who is filing separately is also not covered by the credit.
#19. Tax Credits 101
Tax credits are different from tax deductions or allowances. With tax deductions, the adjusted gross income (AGI) is lessened, making the taxable income smaller. But with tax credits, you get to reduce your taxes directly. How can it possibly happen?
Let's take the tax credit the government is offering for those who purchased or planning to purchase hybrid cars or alternate fuel vehicles (AFV) as an example. Under the Energy Policy Act of 2005, you could qualify for AFV tax credits if you are the original owner and purchased the vehicle with no plans of reselling it; purchased it between January 1, 2005 and December 31, 2010.
If you met the laws qualifications then you can qualify for a $4,000 tax credit. If you owe the government $10,000 for your taxes but can claim tax credits for your AFV, then you will only be paying $6,000. If you have already purchased an AFV within that period of time but have not gotten any credit, then you could file an amended tax return to claim your credit and claim a refund.
Some tax credits, though, are non-refundable. For example, you are entitled to a $1,000 credit but your tax liability is $800. This credit will zero-out your tax liability, but you would not receive the remaining $200.
With tax credits, you will get your money's worth, which is why more people are actually seeing the benefits of using tax credit rather than tax deduction. Aside from AFV tax credits, there are other kinds of credits available. There are four types of tax credits: the child tax credits, child and dependent care credits, earned income credits, and tax credits for higher education.
Another tax credit which the government passed, in an effort to save the housing market, was the First Time Homebuyers Tax Credit. To make it easier for first time homeowners to own their first homes, the government is giving credit for as much as $8,000.
The earned income tax credit or EITC is another credit which would be able to benefit workers and low-wage to medium-wage earners. It can be used by both individuals and those who are married. With this credit, you can generate a larger refund. To apply for EITC, then you need a valid Social Security Number and have filed your tax return.
You could even request your employer to reduce or use the credit in your paycheck. If you prefer using this, it is called Advanced Earned Income tax credit. You just need to file W-5 form and provide it to your employer. But you will still file for the credit and account the advance payments in your paycheck.
Before you provide a form to your employer, you would have to make sure you qualified for the tax credit first. If you are already receiving the advanced EITC but later on, found out that you are not qualified for it, you will be paying it back. Whatever kind of tax credit you are after, the best thing to do, is get informed or ask IRS or the local taxation department about the credits and its qualifications.
#20. Tax Credit Information for First-Time Homebuyers
Are you planning to buy a house this year? If this is your first time owning a home, then here's good news for you: you may be entitled to a tax credit of as much as $8,000 if you purchase a house before April 30, 2010. This newly enacted $8,000 tax credit for first-time homebuyers is part of the government's economic stimulus law that encourages growth of the real estate market.
The following are some important information you may need to know about the first-time homebuyer tax credit, if you can take advantage of it, and how you can use it.
Who are qualified?
According to the law that governs this tax credit (Worker, Homeownership, and Business Assistance Act of 2009), only first-time homebuyers are eligible for a tax credit capped at $8,000. First-time homebuyers are those who have not owned a principal residence for the past three years before purchasing a house. If you have bought a vacation home, which is not your principal residence, you are still entitled to the first-time homebuyer tax credit.
Eligible for the tax credit are only those who bought a home from January 1, 2009 to April 30, 2010. The purchase date refers to the date when the property was transferred to the homeowner.
Any home can qualify for the tax credit as long as it costs $800,000 or less and is the principal home of the person claiming the credit.
What are the income limits for claiming homebuyer tax credit?
To become eligible for the full credit, homebuyers must make sure their income is within the specified limits. For single homebuyers, the income limit is $125,000. For married homebuyers filing a joint tax return, it is $225,000. If your income is beyond the limit, you may still be entitled to the tax credit, but the amount will be reduced.
How is the tax credit computed?
The tax credit for first-time homebuyers is equal to 10% of the purchase cost of the home, at a maximum of $8,000.
Is it refundable?
Yes, the credit can be claimed regardless of how much your tax liability is. Usually, the government sends a check for full or partial amount of the tax credit.
However, you have to be the owner of your house for at least three years to be able to enjoy the tax credit. Otherwise, you will be required to return the tax credit amount to the government.
How is the tax credit claimed?
It can be claimed on your federal income tax return. You will be required to fill out the Form 5405 from the IRS.
#21. Steps in Selecting the Best Tax Preparation Software
As the tax filing deadline draws near, what can you do to ensure that you file your income tax return on time? You have two options when preparing and filing your return. You can either do it yourself or hire a professional tax help. Preparing and filing your tax return on your own can be stressful and time-consuming. However, doing your taxes becomes a breeze with the help of a tax preparation software program.
When you browse the Web, most of the tax software programs you will find offer free services. They are going to charge you for every upgrade to the features that you plan to use for preparing and filing your return. If you are looking for a tax preparation software, choose one as you would with other types of software products. It should suit your needs, not the other way around. Here are the steps to guide you through selecting the best tax preparation software offered in the market.
1. Take note of your computers available disk space and memory.
The tax software you choose depends on your computers available resources. Some complex software products require a huge amount of available disk space and memory. If your chosen program is not compatible with your system requirements, then you have just spent about $50 for nothing.
2. Explore the website that offers the tax software.
You can tell if a software product is easy to use by the way its website is designed. If the site is filled with numerous articles and tools, it may be a sign that the product it offers is very complicated. Your best bet is a software product with a no-frills approach that gives a simple solution to your tax preparation and filing needs.
3. Decide whether to use your tax data only for this year or store it for next year. Many tax software programs enable users to keep tax data on their database so that it can be retrieved for use next year. Just remember that you are going to pay an additional fee for the service next tax year. However, if you just want to use the service this year, you will spend less. You simply have to fill out your return, print it, and send it to the IRS through mail.
4. Decide if you are going to need online tax support.
Some software programs offer value-added services such as online tax advisor or support team. If you have ample experience in preparing your tax return, it would be practical not to avail of this extra service.
#22. Smart Tips to Pay Less Taxes
Did you know that there are a number of ways to make your current income tax a bit easier on your pocket? No, evading your tax or finding loopholes in the tax is out of the question here. The key to reducing the income tax you pay is to increase your tax refund. To be able to do that, you need to manage your taxable items efficiently. Here are a few tips that can help you raise your tax refund while completing your income tax return.
1. Keep and organize your tax records.
While most experts advise you to keep your tax records for up to three years, it would be much better to keep duplicate copies of your records so that you can refer to the records when you need them. This will make it easier for you to file your income tax return.
Don't forget to keep your tax records updated. Why do you have to do so? The Internal Revenue Service (IRS) might cast doubts on some items on your tax return, and you might be required to pay penalties or additional taxes for items that do not have supporting documents. Make sure that your tax records are constantly updated so that you will be able to explain any item that the IRS might find questionable.
2. Observe deadlines.
Make sure you submit your tax returns on or before the deadline set by the IRS to avoid penalties.
3. Keep records of your medical expenses.
The premiums you pay for your dental insurance, health insurance, and other medical expenses may be deducted from your tax. The deductible amount is up to 7.5 percent of your income. Records of your medical expenses such as statements and invoices that are not covered by your medical aid should be kept and organized so that you can get tax deductions for such expenses.
4. Keep track of your business-related commuting costs.
Expenses on business travels are completely tax deductible. These expenses include travel costs for conferences and seminars such as parking fees, hotel accommodations, tips, tolls, car rentals, and airfare. The costs of commuting to work, however, are not tax deductible since they are considered personal expenses, not business expenses.
5. Wait for your refund instead of filing for refund anticipation loans.
It pays to wait until your tax refund arrives rather than to apply for a refund anticipation loan with high annual interest rates. The interest rates on such loan typically range between 50 percent and 500 percent. You might end of using most of your tax refund to pay off the loan.
#23. Should You Do Taxes Yourself?
If given the chance, a lot of people would like to do their taxes themselves, not a lot of people can understand the process. Although doing taxes is not that hard, any people can learn, however a lot of people are a bit intimidated with the entire process.
Benefits Of Doing Taxes Yourself?
Paying someone to do your taxes for you will save you the trouble of worrying about your taxes. All you need to do is simply provide that person all the necessary documents and information that he might need to perform the task. Since there are certain tax software programs that can actually help guide you through the process of filing and preparing your taxes step by step, you can do it in the privacy and comfort of your home. This is a much cheaper alternative compared to paying someone to do your taxes for you.
Disadvantages Of Doing Taxes Yourself?
If you don't know much about how to do taxes, then you might find it to be a handful to understand and perform. You will need to learn how to calculate how much you need to actually pay off in your tax liability.
