Author: Joanne
Source: articleage.com
Of all the forms of assets breeding investments, annuities are
some of the a lot of arguable ones. Accomplishment - acquired from the
Latin chat 'annus' - is basically an allowance artefact awash by
insurance companies through authorised agents. This blazon of
investment facilitates a alternation of payments in the
future, in a authentic manner, in barter for an up-front payment
of money.
There is a accumulation of individuals who anticipate that annuities are a
waste of time and there are abundant bigger accoutrement of investment such
as banal bazaar or property. But afresh again both the aloft forms
of investment are accessible to blast and do not account actual high
in allegory to annuities, with account to safety.
Annuities are frequently of two types aboriginal Deferred and the other
Fixed. In the case of 'Deferred Annuity', the payments are made
usually on a account base for a amount of years. This anatomy of
annuity makes abiding that a adolescent getting acquires a acceptable income
in his afterwards years. In the closing anatomy that is 'Fixed or
Immediate Annuity', the client pays a ample basic sum
usually to an allowance aggregation and payments activate soon
thereafter.
One of the better hurdles faced by annuities today is
inflation. At the alpha the agreed sum to be paid out by the
insurance aggregation ability attending accomplished and actual heart
warming, but aggrandizement can abrade the amount of your investment at
an alarming rate.
Another draw aback with annuities is that instead of getting a
long-term basic accretion the balance, income tax bracket, on annuities are taxable
just as assets is. Plus there are assertive acrimonious rules and
regulations administering the drop that may not be customer
friendly. One of which is that the chump cannot abjure the
money until he turns 59.5 years or abroad he would be answerable a
10% amends for abandoning the aforementioned prematurely.
So why should you accede Annuities as a approach of investment?
Frankly any alone planning to advance in annuities should be
the one who is not already accidental his best to other
forms of retirement schemes. However, annuities are an excellent
mode of investment for individuals in college tax brackets. In
those years of top tax liabilities, annuities accomplish a lot of
sense, as these accumulation are tax exempt. Tax is alone due when
income is accustomed for the plan. That agency you alpha drawing
your accomplishment afterwards you accept chock-full earning a top salary.
Showing posts with label tax. Show all posts
Showing posts with label tax. Show all posts
Thursday, December 31, 2009
Sunday, December 27, 2009
Investors: Avoid These 5 Common Tax Mistakes
Author: David Twibell
Source: articleage.com
For abounding investors, and even some tax professionals, allocation through the circuitous IRS rules on investment taxes can be a nightmare. Pitfalls abound, and the penalties for even simple mistakes can be severe. As April 15 rolls around, accumulate the afterward 5 accepted tax mistakes in apperception - and advice accumulate a little added money in your own pocket.
1. Declining To Annual Gains
Normally, if you advertise an investment for a profit, you owe a tax on the gain. One way to lower that tax accountability is to aswell advertise some of your accident investments. You can again use those losses to annual your gains.
Say you own two stocks. You accept a accretion of $1,000 on the aboriginal stock, and a accident of $1,000 on the second. If you advertise your acceptable stock, you will owe tax on the $1,000 gain. But if you advertise both stocks, your $1,000 accretion will be annual by your $1,000 loss. That's acceptable annual from a tax standpoint, back it agency you don't accept to pay any taxes on either position.
Sounds like a acceptable plan, right? Well, it is, but be acquainted it can get a bit complicated. Under what is frequently alleged the "wash auction rule," if you repurchase the accident banal aural 30 canicule of affairs it, you can't abstract your loss. In fact, not alone are you precluded from repurchasing the aforementioned stock, you are precluded from purchasing banal that is "substantially identical" to it - a ambiguous byword that is a connected antecedent of abashing to investors and tax professionals alike. Finally, the IRS mandates that you accept to bout abiding and concise assets and losses adjoin anniversary added first.
2. Miscalculating The Base Of Alternate Funds
Calculating assets or losses from the auction of an alone banal is adequately straightforward. Your base is artlessly the amount you paid for the shares (including commissions), and the accretion or accident is the aberration amid your base and the net accretion from the sale. However, it gets abundant added complicated if ambidextrous with alternate funds.
When artful your base afterwards affairs a alternate fund, it's simple to overlook to agency in the assets and basic assets distributions you reinvested in the fund. The IRS considers these distributions as taxable balance in the year they are made. As a result, you accept already paid taxes on them. By declining to add these distributions to your basis, you will end up advertisement a beyond accretion than you accustomed from the sale, and ultimately paying added in taxes than necessary.
There is no simple band-aid to this problem, added than befitting acceptable annal and getting active in acclimation your allotment and administration information. The added paperwork may be a headache, but it could beggarly added banknote in your wallet at tax time.
3. Declining To Use Tax-managed Funds
Most investors authority their alternate funds for the continued term. That's why they're generally afraid if they get hit with a tax bill for abbreviate appellation assets accomplished by their funds. These assets aftereffect from sales of banal captivated by a armamentarium for beneath than a year, and are anesthetized on to shareholders to address on their own allotment -- even if they never awash their alternate armamentarium shares.
Recently, added alternate funds accept been absorption on, income tax bracket, able tax-management. These funds try to not alone buy shares in acceptable companies, but aswell abbreviate the tax accountability on shareholders by captivation those shares for continued periods of time. By advance in funds geared appear "tax-managed" returns, you can access your net assets and save yourself some tax-related headaches. To be worthwhile, though, a tax-efficient armamentarium accept to accept both ingredients: acceptable investment achievement and low taxable distributions to shareholders.
4. Missing Deadlines
Keogh plans, acceptable IRAs, and Roth IRAs are abundant means to amplitude your advance dollars and accommodate for your approaching retirement. Sadly, millions of investors let these gems blooper through their fingers by declining to accomplish contributions afore the applicative IRS deadlines. For Keogh plans, the borderline is December 31. For acceptable and Roth IRA's, you accept until April 15 to accomplish contributions. Mark these dates in your agenda and accomplish those deposits on time.
5. Putting Investments In The Wrong Accounts
Most investors accept two types of investment accounts: tax-advantaged, such as an IRA or 401(k), and traditional. What abounding humans don't apprehend is that captivation the appropriate blazon of assets in anniversary annual can save them bags of dollars anniversary year in accidental taxes.
Generally, investments that aftermath lots of taxable assets or concise basic assets should be captivated in tax advantaged accounts, while investments that pay assets or aftermath abiding basic assets should be captivated in acceptable accounts. For example, let's say you own 200 shares of Duke Power, and intend to authority the shares for several years. This investment will accomplish a annual beck of allotment payments, which will be burdened at 15% or less, and a abiding basic accretion or accident already it is assuredly sold, which will aswell be burdened at 15% or less. Consequently, back these shares already accept a favorable tax treatment, there is no charge to apartment them in a tax-advantaged account.
In contrast, a lot of treasury and accumulated band funds aftermath a abiding beck of absorption income. Since, this assets does not authorize for appropriate tax analysis like dividends, you will accept to pay taxes on it at your bordering rate. Unless you are in a actual low tax bracket, captivation these funds in a tax-advantaged annual makes faculty because it allows you to adjourn these tax payments far into the future, or possibly abstain them altogether.
David Twibell is President and Chief Investment Officer of Flagship Basic Management, LLC, an investment advising close in Colorado Springs, Colorado. Flagship provides portfolio administration casework to high-net-worth individuals, corporations, and non-profit entities. For added information, amuse appointment www.flagship-capital.com.
Source: articleage.com
For abounding investors, and even some tax professionals, allocation through the circuitous IRS rules on investment taxes can be a nightmare. Pitfalls abound, and the penalties for even simple mistakes can be severe. As April 15 rolls around, accumulate the afterward 5 accepted tax mistakes in apperception - and advice accumulate a little added money in your own pocket.
1. Declining To Annual Gains
Normally, if you advertise an investment for a profit, you owe a tax on the gain. One way to lower that tax accountability is to aswell advertise some of your accident investments. You can again use those losses to annual your gains.
Say you own two stocks. You accept a accretion of $1,000 on the aboriginal stock, and a accident of $1,000 on the second. If you advertise your acceptable stock, you will owe tax on the $1,000 gain. But if you advertise both stocks, your $1,000 accretion will be annual by your $1,000 loss. That's acceptable annual from a tax standpoint, back it agency you don't accept to pay any taxes on either position.
Sounds like a acceptable plan, right? Well, it is, but be acquainted it can get a bit complicated. Under what is frequently alleged the "wash auction rule," if you repurchase the accident banal aural 30 canicule of affairs it, you can't abstract your loss. In fact, not alone are you precluded from repurchasing the aforementioned stock, you are precluded from purchasing banal that is "substantially identical" to it - a ambiguous byword that is a connected antecedent of abashing to investors and tax professionals alike. Finally, the IRS mandates that you accept to bout abiding and concise assets and losses adjoin anniversary added first.
2. Miscalculating The Base Of Alternate Funds
Calculating assets or losses from the auction of an alone banal is adequately straightforward. Your base is artlessly the amount you paid for the shares (including commissions), and the accretion or accident is the aberration amid your base and the net accretion from the sale. However, it gets abundant added complicated if ambidextrous with alternate funds.
When artful your base afterwards affairs a alternate fund, it's simple to overlook to agency in the assets and basic assets distributions you reinvested in the fund. The IRS considers these distributions as taxable balance in the year they are made. As a result, you accept already paid taxes on them. By declining to add these distributions to your basis, you will end up advertisement a beyond accretion than you accustomed from the sale, and ultimately paying added in taxes than necessary.
There is no simple band-aid to this problem, added than befitting acceptable annal and getting active in acclimation your allotment and administration information. The added paperwork may be a headache, but it could beggarly added banknote in your wallet at tax time.
3. Declining To Use Tax-managed Funds
Most investors authority their alternate funds for the continued term. That's why they're generally afraid if they get hit with a tax bill for abbreviate appellation assets accomplished by their funds. These assets aftereffect from sales of banal captivated by a armamentarium for beneath than a year, and are anesthetized on to shareholders to address on their own allotment -- even if they never awash their alternate armamentarium shares.
Recently, added alternate funds accept been absorption on, income tax bracket, able tax-management. These funds try to not alone buy shares in acceptable companies, but aswell abbreviate the tax accountability on shareholders by captivation those shares for continued periods of time. By advance in funds geared appear "tax-managed" returns, you can access your net assets and save yourself some tax-related headaches. To be worthwhile, though, a tax-efficient armamentarium accept to accept both ingredients: acceptable investment achievement and low taxable distributions to shareholders.
4. Missing Deadlines
Keogh plans, acceptable IRAs, and Roth IRAs are abundant means to amplitude your advance dollars and accommodate for your approaching retirement. Sadly, millions of investors let these gems blooper through their fingers by declining to accomplish contributions afore the applicative IRS deadlines. For Keogh plans, the borderline is December 31. For acceptable and Roth IRA's, you accept until April 15 to accomplish contributions. Mark these dates in your agenda and accomplish those deposits on time.
5. Putting Investments In The Wrong Accounts
Most investors accept two types of investment accounts: tax-advantaged, such as an IRA or 401(k), and traditional. What abounding humans don't apprehend is that captivation the appropriate blazon of assets in anniversary annual can save them bags of dollars anniversary year in accidental taxes.
Generally, investments that aftermath lots of taxable assets or concise basic assets should be captivated in tax advantaged accounts, while investments that pay assets or aftermath abiding basic assets should be captivated in acceptable accounts. For example, let's say you own 200 shares of Duke Power, and intend to authority the shares for several years. This investment will accomplish a annual beck of allotment payments, which will be burdened at 15% or less, and a abiding basic accretion or accident already it is assuredly sold, which will aswell be burdened at 15% or less. Consequently, back these shares already accept a favorable tax treatment, there is no charge to apartment them in a tax-advantaged account.
In contrast, a lot of treasury and accumulated band funds aftermath a abiding beck of absorption income. Since, this assets does not authorize for appropriate tax analysis like dividends, you will accept to pay taxes on it at your bordering rate. Unless you are in a actual low tax bracket, captivation these funds in a tax-advantaged annual makes faculty because it allows you to adjourn these tax payments far into the future, or possibly abstain them altogether.
David Twibell is President and Chief Investment Officer of Flagship Basic Management, LLC, an investment advising close in Colorado Springs, Colorado. Flagship provides portfolio administration casework to high-net-worth individuals, corporations, and non-profit entities. For added information, amuse appointment www.flagship-capital.com.
Wednesday, December 23, 2009
Pension or ISA: Which Investment Route Should You Take?
Author: Ray Prince
Source: download
Let's look at a recent client we worked with, James, a 45 year old dentist who had ฃ500 per month to invest.
James was confident that he could invest this money until his retirement at age 60, in 15 years time. He has a mixture of PEPs and ISAs, with an NHS Pension and a buy to let property.
Looking at this as one investment against another, we need to look at a like on like projection. So we will use a growth figure of 6% net of charges for both investments.
Because of the tax relief available for James at his highest rate (40%), the amount he can invest into a pension fund is ฃ835 pm compared to the ฃ500 pm to an ISA. Using projections of the future fund values over 15 years we get figures of:
Pension - ฃ238,810
ISA - ฃ143,000
It appears there is no contest, however, let's look at the figures a little closer.
The ISA fund is all available as tax free cash, whereas the Pension fund rules say a maximum of 25% of the fund can be taken as tax free cash which is ฃ59,702.
So if we calculate ฃ143,000 minus ฃ59,702 = ฃ83,297, this is the amount of tax free cash we have over and above the Pension route. The remaining ฃ179,107 in the Pension fund has to be used to buy a pension called an annuity. So the question now is what pension amounts could be available for James?
Taking an average example and using today's rates, a level pension of ฃ9,117 per annum would be achievable. However, will James be a higher or lower rate tax payer in retirement? This changes the picture somewhat, as the following after tax pensions would be applicable:
Higher rate tax payer - ฃ5,470 per annum
Lower rate tax payer - ฃ7,111 per annum
So to compare this to the ISA, we need to see how many years the pension needs to pay out to reach the ฃ83,297 value of the ISA fund, allowing for growth on the ISA fund at the same 6%, net of charges.
The answer is 17 years for the basic rate payer and 30 years for the higher rate payer! Not only is this is a massive difference between the two, but it also helps towards the decision whether to invest into a pension tax wrapper or an ISA.
Other considerations
-We have ignored any "pension drawdown" option
-The amounts you can contribute to pensions is currently far more generous than that available to ISAs
-Annuity rates, income tax bracket, on pensions may improve or reduce in the future
-The government may change the rules on either pensions or ISAs or even abolish the tax favourability on one or both
-Financial Advisers/Salespeople are often paid higher initial commission on pensions than ISAs so make sure your adviser is taking these factors into account, and not just selling you a policy that pays him/her the highest commission.
So what did we advise James to do?
In his case it all came down to the picture painted by his cash flow model. This enabled us to see how James's wealth would look in the future.
What was clear was that his NHS Pension would in itself take James into the higher rate tax bracket, and that a tax free cash fund was more attractive to him than more income that would be taxed at 40%. It would also aid James to gift money to his 2 children, to both help them financially and reduce his likely Inheritance Tax liability.
Therefore, James invested monthly sums into an investment Maxi ISA.
The Financial Tips Bottom Line:
In effect, there is no clear cut right or wrong. It always comes back to balancing the pros and cons of all the options available and making your decision based on thorough research.
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps doctors and dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives.
Get your free retirement planning guide, exclusively for UK Resident Doctors and Dentists. Just visit http://www.financialtipsonline.com/ea3. You'll also receive the twice-monthly email newsletter 'Financial Tips' that will enable you to keep posted of all financial issues affecting doctors and dentists. He can be contacted on 01670 505522.
Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.
Source: download
Let's look at a recent client we worked with, James, a 45 year old dentist who had ฃ500 per month to invest.
James was confident that he could invest this money until his retirement at age 60, in 15 years time. He has a mixture of PEPs and ISAs, with an NHS Pension and a buy to let property.
Looking at this as one investment against another, we need to look at a like on like projection. So we will use a growth figure of 6% net of charges for both investments.
Because of the tax relief available for James at his highest rate (40%), the amount he can invest into a pension fund is ฃ835 pm compared to the ฃ500 pm to an ISA. Using projections of the future fund values over 15 years we get figures of:
Pension - ฃ238,810
ISA - ฃ143,000
It appears there is no contest, however, let's look at the figures a little closer.
The ISA fund is all available as tax free cash, whereas the Pension fund rules say a maximum of 25% of the fund can be taken as tax free cash which is ฃ59,702.
So if we calculate ฃ143,000 minus ฃ59,702 = ฃ83,297, this is the amount of tax free cash we have over and above the Pension route. The remaining ฃ179,107 in the Pension fund has to be used to buy a pension called an annuity. So the question now is what pension amounts could be available for James?
Taking an average example and using today's rates, a level pension of ฃ9,117 per annum would be achievable. However, will James be a higher or lower rate tax payer in retirement? This changes the picture somewhat, as the following after tax pensions would be applicable:
Higher rate tax payer - ฃ5,470 per annum
Lower rate tax payer - ฃ7,111 per annum
So to compare this to the ISA, we need to see how many years the pension needs to pay out to reach the ฃ83,297 value of the ISA fund, allowing for growth on the ISA fund at the same 6%, net of charges.
The answer is 17 years for the basic rate payer and 30 years for the higher rate payer! Not only is this is a massive difference between the two, but it also helps towards the decision whether to invest into a pension tax wrapper or an ISA.
Other considerations
-We have ignored any "pension drawdown" option
-The amounts you can contribute to pensions is currently far more generous than that available to ISAs
-Annuity rates, income tax bracket, on pensions may improve or reduce in the future
-The government may change the rules on either pensions or ISAs or even abolish the tax favourability on one or both
-Financial Advisers/Salespeople are often paid higher initial commission on pensions than ISAs so make sure your adviser is taking these factors into account, and not just selling you a policy that pays him/her the highest commission.
So what did we advise James to do?
In his case it all came down to the picture painted by his cash flow model. This enabled us to see how James's wealth would look in the future.
What was clear was that his NHS Pension would in itself take James into the higher rate tax bracket, and that a tax free cash fund was more attractive to him than more income that would be taxed at 40%. It would also aid James to gift money to his 2 children, to both help them financially and reduce his likely Inheritance Tax liability.
Therefore, James invested monthly sums into an investment Maxi ISA.
The Financial Tips Bottom Line:
In effect, there is no clear cut right or wrong. It always comes back to balancing the pros and cons of all the options available and making your decision based on thorough research.
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps doctors and dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives.
Get your free retirement planning guide, exclusively for UK Resident Doctors and Dentists. Just visit http://www.financialtipsonline.com/ea3. You'll also receive the twice-monthly email newsletter 'Financial Tips' that will enable you to keep posted of all financial issues affecting doctors and dentists. He can be contacted on 01670 505522.
Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.
Tuesday, December 22, 2009
Obligated Tax
Author: Jason Webb
Source: articleage.com
I like most American's complain about taxes and how the rich keep getting richer and the poor keep getting poorer. You've heard the arguments, the poor can't pay taxes because they are poor, the rich don't pay enough, and the middle class is left to pay the brunt. I complain not only as a cynic but also as a hopeful citizen that someday, something will change. I don't wish to be seen as a socialist nor a bigot along class lines. I just want everyone to pay a fair share of the collective burden as our founding fathers intended.
Do you think the rich have paid their fair share? Do you feel that after paying taxes on several hundred thousand dollars the burden should be lessened because you've paid enough or more than the average amount per capita? Do you think it is fair or unfair that one person should pay more than another for the same services received?
According to the 16th Amendment on income taxes, "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
Without apportionment, what does that mean?
Here is a quote from Supreme Court Justice Paterson in Hylton vs U.S. (3 US 171 [1796]): "The constitution declares, that a capitation tax is a direct tax; and both in theory and practice, a tax on land is deemed to be a direct tax... The provision was made in favor of the southern states; they possessed a large number of slaves; they had extensive tracts of territory, thinly settled, and not very productive. A majority of the states had but few slaves, and several of them a limited territory, well settled, and in a high state of cultivation. The southern states, if no provision had been introduced in the constitution, would have been wholly at the mercy of the other states. Congress in such case, might tax slaves, at discretion or arbitrarily, and land in every part of the Union, after the same rate or measure: so much a head, in the first instance, and so much an acre, in the second. To guard them against imposition, in these particulars, was the reason of introducing the clause in the constitution."
Without apportionment, means quite clearly that the government has the power to tax people at different rates. In Justice Patterson's explanation, the reason for taxing people at different rates is, some can afford to pay more than others based on their productivity and it is the governments duty to guard those less able to pay, against imposition.
It does not take a genius to understand that sharing the burden equally does not mean we divide up the national debt evenly and each pay one share. Sharing the burden equally means we all carry that portion of the total burden we are capable of carrying (paying).
Unfortunately the current tax structure soaks both the poor and middle classes only to spare the rich. The "Who Pays" national study finds that poor and middle income families pay a much higher percentage of their income to taxes than do the rich. The wealthiest pay non federal taxes at a rate equaling 7.9% of their income while the middle class and poor pay 9.8% and 12.5% respectively. In the United States, a country with the phrase "In God We Trust" bannered on its currency, this seems unconscionable. How can those with the least be expected to contribute the most by percentage? What happened to guarding against imposition?
Taxes are our collective duty, a price of continued enjoyment of the privileges of being a U.S. citizen. When I hear that extremely privileged people can't afford to pay the same percentage of income in taxes that the poor and middle class pay, I find myself hoping their investments fail miserably so that they will be able to afford to pay their share of the burden. If we are Americans collectively and we all enjoy the benefits collectively, then we should pay collectively and accordingly to what our means allow us to contribute. This may seem a harsh view, driven along class lines, but even some of America's wealthiest hold this true to one extent or another.
Warren E. Buffett, George Soros, and Ted Turner, have warned about the concentration of wealth and how it can turn a union based on merit into an aristocracy. Economic growth can be hindered by allowing a nation's capital to sit idly in, income tax bracket, the hands of inheritors instead of funneling it back thru the ranks to a new generation of innovators and workers. Even Alan Greenspan, the Federal Reserve chairman, warned in Congressional testimony, "For the democratic society, that is not a very desirable thing to allow it to happen", speaking on the concentration of wealth in our country.
F. Scott Fitzgerald said the very rich, "are different from you and me," to which Ernest Hemingway replied, "Yes, they have more money." To this I would add yes and they pay a disproportional smaller percentage of taxes on that money. This means the wealthiest one percent, are enjoying an unfair economic advantage over the rest of us beyond what they have earned.
Before you gather up arms against your local doctors and lawyers thinking they aren't paying their share, you should understand I'm not talking about them at all. I am talking about nobody you will, in all likelihood, ever see much less meet. What the average American sees as a person of wealth is more likely a true middle class or upper middle class person. In fact the richest or wealthiest person you know is probably in the 50% tax bracket, fully half of all their earnings going to one tax or another. No, it isn't these people I am speaking of at all.
The persons I'm talking about are the true upper five percent of Americans, those making over ten million dollars a year. Did you know the wealthiest 5% have collected 59% of the money but only pay 38 % of the taxes? Did you know it gets worse? The wealthiest 1% own 38% of all wealth in this country and pay only 25% of the taxes. Does this seem fair and like a shared burden?
Knowing this, would you now be surprised to learn that the bottom 40% of tax payers (you and me), have an average net wealth of $1100.00 hundred dollars? We on average are worth $1100.00 dollars and are paying on average $1793.00 in taxes. This is 163% of our net worth gone every year and people are still wondering why they can't seem to get ahead in life. Why are we paying so much? It's easier to answer this when you consider the wealthiest are paying 3.5 percent of their wealth in taxes. We pay 163% and they pay 3.5 %. The money has to come from somewhere after all.
What does this mean in plain English and what is the solution? If all taxpayers paid the same 10.5 percent of their wealth in taxes as a median income family pays, the taxes of the lowest 40 percent (you and me) would be cut by 94 percent while the taxes of the wealthiest would triple. Source: Congressional Budget Office and United for a Fair Economy
"We the people", need to print this up as a bumper sticker, spread the word and start firing the political puppets of the rich. I for one do not hate the rich, they are Americans also. I just want them to pay the same 10% I feel obligated to.
Born in Southern California in 1964, Jason Webb Considers himself a student of life. He is currently attending the University of Northern Iowa pursuing a degree in communication.
Source: articleage.com
I like most American's complain about taxes and how the rich keep getting richer and the poor keep getting poorer. You've heard the arguments, the poor can't pay taxes because they are poor, the rich don't pay enough, and the middle class is left to pay the brunt. I complain not only as a cynic but also as a hopeful citizen that someday, something will change. I don't wish to be seen as a socialist nor a bigot along class lines. I just want everyone to pay a fair share of the collective burden as our founding fathers intended.
Do you think the rich have paid their fair share? Do you feel that after paying taxes on several hundred thousand dollars the burden should be lessened because you've paid enough or more than the average amount per capita? Do you think it is fair or unfair that one person should pay more than another for the same services received?
According to the 16th Amendment on income taxes, "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
Without apportionment, what does that mean?
Here is a quote from Supreme Court Justice Paterson in Hylton vs U.S. (3 US 171 [1796]): "The constitution declares, that a capitation tax is a direct tax; and both in theory and practice, a tax on land is deemed to be a direct tax... The provision was made in favor of the southern states; they possessed a large number of slaves; they had extensive tracts of territory, thinly settled, and not very productive. A majority of the states had but few slaves, and several of them a limited territory, well settled, and in a high state of cultivation. The southern states, if no provision had been introduced in the constitution, would have been wholly at the mercy of the other states. Congress in such case, might tax slaves, at discretion or arbitrarily, and land in every part of the Union, after the same rate or measure: so much a head, in the first instance, and so much an acre, in the second. To guard them against imposition, in these particulars, was the reason of introducing the clause in the constitution."
Without apportionment, means quite clearly that the government has the power to tax people at different rates. In Justice Patterson's explanation, the reason for taxing people at different rates is, some can afford to pay more than others based on their productivity and it is the governments duty to guard those less able to pay, against imposition.
It does not take a genius to understand that sharing the burden equally does not mean we divide up the national debt evenly and each pay one share. Sharing the burden equally means we all carry that portion of the total burden we are capable of carrying (paying).
Unfortunately the current tax structure soaks both the poor and middle classes only to spare the rich. The "Who Pays" national study finds that poor and middle income families pay a much higher percentage of their income to taxes than do the rich. The wealthiest pay non federal taxes at a rate equaling 7.9% of their income while the middle class and poor pay 9.8% and 12.5% respectively. In the United States, a country with the phrase "In God We Trust" bannered on its currency, this seems unconscionable. How can those with the least be expected to contribute the most by percentage? What happened to guarding against imposition?
Taxes are our collective duty, a price of continued enjoyment of the privileges of being a U.S. citizen. When I hear that extremely privileged people can't afford to pay the same percentage of income in taxes that the poor and middle class pay, I find myself hoping their investments fail miserably so that they will be able to afford to pay their share of the burden. If we are Americans collectively and we all enjoy the benefits collectively, then we should pay collectively and accordingly to what our means allow us to contribute. This may seem a harsh view, driven along class lines, but even some of America's wealthiest hold this true to one extent or another.
Warren E. Buffett, George Soros, and Ted Turner, have warned about the concentration of wealth and how it can turn a union based on merit into an aristocracy. Economic growth can be hindered by allowing a nation's capital to sit idly in, income tax bracket, the hands of inheritors instead of funneling it back thru the ranks to a new generation of innovators and workers. Even Alan Greenspan, the Federal Reserve chairman, warned in Congressional testimony, "For the democratic society, that is not a very desirable thing to allow it to happen", speaking on the concentration of wealth in our country.
F. Scott Fitzgerald said the very rich, "are different from you and me," to which Ernest Hemingway replied, "Yes, they have more money." To this I would add yes and they pay a disproportional smaller percentage of taxes on that money. This means the wealthiest one percent, are enjoying an unfair economic advantage over the rest of us beyond what they have earned.
Before you gather up arms against your local doctors and lawyers thinking they aren't paying their share, you should understand I'm not talking about them at all. I am talking about nobody you will, in all likelihood, ever see much less meet. What the average American sees as a person of wealth is more likely a true middle class or upper middle class person. In fact the richest or wealthiest person you know is probably in the 50% tax bracket, fully half of all their earnings going to one tax or another. No, it isn't these people I am speaking of at all.
The persons I'm talking about are the true upper five percent of Americans, those making over ten million dollars a year. Did you know the wealthiest 5% have collected 59% of the money but only pay 38 % of the taxes? Did you know it gets worse? The wealthiest 1% own 38% of all wealth in this country and pay only 25% of the taxes. Does this seem fair and like a shared burden?
Knowing this, would you now be surprised to learn that the bottom 40% of tax payers (you and me), have an average net wealth of $1100.00 hundred dollars? We on average are worth $1100.00 dollars and are paying on average $1793.00 in taxes. This is 163% of our net worth gone every year and people are still wondering why they can't seem to get ahead in life. Why are we paying so much? It's easier to answer this when you consider the wealthiest are paying 3.5 percent of their wealth in taxes. We pay 163% and they pay 3.5 %. The money has to come from somewhere after all.
What does this mean in plain English and what is the solution? If all taxpayers paid the same 10.5 percent of their wealth in taxes as a median income family pays, the taxes of the lowest 40 percent (you and me) would be cut by 94 percent while the taxes of the wealthiest would triple. Source: Congressional Budget Office and United for a Fair Economy
"We the people", need to print this up as a bumper sticker, spread the word and start firing the political puppets of the rich. I for one do not hate the rich, they are Americans also. I just want them to pay the same 10% I feel obligated to.
Born in Southern California in 1964, Jason Webb Considers himself a student of life. He is currently attending the University of Northern Iowa pursuing a degree in communication.
Sunday, December 20, 2009
Marginal Tax Brackets - A Glimpse Into What They Are About
Author: Dean Sturridge
Source: ezinearticles.com
Have you anytime wondered why it is that your added hours of plan yields you bottom assets but nets you college tax rates? Have you accomplished the point area you in fact questioned the acumen of putting in added plan hours? Does it not assume to be advantageous as you amorously anticipation it would? The acknowledgment to these questions may be the bordering tax brackets. This may assume abashing at first, but if appropriately understood, it will accomplish things clearer.
To activate with, here's a abrupt description of the thing: Bordering tax brackets accredit to the analysis of added assets earners on the bulk for which they will be answerable for every added assets they earn. This bureau that every added assets becoming accomplished a accustomed point will be levied at a college rate. With assets taxes getting burdened in a accelerating manner, every added dollar of assets will be burdened college than all the dollars above-mentioned it.