Is Paying Someone To Do Your Tax An Assurance?
Paying someone to do your tax does not insure that the job will be done properly. What's worse is that paying someone to do your taxes will only make you spend more money. You may still get audited regardless if you did the taxes yourself or if you paid someone to do it for you. When you pay someone to do your taxes, it will still be subject to faults and mistakes. Certified public accountants, or CPAs, for example, are certified by the state as the right people to handle such affairs. They do possess more knowledge, skill and experience than your average person however they can still have errors.
When Should You Hire Someone?
Although doing tax yourself might seem like a very good idea, there are instances that you might want to hire someone to do your taxes for you, especially if there are certain factors that only trained professionals, such as certified public accountants (CPAs), can understand and fix. Although having a CPA license does not necessarily mean that they have the best tax expertise. There are actually two possible scenarios wherein you might need to hire someone to do your taxes for you, and that is when you receive a sum of money whose amount is a bit large, and second is when you want to start your own business.
Receiving Large Sum Of Money
When dealing with or handling large sums of money, like a sum that is $1 million dollars and above, you might want to consider hiring a CPA for that particular task, as handling this big of an amount could result in a higher tax liability if you do not know exactly how to lower it. Receiving a large sum of money would require you to have a solid estate plan, so that you won't have much to worry about when the time comes that you need to pass on your money to your heirs. There are just a lot of things that you need to consider when handling large sums of money, which is why hiring a CPA to handle it would be best.
Starting Your Own Business
When starting your own business, hiring a CPA to help you monitor and handle all your monetary issues, especially with your tax liabilities, is probably best. Things will get more complicated as your business begins to grow and progress, especially if there are a lot of money that begins pouring in. You need to ensure that you are doing things right in order to avoid any problems later on.
#24. Self-Employment Taxes
First, self-employment taxes (SE tax) are those social security and Medicare taxes for individuals who work for themselves. It is no different from those social security and Medicare taxes withheld from the pay of most wage earners.
Self-employed individuals figure their SE tax using Schedule SE (Form 1040). They can deduct half of their SE tax in figuring their adjusted gross income. This affects only their income taxes and not their net earnings or their SE tax.
Regular wage earners have their Social security and Medicare figured by their employers. They cannot deduct their social security and Medicare taxes.
If you are self-employed, you must pay SE tax if your net earnings from self-employment were $400 or more. (This does not include church employee income. The floor level for church employee income is $108.28 or more.)
Your net earnings from self-employment are based on your earnings subject to SE tax.
Use Schedule SE to figure your net earnings from self-employment if your earnings are subject to SE tax.
(The SE tax rules apply no matter how old you are. They apply even if you are already receiving social Security or Medicare.)
Your self-employment tax rate has two parts, 12.4% for social security (old age, survivors, and disability insurance), and 2.9% for Medicare (hospital insurance). Both adds up to a total of 15.3% SE tax rate.
Only the first $106,800 of your combined wages, tips, and net earnings is subject to the 12.4% social security portion of the SE tax. However, all your combined wages, tips and net earnings are subject to the 2.9% Medicare part of your SE tax.
Paying SE tax
You must have a social security number (SSN) or an individual taxpayer identification number (ITIN) in order to pay SE tax.
If you have no SSN yet, apply for one using Form SS-5, Application for a Social Security Card which can be obtained at any Social Security office. (You can download the form from the Social Security site.)
The IRS can issue you an ITIN if you are a non-resident or resident alien and do not have (and are not eligible to get) an SSN. You can file Form W-7, Application for IRS Individual Taxpayer Identification Number.
Who are self-employed?
Lastly, you have to figure out which class of taxpayers you belong to – a regular wage earner working for a company or self-employed.
The IRS characterize you as a self-employed individual if (1) you carry on a trade or business as a sole proprietor or as an independent contractor, (2) you are a member of a partnership that carries on a trade or business and (3) you are otherwise in business for yourself.
If you are self-employed, then you must pay your SE taxes.
#25. Tax Planning: Reducing Your Taxes
Dealing with taxes is something that most people do not enjoy doing. But not paying attention on your taxes is a disadvantage. Tax planning intends to keep your financial matters in check. Paying attention to it could actually reduce the amount of taxes you are paying and maximize the tax credits the government is offering.
There are some ways on how you can reduce your taxes.
* Reduce your taxable income. You could start contributing to a retirement plan sponsored by your employer. This would reduce your income at the same time allot money for savings. Aside from that, if you are already 50 years old, you could make a $5,000 catch-up retirement savings or contribution.
* In relation with your retirement plan, any withdrawals would add to your income and would be taxed. Aside from that you would also pay additional taxes for early withdrawal.
* Reduce your taxes by giving to others. Think about donating an old vehicle or other property to charitable institutions. Not only are you helping others.
* Maximize and take advantage of tax deductions that you and your family could use.
* Itemized deductions which would include deductions for health care, state and local taxes, property taxes and other expenses related to investments. There are standard deductions. You could choose between the standard and itemized deductions about which one is higher.
* Unincorporated businesses would usually hire family members. By doing so, they are able to save on income and self-employment taxes.
* Tax credits are also a great way to reduce your tax. There are different credits offered for college expenses, retirement and even for adoption.
* Increasing your withholding tax is another way of reducing your year-end taxes. By increasing the tax being taken out of your pay check, you may get a bigger refund when you file your taxes at the end of the year.
When you are thinking of reducing your taxes, always consult a Certified Public Accountant or a tax professional about your money. For tax information, there are some local organizations partnering with IRS to conduct tax education programs for self-employed individuals and small business owners. They would hold tax workshops, in-depth courses, and trainings to prepare them for their business and teach recordkeeping.
These professionals are highly qualified to help you right decisions. There are situations when these steps are able to reduce taxes within the existing year but may have an impact on your taxes the next year.
#26. Real Estate Property Taxes
Property taxes collected is one of the major sources of revenue for the local government. These taxes can subsidize programs and public services like law enforcement, road fixes and maintenance of public buildings like schools. It can also be used to fund local courts, libraries, parks, civics centers and other community programs.
Property tax is collected on an individual's real or personal property, which is why it can be called realty tax. Aside from property, like real estate, it can be collected from possessions like vehicles, boats, motorcycles, campers, etc. Taxing personal property may not be present on all states.
The property is assessed and the tax is calculated based on the market value of the property or the real estate. Its market value will be multiplied with the current tax rate. The tax rate depends on the tax levy of the community. To determine the tax levy, the local government would first determine the sources of income, aside from property tax. Once the budget is already determined, the revenues from other sources will be deducted from the budget. The remaining amount would be the tax levy.
Unlike income tax, it does not naturally progress, it is be based on how much the property is worth. The property tax will be based on its purchase amount. If there are major property improvements that could significantly affect its market value, then the property would be reassessed which may increase the taxable value of the property.
Aside from major renovations, the value of your property could also change based on the market value of other properties in your community. It could change base on the value of the property if it is rented out or sold. The historical value of the property could also be a reason for an increase in value.
According to Tax Foundations 2005-2007 data, New York counties have the top real estate taxes, ranging from 2.84% (Monroe) to 3.05% (Orleans). The areas with the lowest tax rate are in Louisiana, ranging from 0.145% (St. James Parish) to 0.122% (St. John the Baptist Parish). If you house worth $400,000 and the tax rate in your area is about 2.75%, then your property tax would be $11,000.
The real estate tax or property tax could be paid annually. In some cases, it could be divided into installments or quarterly payments. This is common for commercial properties. Homeowners would often pay their property tax through monthly installments, in addition with their mortgage.
Aside from the fact that homeowners should know how much tax they are paying every month, for house hunters, it is important to have an idea about property tax rates in the area where you are planning to move. After all, you will be paying them on top of your mortgage in exchange of quality public service from the state government.
#27. Paying Estimated Taxes
The method used in paying tax on income that is not subject to withholding is called estimated tax. These kinds of income come from many sources. They could come from interests and dividends, alimony, rent, gains from sales of assets, prizes and awards, and from self-employment.
Estimated tax is paid if the amount of income tax being withheld from your salary (or some other income sources) is not sufficient. This is the tax used to pay both income tax and self-employment tax.
If this is not paid enough, you may be charged with a penalty. If you have not paid not enough taxes by the due date there is a penalty charged even if you are awarded a refund.
Who needs to pay?
As an individual taxpayer, you must pay if (1) you had a tax liability the previous year, (2) you expect to owe at least $1,000 after subtracting your withholding and credits, and (3) you expect your withholding and credits to be less than the smaller of 90% of your tax return.