Illustrating Bordering Tax Brackets
Let's just say you plan as a agent at a pharmacy. You acquire account salaries with assets tax called at 20 percent of your income. Because you absitively that the pay you yield home with you is just not enough, you took on added plan as a secretary at an application agency. You ample that you'd accompany home a decidedly bigger bulk with the balance from the 2 jobs combined, addition that the tax would abide at the 20 percent level. However, to your annoyance, you begin out that you were burdened decidedly college than what you anticipation would be at the bulk levied on you. This is because your added plan felled you in the brackets, which makes you acceptable for added taxes based on the added plan you put in. As such, for those advertent on accretion an added employment, the anticipation of accepting to pay added taxes sometimes, income tax bracket, holds them back.
Source: ezinearticles.com
Have you anytime wondered why it is that your added hours of plan yields you bottom assets but nets you college tax rates? Have you accomplished the point area you in fact questioned the acumen of putting in added plan hours? Does it not assume to be advantageous as you amorously anticipation it would? The acknowledgment to these questions may be the bordering tax brackets. This may assume abashing at first, but if appropriately understood, it will accomplish things clearer.
To activate with, here's a abrupt description of the thing: Bordering tax brackets accredit to the analysis of added assets earners on the bulk for which they will be answerable for every added assets they earn. This bureau that every added assets becoming accomplished a accustomed point will be levied at a college rate. With assets taxes getting burdened in a accelerating manner, every added dollar of assets will be burdened college than all the dollars above-mentioned it.
Illustrating Bordering Tax Brackets
Let's just say you plan as a agent at a pharmacy. You acquire account salaries with assets tax called at 20 percent of your income. Because you absitively that the pay you yield home with you is just not enough, you took on added plan as a secretary at an application agency. You ample that you'd accompany home a decidedly bigger bulk with the balance from the 2 jobs combined, addition that the tax would abide at the 20 percent level. However, to your annoyance, you begin out that you were burdened decidedly college than what you anticipation would be at the bulk levied on you. This is because your added plan felled you in the brackets, which makes you acceptable for added taxes based on the added plan you put in. As such, for those advertent on accretion an added employment, the anticipation of accepting to pay added taxes sometimes, income tax bracket, holds them back.
My name is Dean and I love all financial issues. I run the http://www.loansfinance.eu Website. If you are interested in finding out more information on financial issues then I recommend the following article: Marginal tax brackets.
Monday, December 14, 2009
Investment via Annuities
Author: Joanne Elizabeth
Source: articleage.com
Of all the forms of income generating investments, annuities are some of the most controversial ones. Annuity - derived from the Latin word 'annus' - is basically an insurance product sold by insurance companies through authorised agents. This type of investment facilitates a series of payments in the future, in a defined manner, in exchange for an up-front payment of money.
There is a group of individuals who think that annuities are a waste of time and there are much better tools of investment such as stock market or property. But then again both the above forms of investment are vulnerable to crash and do not score very high in comparison to annuities, with respect to safety.
Annuities are commonly of two types first Deferred and the other Fixed. In the case of 'Deferred Annuity', the payments are made usually on a monthly basis for a number of years. This form of annuity makes sure that a younger person acquires a good income in his later years. In the latter form that is 'Fixed or Immediate Annuity', the purchaser pays a large capital sum usually to an insurance company and payments begin soon thereafter.
One of the biggest hurdles faced by annuities today is inflation. At the outset the agreed sum to be paid out by the insurance company might look excellent and very heart warming, but inflation can erode the value of your investment at an alarming rate.
Another draw back with annuities is that instead of being a long-term capital gain the earnings on annuities are taxable just as income is. Plus there are certain stringent rules and regulations governing the deposit that may not be customer friendly. One of which is that the customer cannot withdraw the money until he turns 59.5 years or else he would be charged a 10% penalty for withdrawing the same prematurely.
So why should you consider Annuities as a mode of investment?
Frankly any individual planning, income tax bracket, to invest in annuities should be the one who is not already contributing his maximum to other forms of retirement schemes. However, annuities are an excellent mode of investment for individuals in higher tax brackets. In those years of high tax liabilities, annuities make a lot of sense, as these savings are tax exempt. Tax is only due when income is received for the plan. That means you start drawing your annuity after you have stopped earning a high salary.
Webmaster
Investment via Annuities
Source: articleage.com
Of all the forms of income generating investments, annuities are some of the most controversial ones. Annuity - derived from the Latin word 'annus' - is basically an insurance product sold by insurance companies through authorised agents. This type of investment facilitates a series of payments in the future, in a defined manner, in exchange for an up-front payment of money.
There is a group of individuals who think that annuities are a waste of time and there are much better tools of investment such as stock market or property. But then again both the above forms of investment are vulnerable to crash and do not score very high in comparison to annuities, with respect to safety.
Annuities are commonly of two types first Deferred and the other Fixed. In the case of 'Deferred Annuity', the payments are made usually on a monthly basis for a number of years. This form of annuity makes sure that a younger person acquires a good income in his later years. In the latter form that is 'Fixed or Immediate Annuity', the purchaser pays a large capital sum usually to an insurance company and payments begin soon thereafter.
One of the biggest hurdles faced by annuities today is inflation. At the outset the agreed sum to be paid out by the insurance company might look excellent and very heart warming, but inflation can erode the value of your investment at an alarming rate.
Another draw back with annuities is that instead of being a long-term capital gain the earnings on annuities are taxable just as income is. Plus there are certain stringent rules and regulations governing the deposit that may not be customer friendly. One of which is that the customer cannot withdraw the money until he turns 59.5 years or else he would be charged a 10% penalty for withdrawing the same prematurely.
So why should you consider Annuities as a mode of investment?
Frankly any individual planning, income tax bracket, to invest in annuities should be the one who is not already contributing his maximum to other forms of retirement schemes. However, annuities are an excellent mode of investment for individuals in higher tax brackets. In those years of high tax liabilities, annuities make a lot of sense, as these savings are tax exempt. Tax is only due when income is received for the plan. That means you start drawing your annuity after you have stopped earning a high salary.
Webmaster
Investment via Annuities
Thursday, December 3, 2009
The Jobs and Growth Tax Relief Reconciliation Act of 2003 - - What Does It Mean
Author: Ted Koester
Source: free-articles
the third largest tax reduction in our country's history. Since it is such a large tax cut, it will affect most Americans. The purpose of this article is to summarize the Act and examine its effects.
On Wednesday, May 28, 2003, President George W. Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act") into law. It has been reported that this Act is the third largest tax reduction in our country's history. Since it is such a large tax cut, it will affect most Americans. The purpose of this article is to summarize the Act and examine its effects.
Summary Of The Act
All of the tax cuts created by the Act involve income taxes. Transfer taxes, such as gift, estate and generation-skipping taxes, are not affected by the Act.
The Act changes the income tax system in several ways. First, the maximum child tax credit for 2003 and 2004 is increased from $600 to $1,000 per child. The amount of the increase ($400) for 2003 will be advanced to eligible taxpayers this year in the form of checks. However, in 2005 the child tax credit falls to $700 per child, as specified under the law prior to the Act.
Secondly, the Act lessens the effect of the so-called "marriage penalty." This is accomplished by making the standard deduction for jointly filing, married taxpayers twice the amount of the standard deduction for single taxpayers and by increasing the 15% tax bracket for jointly filing, married taxpayers so that it is double the 15% tax bracket for single filers.
A significant change made by the Act is the lowering of the four highest income tax rates. The 10% and 15% rates are not altered, but the 27% rate is lowered to 25%; the 30% rate reduced to 28%; the 35% rate goes down to 33%; and the 38.6% rate drops to 35%. The Act also provides some minimum tax relief to individual taxpayers.
All these amendments to the Internal Revenue Code, as they are significant, are only effective until December 31, 2010. After that date, the law in effect prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 goes back into effect.
The Act also reduces the tax rate on capital gains and dividends received by individuals. The 10% capital gains rate is lowered to 5% and the 20% rate reduced to 15%. Dividends are no longer taxed at ordinary income tax rates, but will be taxed at the 5% and 15% capital gains rates. However, these changes aren't permanent, either; they will expire after December 31, 2008.
The Act also contains income tax benefits for businesses. Specifically, the so-called "Section 179" expense amount is increased from $25,000 to $100,000 for tax years 2003 through 2005. Further, certain computer software will now qualify for the Section 179 expense. In addition, the 30% "bonus depreciation" deduction is increased to 50% for qualifying property acquired after May 5, 2003 (but not under contract to be acquired prior to May 6, 2003) and before January 1, 2005.
Finally, the Act contains some provisions granting fiscal relief to states for Medicaid and other government services and pushes the due date for the 25% required installment of corporate estimated tax back from September 15, 2003 to October 1, 2003.
What Do The Changes Mean To You?
Obviously, the child tax credit advance checks many Americans will receive will be a welcomed change. The recipients will be able to use this money for any purpose. However, this author suggests that parents consider depositing this money into education savings accounts for their children, such as Section 529 Plans. These Plans offer many tax benefits to the contributors and the beneficiaries. Plus, Illinois' Bright Startยฎ Plan gives all Illinois contributors a tax deduction on their Illinois income tax return.
Another benefit the Act will provide is more take-home pay to working taxpayers. This will result from the decrease in the ordinary income tax rates, the increased standard deduction, and the, income tax bracket, larger 15% bracket for jointly filing, married taxpayers. The lawmakers believe that this will create more jobs by infusing more money into the economy. But as with most things, only time will tell if that is true. However, this author believes that if people have more money they will, as a whole, be more likely to invest that money - - especially given that the tax on investment returns (capital gains and dividends) has been lowered and the deductions allowed (50% bonus depreciation and Section 179 expense) for such investments have been increased. Of course, the investments made should be sound ones. Thorough analysis is important before making any decisions. Further, this author strongly recommends that the appropriate professionals be employed before making any investment decisions.
Remember that many of the tax cuts in the Act are only temporary and will expire in a few years. All taxpayers are encouraged to take advantage of them now, because the future is uncertain.
Source: free-articles
the third largest tax reduction in our country's history. Since it is such a large tax cut, it will affect most Americans. The purpose of this article is to summarize the Act and examine its effects.
On Wednesday, May 28, 2003, President George W. Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act") into law. It has been reported that this Act is the third largest tax reduction in our country's history. Since it is such a large tax cut, it will affect most Americans. The purpose of this article is to summarize the Act and examine its effects.
Summary Of The Act
All of the tax cuts created by the Act involve income taxes. Transfer taxes, such as gift, estate and generation-skipping taxes, are not affected by the Act.
The Act changes the income tax system in several ways. First, the maximum child tax credit for 2003 and 2004 is increased from $600 to $1,000 per child. The amount of the increase ($400) for 2003 will be advanced to eligible taxpayers this year in the form of checks. However, in 2005 the child tax credit falls to $700 per child, as specified under the law prior to the Act.
Secondly, the Act lessens the effect of the so-called "marriage penalty." This is accomplished by making the standard deduction for jointly filing, married taxpayers twice the amount of the standard deduction for single taxpayers and by increasing the 15% tax bracket for jointly filing, married taxpayers so that it is double the 15% tax bracket for single filers.
A significant change made by the Act is the lowering of the four highest income tax rates. The 10% and 15% rates are not altered, but the 27% rate is lowered to 25%; the 30% rate reduced to 28%; the 35% rate goes down to 33%; and the 38.6% rate drops to 35%. The Act also provides some minimum tax relief to individual taxpayers.
All these amendments to the Internal Revenue Code, as they are significant, are only effective until December 31, 2010. After that date, the law in effect prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 goes back into effect.
The Act also reduces the tax rate on capital gains and dividends received by individuals. The 10% capital gains rate is lowered to 5% and the 20% rate reduced to 15%. Dividends are no longer taxed at ordinary income tax rates, but will be taxed at the 5% and 15% capital gains rates. However, these changes aren't permanent, either; they will expire after December 31, 2008.
The Act also contains income tax benefits for businesses. Specifically, the so-called "Section 179" expense amount is increased from $25,000 to $100,000 for tax years 2003 through 2005. Further, certain computer software will now qualify for the Section 179 expense. In addition, the 30% "bonus depreciation" deduction is increased to 50% for qualifying property acquired after May 5, 2003 (but not under contract to be acquired prior to May 6, 2003) and before January 1, 2005.
Finally, the Act contains some provisions granting fiscal relief to states for Medicaid and other government services and pushes the due date for the 25% required installment of corporate estimated tax back from September 15, 2003 to October 1, 2003.
What Do The Changes Mean To You?
Obviously, the child tax credit advance checks many Americans will receive will be a welcomed change. The recipients will be able to use this money for any purpose. However, this author suggests that parents consider depositing this money into education savings accounts for their children, such as Section 529 Plans. These Plans offer many tax benefits to the contributors and the beneficiaries. Plus, Illinois' Bright Startยฎ Plan gives all Illinois contributors a tax deduction on their Illinois income tax return.
Another benefit the Act will provide is more take-home pay to working taxpayers. This will result from the decrease in the ordinary income tax rates, the increased standard deduction, and the, income tax bracket, larger 15% bracket for jointly filing, married taxpayers. The lawmakers believe that this will create more jobs by infusing more money into the economy. But as with most things, only time will tell if that is true. However, this author believes that if people have more money they will, as a whole, be more likely to invest that money - - especially given that the tax on investment returns (capital gains and dividends) has been lowered and the deductions allowed (50% bonus depreciation and Section 179 expense) for such investments have been increased. Of course, the investments made should be sound ones. Thorough analysis is important before making any decisions. Further, this author strongly recommends that the appropriate professionals be employed before making any investment decisions.
Remember that many of the tax cuts in the Act are only temporary and will expire in a few years. All taxpayers are encouraged to take advantage of them now, because the future is uncertain.
Monday, November 30, 2009
Year-End Tax Planning
Author: Robert D. Flach
Source: articleage.com
While the average taxpayer will avoid thinking about income taxes until the approach of the April deadline forces him to do so, once the ball drops on One Times Square at midnight on December 31st and the New Year is rung in there is very little that can be done to cut your tax bill.
However, during the last two months of the year you can do a great deal to reduce your tax liability.
Sit down with paper and pencil and list your anticipated income for 2005 and all your allowable deductions to date. What you want to do is, using your 2004 return as a guide, prepare a projected 2005 return. Once this is done you can decide what steps to take to make sure you pay the absolute least amount of federal and state income tax possible for 2005 and 2006. Tax information for 2005 (i.e. standard deduction and personal exemption amounts, tax rates, etc.) is available on the WHAT'S NEW FOR 2005 Page at www.robertdflach.net.
Here are some year-end tips:
1) Traditional year-end planning calls for postponing the receipt of taxable income until 2006 and accelerating allowable deductions to be claimed in 2005, the idea being to reduce your 2005 taxable income to a minimum. This strategy will generally apply if you expect to be in the same tax bracket for both 2005 and 2006, or if you will be in a lower bracket in 2006.
If, however, you anticipate a substantial increase in taxable income in 2006, which will push you into a higher bracket, you should do the reverse and accelerate the receipt of taxable income to 2005 and postpone deductible expenses until 2006. Income received in 2005 will be taxed at a lower rate, and deductions claimed in 2006 will yield a greater tax savings.
Not sure what your 2006 income will be. Follow the rule of "when in doubt - defer" - go the traditional route and postpone income and accelerate expenses.