For sole proprietors, partners and S corporation shareholders, you have to pay if you expect to owe tax of $1,000 or more on filing your return.
For corporations, you need to pay estimated tax for your corporation if you expect to owe tax of $5000 or more when you file its return.
Who need not pay?
You need not pay estimated tax if you ask your employer to take more tax out of your earnings. (File a new form W-4 with your employer and enter the additional amount you want your employer to withhold.)
You need not pay estimated tax if (1) you have no tax liability the previous year, (2) you were a U.S. citizen or resident for the whole year, and (3) your previous tax year covered a 12-month period.
When and how to pay
The year is divided into four payment periods, with specific payment due dates on each. Non-payment of tax or payment of not enough tax on due dates will be liable for penalties.
Estimated tax payers are urged to use the Electronic Federal Tax Payment System (EFTPS). With it, you can access your payment history and do possible adjustments.
You may pay your estimated taxes weekly, bi-weekly or monthly as long as you have paid enough by the due date of the quarter period.
Figuring estimated tax
To get a good approximation of your estimated tax, figure out your expected gross income, taxable income, taxes, deductions and credits for the whole year.
You can use your tax return for the previous year as your guide. Try to estimate your income as close as you can so you can estimate your taxes as close as you can, too. This is to avoid penalties.
#28. Obsolete Taxes: A Characteristic of Old Civilization
Financial payments levied to citizens of a state or a similar unit is a characteristic of civilization. These are called taxes that came in different forms. It became a symbol of flourishing civilization and greatly contributed to today's economic activity.
Tax policies change as time passes. As new taxes are implemented to address recent crisis or developments, the old ones are abolished.
The scutage is one of the obsolete forms of taxation. It was a feudal payment in cash given in lieu of military service, especially to the Kings vassals. The amount of scutage significantly increased in the late 12th century when professional military class of knights became popular. However, scutage was eventually displaced by taxes after the time of Edward III of England.
Another example of obsolete tax is the tallage. The word originated from French tailler, which means a part cut out of the whole. Tallage therefore is a tax levied by a landlord upon his unfree tenants during the medieval Europe. In addition, landlords decided the amount and frequency of payment until the 13th century. The last collected royal tallage was in 1312.
The origin of tallage was actually a tax called danegeld. It was a land tax levied in Anglo-Saxon England to buy off Viking raiders. This was different from the annual tax called heregeld between 1012 and 1051. This tax, which characterized England and France royal policies, served two purposes, to buy off attackers and to pay the defensive forces. It became a regular tax during the time of Ethelred; it was later converted into tallage in the 12th century.
The demise of danegeld started the land tax, which was based on the size of an estate(s). This tax called carucage only lasted for a while, collected only six times because it was eventually replaced with income and personal property taxes. It was originally just an experiment however, carucage helped augment the royal income. It ended after 1224.
More of a contribution, tithe was a custom dating back to the Old Testament. It was adopted by the Christian Church, which required believers to contribute 10 percent of their income for religious purposes such as ecclesiastical and legal obligation. The collection was used to support the clergy and maintain the churches. Furthermore, it was one of the major sources of money in constructing large basilicas and cathedrals in Europe.
Today, there have been burgeoning forms of taxes to adapt to changing environment such as energy-efficiency tax credit to encourage use of renewable resources.
#29. Legal Tax Shelters Vs. Abusive Ones
The recent years showed the rising number of tax evasion cases. In the United States alone, Internal Revenue Service (IRS) with the California state estimated a $1.3 billion lost in tax revenue. A significant number of this tax evasion cases is accounted to abuse of tax shelters.
Tax shelters are actually legal method of reducing taxable income. These are tax policies to promote long-term investment, thus stir up economic growth. Tax shelters vary depending on present domestic and international laws. Just to give an example, United States define its tax shelters by any method that recovers more than $1 in tax for every $1 spent within 4 years.
It is a usual form of tax evasion because it entails lower taxable income, the less your payment of taxes. It includes investments and accounts such as personal retirement plans. This is an effort to encourage investment on pension plans, and thus reduce government burden on funded pension systems. The retirement plan will not be taxable until the individual retires.
Also included in tax shelters is the flow through shares or limited partnerships. For example, the mining or oil drilling companies are allowed to distribute the exploration costs to their shareholders as tax deductions. It aimed at encouraging investment in this area.
Other legitimate tax shelters includes real estate investment, 401(k) and 403(k) plans, individual retirement accounts (IRAs), setting up one's own business, municipal bonds, employer-sponsored health coverage, employer-sponsored life insurance, and employer-funded education to name a few.
Although sometimes it is hard to differentiate legitimate tax shelters from abusive ones, the United States revenue bureau identified cases of abusive tax shelters. Examples of these are variable forward contracts and offshore tax haven.
The former happens when a person invests and promises to sell his stocks in a bank who then gives him a significant percentage of stocks value and a pledge. Later, he receives capital gains after the reinvests it somewhere, thus the person does not have to pay for capital gains taxes.
Another example is the offshore tax haven. This happens when companies create corporations in foreign countries called tax havens so they can hold their money to avoid paying the US federal tax. In this case, the companies make sure that their corporations or trust provides have an ownership difficult to trace. Countries such as British Virgin Islands, Panama, Cayman Islands, and Belize to name a few are known tax havens.
#30. Keeping Good Records
Lot's of people experience a lot of stress during the tax season, mostly due to the fact that they were unable to keep good records of their taxes. You will need to be able to keep accurate records of your taxes in order for you to be able to get good and accurate tax returns when you file. You can avoid the headache of trying to remember every transaction that you have made throughout the year by making sure that you have all of your records with you, so make sure that you keep them organized.
Whether you are a business owner, or an individual taxpayer, you will definitely benefit from this article. Here are some of the things that you should remember in order to keep good records. Although there are no specific manner in which you should keep your records, you should just keep all the necessary documents that could impact your tax return.
Keep Documents For Deduction
There are certain documents that the IRS will require from you so that you can justify all the deductions that will be done on your federal tax return once the IRS performs their audit. You need to keep a detailed record of these documents so that it is easier for you, and the IRS, to check how much deductions should be made. Documents such as receipts, documents that are related to sale, purchase, ownership, improvements and repairs, including other financial documents that are related to charity and gift donations and investments, should be kept so you can claim the exemptions or credits that you have on your tax return.
Keep Proof Of Payment Documents
Another way that you can keep good tax records is by simply keeping all proof of payment documents. These documents should include bank statements, credit statements, medical and insurance bills, invoices, financial statements, and even cancelled checks. Just make sure that when you keep these types of documents that you include all documents that are within three years from the actual date that you filed your tax return.
Keep A Good Record System
If you want to be able to file, sort and organize all of your important records and documents, then you should try to develop a good record system that will allow you to do just that. Having all of your financial documents in one place and organized will make it easier for you to file your taxes.
Documents For Single Taxpayer
If you are a single taxpayer, then there are actually certain documents that you might need to focus on organizing. Documents such as bills, invoices, mileage logs, credit card receipts, proof of payment products like cancelled or substituted checks, and other receipts and documents that could confirm all the deductions that should be included in your tax return. These records should support at least three years from the time that you filed your tax return.
Documents For Business Owner
If you are a business owner, then there are certain employment tax records that you should try to monitor and keep. These records should support at least four years from the time that you have either paid your tax or when it becomes due, whichever is later. The documents that are needed would include documents that would verify your assets, such as canceled checks, sales and purchase invoices, as well as real estate closing statements. It would also include proof of purchase documents such as credit card sale invoices and slips, and cash register tape receipts. Gross receipts are included in the list of documents needed.
Never Claim False Business Expenses
Some people will try to claim false business expenses just so they could reduce the amount of taxes that they need to pay and get certain deductions based on their so-called business expenses. You will be subjected to IRS penalties if you will be unable to produce the necessary documents to support these deductions, thereby resulting to a bigger tax payment than what you could've just paid for initially. Learn from the mistake of others and avoid filing false business expenses just so you can add more deductions to your taxes, for you might just end up paying more.
#31. Income Tax Tips to Help You Save Money
Preparation - it's what makes the difference between paying a huge amount every April 15 and getting a big refund check. Yes, paying taxes is your obligation as a citizen of this country. However, there are ways to prevent paying more tax than you actually owe to the government.
If you are less than 65 years old, not a dependent of your parents, and earn at least $8,750, you are required to file a federal income tax return. The income tax you pay, as the term suggests, is the tax deducted on the income you make.
It pays to know the tax deductions you are entitled to before you file your income tax return. Examples of deductions you may claim are those for real estate taxes, property taxes, mortgage interest, and even expenses for home maintenance or repairs.