2) It does not pay to itemize unless the total of your allowable deductions exceeds the standard deduction that applies to your filing status, plus any additions for age or blindness. If you decide to accelerate allowable deductions to claim them in 2005, you can accelerate all you want, but it will be wasted unless your total "itemizable" deductions exceed your applicable standard deduction.
Let us say you usually do not have enough deductions to itemize. However, after preparing your projected 2005 return you discover that, because of some special circumstance, you will be able to itemize this year. During the last two months of the year you should incur, and pay for, as many deductible expenses as possible.
If, on the other hand, your projected return indicates that you do not have anywhere near enough deductions to be able to itemize, postpone making any deductible payments until 2006. Making these payments in 2005 would not produce any tax savings, while it is possible that by deferring them until next year you may be able to itemize in 2006.
3) The timing of deductions is especially important when it comes to medical expenses and miscellaneous job-related and investment expenses. You are allowed to deduct medical expenses only to the extent that they exceed 7 1/2% of your Adjusted Gross Income (AGI), and most miscellaneous deductions are only deductible to the extent that the total exceeds 2% of AGI.
If you anticipate a 2005 AGI of $70,000.00 you must exclude the first $5,250.00 of medical expenses - the first $5,250.00 is not deductible. If your medical expenses to date are close to or more than %5,250.00, and you will be able to itemize, pay any outstanding medical bills and schedule, and pay for, check-ups, doctor visits and needed dental work in November and December. If medical payments to date are substantially less than $5,250.00, put off paying any more medical bills until 2006. The same concept applies for miscellaneous deductions.
If you expect to be able to itemize, and you are making quarterly state estimated tax payments, make the 4th quarter payment in December, instead of waiting until the January 16, 2006 due date, so you will be able to deduct the payment on your 2005 Schedule A.
4) If you do not have the cash available to pay for the deductible items you have scheduled as part of your year-end plan, you can use a credit card to pay for the item and still get a 2005 deduction. Allowable expenses charged to a credit card (VISA, Master Card, American Express, Discover) are deductible in the year charged, and not in the year that you actually pay for the charge.
5) The option to deduct state and local sales tax paid instead of state and local income tax paid will expire on December 31, 2005. This option will not be available for 2006. If you are planning to buy a new car (other than a qualifying energy-saving hybrid - see tip #6), SUV, motorcycle, or other "big ticket" item in the near future you may want to do so before the end of the year to be able to deduct the sales tax.
6) The Energy Tax Incentives Act of 2005 creates new tax credits for certain energy-saving autos, consumer products and home improvements beginning in 2006. You may want to postpone any purchase of qualifying, income tax bracket, energy-saving items until next year to be able to claim the credit.
7) While postponing income and accelerating deductions may reduce your "regular" income tax for 2005, these actions may backfire and end up costing you if you fall victim to the dreaded Alternative Minimum Tax (AMT). Why? Because taxes and miscellaneous expenses are not deductible in calculating AMT, and medical expenses are only deductible to the extent they exceed 10% of AGI. When preparing your projected 2005 return be sure to determine if you will be subject to AMT and plan your strategies accordingly.
8) When preparing your projected return you should review the performance of your investment portfolio for the year. Add up all your realized gains and losses from actual sales of stock, bonds and mutual fund shares for the first 10 months of the year, with separate net totals for short-term (held one year of less) and long-term (held more than one year) activity. Gains and losses from inherited property are always considered long-term. Include in the long-term calculation any "capital gain distributions" from mutual funds.
Now do a similar calculation for unrealized "paper" gains and losses on the investments you still hold. You may want to sell some of your investments before the end of the year at a loss to wipe out year-to-date gains, or at a profit to take advantage of year-to-date losses in excess of $3,000.00.
There are no written in stone year-end tax planning rules that apply to all taxpayers in all cases. As with any other transaction, year-end strategies must be evaluated in the context of the special facts and circumstances of your individual situation. You may want to review your year-end situation with your tax professional.
And remember - your first criteria for evaluating any financial transaction you are considering should always be economic. Taxes are second.
Robert D Flach is a tax professional with 34 tax seasons of experience preparing 1040s for individuals in all walks of life. He writes THE WANDERING TAX PRO weblog (http://rdftaxpro.tripod.com/weblog), the NJ TAX PRACTICE BLOG (http://rdftaxpro.tripod.com/newjerseytaxpractitionernetwork), and the website http://www.robertdflach.net, which has a wealth of tax planning and preparation advice and information. He also writes and publishes THE FLACH REPORT, a quarterly tax newsletter. For more info on THE FLACH REPORT go to http://rdftaxpro.tripod.com/avoidtaxeslegally. The above article is taken from postings to THE WANDERING TAX PRO.
Source: articleage.com
While the average taxpayer will avoid thinking about income taxes until the approach of the April deadline forces him to do so, once the ball drops on One Times Square at midnight on December 31st and the New Year is rung in there is very little that can be done to cut your tax bill.
However, during the last two months of the year you can do a great deal to reduce your tax liability.
Sit down with paper and pencil and list your anticipated income for 2005 and all your allowable deductions to date. What you want to do is, using your 2004 return as a guide, prepare a projected 2005 return. Once this is done you can decide what steps to take to make sure you pay the absolute least amount of federal and state income tax possible for 2005 and 2006. Tax information for 2005 (i.e. standard deduction and personal exemption amounts, tax rates, etc.) is available on the WHAT'S NEW FOR 2005 Page at www.robertdflach.net.
Here are some year-end tips:
1) Traditional year-end planning calls for postponing the receipt of taxable income until 2006 and accelerating allowable deductions to be claimed in 2005, the idea being to reduce your 2005 taxable income to a minimum. This strategy will generally apply if you expect to be in the same tax bracket for both 2005 and 2006, or if you will be in a lower bracket in 2006.
If, however, you anticipate a substantial increase in taxable income in 2006, which will push you into a higher bracket, you should do the reverse and accelerate the receipt of taxable income to 2005 and postpone deductible expenses until 2006. Income received in 2005 will be taxed at a lower rate, and deductions claimed in 2006 will yield a greater tax savings.
Not sure what your 2006 income will be. Follow the rule of "when in doubt - defer" - go the traditional route and postpone income and accelerate expenses.
2) It does not pay to itemize unless the total of your allowable deductions exceeds the standard deduction that applies to your filing status, plus any additions for age or blindness. If you decide to accelerate allowable deductions to claim them in 2005, you can accelerate all you want, but it will be wasted unless your total "itemizable" deductions exceed your applicable standard deduction.
Let us say you usually do not have enough deductions to itemize. However, after preparing your projected 2005 return you discover that, because of some special circumstance, you will be able to itemize this year. During the last two months of the year you should incur, and pay for, as many deductible expenses as possible.
If, on the other hand, your projected return indicates that you do not have anywhere near enough deductions to be able to itemize, postpone making any deductible payments until 2006. Making these payments in 2005 would not produce any tax savings, while it is possible that by deferring them until next year you may be able to itemize in 2006.
3) The timing of deductions is especially important when it comes to medical expenses and miscellaneous job-related and investment expenses. You are allowed to deduct medical expenses only to the extent that they exceed 7 1/2% of your Adjusted Gross Income (AGI), and most miscellaneous deductions are only deductible to the extent that the total exceeds 2% of AGI.
If you anticipate a 2005 AGI of $70,000.00 you must exclude the first $5,250.00 of medical expenses - the first $5,250.00 is not deductible. If your medical expenses to date are close to or more than %5,250.00, and you will be able to itemize, pay any outstanding medical bills and schedule, and pay for, check-ups, doctor visits and needed dental work in November and December. If medical payments to date are substantially less than $5,250.00, put off paying any more medical bills until 2006. The same concept applies for miscellaneous deductions.
If you expect to be able to itemize, and you are making quarterly state estimated tax payments, make the 4th quarter payment in December, instead of waiting until the January 16, 2006 due date, so you will be able to deduct the payment on your 2005 Schedule A.
4) If you do not have the cash available to pay for the deductible items you have scheduled as part of your year-end plan, you can use a credit card to pay for the item and still get a 2005 deduction. Allowable expenses charged to a credit card (VISA, Master Card, American Express, Discover) are deductible in the year charged, and not in the year that you actually pay for the charge.
5) The option to deduct state and local sales tax paid instead of state and local income tax paid will expire on December 31, 2005. This option will not be available for 2006. If you are planning to buy a new car (other than a qualifying energy-saving hybrid - see tip #6), SUV, motorcycle, or other "big ticket" item in the near future you may want to do so before the end of the year to be able to deduct the sales tax.
6) The Energy Tax Incentives Act of 2005 creates new tax credits for certain energy-saving autos, consumer products and home improvements beginning in 2006. You may want to postpone any purchase of qualifying, income tax bracket, energy-saving items until next year to be able to claim the credit.
7) While postponing income and accelerating deductions may reduce your "regular" income tax for 2005, these actions may backfire and end up costing you if you fall victim to the dreaded Alternative Minimum Tax (AMT). Why? Because taxes and miscellaneous expenses are not deductible in calculating AMT, and medical expenses are only deductible to the extent they exceed 10% of AGI. When preparing your projected 2005 return be sure to determine if you will be subject to AMT and plan your strategies accordingly.
8) When preparing your projected return you should review the performance of your investment portfolio for the year. Add up all your realized gains and losses from actual sales of stock, bonds and mutual fund shares for the first 10 months of the year, with separate net totals for short-term (held one year of less) and long-term (held more than one year) activity. Gains and losses from inherited property are always considered long-term. Include in the long-term calculation any "capital gain distributions" from mutual funds.
Now do a similar calculation for unrealized "paper" gains and losses on the investments you still hold. You may want to sell some of your investments before the end of the year at a loss to wipe out year-to-date gains, or at a profit to take advantage of year-to-date losses in excess of $3,000.00.
There are no written in stone year-end tax planning rules that apply to all taxpayers in all cases. As with any other transaction, year-end strategies must be evaluated in the context of the special facts and circumstances of your individual situation. You may want to review your year-end situation with your tax professional.
And remember - your first criteria for evaluating any financial transaction you are considering should always be economic. Taxes are second.
Robert D Flach is a tax professional with 34 tax seasons of experience preparing 1040s for individuals in all walks of life. He writes THE WANDERING TAX PRO weblog (http://rdftaxpro.tripod.com/weblog), the NJ TAX PRACTICE BLOG (http://rdftaxpro.tripod.com/newjerseytaxpractitionernetwork), and the website http://www.robertdflach.net, which has a wealth of tax planning and preparation advice and information. He also writes and publishes THE FLACH REPORT, a quarterly tax newsletter. For more info on THE FLACH REPORT go to http://rdftaxpro.tripod.com/avoidtaxeslegally. The above article is taken from postings to THE WANDERING TAX PRO.
Thursday, November 26, 2009
Tax Concerns For Ecommerce And Small Business
Author: Mark Walters
Source: isnare.com
One of the most complex and confusing aspects of running a small business, especially an ecommerce business, is the bookkeeping. Each state and country has different tax requirements, different expenses that can be written off, and different percentages.
One of the biggest mistakes small business owners make is by putting their receipts in a shoe box and then taking it to a bookkeeper once a year. This type of financial management costs small businesses thousands of dollars a year. 'A penny saved is a penny earned.' This adage applies to small business.
The ability to save $500 - $5000 in a year is the same as earning that money. However, to do this, a business needs to keep solid records. They need to know what they can write off. For example, small businesses are allowed to write off a percentage of their home. This not only includes the floor space used by the business, it includes everything from the cleaning supplies, yard care products, hydro, taxes, insurance, and mortgage interest.
Very few business owners keep receipts for things such as light bulbs, vacuum bags, window cleaner. Most business owners do not even keep all the receipts for their office supplies. They run to the store and buy a package of printer paper, or while they are shopping for Christmas they will treat themselves to a new keyboard. They have good intentions, and plan to save these receipts, but they never do.
A business person that must do sales calls can claim their clothing, grooming products, and dry-cleaning costs. However, they may only claim a certain percentage of their food, entertainment, and auto expenses.
Auto expenses includes everything from car washes, insurance, car repairs, tires, interior detailing, and even air fresheners and oil jobs.
Take a look at these figures for food. Assume that a small business owner drinks two coffees a day, at $1.20 each. That is $48 a month, or about $625 a year, income tax bracket, . Add to this the cost of an occasional lunch, fast food, and the bill can grow to $1000. Writing off 50%, $500, at a 25% income tax bracket, saves the business owner $125.
Do this with cleaning products, office supplies, oil jobs, and the small business owner can easily recoup thousands of dollars. Now, here it the key.
Some states and countries will repay the small business owner income tax money, even if they haven't paid any. For example, in Canada, a company that takes a $5000 loss in a sole proprietorship, and the business owner did not pay income tax, they may still see a $400 - $1000 refund.
The second concern is that small business owners are not concerned with $1000 - $5000 in random or inconsequential receipts. However, three years down the road when the business is earning a profit, those 'write offs' will come in handy.
It is also possible to earn a tax break by volunteering services. The small business owner gives their services, and bills the service. Then, they take a tax receipt for the 'donation.' The business owner has built their credibility and exposure, and received a receipt to lower their taxes.
This is one area where it becomes tricky. Many businesses barter. There are even B2B bartering organizations. This is 'real' cash from the Tax man's perspective. The business must charge the other business at 'real value' and in return, accept a bill for 'real value.' This money is taxed as if it was cash. Many businesses never consider this when accepting 'free' help, or services in exchange for help they must pay federal, state, and income tax, on the service.
Retail tax is another area that business owners overlook. This is a legitimate tax deduction. In fact, a business may be able to claim 'tax exempt' status, so they do not need to pay tax to their vendors and suppliers.
Taking advantage of the legitimate tax breaks offered by the government is one way to help launch a business and increase cash flow.
Source: isnare.com
One of the most complex and confusing aspects of running a small business, especially an ecommerce business, is the bookkeeping. Each state and country has different tax requirements, different expenses that can be written off, and different percentages.
One of the biggest mistakes small business owners make is by putting their receipts in a shoe box and then taking it to a bookkeeper once a year. This type of financial management costs small businesses thousands of dollars a year. 'A penny saved is a penny earned.' This adage applies to small business.
The ability to save $500 - $5000 in a year is the same as earning that money. However, to do this, a business needs to keep solid records. They need to know what they can write off. For example, small businesses are allowed to write off a percentage of their home. This not only includes the floor space used by the business, it includes everything from the cleaning supplies, yard care products, hydro, taxes, insurance, and mortgage interest.
Very few business owners keep receipts for things such as light bulbs, vacuum bags, window cleaner. Most business owners do not even keep all the receipts for their office supplies. They run to the store and buy a package of printer paper, or while they are shopping for Christmas they will treat themselves to a new keyboard. They have good intentions, and plan to save these receipts, but they never do.
A business person that must do sales calls can claim their clothing, grooming products, and dry-cleaning costs. However, they may only claim a certain percentage of their food, entertainment, and auto expenses.
Auto expenses includes everything from car washes, insurance, car repairs, tires, interior detailing, and even air fresheners and oil jobs.
Take a look at these figures for food. Assume that a small business owner drinks two coffees a day, at $1.20 each. That is $48 a month, or about $625 a year, income tax bracket, . Add to this the cost of an occasional lunch, fast food, and the bill can grow to $1000. Writing off 50%, $500, at a 25% income tax bracket, saves the business owner $125.
Do this with cleaning products, office supplies, oil jobs, and the small business owner can easily recoup thousands of dollars. Now, here it the key.
Some states and countries will repay the small business owner income tax money, even if they haven't paid any. For example, in Canada, a company that takes a $5000 loss in a sole proprietorship, and the business owner did not pay income tax, they may still see a $400 - $1000 refund.
The second concern is that small business owners are not concerned with $1000 - $5000 in random or inconsequential receipts. However, three years down the road when the business is earning a profit, those 'write offs' will come in handy.
It is also possible to earn a tax break by volunteering services. The small business owner gives their services, and bills the service. Then, they take a tax receipt for the 'donation.' The business owner has built their credibility and exposure, and received a receipt to lower their taxes.
This is one area where it becomes tricky. Many businesses barter. There are even B2B bartering organizations. This is 'real' cash from the Tax man's perspective. The business must charge the other business at 'real value' and in return, accept a bill for 'real value.' This money is taxed as if it was cash. Many businesses never consider this when accepting 'free' help, or services in exchange for help they must pay federal, state, and income tax, on the service.
Retail tax is another area that business owners overlook. This is a legitimate tax deduction. In fact, a business may be able to claim 'tax exempt' status, so they do not need to pay tax to their vendors and suppliers.
Taking advantage of the legitimate tax breaks offered by the government is one way to help launch a business and increase cash flow.
Thursday, November 5, 2009
Universal Life Insurance Rates - Getting Them Low With the Coverage You Need
Author: Elizabeth Newberry
Source: articleage.com
Without a doubt, Universal Activity Allowance is one of the a lot of adjustable and advantageous allowance options available, alms affordability and versatility. This blazon of allowance was decidedly accepted in the aboriginal 1980s if the plan was aboriginal devised based on tax changes, and offered participants the appearance of both a accepted allowance action as able-bodied as a accession plan. Artlessly put, from the payments you make, some of your money is traveling into a accession plan and some into an allowance plan.
One of the aboriginal appearance of the plan was that it accustomed the actor to calmly acclimatize the bulk of money they were putting into both the accession and the allowance allotment of the policy. Another advantage is that the bulk of the premiums can be calmly adapted - or skipped altogether - clashing the added acceptable accomplished activity allowance that usually has anchored transaction amounts. Universal Activity Allowance tends to action a college absorption bulk and the amounts of the premiums are usually lower than added types of allowance plans.
Universal Activity Allowance aswell has assertive tax advantages. The banknote bulk in your, income tax bracket, allowance action can accumulate absorption after the user accepting to pay taxes on it. And if the allowance premiums are paid with after-tax money, the action is paid out assets tax chargeless in the accident of your death. The tax advantages are a huge advantage for those in the college tax bracket of 25% or more.
There are some disadvantages to Universal Activity Insurance. The annual bulk will abatement over time if the accuse to administrate the annual are added than the accumulated absolute of your premiums additional profits. You may accept to lower your allowances or access your premiums artlessly to accumulate the action active. Your banknote accession is burdened heavily if you abjure from the action afore your death. And ultimately, the bulk of banknote bulk accrued will depend abundantly on the achievement of your investments - which is of course, never guaranteed.
View our Recommended Activity Allowance Company, a simple website that has an simple to ample out application. It aswell has a lot of abundant advice about Home Allowance and Affordable Health Insurance
Source: articleage.com
Without a doubt, Universal Activity Allowance is one of the a lot of adjustable and advantageous allowance options available, alms affordability and versatility. This blazon of allowance was decidedly accepted in the aboriginal 1980s if the plan was aboriginal devised based on tax changes, and offered participants the appearance of both a accepted allowance action as able-bodied as a accession plan. Artlessly put, from the payments you make, some of your money is traveling into a accession plan and some into an allowance plan.
One of the aboriginal appearance of the plan was that it accustomed the actor to calmly acclimatize the bulk of money they were putting into both the accession and the allowance allotment of the policy. Another advantage is that the bulk of the premiums can be calmly adapted - or skipped altogether - clashing the added acceptable accomplished activity allowance that usually has anchored transaction amounts. Universal Activity Allowance tends to action a college absorption bulk and the amounts of the premiums are usually lower than added types of allowance plans.
Universal Activity Allowance aswell has assertive tax advantages. The banknote bulk in your, income tax bracket, allowance action can accumulate absorption after the user accepting to pay taxes on it. And if the allowance premiums are paid with after-tax money, the action is paid out assets tax chargeless in the accident of your death. The tax advantages are a huge advantage for those in the college tax bracket of 25% or more.
There are some disadvantages to Universal Activity Insurance. The annual bulk will abatement over time if the accuse to administrate the annual are added than the accumulated absolute of your premiums additional profits. You may accept to lower your allowances or access your premiums artlessly to accumulate the action active. Your banknote accession is burdened heavily if you abjure from the action afore your death. And ultimately, the bulk of banknote bulk accrued will depend abundantly on the achievement of your investments - which is of course, never guaranteed.
View our Recommended Activity Allowance Company, a simple website that has an simple to ample out application. It aswell has a lot of abundant advice about Home Allowance and Affordable Health Insurance
Monday, October 26, 2009
History Of The Federal Income Tax
Author: Steve Austin
Source: articleage.com
The powers of Congress, and the limitations set upon those powers, are set forth in Article I of the United States Constitution. Section 8 specifies both the power to collect, "Taxes, Duties, Imposts and Excises," and the requirement that, "Duties, Imposts and Excises shall be uniform throughout the United States."
One of the major concerns of the Constitutional Convention was to limit the powers of the Federal Government. Among the powers to be limited was the power of taxation. It was thought that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the Federal Government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."
The courts have generally held that direct taxes are limited to taxes on people (variously called capitation, poll tax or head tax) and property. (Penn Mutual Indemnity Co. v. C.I.R., 227 F.2d 16, 19-20 (3rd Cir. 1960).) All other taxes, income tax bracket, are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se. (Steward Machine Co. v. Davis, 301 U.S. 548, 581-582 (1937).) What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.
In order to help pay for its war effort in the American Civil War, the United States government issued its first personal income tax, on August 5, 1861 as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872). Other income taxes followed, although a 1895 Supreme Court ruling, Pollock v. Farmers' Loan & Trust Co., held that taxes on capital gains, dividends, interest, rents and the like were unapportioned direct taxes on property, and therefore unconstitutional.
The Sixteenth Amendment to the United States Constitution removed the limitations on Congress, paving the way for the income tax to become the government's main source of revenue; it states: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
A growing number of citizens seeks to challenge the power of the state to collect taxes by finding a way to discount the sixteenth amendment. The italicized paragraphs below are represenative of these attempts:
Lower federal courts sometimes refer to "unapportioned direct taxes" and similar catch phrases to describe the power of Congress to tax income. (See U.S. v. Turano, 802 F.2d 10, 12 (1st Cir. 1986). ("The 16th Amendment eliminated the indirect/direct distinction as applied to taxes on income.")) This, however, does not seem to be the stated position of the Supreme Court.
Yet, despite popular opinion, the 16th Amendment did not give Congress any new taxing powers. In Treasury Decision 2303, the Secretary of the Treasury directly quoted the Supreme Court (Stanton v. Baltic Mining Co. (240 U.S. 103)) in saying that "The provisions of the 16th amendment conferred no new power of taxation," but instead simply prohibited Congress original power to tax incomes "from being taken out of the category of indirect taxation, to which it inherently belonged, and being placed in the category of direct taxation subject to apportionment."
The closest the Supreme Court has come to saying that "from whatever source derived" in the amendment expanded the taxing power of Congress was in Justice Holmes' dissent in Evans v Gore (253 U.S. 245, 267 (1920). (Holmes dissent) (Partially overruled by U.S. v Hatter. 532 U.S. 557 (2001), with respect to the prior reasoning about the compensation clause.)). In that case, the Court was considering the effect the 16th Amendment had on the compensation clause, and specifically whether the compensation of judges was unlawfully reduced by the imposition of the income tax. Justice Holmes opined that under the 16th Amendment, "Congress is given power to collect taxes on incomes from whatever source derived …[so] it seems to me that the Amendment was intended to put an end to the cause and not merely obviate" the result in Pollock. (Id.) Even in this case, though, the majority affirmed the more restrictive interpretation of the Amendment. (Id. at 262-263. (Majority opinion))
The federal income tax statutes echos the language of the 16th amendment in stating that it reaches "all income from whatever source derived," (26 USC s. 61) including criminal enterprises; criminals who fail to report their income accurately have been successfully prosecuted for tax evasion. Since the language of the amendment is clearly meant to restrict the jurisdiction of the courts, it is not immediately clear why the courts emphasize the words "all income" and ignore the derivation of the entire phrase to interpret this section - except to reach a desired political result.
Arguments about the meaning of the current income tax has continued for nearly 100 years. Courts are reluctant to support a literal reading of the tax laws in favor of potential taxpayers, since it can lead to tax avoidance. Professor Soled points out why judicial doctrines are used against tax avoidance strategies in general,
"The use of judicial doctrines to curtail tax avoidance is pervasive in the area of income taxation. There are several reasons for this phenomenon: central among them is that courts believe that if the Internal Revenue Code ("Code") were read literally, impermissible tax avoidance would become the norm rather than the exception. No matter how perceptive the legislature, it cannot anticipate all events and circumstances that may unfold, and, due to linguistic limitations, statutes do not always capture the essence of what is intended. Judicial doctrines fill the void left either by the legislature or by the words of the Code. Another reason for the popularity of these doctrines is that courts do not want to appear duped by taxpayers..." (Jay A. Soled, Use of Judicial Doctrines in Resolving Transfer Tax Controversies, 42 B.C. L. Rev 587, 588-589 (2001).)
Of course, if the intent of Congress was to actually reach all income then the simplest way to state s. 61 would be "all income ***however realized.***" Instead, s. 61 mentions sources and other sections of the federal tax code actually lists about 20 sources of income that are specifically taxed. (26 USC ss. 861-864.) A common rule of statutory interpretation is the doctrine inclusio unius est exclusio alterius. This doctrine means "[t]he inclusion of one is the exclusion of another…This doctrine decrees that where law expressly describes [a] particular situation to which it shall apply, an irrefutable inference must be drawn that what is omitted or excluded was intended to be omitted or excluded." (Black's Law Dictionary 763 (6th Ed. 1990).) Since particular sources are listed as taxable in the tax law, then it is reasonable to infer that other sources of income are excluded from taxation. This argument is called the "861 source argument" and the courts refuse to analyze the argument despite consistently holding against it, even going so far as to issue restraining orders against people who publish websites about it. (U.S. v. Bell, 238 F.Supp.2d 696, 698 (M.D. Pa. 2003).''
In 1913 the tax rate was 1 percent on taxable net income above $3,000 ($4,000 for married couples), less deductions and exemptions. It rose to a rate of 7 percent on incomes above $500,000.
During World War I the top rate rose to 77 percent; following the war, the top rate was scaled down (to a low of 25 percent).
During the Great Depression and World War II, the top income tax rate rose again, reaching 91% during the war; this top rate remained in effect until 1964.
In 1964 the top rate was decreased to 70% (1964 Revenue Act), and then to 50% in 1981 (Economic Recovery Tax Act or ERTA).
The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets).
During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.
In 2001 the top rate was cut to 35% and the bottom rate was cut to 10% by the EGTRRA, or Economic Growth and Tax Relief Reconciliation Act.
In 2003 the JGTRRA, or Jobs and Growth Tax Relief Reconciliation Act, was passed, expanding the 10% tax bracket and accelerating some of the changes passed in the 2001 EGTRRA.
For more free legal information on Tax Law, please visit Free Legal Information.
Source: articleage.com
The powers of Congress, and the limitations set upon those powers, are set forth in Article I of the United States Constitution. Section 8 specifies both the power to collect, "Taxes, Duties, Imposts and Excises," and the requirement that, "Duties, Imposts and Excises shall be uniform throughout the United States."
One of the major concerns of the Constitutional Convention was to limit the powers of the Federal Government. Among the powers to be limited was the power of taxation. It was thought that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the Federal Government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."
The courts have generally held that direct taxes are limited to taxes on people (variously called capitation, poll tax or head tax) and property. (Penn Mutual Indemnity Co. v. C.I.R., 227 F.2d 16, 19-20 (3rd Cir. 1960).) All other taxes, income tax bracket, are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se. (Steward Machine Co. v. Davis, 301 U.S. 548, 581-582 (1937).) What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.
In order to help pay for its war effort in the American Civil War, the United States government issued its first personal income tax, on August 5, 1861 as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872). Other income taxes followed, although a 1895 Supreme Court ruling, Pollock v. Farmers' Loan & Trust Co., held that taxes on capital gains, dividends, interest, rents and the like were unapportioned direct taxes on property, and therefore unconstitutional.
The Sixteenth Amendment to the United States Constitution removed the limitations on Congress, paving the way for the income tax to become the government's main source of revenue; it states: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
A growing number of citizens seeks to challenge the power of the state to collect taxes by finding a way to discount the sixteenth amendment. The italicized paragraphs below are represenative of these attempts:
Lower federal courts sometimes refer to "unapportioned direct taxes" and similar catch phrases to describe the power of Congress to tax income. (See U.S. v. Turano, 802 F.2d 10, 12 (1st Cir. 1986). ("The 16th Amendment eliminated the indirect/direct distinction as applied to taxes on income.")) This, however, does not seem to be the stated position of the Supreme Court.
Yet, despite popular opinion, the 16th Amendment did not give Congress any new taxing powers. In Treasury Decision 2303, the Secretary of the Treasury directly quoted the Supreme Court (Stanton v. Baltic Mining Co. (240 U.S. 103)) in saying that "The provisions of the 16th amendment conferred no new power of taxation," but instead simply prohibited Congress original power to tax incomes "from being taken out of the category of indirect taxation, to which it inherently belonged, and being placed in the category of direct taxation subject to apportionment."
The closest the Supreme Court has come to saying that "from whatever source derived" in the amendment expanded the taxing power of Congress was in Justice Holmes' dissent in Evans v Gore (253 U.S. 245, 267 (1920). (Holmes dissent) (Partially overruled by U.S. v Hatter. 532 U.S. 557 (2001), with respect to the prior reasoning about the compensation clause.)). In that case, the Court was considering the effect the 16th Amendment had on the compensation clause, and specifically whether the compensation of judges was unlawfully reduced by the imposition of the income tax. Justice Holmes opined that under the 16th Amendment, "Congress is given power to collect taxes on incomes from whatever source derived …[so] it seems to me that the Amendment was intended to put an end to the cause and not merely obviate" the result in Pollock. (Id.) Even in this case, though, the majority affirmed the more restrictive interpretation of the Amendment. (Id. at 262-263. (Majority opinion))
The federal income tax statutes echos the language of the 16th amendment in stating that it reaches "all income from whatever source derived," (26 USC s. 61) including criminal enterprises; criminals who fail to report their income accurately have been successfully prosecuted for tax evasion. Since the language of the amendment is clearly meant to restrict the jurisdiction of the courts, it is not immediately clear why the courts emphasize the words "all income" and ignore the derivation of the entire phrase to interpret this section - except to reach a desired political result.