Charitable donations such as funds you donate to non-profit or religious organizations can be used to lower the tax you pay. Cash donations, as well as donations in kind (e.g. clothing, medicines, food, household items, etc.), are deducted from your taxable income, thus reducing the amount you owe to the government.
Your business-related expenses may be used as tax deductions as well. These include the following:
* Fees for continuing education classes
* Union dues
* Computer and cell phone expenses related to your business
* Equipment, gear, and tools used in your business
* Business liability insurance premiums
As a taxpayer, you can lower your tax bill by closely monitoring your deductions. It is best to itemize your tax deductions before you claim them. That entails organizing your tax records and keeping them updated from time to time. You need to gather and compile all the documents relevant to the tax deductions you will claim as you file your tax return. They may come in handy when the IRS audits your tax return.
Be aware of the things that may increase your tax and take you by surprise when filing your tax return. One of them is salary increase. If you got a raise this year but did not change your withholding tax, then you will definitely owe more than you thought. Check with the IRS website if your tax withholdings are sufficient to cover your tax liability when the current year ends.
Knowing the deductions you qualify for and keeping your tax records are two important things you have to keep in mind to make sure that you pay correct taxes without burdening your pocket.
#32. How To Write Off Bad Debts
What Is A Bad Debt?
A bad debt is basically a sum owed by an individual or a company to another individual or company and is considered to be a debt that is not collectible. These receivables, or the sum in question, are deemed as a debt that can no longer be collected because the cost of pursuing the debtor to pay off the debt would be more than the actual cost of the debt itself. Once this happens, the bad debt becomes an expense for the company.
There are actually two types of bad debts, namely, the business bad debt and the non-business bad debt.
Business Bad Debt
As the name implies, a business bad debt is a debt that is a direct result of operating a business or a trade, and can only be considered as a tax deductible only if it has been included in the income of your business. You can even include the cost of earning your income along as part of the deductibles, depending on the situation.
Non-Business Bad Debt
The other bad debts that are not included in the business bad debts are considered to be non-business bad debts. These debts must be completely worthless in order for them to become tax deductible. In order for you to be able to show that it is indeed a totally worthless debt, you need to show that you have taken all the necessary steps in attempting to collect the debt from your debtor.
Are Bad Debts Deductible?
Some types of bad debts can actually be considered deductible from your total tax liability, regardless if they are business debs or non-business debts. For business bad debts, they are considered to be a deduction against your ordinary income, while a non-business bad debt can be considered to be a deduction from your gross income, but only as a short-term capital loss. However, in order for these bad debts to be considered as deductibles, they must meet certain requirements.
Requirements For Deduction
Before these bad debts can qualify as tax deductibles, they must first meet these simple requirements. One of the requirements is that the bad debt must in fact be a bona fide debt. This means that the debt, which is a determinable amount of money, should arise from a valid and enforceable obligation between the debtor and the creditor. Since a bad debt is a debt that cannot be collected, it is worthless. The second requirement is that it should become worthless within the year that it is taxable.
Another factor that could be viewed as a requirement for the bad debt to be considered as a tax deductible has something to do with how the debt was classified, as the classification can have a significant effect on its deductibility. A business bad debt can be deducted even if it is just partially worthless. However, a non-business debt needs to be completely worthless for it to be considered as a tax deductible.
Steps In Writing Off A Bad Debt
In order to understand how you can write off a bad debt, you need to learn the steps that you need to take in order to be able to do it. The first thing that you need to do is that you must take note of all the debts that people or companies will make. Keep track of all of these things, and make sure that you remember that receivables are taxable, and a debt owed is actually a receivable. If left uncollected, it will continue to be taxed, causing you some undue taxable hardships in the future. Make sure that you make an attempt to make a collection on all of the overdue receivables that are still not collected.
The Next step that you need to take is to make a decision as to whether you would "write off" the bad debt yourself, which means that you treat the bad debt as though it was not a transaction, giving you the chance to eschew taxes against the debt, or whether you would write off the bad debt by selling it to a collection agency at any price you choose. Just keep in mind that for a large corporation, writing off a bad debt can lead to more complicated problems later on.
#33. How to Prepare Your Income Tax Return
Filing your income tax return early has its advantage it gives you more time to prepare and fix any tax issues. That said, don't wait until a few weeks before the Tax Day to file your income tax return. You might end up paying more in penalties if you submit your tax return after the April 15 deadline of the Internal Revenue Service (IRS). To make it easier for you to prepare and file your tax return, take heed of the tips discussed below.
A very important step in preparing your tax return is to prepare all the documents and records that can support your expenses, income, and tax deductions. Thus, you need to allot a considerable amount of time for collecting and consolidating all the required documents for your income tax return. It is because preparing the necessary documentation can take a lot of time and that would be a headache if you do it weeks before the deadline of tax return submission.
Are you considering hiring a professional tax help to assist you with preparing your tax return? Well, tax help may or may not be necessary in certain conditions. You can do away with tax help if your taxes are not too complicated to be done on your own that is, if you have no assets, have no itemized deductions, and have to accomplish only one Wage and Tax Statement (W-2 form).
On the other hand, you need tax help if you are a small business owner or an independent contractor who need to itemize your deductions and to fill out multiple W-2 forms in various states. Hiring tax help makes a lot of sense in that case because it can help you avoid potential penalties through correct filing of tax return and include as many deductions as possible in your return.
If you prefer to prepare the tax return on your own, it is recommended that you use an income tax filing software. A tax filing software is a more affordable solution than hiring an accountant to prepare your taxes. This software program will guide you in every step of preparing and filing your tax return. Most tax software programs come with income tax tips that educate you on how to pay all the required taxes and to report all the applicable tax deductions in your tax return.
Whether you decide to do it yourself or with a help of a tax professional, always make sure that you pay your taxes correctly and immediately to avoid fines and penalties.
#34. The History of Property Tax
Mainly, taxes were developed due to pressing economic and political conditions. Tithe is an obsolete form of tax based on religious purposes.
In the agricultural era, property tax was imposed to be a source of local governments revenue. During the revolutionary war, tax systems facilitated the war against different colonies by assisting military power. Five kinds of tax structure existed during this time, but they varied from one country to another. Poll taxes were levied on adult males and sometimes on slaves; property taxes were collected on enumerated items such as land; faculty taxes were charged to taxpayers based on their earning capacities; tariffs were collected on goods imported or exported and excises on consumption goods. Property tax is one of the tax structures that continued until now.
By the end of war, many called for changes in tax systems such as uniformity. For instance, seven of the fifteen states charges regular capitation taxes. However, the beginning of the twentieth century marked the booming criticisms on the uniform and universal property tax. Several reasons for the failure were considered. For one, they failed to see problems resulting from differences between property as both legal term and economic concept.
Another problem came from the inability, sometimes unwillingness, of elected local evaluators to value other states properties at full value. This is because an assessor who valued a property below its market value had the higher chance to be reelected.
In addition, the rise of professionals and wage-earners who had sizeable incomes but few properties made property ownership no more an apt measure of ability to pay taxes. This led to the enactment of income taxes and removed other tangible personal property in the property tax. This time, professionally trained evaluators did the assessment of property tax.
In the years to come, tax proved to be an effective revenue of varied systems of government throughout the world. Local governments translated these taxes to provide basic services such as water, drainage, irrigation, roads, parks, libraries, health services, and fire protection to name a few.
In the twentieth century, there were efforts to reform the property tax. Common to these efforts is the centralized assessment of railroad and utility property as well as exception of other properties. Mortgages, for example, were taxed at lower rates.
The creation of National Association of Assessing Officers, which eventually became International Association of Assessing Officers, improved the system of taxation. The organization would later develop better assessment methods as well as train and certify assessors.
#35. Fat Tax: the Historic Struggle to be Proved Effective and Efficient
World Health Organization is not the brainchild of taxing junk foods to encourage healthier choices of food.
The idea of junk-food taxes started on the war period, 61 years before WHO stated that other countries use taxes to increase or decrease consumption of food. This 1942 tax, proposed by A. J. Carlson, is aimed at increasing the available food due to war by reducing luxury in food buying.
Levying fees on less healthy food became popular after four decades when Yale's Rudd Center for Food Policy and Obesity director Kelly D. Brownell proposed that revenue from these taxes should be used to fund nutrition campaigns and public programs promoting healthy and responsible eating.
His opinion piece about fat taxi in New York Times in 1994 received considerable criticisms especially from Rush Limbaugh who counter argued on the grounds of potential invasion of privacy. Nevertheless, he was included in the United States News and World Reports "16 Smart Ideas to Fix the World."