Arguments about the meaning of the current income tax has continued for nearly 100 years. Courts are reluctant to support a literal reading of the tax laws in favor of potential taxpayers, since it can lead to tax avoidance. Professor Soled points out why judicial doctrines are used against tax avoidance strategies in general,
"The use of judicial doctrines to curtail tax avoidance is pervasive in the area of income taxation. There are several reasons for this phenomenon: central among them is that courts believe that if the Internal Revenue Code ("Code") were read literally, impermissible tax avoidance would become the norm rather than the exception. No matter how perceptive the legislature, it cannot anticipate all events and circumstances that may unfold, and, due to linguistic limitations, statutes do not always capture the essence of what is intended. Judicial doctrines fill the void left either by the legislature or by the words of the Code. Another reason for the popularity of these doctrines is that courts do not want to appear duped by taxpayers..." (Jay A. Soled, Use of Judicial Doctrines in Resolving Transfer Tax Controversies, 42 B.C. L. Rev 587, 588-589 (2001).)
Of course, if the intent of Congress was to actually reach all income then the simplest way to state s. 61 would be "all income ***however realized.***" Instead, s. 61 mentions sources and other sections of the federal tax code actually lists about 20 sources of income that are specifically taxed. (26 USC ss. 861-864.) A common rule of statutory interpretation is the doctrine inclusio unius est exclusio alterius. This doctrine means "[t]he inclusion of one is the exclusion of another…This doctrine decrees that where law expressly describes [a] particular situation to which it shall apply, an irrefutable inference must be drawn that what is omitted or excluded was intended to be omitted or excluded." (Black's Law Dictionary 763 (6th Ed. 1990).) Since particular sources are listed as taxable in the tax law, then it is reasonable to infer that other sources of income are excluded from taxation. This argument is called the "861 source argument" and the courts refuse to analyze the argument despite consistently holding against it, even going so far as to issue restraining orders against people who publish websites about it. (U.S. v. Bell, 238 F.Supp.2d 696, 698 (M.D. Pa. 2003).''
In 1913 the tax rate was 1 percent on taxable net income above $3,000 ($4,000 for married couples), less deductions and exemptions. It rose to a rate of 7 percent on incomes above $500,000.
During World War I the top rate rose to 77 percent; following the war, the top rate was scaled down (to a low of 25 percent).
During the Great Depression and World War II, the top income tax rate rose again, reaching 91% during the war; this top rate remained in effect until 1964.
In 1964 the top rate was decreased to 70% (1964 Revenue Act), and then to 50% in 1981 (Economic Recovery Tax Act or ERTA).
The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets).
During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.
In 2001 the top rate was cut to 35% and the bottom rate was cut to 10% by the EGTRRA, or Economic Growth and Tax Relief Reconciliation Act.
In 2003 the JGTRRA, or Jobs and Growth Tax Relief Reconciliation Act, was passed, expanding the 10% tax bracket and accelerating some of the changes passed in the 2001 EGTRRA.
For more free legal information on Tax Law, please visit Free Legal Information.
Sunday, October 25, 2009
An Annuity Based Pension Might Just be the Answer
Author: Derek Miller
Source: articleage.com
Of all types of income generating investments,, income tax bracket, annuities are some of the most controversial. There is a body of opinion that says they are a complete waste of time and you would do much better if you were to place the capital sum on the stockmarket or invest in property. But then again the stock market has been known to crash and property has frequently been known to decrease in real value, so if security is high on your list of priorities maybe annuities are worth a thought after all.
Annuities are popular as vehicles for pensions, perhaps mainly because they can be very tax efficient. If money is wrapped up in this investment it takes a tax holiday until such time as the premiums become due and payments are made. As this is likely to happen after retirement the tax liability falls dramatically.
There are two types of annuity. The former is deferred, which means payments are made, usually on a monthly basis for a number of years. This is a good way for the younger person to acquire an income later in life. The other variety is the fixed version. In this package, the purchaser pays a large capital sum usually to an insurance company and payments begin soon afterwards.
The big enemy of annuities is inflation. At the outset the agreed sum to be paid out might seem generous, but inflation can erode the value of the venture in a very alarming fashion.
On the other hand a fixed payment annuity based pension provides an excellent budgeting tool. You will know each month how much money you will receive and thus in much the same way as a salary, be able to cut your cloth accordingly. This allows for more efficient financial planning.
When it come to tax, there can be penalties if the annuity is cashed in before the "owner" reaches sixty years of age and this could be a disincentive for those folks who plan early retirement or find themselves made redundant before reaching the official age of retirement. However, as I said before there are some distinct tax advantages, particularly for those individuals in the higher tax brackets. Deferred Annuities are in effect a compulsory savings plan. In those years of high tax liability it would make a lot of sense to save as much as possible because these savings are then tax exempt. Tax is only due when income is received from the plan. That means you start drawing your annuity after you have stopped earning a high salary. It's very neat because as you have decreased earning your tax liability will drop to a lower level than previously. This all means you have allowed the IRS to partly finance those golden days of retirement. Now that begins to appeal does it not?
Interested in this subject? Try this link for more of the same.
Source: articleage.com
Of all types of income generating investments,, income tax bracket, annuities are some of the most controversial. There is a body of opinion that says they are a complete waste of time and you would do much better if you were to place the capital sum on the stockmarket or invest in property. But then again the stock market has been known to crash and property has frequently been known to decrease in real value, so if security is high on your list of priorities maybe annuities are worth a thought after all.
Annuities are popular as vehicles for pensions, perhaps mainly because they can be very tax efficient. If money is wrapped up in this investment it takes a tax holiday until such time as the premiums become due and payments are made. As this is likely to happen after retirement the tax liability falls dramatically.
There are two types of annuity. The former is deferred, which means payments are made, usually on a monthly basis for a number of years. This is a good way for the younger person to acquire an income later in life. The other variety is the fixed version. In this package, the purchaser pays a large capital sum usually to an insurance company and payments begin soon afterwards.
The big enemy of annuities is inflation. At the outset the agreed sum to be paid out might seem generous, but inflation can erode the value of the venture in a very alarming fashion.
On the other hand a fixed payment annuity based pension provides an excellent budgeting tool. You will know each month how much money you will receive and thus in much the same way as a salary, be able to cut your cloth accordingly. This allows for more efficient financial planning.
When it come to tax, there can be penalties if the annuity is cashed in before the "owner" reaches sixty years of age and this could be a disincentive for those folks who plan early retirement or find themselves made redundant before reaching the official age of retirement. However, as I said before there are some distinct tax advantages, particularly for those individuals in the higher tax brackets. Deferred Annuities are in effect a compulsory savings plan. In those years of high tax liability it would make a lot of sense to save as much as possible because these savings are then tax exempt. Tax is only due when income is received from the plan. That means you start drawing your annuity after you have stopped earning a high salary. It's very neat because as you have decreased earning your tax liability will drop to a lower level than previously. This all means you have allowed the IRS to partly finance those golden days of retirement. Now that begins to appeal does it not?
Interested in this subject? Try this link for more of the same.
Thursday, October 22, 2009
Your Dreams Capitalized - IRA Power
Author: Simone Nathan
Source: download
What are your dreams? What is your focus? You can not travel where you can not "see" the road.
Do you long for a beach condo? The chance to travel? A private cabin in the mountains?
Please allow yourself to keep dreaming and keep building - building your life around dreams you can see clearly and almost taste.
IRA building blocks can help fund your retirement dreams.
The Roth IRA: With this block you will pay taxes now and never pay again.
You contribute up to $5,000, or 100% of your earned income (whichever is less) annually, after taxes, and your investment earnings accumulate tax-free.*
Then you can:
Take contributions out, tax-free and penalty-free at any time. *
Take your earnings out, federal income tax-free* and penalty-free after five years and age 59ฝ.
There's no mandatory withdrawal, so your IRA can continue to compound after age 70ฝ.
After only five years in the account, up to $10,000 in earnings can be withdrawn penalty-free and tax-free for a qualified first home purchase.
Individuals over 70ฝ with earned income may continue to contribute annually.
You never have to "spend this account down", but if you do take it all you never pay any federal tax on the distributions.
*While many states have changed their income tax laws to conform to federal tax treatment of ROTH IRAs, some have not. Check with your tax advisor to ascertain whether the earnings on ROTH IRAs are subject to state income tax in your particular situation.
Consider the Roth IRA building block for your dreams if: You or your spouse work, whatever your age (even if you have a retirement plan at work) and you are:
• A single tax filer with adjusted gross income (AGI) of less than $110,000 or
• Joint tax filers with AGI of less than $160,000 or
• An unemployed spouse with joint AGI of less than $160,000 or
• You have a Traditional IRA you may want to convert- Please be aware that this is a taxable event.
The Traditional Deductible IRA: With this block you get a deduction now and you defer taxes until you withdraw from this IRA.
You contribute up to $5,000, or 100% of your earned income (whichever is less), annually and gain two tax benefits:
A deduction on your federal income taxes, if you qualify
Investment earnings accumulate tax-deferred until you withdraw.
Withdrawals prior to age 59ฝ may be subject to a 10% penalty tax.
You can withdraw contributions and earnings penalty-free for a first home purchase and higher education costs (subject to certain limits).
Consider the Traditional Deductible IRA building block for your dreams if:
You don't qualify for a Roth IRA and/or You or your spouse work and are under age 70ฝ, (even if you have a retirement plan at work, a partial deduction may be available to you.) or You have a short time horizon before you expect to be in a lower tax bracket when you retire and you are:
A single tax filer with AGI of less than $40,000 or
Joint tax filers with AGI of less than $60,000 or
An unemployed spouse or one who isn't in a retirement plan at work with joint AGI or less than $160,000
Not covered by a retirement plan at work.
The Traditional Nondeductible IRA can pay for your dreams with tax-deferred IRA dollars.
You can currently invest up to $5,000 annually and enjoy one of the few remaining opportunities to have your contribution grow tax-deferred.
You pay no taxes on your earnings until you withdraw your money.
You can withdraw earnings penalty-free for a first home purchase and higher education costs (subject to certain limits). Withdrawals prior to age 59ฝ may be subject to a 10% penalty tax.
Consider the Traditional Nondeductible IRA building block for your dreams if:
Your household income is higher than that allowed for the Roth, income tax bracket, or Traditional Deductible IRAs.
Participation in retirement plans at work and your household income keeps you from getting a deduction on an IRA
Today's Individual Retirement Account (IRA) choices give you the flexibility to build a program to help you meet your retirement dreams. This information is general in nature and should not be construed as tax or legal advice
Author of "Going for Gold after 50: An Illustrated Guide to High Probability Investing for The Plus Years". Discover how to put the investing odds greatly in your favor at http://www.goldafter50.com Personal, spiritual, financial, healthful life planning — http://www.dreamcatcherprogram.com.
Source: download
What are your dreams? What is your focus? You can not travel where you can not "see" the road.
Do you long for a beach condo? The chance to travel? A private cabin in the mountains?
Please allow yourself to keep dreaming and keep building - building your life around dreams you can see clearly and almost taste.
IRA building blocks can help fund your retirement dreams.
The Roth IRA: With this block you will pay taxes now and never pay again.
You contribute up to $5,000, or 100% of your earned income (whichever is less) annually, after taxes, and your investment earnings accumulate tax-free.*
Then you can:
Take contributions out, tax-free and penalty-free at any time. *
Take your earnings out, federal income tax-free* and penalty-free after five years and age 59ฝ.
There's no mandatory withdrawal, so your IRA can continue to compound after age 70ฝ.
After only five years in the account, up to $10,000 in earnings can be withdrawn penalty-free and tax-free for a qualified first home purchase.
Individuals over 70ฝ with earned income may continue to contribute annually.
You never have to "spend this account down", but if you do take it all you never pay any federal tax on the distributions.
*While many states have changed their income tax laws to conform to federal tax treatment of ROTH IRAs, some have not. Check with your tax advisor to ascertain whether the earnings on ROTH IRAs are subject to state income tax in your particular situation.
Consider the Roth IRA building block for your dreams if: You or your spouse work, whatever your age (even if you have a retirement plan at work) and you are:
• A single tax filer with adjusted gross income (AGI) of less than $110,000 or
• Joint tax filers with AGI of less than $160,000 or
• An unemployed spouse with joint AGI of less than $160,000 or
• You have a Traditional IRA you may want to convert- Please be aware that this is a taxable event.
The Traditional Deductible IRA: With this block you get a deduction now and you defer taxes until you withdraw from this IRA.
You contribute up to $5,000, or 100% of your earned income (whichever is less), annually and gain two tax benefits:
A deduction on your federal income taxes, if you qualify
Investment earnings accumulate tax-deferred until you withdraw.
Withdrawals prior to age 59ฝ may be subject to a 10% penalty tax.
You can withdraw contributions and earnings penalty-free for a first home purchase and higher education costs (subject to certain limits).
Consider the Traditional Deductible IRA building block for your dreams if:
You don't qualify for a Roth IRA and/or You or your spouse work and are under age 70ฝ, (even if you have a retirement plan at work, a partial deduction may be available to you.) or You have a short time horizon before you expect to be in a lower tax bracket when you retire and you are:
A single tax filer with AGI of less than $40,000 or
Joint tax filers with AGI of less than $60,000 or
An unemployed spouse or one who isn't in a retirement plan at work with joint AGI or less than $160,000
Not covered by a retirement plan at work.
The Traditional Nondeductible IRA can pay for your dreams with tax-deferred IRA dollars.
You can currently invest up to $5,000 annually and enjoy one of the few remaining opportunities to have your contribution grow tax-deferred.
You pay no taxes on your earnings until you withdraw your money.
You can withdraw earnings penalty-free for a first home purchase and higher education costs (subject to certain limits). Withdrawals prior to age 59ฝ may be subject to a 10% penalty tax.
Consider the Traditional Nondeductible IRA building block for your dreams if:
Your household income is higher than that allowed for the Roth, income tax bracket, or Traditional Deductible IRAs.
Participation in retirement plans at work and your household income keeps you from getting a deduction on an IRA
Today's Individual Retirement Account (IRA) choices give you the flexibility to build a program to help you meet your retirement dreams. This information is general in nature and should not be construed as tax or legal advice
Author of "Going for Gold after 50: An Illustrated Guide to High Probability Investing for The Plus Years". Discover how to put the investing odds greatly in your favor at http://www.goldafter50.com Personal, spiritual, financial, healthful life planning — http://www.dreamcatcherprogram.com.
Monday, October 19, 2009
Taxed by Taxes? Relax
Author: Richard Streitfeld
Source: ezinearticles.com
With a little bit of planning some gay and lesbian couples can take advantage of their unmarried status and save more money with two separate tax returns than a married couple saves with one. In my last column I explored ways in which a few couples can make the medical deductions work for them. Today I will address common questions that same sex couples have about allocating the biggest prize of the itemized deductions - mortgage interest. There are many considerations and complications that legally married "joint return" filers do not have to face.
How do we decide who takes the mortgage interest deduction?
You should plan to file your two returns in whatever way benefits the two of you the most as a unit. For instance, if there is a large disparity in income the partnership generally benefits the most if the higher income/higher tax bracket taxpayer takes the deduction.
O.K. But we have only one checking account, which is joint. The IRS would not expect us to "split" the deduction?
No. Would the bank only go after 1/2 of the house if you were in default? You are essentially one "unit" to the bank; it's just for tax purposes you are two. There are no clear written IRS rules on how to allocate the deduction in this case, so common sense and accepted practice take precedence. As long as the evidence supports your deduction- you made the payments together on a joint liability and have no individual checking accounts - you should be able to allocate the mortgage interest deduction in any matter that you choose.
That's a lot of ifs. We each have individual checking accounts as well. We do pay the mortgage interest out of the joint checking account, but it is funded by our contributions from the individual accounts.
In this case you need a little more planning. The IRS might take the position (in the case of an audit or examination) that the deduction should be split in the same ratio as the contributions from the individual accounts. To avoid this problem, consider having the partner taking the deduction pay the interest out of his or her personal account, and have the other partner "offset" it with payments for other expenses. The details of the arrangement -whether you want an equal offset, whether you want the agreement in writing, etc. are of course up to you.
We have a joint checking account - our paychecks are deposited there and all our routine expenses are paid out of it. In addition I have an investment account that I write checks out of occasionally, but it is not used to fund the joint account? Problem?
I don't see why that would be a problem, unless you started transferring funds from your account into the joint account.
We have arranged that I will take the deduction on my tax return. But the "1098" form the lending institution issued at the end of the year was in the name of my partner not me. Can I still take the deduction?
Yes. Your name is still on the loan, although it is not on the tax form. You should list your mortgage interest on line 11 of Schedule A, "mortgage interest not reported on 1098" with your partner's name and social security number on it. But if you are going to be the person taking the full deduction for the near future I recommend you contact your lender and ask them to make your social security number the primary one for reporting purposes. The IRS keys on the social security number on the 1098. In the case of an examination you would ultimately prevail because your name is also on the loan, but you do not want to give the IRS a reason to investigate your full return, do you?
Must we be consistent in determining who takes the deduction? Can we alternate?
While some tax preparers advise against alternating, to my knowledge there is nothing in the tax code or tax case law that prevents it. Just remember to pay out of the appropriate account and make sure to have your lender change the 1098 forms accordingly. This means planning before the year begins, income tax bracket, .
Her income is higher but not by much. How should we allocate the deduction?
In this case it's not as straightforward. You may want to actually split the deduction, but it really depends on your entire tax situation. Again, try to plan.
My name is not on the deed but both our names are on the mortgage. I pay the entire mortgage. Can I legitimately take the deduction?
You certainly can, and should. You and your partner can each be held liable for the entire mortgage. And since you made the payments yourself, the deduction is yours alone. The bank (apparently) doesn't care that your name is not on the deed - if the joint loan goes into default they can still go after the underlying asset.
Now, whether this is a fair partnership situation is another question. In the case of dissolution of the relationship the "deedless" party may be at a disadvantage - liable on the loan but the other partner holds the "cards" (the house).
Phew! Do they have these problems in Canada? Legally recognized marriage simplifies tax matters. Maybe when the practice heads south CPA's will become obsolete.
Source: ezinearticles.com
With a little bit of planning some gay and lesbian couples can take advantage of their unmarried status and save more money with two separate tax returns than a married couple saves with one. In my last column I explored ways in which a few couples can make the medical deductions work for them. Today I will address common questions that same sex couples have about allocating the biggest prize of the itemized deductions - mortgage interest. There are many considerations and complications that legally married "joint return" filers do not have to face.
How do we decide who takes the mortgage interest deduction?
You should plan to file your two returns in whatever way benefits the two of you the most as a unit. For instance, if there is a large disparity in income the partnership generally benefits the most if the higher income/higher tax bracket taxpayer takes the deduction.
O.K. But we have only one checking account, which is joint. The IRS would not expect us to "split" the deduction?
No. Would the bank only go after 1/2 of the house if you were in default? You are essentially one "unit" to the bank; it's just for tax purposes you are two. There are no clear written IRS rules on how to allocate the deduction in this case, so common sense and accepted practice take precedence. As long as the evidence supports your deduction- you made the payments together on a joint liability and have no individual checking accounts - you should be able to allocate the mortgage interest deduction in any matter that you choose.
That's a lot of ifs. We each have individual checking accounts as well. We do pay the mortgage interest out of the joint checking account, but it is funded by our contributions from the individual accounts.
In this case you need a little more planning. The IRS might take the position (in the case of an audit or examination) that the deduction should be split in the same ratio as the contributions from the individual accounts. To avoid this problem, consider having the partner taking the deduction pay the interest out of his or her personal account, and have the other partner "offset" it with payments for other expenses. The details of the arrangement -whether you want an equal offset, whether you want the agreement in writing, etc. are of course up to you.
We have a joint checking account - our paychecks are deposited there and all our routine expenses are paid out of it. In addition I have an investment account that I write checks out of occasionally, but it is not used to fund the joint account? Problem?
I don't see why that would be a problem, unless you started transferring funds from your account into the joint account.
We have arranged that I will take the deduction on my tax return. But the "1098" form the lending institution issued at the end of the year was in the name of my partner not me. Can I still take the deduction?
Yes. Your name is still on the loan, although it is not on the tax form. You should list your mortgage interest on line 11 of Schedule A, "mortgage interest not reported on 1098" with your partner's name and social security number on it. But if you are going to be the person taking the full deduction for the near future I recommend you contact your lender and ask them to make your social security number the primary one for reporting purposes. The IRS keys on the social security number on the 1098. In the case of an examination you would ultimately prevail because your name is also on the loan, but you do not want to give the IRS a reason to investigate your full return, do you?
Must we be consistent in determining who takes the deduction? Can we alternate?
While some tax preparers advise against alternating, to my knowledge there is nothing in the tax code or tax case law that prevents it. Just remember to pay out of the appropriate account and make sure to have your lender change the 1098 forms accordingly. This means planning before the year begins, income tax bracket, .
Her income is higher but not by much. How should we allocate the deduction?
In this case it's not as straightforward. You may want to actually split the deduction, but it really depends on your entire tax situation. Again, try to plan.
My name is not on the deed but both our names are on the mortgage. I pay the entire mortgage. Can I legitimately take the deduction?
You certainly can, and should. You and your partner can each be held liable for the entire mortgage. And since you made the payments yourself, the deduction is yours alone. The bank (apparently) doesn't care that your name is not on the deed - if the joint loan goes into default they can still go after the underlying asset.
Now, whether this is a fair partnership situation is another question. In the case of dissolution of the relationship the "deedless" party may be at a disadvantage - liable on the loan but the other partner holds the "cards" (the house).
Phew! Do they have these problems in Canada? Legally recognized marriage simplifies tax matters. Maybe when the practice heads south CPA's will become obsolete.
Note: Everyone's tax situation is a little bit different. Contact your tax adviser about your specific situation.
Richard Streitfeld is a CPA practicing in Cranston.
Monday, October 5, 2009
Shorten Your Journey to Business and Personal Success
Author: Judy Cullins
Source: articleage.com
According to a new survey carried out by Alliance & where ID_NUM=9270;Leicester, one in five small business owners view tax astheir greatest concern. The Chancellor has announced in hislast budget that companies with profits below œ10,000 willnot have to pay any corporation tax with effect from 1 April2002. The question to be asked is: does that announcementmake incorporation a more attractive option compared tobeing a sole trader?The answer is that from a tax point of view, it isadvantageous to trade through a limited company as longas the income is drawn from the company by the owners asdividends from their shares and the amount of dividendsdrawn is restricted below the 40% band rate (i.e. œ31,063for tax year 2002/03). That way, the owners have no furtherpersonal tax ("income tax") to pay. Moreover, dividends arenot subject to national insurance contributions. This isexcellent news of course. But, if dividend income fallswithin the higher rate bracket of income tax (i.e. aboveœ34,515), they will be taxed at 22.5% on the excess, whichof course will increase the tax burden. The company profitsare subject to corporation tax rates. Those are lower thanincome tax rates.The most catastrophic scenario is when the director takeshis reward from the company as salary. Then his/her salaryis taxed at income tax rates (like a sole trader's income).That is because, unlike sole traders, the tax system treatscompanies as separate from their owners because a company isa separate legal entity. The problem is that the incometaxes are higher than corporation tax rates. On top ofthat, they will be subject to employee and employer nationalinsurance contributions, which of course increase the taxburden and render his position worse than even anunincorporated business ("sole trader"), because NIC Class 1on payroll are higher than NIC Class 2 paid by selfemployed.In contrast, a self employed person ("sole trader") is taxedat income tax rates on the profits from his business, whichare added to his other sources of income. As it has alreadybeen mentioned, income tax rates are overall higher thancorporation tax rates. On top of income tax, nationalinsurance contributions class 4 are payable on the businessprofits within a specified band (7% on profits betweenœ4,615and œ30,420). National insurance contributions Class 2are also paid by self-employed people, although those arelower than those payable by company directors on theirsalaries.To illustrate the above, let's take a simple example. Wehave a limited company and a sole trader. They both makeœ60,000 profits each in the tax year 2002/03. We assume thatthe company director takes a salary equal to the amount ofhis personal allowances (untaxed income) of œ4,615 and thebalance as dividends. The company will pay corporation taxat 19% equal to œ10,523 and nothing else. The sole traderwill pay income tax œ16,542, National insurance Class 2 œ104and National insurance Class 4 œ1,806. Total œ18,452. Thebottom line is that the person that has incorporated hisbusiness into a limited company will make a tax saving ofœ7,929 compared to a sole trader! Isn't that fantastic?Somebody might be wondering: why is this entire happening?The official explanation is that, this government, to helpthe economy grow, encourages people to leave as much profitswithin their businesses to be reinvested, instead of beingtaken out and spent.The "unofficial line" is that, as a matter of fact, foryears the Inland Revenue has tried to reclassify theself-employed. The 1% in NIC hike on staff salaries abovethe NIC threshold from next April adds to both theemployees' and employers' tax burden and may more thanoffset the saving from the corporation tax zero rate on thefirst œ10,000 of profits.Aren't there any other matters to consider in decidingwhether to incorporate or not?Higher administration costs to comply with company law,payroll and bookkeeping is one factor. Another issue ispension planning. Extracting profits out of the company asdividends rather than salary means that there will be no"net relevant earnings" and therefore pension contributionscan't be made. But the advent of stakeholder pension planshas meant that contributions up to œ3,600 per year can bemade without the need for any earnings. If a person does notwish to transfer funds in existing plans into stakeholderbecause of high charges, there is a way out: the best netrelevant earnings (i.e. salary) in five consecutive yearscan be used for making contributions for the next fiveyears, even if there were no salaries in the remainder fouryears. It is comforting to know that entitlement to basicstate pension is not affected by taking a salary from thecompany at the level of a person's personal allowances i.e.œ4,615.Furthermore, an individual may decide not to bother withpension plans and instead invest in ISA. Often, these can bemore efficient than pensions but that's beside the scope ofthis article. If that option is taken, no salary isnecessary.Another factor is business motoring. It might be taxadvantageous for an unincorporated business that owns manycars not to incorporate because if these cars have someprivate use there will be benefits in kind taxed on theusers. These are generally higher than the straightapportionment between private and business for all carrunning costs in the case of sole traders.The conclusion is that there can be considerable tax savingswaiting the sole trader who decides to go down theroad to incorporation. But, one needs to proceed withcaution and careful planning. And don't forget the biggestadvantage of incorporation, which is Protectionfrom Personal Liability. Incorporating is one of the bestways to protect a business owner from personal liability.Shareholders of a company are generally not liable for theobligations of the company. Creditors of a company may seekpayment from its assets, but not the assets of theshareholders. This means that business owners may engage inbusiness without risking their homes or other personalproperty.Thank you for taking the time to read this Article. I hopeyou've found it useful. If you have, please drop me an emailand let me know what you think.You can email me at...constantinesavva@accamail.comAlternatively, you can visit our website athttp://www.tax-accounting-london.info and read a series ofother full length articles that present the complete pictureon a variety of interesting topics.If you would like to know how to save tax and make sure thatmore of your hard earned cash stays with you to expand yourbusiness and increase your profits, we have a Free SpecialReport addressed to small businesses either starting up oralready in business. This Exclusive Free Special Report isavailable automatically when you subscribe to our regularseries of Free Newsletters on finance advice and taxplanning by visiting our subscription area on our websitewww.tax-accounting- london.info. It is complied from reallife situations dealing with small business tax affairs forover 10 years and it is loaded with down-to-earth advice andpractical, understandable examples.LEGAL NOTICEWhilst every care has been taken in the preparation of thisarticle, the author cannot accept responsibility for anyerrors or omissions. Proper professional advice should betaken at all times.We retain copyright for the contents of this article. Anyunauthorized copying or onward distributions are prohibitedwithout our consent.
Source: articleage.com
According to a new survey carried out by Alliance & where ID_NUM=9270;Leicester, one in five small business owners view tax astheir greatest concern. The Chancellor has announced in hislast budget that companies with profits below œ10,000 willnot have to pay any corporation tax with effect from 1 April2002. The question to be asked is: does that announcementmake incorporation a more attractive option compared tobeing a sole trader?The answer is that from a tax point of view, it isadvantageous to trade through a limited company as longas the income is drawn from the company by the owners asdividends from their shares and the amount of dividendsdrawn is restricted below the 40% band rate (i.e. œ31,063for tax year 2002/03). That way, the owners have no furtherpersonal tax ("income tax") to pay. Moreover, dividends arenot subject to national insurance contributions. This isexcellent news of course. But, if dividend income fallswithin the higher rate bracket of income tax (i.e. aboveœ34,515), they will be taxed at 22.5% on the excess, whichof course will increase the tax burden. The company profitsare subject to corporation tax rates. Those are lower thanincome tax rates.The most catastrophic scenario is when the director takeshis reward from the company as salary. Then his/her salaryis taxed at income tax rates (like a sole trader's income).That is because, unlike sole traders, the tax system treatscompanies as separate from their owners because a company isa separate legal entity. The problem is that the incometaxes are higher than corporation tax rates. On top ofthat, they will be subject to employee and employer nationalinsurance contributions, which of course increase the taxburden and render his position worse than even anunincorporated business ("sole trader"), because NIC Class 1on payroll are higher than NIC Class 2 paid by selfemployed.In contrast, a self employed person ("sole trader") is taxedat income tax rates on the profits from his business, whichare added to his other sources of income. As it has alreadybeen mentioned, income tax rates are overall higher thancorporation tax rates. On top of income tax, nationalinsurance contributions class 4 are payable on the businessprofits within a specified band (7% on profits betweenœ4,615and œ30,420). National insurance contributions Class 2are also paid by self-employed people, although those arelower than those payable by company directors on theirsalaries.To illustrate the above, let's take a simple example. Wehave a limited company and a sole trader. They both makeœ60,000 profits each in the tax year 2002/03. We assume thatthe company director takes a salary equal to the amount ofhis personal allowances (untaxed income) of œ4,615 and thebalance as dividends. The company will pay corporation taxat 19% equal to œ10,523 and nothing else. The sole traderwill pay income tax œ16,542, National insurance Class 2 œ104and National insurance Class 4 œ1,806. Total œ18,452. Thebottom line is that the person that has incorporated hisbusiness into a limited company will make a tax saving ofœ7,929 compared to a sole trader! Isn't that fantastic?Somebody might be wondering: why is this entire happening?The official explanation is that, this government, to helpthe economy grow, encourages people to leave as much profitswithin their businesses to be reinvested, instead of beingtaken out and spent.The "unofficial line" is that, as a matter of fact, foryears the Inland Revenue has tried to reclassify theself-employed. The 1% in NIC hike on staff salaries abovethe NIC threshold from next April adds to both theemployees' and employers' tax burden and may more thanoffset the saving from the corporation tax zero rate on thefirst œ10,000 of profits.Aren't there any other matters to consider in decidingwhether to incorporate or not?Higher administration costs to comply with company law,payroll and bookkeeping is one factor. Another issue ispension planning. Extracting profits out of the company asdividends rather than salary means that there will be no"net relevant earnings" and therefore pension contributionscan't be made. But the advent of stakeholder pension planshas meant that contributions up to œ3,600 per year can bemade without the need for any earnings. If a person does notwish to transfer funds in existing plans into stakeholderbecause of high charges, there is a way out: the best netrelevant earnings (i.e. salary) in five consecutive yearscan be used for making contributions for the next fiveyears, even if there were no salaries in the remainder fouryears. It is comforting to know that entitlement to basicstate pension is not affected by taking a salary from thecompany at the level of a person's personal allowances i.e.œ4,615.Furthermore, an individual may decide not to bother withpension plans and instead invest in ISA. Often, these can bemore efficient than pensions but that's beside the scope ofthis article. If that option is taken, no salary isnecessary.Another factor is business motoring. It might be taxadvantageous for an unincorporated business that owns manycars not to incorporate because if these cars have someprivate use there will be benefits in kind taxed on theusers. These are generally higher than the straightapportionment between private and business for all carrunning costs in the case of sole traders.The conclusion is that there can be considerable tax savingswaiting the sole trader who decides to go down theroad to incorporation. But, one needs to proceed withcaution and careful planning. And don't forget the biggestadvantage of incorporation, which is Protectionfrom Personal Liability. Incorporating is one of the bestways to protect a business owner from personal liability.Shareholders of a company are generally not liable for theobligations of the company. Creditors of a company may seekpayment from its assets, but not the assets of theshareholders. This means that business owners may engage inbusiness without risking their homes or other personalproperty.Thank you for taking the time to read this Article. I hopeyou've found it useful. If you have, please drop me an emailand let me know what you think.You can email me at...constantinesavva@accamail.comAlternatively, you can visit our website athttp://www.tax-accounting-london.info and read a series ofother full length articles that present the complete pictureon a variety of interesting topics.If you would like to know how to save tax and make sure thatmore of your hard earned cash stays with you to expand yourbusiness and increase your profits, we have a Free SpecialReport addressed to small businesses either starting up oralready in business. This Exclusive Free Special Report isavailable automatically when you subscribe to our regularseries of Free Newsletters on finance advice and taxplanning by visiting our subscription area on our websitewww.tax-accounting- london.info. It is complied from reallife situations dealing with small business tax affairs forover 10 years and it is loaded with down-to-earth advice andpractical, understandable examples.LEGAL NOTICEWhilst every care has been taken in the preparation of thisarticle, the author cannot accept responsibility for anyerrors or omissions. Proper professional advice should betaken at all times.We retain copyright for the contents of this article. Anyunauthorized copying or onward distributions are prohibitedwithout our consent.