Years after, the debate on fat tax has continued. Proportionally, the campaigns and its critic increase too. These include non-profit nutrition advocacy group Center for Science in the Public Interest and New York legislator Felix Ortiz.
Apparently, this fat tax is appealing for nutrition campaigners and supporters. Some may have the answers but the question why it has remained unpopular with the public remains an 18 percent approval rate was seen in an online poll.
One of the important considerations in taxing unhealthy foods is how to delineate what is taxable and what is not. A 2007 studied narrowed fat tax into placing tax on fatty or unhealthy foods. This result alone did not gain much attention if it had not suggested that fat tax would save lives and reduce health care costs.
Still the forecast of its implications vary especially the social one. This is because careless implementation might have adverse effects. For example, experts say that taxing saturated fat would possibly encourage consumers to increase salt intake as suggested by consumer patterns.
While fat tax has yet to be decided as an effective measure to encourage public to eat healthy foods, nutritional campaigns have continued.
For instance, the Japan government implemented a required waist size measurement to prevent obesity epidemic, which the United States is facing. The government impose penalties on companies and local government that fails to meet the requirement. The government aimed to reduce its overweight population by 10 percent in four years and 25 percent in seven years.
#36. Energy Tax Credits
There are a lot of possible things that taxpayers can invest in, one of those is on alternative energy and energy efficient technology to be used to supply power to their homes. If American consumers would invest in this, then they would be privy to energy tax credits, which is designed to give these taxpayers tax credit incentives for simply trying to make their homes more efficient. What's more is that if they use or add alternative energy to their improvements, then the amount of tax credit incentives for their energy tax credit that they would receive would be virtually limitless, all depending on how much of the improvements you have made, and how much energy you were actually able to save up.
What Are The Requirements?
The basic requirement for you to be able to avail of the tax credit incentives for your energy tax credit is that you must buy and install in your home energy-efficient equipments. These energy-efficient equipments should remain installed in your home for a duration of not less than five years. However, the energy credit is only available to those homes that were able to procure energy-efficient equipments and properties in the years 2006, 2007, and 2009. For those energy-efficient improvements made on the year 2008, no energy credit is actually available, as stated by Energy Star in their website.
What Are Examples Of These Home Improvements?
In order for you to be able to qualify for the tax credit incentives for your energy tax credit, you need to be able to identify which type of home improvements would be considered to be a part of the home improvements mentioned under energy tax credits. Some of the improvements that you could make to qualify would include improvements on your homes central heating and air conditioning, advanced main circulating air fans, insulation, exterior doors and windows, hot water boilers, geothermal heat pumps, skylights and metal roofs, storm windows, asphalt roofs with cooling granules, and biomass fuel stoves. Purchasing of qualified energy-efficient equipments and products will also give you certain tax credit incentives.
What Are Qualified Energy-Efficient Equipment And Products?
Purchasing these qualified energy-efficient equipments and products is one way that you can get over 10% of tax credit incentives in your energy tax credit. Aside from that, these qualified energy-efficient equipment and products will also provide you with a means to save up some money by reducing the amount of power you are using from your electric lines.
Examples of these energy-efficient equipments are the different equipments that uses solar, wind and geothermal-powered systems. An example of a product that uses one of those systems is the solar panel. The solar panel can be used to convert solar energy into electricity, thereby reducing the amount of electricity you use in a month by a significant amount. Aside from that, the energy tax credit system allows you to receive one credit equivalent to over 30% of your investment in a solar panel, as long as it is qualified. You could even receive credits that would reach over $2,000, which is actually the maximum.
How Does Energy Tax Credit Benefit You?
Energy tax credit not only allows people to save some extra dollars by shaving off some of it from the cost that they would be made to pay for using regular electricity to power up their homes by simply purchasing and installing energy-efficient equipments to their homes, energy tax credit also lowers the cost basis of your house based on the credit allowed by energy tax credit.
How To File For Energy Tax Credit?
If you want to file for energy tax credit, you simply need to fill out certain forms, such as the Form 5695. You will, however, need to supply a written manufacturers certification that the product qualifies for credit.
What Documents Do You Need To Organize?
In order for you to be able to file and claim the tax credit incentives that you will get from the energy tax credit, you need to make sure that you keep all necessary and relevant documents so that you can prove your claim. Keep all receipts, warranties, and product information.
#37. Deceased Tax Payer: What To Do?
Death is something that would always take us unaware. When a person dies, not only are we left with the sense of grief and loss, we also have to deal with their properties and finances. How do we deal with a deceased love ones financial matter, especially their taxes?
* A final return must be filed for the deceased. On top of the tax return form, the word deceased, the name of the deceased and the date of death should be written or typed. For example: " DECEASED, <name>, <date of death>." Failure to include this may cause the processing some delay.
* The return should be filed by the executor or administrator of the estate. If the deceased is unable to name an executor, then surviving spouse could file the return as long as the living spouse did not re-marry within the year the other spouse died.
* When filing the return of the deceased, the deadline is on April 15 of the following year of the death of the taxpayer. There is no need to attach a death certificate or a proof of death.
* In the date of death was before the closing of the tax year and before the return of that year was filed, then return filed that year is not the final return. For example, if the deceased passed away on February 2009 and was not able to file her 2008 tax return, then the executors or survivor will file the 2008 return. The final return will be filed in 2010.
* Those who are named as the executor or the surviving spouse is responsible for filing the income tax return and making sure that the tax is duly paid. These people are not only responsible for filing the final return of the deceased, but also responsible for any returns that were not filed.
* The final return will cover the beginning of the tax year until the death of the taxpayer.
* When filing for a return, wages and other income that the deceased received prior to death should be stated. The final return can still claim deduction or exemption. For example, medical bills paid within a year after the death can be deducted on the final return.
* Any income that the deceased earned after death is considered as an income of the deceased's estate. An estate income tax return should be filed if the estate received more the $600 of income.
* The executor, administrator of the deceased, beneficiary or the surviving spouse can claim the refund on behalf of the deceased.
If you are a survivor or an executor filing the final return or claiming the refund and is at lost with the process, getting a tax professional to assist you will be a good idea. Inheritance and other tax payments would be addressed by a professional. Aside from that, the IRS are proving information through their publications about different taxpayer questions and inquiries.
#38. Common Tax Problems
Tax season is here again. It is one of the most dreaded period of the year for some of us. The process could indeed be taxing. There are cases when people would run into problems with IRS, even if you are already filing your own return for a long time.
Common tax problems could start with small and trivial things, like incorrect social security number, forgetting to sign your tax form, incomplete statement of sources of income, or incorrect or typos in writing numbers. These problems could be easily resolved by double checking your forms before filing.
These problems could easily be resolved by filing an amended return. If not all sources of income is stated or was not able to claim a credit, then the taxpayer could file an amended return. The amended return should be filed within three years of the date when the original return was filed or two years after paying the tax.
Other issues with taxes would include:
* Payroll taxes. Always check payroll stubs for tax deductions. By keeping all documents updated with correct information, you get to ensure that the IRS would be taking more than half of your salary because of taxes.
* Tax liens. If you have pending taxes to pay, they would usually be placed on your personal or business property. When this happens, you cannot sell the property, transfer its ownership, or get a loan on the property.
* Levy. Pending taxes will be paid by cutting off your salary abruptly. The IRS would make you pay all your taxes through your wage.
* Audits. IRS audit would usually include missing documents like W-2 or 1099 income items. Correspondence audit can usually be handled thru mail. Aside from correspondence audit, they could audit in their office or in your home. They would request numerous documents and ask you for explanations of different deductions.
* Seizures. In some extent, IRS could seize personal and business properties if you have outstanding tax liabilities.
Whenever these problems happen, the best thing to do is consult a tax attorney or get legal assistance. In some instances, to settle tax problems, tax payers would compromise with IRS. In the Compromise program, taxpayers could settle their old tax liabilities for fraction of what they actually owe.
There is a Payment Plan which would allow you to negotiate payment terms. However interests and penalties would still be charged making the debt heavier. But in some situation, the penalties could be removed. Taxes can be wiped out if you will declare bankruptcy. There are certain rules to be met before declaring for bankruptcy.
As long as you file your taxes on time, properly, and have declared the correct amount of income, then it would be unlikely you would be running into these problems. But if ever it happens, make sure that you are well supported with your documents and of course, some legal help.
#39. Choosing An Accounting Method (Cash vs. Accrual)
Starting a business is not an easy thing to accomplish by any means. You simply need to understand what you need to do, and how to do them. One of the things that you need to do, especially if you are just starting your own business, is that you must choose a certain method of accounting for your business so that you know how to pay off your taxes accordingly, saving a lot of headache in the future.
Different Accounting Methods
There are actually different types of accounting methods that your business can use, depending on what your needs are. Each system of accounting has their benefits and merits, as well as some disadvantages. The two methods for accounting that businesses usually use are the cash accounting method and the accrual accounting method.
Cash Accounting Method
The cash accounting method, is an accounting method used whenever money is actually being transacted, like when the subject money involved in the transaction is exchanged between the buyer and the seller. This means that the sales are recorded right away as soon as the money is received. Using this type of accounting method is usually for the purpose of being able to report earnings and income during your fiscal accounting period. If your business is only earning about less than one million within a fiscal year, then this type of accounting method is just right for your business, as this method will allow you to instantly collect the payment for your service or product.
Benefits Of Cash Accounting Method
Cash accounting method has certain benefits that set it apart from the other type of accounting method. One of the good things about this type of accounting method is that it allows for the unexpected things that could happen in your business, such as when a prospective client would change his mind and back out from the transaction, leaving you with the goods. Since there has been no exchange of cash between you and your buyer, then the transaction is not recorded in your business financial ledger.
This type of accounting method will let you save some money as you won't need to spend much on book keeping, especially since you don't have to maintain an inventory, nor do you need to keep customer accounts.
Accrual Accounting Method
Accrual accounting method is another method that is widely used by most businesses, especially those that aim to monitor their finances, transactions and sales even if no money was received as of yet. This means that this method is more focused on the output of the business, and not much on the input. Everything is recorded. This means that you will be able to keep track of all of your business profits regularly, giving you the ability to monitor and check if whether your business is actually cost effective and efficient or not. This will allow you to better manage your finances, as well as improve how you perform accounting for your business.
Benefits Of Accrual Accounting Method
One of the major benefits of accrual accounting method is that it allows you to stay on top of your finances, which means that you know exactly what your position is in terms of your finances. All of the data regarding your transactions are well documented, such as the dates of when the transactions were made, regardless if there has been payment done already or not. An average sized business will find this type of method useful, as it allows you to keep track of all of your company's profit regularly.
Which Is Better?
Each accounting method actually has its own benefits and disadvantages. It is difficult to say which one is better over the other. If you are a small business working with just under one million of profit through sales in a fiscal year, then the cash accounting method would be the better choice for you as this type of system is easier to understand. If your business earns over $5 million dollars in a fiscal year, then you don't necessarily have a choice but to use the accrual accounting method as this is mandated by the IRS. Any business that earns between $1 million to $5 million dollars has the luxury of choosing which accounting method they would like for their particular business.
#40. Good News For Parents: Child Tax Credit
The great thing about tax credits is that it would reduce your tax straight-away, not like tax deductions that would deduct the sum from your adjusted gross income. With tax credits, the burden that taxpayers carry them throughout the year is lessened. Just like child tax credit.
When it was enacted in 1997, child tax credit started to provide credits for as much as $400 in 1998. But in 2009 returns until 2010, the child credit could be as much as $1,000. What are the basic requirements before you can claim the credit? The IRS would test the parents and the kids, if they are indeed eligible.
The threshold amount for applying for the credit is $110,000 and are married (with joint return); $75,000 as head of the household, single, widow or widower; or $55,000 as a married-filing-separately-taxpayer. The taxpayer is a parent of a qualifying child to claim the credit. A qualifying child is:
* Seventeen years old or younger by the end of the tax year.
* Your own child, sibling, descendent of one of the relatives.
* Your child by birth, thru adoption, or under your foster care as authorized by the court or responsible agency.
* A United States citizen or resident.
* Living in your home for more than half the year.
* Not contributing for his or her own support for the entire year.
In cases when the parents are filing for return separately and both claim the child as a dependent, then the claim will be granted to the parent who is living with the child for the longest period of time. If for example a sibling or a parent will claim the credit, the credit will be granted to the parent. These are new qualifications based on the revisions made in 2005. Prior to 2005, the taxpayer who claims to have paid half of the support of the child is given credit. But that rule is no longer used.
One downside of this tax credit is that it is not refundable. For example, if you have two qualifying children for the tax credit then you qualify for $2000. If your tax liability is about $1000, then what you owe would become, thanks to the credit. But the remaining $1,000 would not be refunded.
In addition to this, parents could apply for the Child and Dependent Care expenses. To qualify for this, the child should be under thirteen and has lived with the parent within the year. The person who takes care of the child while working is not the other parent or a person who could claim as a dependent.
These tax breaks enable parents to get some breathing room in planning for their future. Instead of allocating their funds for taxes, these credits may actually mean additional savings or literally food on their table. It may take additional paperwork but it is surely worth the time.
#41. Child Custody And Taxes
If you are currently divorced or separated, then reviewing your tax situation might be a good idea, as your new situation could help alter the amount and way you need to pay your tax as your tax liability could change as a result of your divorce or separation.
How Can You Qualify For Child Tax Credit?
In order for you to qualify for child tax credit, there are certain requirements that you need to meet. The very first thing that you must meet is that you must have a child that is under a certain age. You should have a child below 17 years of age, and that child must qualify under the terms and conditions stated under the law. Another requirement is that your gross income that has been modified and adjusted should be below a certain level or limit.
How Can Your Child Qualify For Child Tax Credit?
When it comes to child custody tax, it is not enough that you yourself would qualify for it, but your child must qualify for it as well. In order for your child to qualify for child tax credit, your child should first be claimed by you as a dependent under Form 1040 line 6c, or you can claim them as not being your dependents by filing Form 8901. They should be 16 years of age or younger at the end of the year that you filed for your child tax credit, can be a U.S. citizen or a resident alien, and should be related to you whether it be through marriage, birth, adoption, or any kind of foster arrangement that designates you as the official parent or guardian of the child.
Are There Any Limitations?
There are certain limitations that exist when filing your child tax credits. One of the main limitations that exist has something to do with your income. If your income goes beyond a certain level, then your child tax credit would be phased out, which means that you won't be able to claim it since you are no longer eligible for it since your modified adjusted gross income has exceeded its limit. Another factor that should be checked is your tax liability. If your tax liability is less than the child tax credit that you are applying for, then you won't be able to claim the entire amount for your child tax credit.
Who Can Claim Child Tax Credit?
If a couple remains married at the time that they filed for their joint tax return, then they would be able to claim their child or children as exemptions, and they would be able to do this collectively. However, if unmarried couples try to claim and file for child tax credits, then there can only be one parent who will be able to benefit from the claim. In some cases, only the legally recognized parent has the right to claim the child as his or her dependent for tax purposes. If both parents are legally recognized as parents, then they simply make a determination as to which parent gets the claim.
How Can Claim Child Tax Credit?
Normally, you should be able to claim a child tax credit if your child is registered and is claimed to be a dependent of yours. However, if you are trying to claim a child who is not your dependent for the child tax credit, then you should file certain forms (IRS Form 8901) in order for you to get it. If you cannot claim your child as your dependent, you might still be able to get the child tax credit by filing that you are a dependent by someone else, or if your child, who is qualified under the law, gets married and files with his or her spouse a joint tax return.
What Are The Benefits?
One of the major benefits of filing and claiming child tax credit is that you can decrease the amount of tax that you need to pay off. This will help you cope financially, as well as get the financial aid that you need, especially if you are raising a child in your household.
#42. Can You Deduct Alimony?
Getting a divorce or legal separation can be a difficult time for both spouses, especially due to the fact that undergoing something like this will affect you financially. Fortunately for most spouses, there are ways that they can get financial assistance even if they are subjected to paying alimony to their partner, one of which is by deducting alimony from your total tax liability.
What Is Alimony?
Alimony actually refers to the obligation of both spouses to offer maintenance or spousal support towards one another. This is clearly defined in the divorce law or family law. This form of obligation is actually something that aims to maintains the support and aid that should be given by one spouse to the other, even after marriage, like when a couple is separated or divorced.
What Is The Purpose Of Alimony?
Alimony is specifically designed to provide some help or assistance to those spouses who are financially unstable, especially after the divorce. Recovering after a divorce might take a while, and it can be difficult if one of the spouses is not able to stabilize his or her financial status. By making sure that both spouses will get alimony payments, they can be assisted in trying to recover after their divorce. The alimony payments can actually be paid in lump sum or in partial payments done periodically.
Steps In Filing For Alimony Deduction
If you want to file for alimony deduction so your adjusted gross income, which is basically your annual gross income minus all of the allowable tax deductions that can be taken from your total, then you need to learn how to file for alimony deduction properly. There are steps that you need to take.
The very first step that you must take is probably to make sure that you are filing for alimony deduction with the recipient of the alimony, and not for a joint return. It is important that you and the recipient of the alimony are not maintaining a household together, as this could raise some questions and could be a cause for delay in the alimony payments or deductions.
Once you have done this, you now need to secure all documents and proof of all payments of checks, cash and money orders, to your spouse, or to any third party who took the payment on behalf of your spouse. These are important so that you can take note of how much alimony has already been paid.
What Are Excluded?
It is important to know that not all payments made should be included in your list. You should exclude child support payments, as well as payments for the maintenance of any piece of property or equipment that you might own. These types of exemptions are being monitored by the IRS, and should not be included in your list. As soon as you are done with that, simply calculate all the legitimate payments of money that you have made for the alimony and file it accordingly on the 1040 section of the form.
When Can You Deduct Alimony?
Paying alimony to your ex-spouse, or to a spouse that you are legally separated from, usually qualifies you to be able to deduct those types of expenses and payments from your taxes. However, not all types of payments made can be legally considered as alimony. Normally, alimony payments that can be deducted from your tax should be the ones paid in cash, checks, and money orders. Those that are paid in the form of physical assets, such as houses, properties, cars, and the like, cannot be deducted from your tax. Also, paying child support is a whole separate issue, which means that it won't be deducted as part of your alimony.
To Whom Should Alimony Be Paid?
The only way that you can get your alimony payments to become tax deductible is if you make those payments towards your ex-spouse, or to your spouse who is already legally separated or is divorced with you. If you make any form of alimony payments to your spouse voluntarily, then that cannot be considered as tax deductible. You both need to be under a formal divorce decree in order for your alimony payments to become tax deductible.
#43. Buy New Hybrid Cars and Avail the Tax Credit
Do you know that you can decrease the amount of taxes you pay through buying a new hybrid gas-electric or diesel automobile?
This is because of the new energy-efficiency home and vehicle tax credits. A tax credit can be claimed in your federal income tax at the end of the year. Otherwise, your tax refund will increase.
A tax credit of $250 - $3,400 is given to taxpayers who buy energy-efficient vehicles in an effort to encourage the use of these. One way to ensure this is through agencies such as Alliance to Save Energy especially when you opt to replace your old vehicle with low-emissions ones. This agency is limited only to United States.
How can you use this? Any individual or business buying a new hybrid or diesel vehicle can apply for this tax credit. Hybrid vehicles include the ones that use less gasoline. These cars should also meet the emissions standard. You can opt to buy diesel vehicles however; there are a few that meet the emissions standards. Other options include plug-in hybrid or pure electric vehicles, alternative-fuel vehicles and fuel-cell vehicles.
The tax credit depends on the fuel economy and the weight. For example, you can get a tax credit amounting to $2,200 if you buy the 2009 Chrysler Aspen and Dodge Durango Hybrids. The 2010 Ford Fusion and Mercury Milan Hybrids have a higher worth of tax credit at $3,400. Both 2008 and 2009 Mazda Tribute Hybrids are worth $3,000. Also worth $3,000 tax credit are 2008 and 2009 Ford Escape, Mercury Mariner Hybrid. Vehicles with smaller tax credits include 2006 - 2007 Chevrolet Silverado and GMC Sierra Hybrids at $250 worth. While the 2010 Chevrolet Malibu Hybrid is worth $1,550 tax credit, a year older of the same kind is $1,500 and two years older of it is worth $1,300 tax credit.
The tax credit is available in vehicles placed in service after December 31, 2006 and purchased on or before December 31, 2010. You will only need to accomplish IRS Form 8910 and file it with your taxes, a certification from the manufacturer, and receipt of your purchase. Buyers of hybrid cars who purchased in 2005 can also avail a $2,000 tax deduction.
In addition, Alternative Fuel Vehicles (AFV’s), which can be ran by alternative fuels such as compressed natural gas (CNG), ), liquefied natural gas (LNG), liquefied petroleum gas (LPG), hydrogen, or any liquid at least 85% methanol by volume, are eligible for a federal income tax credit worth of up to $4,000.
#44. Avoiding A Tax Audit
Except perhaps for specialists, filing taxes have always been a challenging, daunting and confusing task for the average citizen. Filling out the tax forms can be very confusing.
Sometimes, because of haste or plain oversight one makes some monumental mistakes that can result in scary consequences. One of these is a tax audit.
Receiving a summons letter from the Internal Revenue Service (IRS) can be frightening, especially after hearing some horror stories about other people's experiences with audits. On the other hand, there should be no room for fear if you have not given the IRS reasons to audit you.
The following tips are some of the ways on how to avoid a tax audit.
Completing all income reports
By this time, you will know that filing your Income Tax should be thorough and accurate with the details. Whether you are an employee or a self-employed individual, clearly filling out your income tax form is a must.
When you make your tax return report, ensure that it matches with what is shown on the form provided by your company (Form 1099 or Form W-2 that indicates your past year income).
You can have it as proof of documentation should you need it later.
Check and double check
Numbers and computations are producers of errors. Be accurate and double check everything you put in. If your figures are questionable, the IRS will think there may be more errors. That is a good ground for an audit.
Keep your records clean. Sign and file the tax return. Do not forget to sign Form 1040. You will need to submit. Do it on time and beat the deadline, or you will be in the IRS audit list.
Review for errors
Make it a habit to review all your work for possible mistakes. Double check all the information written, especially on the personal information section. Write your Social Security number correctly so you will not be suspected of hiding your identity and be subjected for audit.
Double check the deductions.
For every income bracket, the IRS has guidelines to follow. Don't make yourself a candidate for possible audit simply because you exceeded the allotted average for your income.
Always be on the safe side (and be a good citizen as well) by following the rules, by honestly declaring your income, and by filing your taxes on time.
#45. About Your IRA And Taxes
Laws on tax actually play a major role in influencing the entire retirement plans of most people in the United States. A lot of how taxpayers plan out their retirements is rooted to how the tax laws implement its provisions. There are actually a lot of different tax-advantaged accounts that most retiring taxpayers can avail off, each with its own rules and benefits. If you want to learn which one of those retirement savings account to choose and avail off, you need to learn about IRA and how it can affect your choice.
What Is IRA?
For those of you who do not know, IRA is actually just an abbreviation for an individual retirement arrangement. IRA is basically a personal savings method where you can save money that you can use for your retirement, and at the same time, offering you advantages that you can use on your tax liability. You have the option to subtract your contributions to your IRA either in full or just partially. The beauty of your contribution is that you can actually get a tax credit that is equivalent to the amount of your contribution. If there is any amount left in your IRA in the event of your death, your beneficiaries will get that amount and get paid with it.
What Is The Function Of IRA?
Individual retirement arrangements are actually one of the more common and more popular retirement arrangement choices that most taxpayers opt for. IRA's are a great way that you can protect your all of the money and earnings that you have deposited on your account, as well as provide you with the possibility of getting certain tax breaks on your tax liabilities on the same year that you have made the deposit.
Types Of IRA
There are actually two kinds of IRA that are available for taxpayers, and those are the Roth IRA and the Traditional IRA. Roth IRA's are referred to as tax-free IRAs, though they are not actually tax-free. Traditional IRA's, on the other hand, are known as tax-deductible or tax-deferred. Each of the two types of IRA have their own tax rules, and are subject to different requirements for withdrawal, as well as to different limits to the required income of the taxpayer.
Roth IRA's, though it is referred to as tax-free, is actually not. You are still taxed for the money that you have deposited in that particular type of account, but it will only be taxed in the same year that it is earned. That means that you will not receive any form of immediate tax relief as you deposit the money, the money is allowed to grow tax-free, and remains tax-free even upon withdrawal.
Traditional IRAs are believed by many as the better way to get tax breaks compared to the other type of IRA. As long as you stay within the maximum income limits set by the tax rules for traditional IRA's, then the contributions that you have made will become tax-deductible within the year that they were made. Just like with Roth IRA's, the contributions that you have put in the Roth IRA will be allowed to grow tax-free, a tax will be imposed on it when the money is withdrawn at the period that is allowed.
Advantages And Disadvantages Of IRA
If you are choosing between which types of IRA to use, it is probably best that you first understand the advantages and disadvantages that both types of IRAs bring to the table.
Between the two types of IRA, the traditional IRA allows for most of your contributions to become tax-deductible, especially if you are well within the marginal tax bracket that the tax rules have required for you to be in order for you to avail of the tax-deductible contributions. If you find yourself belonging to the lower tax bracket during the time that you were working, then you might be able to avail of certain increased incentives more than what the Roth IRA is able to give you. When you decide to use the Traditional IRA, you will immediately get the tax benefit that you are supposed to get for using that particular IRA.
Unfortunately, using these types of IRA's do carry with them their own disadvantages. One of the major factors that could prevent you from becoming eligible for the tax-deduction is that you must first comply with the requirements set by the law. If you exceed the threshold for your status when filing, then you won't be able to benefit from the tax-deduction.
#46. About Inheritance Taxes
What Is Inheritance Taxes?
A tax that arises whenever a person or beneficiary would acquire an inheritance from the death of another person taken under the deceased persons intestacy or will is actually referred to as an inheritance tax.
Who Will Pay Inheritance Tax?
There are basically certain parties that will have to pay the inheritance taxes, but different rules govern each party with regards to how they pay the inheritance taxes that they will receive from the deceased person who left them the inheritance. There are two main parties who can actually receive the inheritance, and are subject to pay the inheritance tax that comes along with it. For the surviving spouse who received the inheritance from the deceased spouse, he or she will not be liable to pay the inheritance tax that is supposed to go along with the inheritance itself since the inheritance that they will receive is completely exempt, regardless of its value.
For other beneficiaries, they will be depending on certain factors and terms on how they would pay the inheritance that they will receive from the deceased person. Some of the factors that could affect how they are expected to pay off the inheritance tax would depend on the exact value of all the inheritance and gifts that you will receive from the deceased.
When Do You Have To Pay Tax?
There is actually a certain period wherein you need to pay off the inheritance tax. This period is referred to as the Valuation Date, wherein the assets that are the subject of the inheritance is valued. After the assets have been valued, the person assigned to receive the inheritance tax would be given 4 months to pay it. The valuation of the assets is actually being done for inheritance tax purposes, and it is usually within this period that the District Probate Registry or Probate Office will issue a Grant of Representation.
What Are The Steps In Paying Inheritance Tax?
When paying the inheritance tax, you need to go through several steps in order to accomplish it. The first thing that you have to do is to fill out and complete the Inheritance Tax Self-Assessment Return Form 1040, which will include the Form 1040 EZ and Form 1040 A. These forms will let you itemized all the necessary deductions that you need to make, which include all the standard deductions along with your inheritance tax. The inheritance tax should be shown in the itemized deductions on the form, unless you don't have any other major deduction to include aside from the inheritance tax. One hint though, it would probably allow you to save more if you use the standard deduction if your total deductions, which would include your inheritance tax deduction, is less than the standard deductions.
You now need to make the necessary calculations to be able to come up with the total amount of tax that you need to pay off the state government. The amount that you have calculated will be used, along with all the other deductions, to reduce the exact amount of your total taxable income, thereby reducing the amount of federal income tax that you need to pay.
Once you have finished filling the forms out, you should then send it to the Capital Taxes Office along with the tax that you need to pay.
Keep in mind that any late payments done on your inheritance tax, especially those that are no longer within the valuation date set by the Probate Office will result to additional charges on your payment.
Are The Beneficiaries Subject To Exemptions?
There are actually a number of exemptions that the beneficiaries, especially the surviving spouse, are able to enjoy and benefit from. One of the main exemptions that the surviving spouse is able to benefit from is that they are exempted from paying the inheritance tax completely, as long as they are able to prove that they are in fact the surviving spouse of the deceased.
Aside from that exemption, exemptions and reliefs for certain properties can be enjoyed by the beneficiaries, such as certain business properties and agricultural properties, as well as exemptions for dwelling-houses. A 90% reduction is placed on the agricultural or business properties that are subject of the inheritance tax, while a complete exemption is given to the dwelling-houses that are subject of the inheritance tax.
#47. About Deducting Moving Expenses
You probably didn't know that you can deduct certain expenses you might incur when you try to move from your total tax income. Simply moving will not automatically qualify you for tax deduction. Here are some things that you need to know in order to be able to deduct whatever moving expense you may have from your total tax liability.
What Are The Requirements?
The basic requirements to qualify for this type of tax deduction is that you must be moving for the purpose of seeking a new job in a new city, or if your job is assigning you to another city or state. You should be qualified to deduct moving expenses from your income if you meet these requirements. All costs and expenses that you may incur in the process of moving can be included in your total moving expense that would be deducted from your total tax income. These would include the cost of travel, gas, lodging, as well as the shipping and packing costs of moving some of your personal properties and goods. If you have already made a determination that you qualify under these requirements, you must now pass the distance and time tests to truly qualify.
One of the tests that you need to take in order to pass the requirement is the distance test. This test basically tests if whether the distance from house to your new job should be greater than the distance between your old home and your old job. For example, when you use to commute about 10 miles to your old job from your old house before, but now, it would take about 60 miles for you to commute from your old house to your new job, this shows that there is a great difference in distance between the two. If you move to your new house because of this significant difference in distance, you can actually include this in the expenses that could be deducted from your total tax income.
Another test that you must pass is the time test. Basically, this test will ensure that when you moved from your old place of residence to your new one, that it was specifically for business. This can be measured by the number of weeks that you have spent working full-time after your move. It is usually 39 weeks within the 12 months after your move for employees, 78 weeks within a 24 month period for those who are self-employed.
What Are The Limitations?
When you move mainly because of your job, you can actually get certain reimbursements from your new employer, or from the company that is hiring you, depending on their conditions and requirements. If, however, there are still some amount that is not covered in the reimbursements made by your company, then you can actually include those in the amount of deductibles from your total tax income. As long as you comply with all the requirements for it, you should be able to claim the tax deductions.
What Are The Steps In Deducting Moving Expenses?
When calculating how much exactly you can deduct from your total tax income based on your moving expenses, you simply need to follow these simple steps in order to determine how much deduction you can actually get. The very first thing that you need to do is examine the criteria, and make sure that you are qualified for the tax deduction. The requirements are all mentioned above.
If you are qualified, begin calculating how much moving expense you have incurred. Include in your calculation all costs and expenses, such as the costs for packing and moving your personal property to your new place of residence, gas, lodging, and other travel expenses, food storage for up to a month, and other legitimate expenses.
After that, save all pertinent documents that prove your claim so that you can support your tax deduction when the time comes that you need to show proof.
What Moving Expenses Can Be Deducted?
Basically, all moving costs and expenses that you have incurred during the actual move can be included in this list, such as the cost for shipping your vehicle, for transporting your pets, for packing and hauling all of your property, as well as your lodging expenses. Food expenses, however, are not included in the computation.
#48. A Brief Overview of Inheritance Tax
Heirs, who receive an inheritance from their deceased relatives are required by law to pay the inheritance tax. This tax is applied on the estate and other assets of a person who has passed away that are given to the heirs. It is imposed after the loans or debts have been deducted or adjusted.
Why impose a tax on an inheritance, you might ask. It is because an inheritance is considered a gift or a type of income that is given to an individual taxpayer. Of course, any type of income is taxed.
Inheritance taxes have been very controversial mainly because they tend to be fairly higher than other types of taxes. Tax rates vary according to state, but there is one thing that is common about inheritance taxes in all states: the higher the value of the estate, the higher the tax rate.
To determine your inheritance tax rate, you need to get the total appraised value of your inheritance. Also, you must find the tax bracket for your inheritance. Your tax bracket is determined by your state based on your relationship to the deceased (e.g. heir, beneficiary, transferee, etc.). For example, Pennsylvania imposes a 4.5% tax rate for lineal descendants, 12% for siblings, and 15% for the rest of heirs.
As with other types of taxes, inheritance taxes have exemptions. An exemption decreases the taxable value of an inheritance, meaning you will pay less inheritance tax. When computing your tax rate, you have to take into account any deductions you may claim.
If you are a surviving spouse of the deceased, you are 100% exempt from inheritance tax. That means if your spouse left you his or her entire estate, you will not have to pay a single dime of inheritance tax.
Close family members can claim inheritance tax exemptions as well. In Pennsylvania, for instance, each family member is entitled to a $3,500 tax exemption. Heirs that are not part of the immediate family of the deceased are not eligible for such exemption. Non-family heirs will not have to pay inheritance tax if the value of their inheritance is less than the limit or threshold set by the state.
Inheritance tax exemption also applies to charitable donations in some states. For example, all money, estate, and other assets left to a charity are exempted from inheritance tax.
Ultimate Tax Reduction Guide:
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A Federal Tax Savings Strategy For Small Business Owners:
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