Thursday, October 1, 2009
<B>College Families Overpaid The IRS - Again!</B>
Author: Reecy Aresty
Source: articleage.com
College families who made their best guess as to which of the Education Tax Incentives would save them the most on their income taxes have put their 2004 tax returns to bed. However, for many, a sigh of relief may be a bit premature and inappropriate. Countless families, even some assisted by professional tax preparers, chose incorrectly and have significantly overpaid the IRS - AGAIN! Mark Twain once said, "No man's life, liberty, or property are safe while the legislature is in session," and never have truer words been spoken!On June 6, 2001, President Bush signed HR 2014 into law. This created The Tuition and Fees Deduction, based on Senator Charles E. Schumer's (D-NY) Make College Affordable Act. However, Congress presented and the President signed a watered down version of the Senator's proposal and consequently, it doesn't work for the families who need it the most!Senator Schumer had been tirelessly championing legislation that would allow families, including independent students, to deduct a portion of their college expenses on their taxes. The Senator's Make College Affordable Act, as originally proposed, would have given millions of American families the opportunity to deduct up to $12,000 per year from their total incomes to help reduce the rising costs of college tuition and related expenses. Unfortunately, and to the detriment of untold numbers of taxpayers with students in college, the Tuition and Fees Deduction allows a mere deduction of $3,000 for tax years 2002-2003, and $4,000 for tax years 2004-2005. The Deduction sunsets after 2005.To many families, an annual eight or nine thousand dollars could mean the difference of being forced to settle for a local community college as opposed to sending their student to a state school. Arguably, America's future rests with its educated youth, and this is no way to treat those who will hold the fate of our country in their hands.The drastic slashing by Congress of Senator Schumer's proposed bill and President Bush's failure to send it back to them is the case in point substantiating that the government of the United States doesn't give a hoot in hell about the financial struggle the average American parent endures in their endless pursuit of the American dream for their children! Effective legislation to make college expenses tax deductible is long overdue and began with the Tax Payer Relief Act of 1997, which Senator Schumer also supported and voted for. The Act created two education tax credits, the HOPE Scholarship Credit (maximum $1,500 a year for 2 years), and the Lifetime Learning Credit (maximum $1,000 increasing to $2,000 in 2003).Note: A tax deduction lowers taxable income, and the savings depends on the filer's tax bracket. A tax credit directly lowers taxes by the amount of the credit, dollar for dollar, regardless of the filer's tax bracket.Although it certainly was a step in the right direction, the Tax Payer Relief Act of 1997 fell far too short in providing major tax relief for America's college families, especially in view of soaring tuition costs and other related expenses that families endure year after year to send their kids to college. Nonetheless, the real tragedy for America is the Tuition and Fees Deduction, which, when taken by taxpayers who qualify for The HOPE Scholarship Credit or The Lifetime Learning Credit, will actually cause them to overpay their taxes by hundreds of dollars each year!Affluent single and head of household taxpayers whose incomes exceed $51,000, and joint filers whose incomes exceed $102,000, will not qualify for the HOPE Scholarship or Lifetime Learning Credit, and are therefore, the only ones who actually benefit from taking the Tuition and Fees Deduction. Thus, camouflaged as tax relief to offset college costs for all of America's college families, all Congress actually did was Robin-Hoodwink most lower and middle income families by taking from them and giving to the rich! The wisdom of Mark Twain's words cannot be denied.This is one of a series of articles by college admissions and financial aid expert, Reecy Aresty, based on his book, "Getting Into College And Paying For It!" For further information including how to obtain the complete SPECIAL REPORT on the Tuition And Fees Deduction with refund eligibility, please visit www.thecollegebook.com.
Source: articleage.com
College families who made their best guess as to which of the Education Tax Incentives would save them the most on their income taxes have put their 2004 tax returns to bed. However, for many, a sigh of relief may be a bit premature and inappropriate. Countless families, even some assisted by professional tax preparers, chose incorrectly and have significantly overpaid the IRS - AGAIN! Mark Twain once said, "No man's life, liberty, or property are safe while the legislature is in session," and never have truer words been spoken!On June 6, 2001, President Bush signed HR 2014 into law. This created The Tuition and Fees Deduction, based on Senator Charles E. Schumer's (D-NY) Make College Affordable Act. However, Congress presented and the President signed a watered down version of the Senator's proposal and consequently, it doesn't work for the families who need it the most!Senator Schumer had been tirelessly championing legislation that would allow families, including independent students, to deduct a portion of their college expenses on their taxes. The Senator's Make College Affordable Act, as originally proposed, would have given millions of American families the opportunity to deduct up to $12,000 per year from their total incomes to help reduce the rising costs of college tuition and related expenses. Unfortunately, and to the detriment of untold numbers of taxpayers with students in college, the Tuition and Fees Deduction allows a mere deduction of $3,000 for tax years 2002-2003, and $4,000 for tax years 2004-2005. The Deduction sunsets after 2005.To many families, an annual eight or nine thousand dollars could mean the difference of being forced to settle for a local community college as opposed to sending their student to a state school. Arguably, America's future rests with its educated youth, and this is no way to treat those who will hold the fate of our country in their hands.The drastic slashing by Congress of Senator Schumer's proposed bill and President Bush's failure to send it back to them is the case in point substantiating that the government of the United States doesn't give a hoot in hell about the financial struggle the average American parent endures in their endless pursuit of the American dream for their children! Effective legislation to make college expenses tax deductible is long overdue and began with the Tax Payer Relief Act of 1997, which Senator Schumer also supported and voted for. The Act created two education tax credits, the HOPE Scholarship Credit (maximum $1,500 a year for 2 years), and the Lifetime Learning Credit (maximum $1,000 increasing to $2,000 in 2003).Note: A tax deduction lowers taxable income, and the savings depends on the filer's tax bracket. A tax credit directly lowers taxes by the amount of the credit, dollar for dollar, regardless of the filer's tax bracket.Although it certainly was a step in the right direction, the Tax Payer Relief Act of 1997 fell far too short in providing major tax relief for America's college families, especially in view of soaring tuition costs and other related expenses that families endure year after year to send their kids to college. Nonetheless, the real tragedy for America is the Tuition and Fees Deduction, which, when taken by taxpayers who qualify for The HOPE Scholarship Credit or The Lifetime Learning Credit, will actually cause them to overpay their taxes by hundreds of dollars each year!Affluent single and head of household taxpayers whose incomes exceed $51,000, and joint filers whose incomes exceed $102,000, will not qualify for the HOPE Scholarship or Lifetime Learning Credit, and are therefore, the only ones who actually benefit from taking the Tuition and Fees Deduction. Thus, camouflaged as tax relief to offset college costs for all of America's college families, all Congress actually did was Robin-Hoodwink most lower and middle income families by taking from them and giving to the rich! The wisdom of Mark Twain's words cannot be denied.This is one of a series of articles by college admissions and financial aid expert, Reecy Aresty, based on his book, "Getting Into College And Paying For It!" For further information including how to obtain the complete SPECIAL REPORT on the Tuition And Fees Deduction with refund eligibility, please visit www.thecollegebook.com.
Wednesday, September 30, 2009
TAKE ADVANTAGE OF ADWORDS
Author: Jennifer Johnson
Source: articleage.com
According to a new survey carried out by Alliance & whereID_NUM=9270; Leicester, one in five small business owners viewtax as their greatest concern. The Chancellor has announced inhis last budget that companies with profits below œ10,000will not have to pay any corporation tax with effect from 1April 2002. The question to be asked is: does that announcementmake incorporation a more attractive option compared to being asole trader?The answer is that from a tax point of view, it is advantageousto trade through a limited company as long as the income isdrawn from the company by the owners as dividends from theirshares and the amount of dividends drawn is restricted below the40% band rate (i.e. œ31,063 for tax year 2002/03). Thatway, the owners have no further personal tax ("income tax") topay. Moreover, dividends are not subject to national insurancecontributions. This is excellent news of course. But, ifdividend income falls within the higher rate bracket of incometax (i.e. above œ34,515), they will be taxed at 22.5% onthe excess, which of course will increase the tax burden. Thecompany profits are subject to corporation tax rates. Those arelower than income tax rates.The most catastrophic scenario is when the director takes hisreward from the company as salary. Then his/her salary is taxedat income tax rates (like a sole trader's income). That isbecause, unlike sole traders, the tax system treats companies asseparate from their owners because a company is a separate legalentity. The problem is that the income taxes are higher thancorporation tax rates. On top of that, they will be subject toemployee and employer national insurance contributions, which ofcourse increase the tax burden and render his position worsethan even an unincorporated business ("sole trader"), becauseNIC Class 1 on payroll are higher than NIC Class 2 paid by selfemployed.In contrast, a self employed person ("sole trader") is taxed atincome tax rates on the profits from his business, which areadded to his other sources of income. As it has already beenmentioned, income tax rates are overall higher than corporationtax rates. On top of income tax, national insurancecontributions class 4 are payable on the business profits withina specified band (7% on profits between œ4,615andœ30,420). National insurance contributions Class 2 are alsopaid by self-employed people, although those are lower thanthose payable by company directors on their salaries.To illustrate the above, let's take a simple example. We have alimited company and a sole trader. They both make œ60,000profits each in the tax year 2002/03. We assume that the companydirector takes a salary equal to the amount of his personalallowances (untaxed income) of œ4,615 and the balance asdividends. The company will pay corporation tax at 19% equal toœ10,523 and nothing else. The sole trader will pay incometax œ16,542, National insurance Class 2 œ104 andNational insurance Class 4 œ1,806. Total œ18,452. Thebottom line is that the person that has incorporated hisbusiness into a limited company will make a tax saving ofœ7,929 compared to a sole trader! Isn't that fantastic?Somebody might be wondering: why is this entire happening? Theofficial explanation is that, this government, to help theeconomy grow, encourages people to leave as much profits withintheir businesses to be reinvested, instead of being taken outand spent.The "unofficial line" is that, as a matter of fact, for yearsthe Inland Revenue has tried to reclassify the self-employed.The 1% in NIC hike on staff salaries above the NIC thresholdfrom next April adds to both the employees' and employers' taxburden and may more than offset the saving from the corporationtax zero rate on the first œ10,000 of profits.Aren't there any other matters to consider in deciding whetherto incorporate or not?Higher administration costs to comply with company law, payrolland bookkeeping is one factor. Another issue is pensionplanning. Extracting profits out of the company as dividendsrather than salary means that there will be no "net relevantearnings" and therefore pension contributions can't be made. Butthe advent of stakeholder pension plans has meant thatcontributions up to œ3,600 per year can be made without theneed for any earnings. If a person does not wish to transferfunds in existing plans into stakeholder because of highcharges, there is a way out: the best net relevant earnings(i.e. salary) in five consecutive years can be used for makingcontributions for the next five years, even if there were nosalaries in the remainder four years. It is comforting to knowthat entitlement to basic state pension is not affected bytaking a salary from the company at the level of a person'spersonal allowances i.e. œ4,615.Furthermore, an individual may decide not to bother with pensionplans and instead invest in ISA. Often, these can be moreefficient than pensions but that's beside the scope of thisarticle. If that option is taken, no salary is necessary.Another factor is business motoring. It might be taxadvantageous for an unincorporated business that owns many carsnot to incorporate because if these cars have some private usethere will be benefits in kind taxed on the users. These aregenerally higher than the straight apportionment between privateand business for all car running costs in the case of soletraders.The conclusion is that there can be considerable tax savingswaiting the sole trader who decides to go down the road toincorporation. But, one needs to proceed with caution andcareful planning. And don't forget the biggest advantage ofincorporation, which is Protection from Personal Liability.Incorporating is one of the best ways to protect a businessowner from personal liability. Shareholders of a company aregenerally not liable for the obligations of the company.Creditors of a company may seek payment from its assets, but notthe assets of the shareholders. This means that business ownersmay engage in business without risking their homes or otherpersonal property.Thank you for taking the time to read this Article. I hopeyou've found it useful. If you have, please drop me an email andlet me know what you think. You can email me at...constantinesavva@accamail.comAlternatively, you can visit our website athttp://www.tax-accounting-london.info and read a series of otherfull length articles that present the complete picture on avariety of interesting topics.If you would like to know how to save tax and make sure thatmore of your hard earned cash stays with you to expand yourbusiness and increase your profits, we have a Free SpecialReport addressed to small businesses either starting up oralready in business. This Exclusive Free Special Report isavailable automatically when you subscribe to our regular seriesof Free Newsletters on finance advice and tax planning byvisiting our subscription area on our websitewww.tax-accounting- london.info. It is complied from real lifesituations dealing with small business tax affairs for over 10years and it is loaded with down-to-earth advice and practical,understandable examples.LEGAL NOTICE Whilst every care has been taken in the preparationof this article, the author cannot accept responsibility for anyerrors or omissions. Proper professional advice should be takenat all times.We retain copyright for the contents of this article. Anyunauthorized copying or onward distributions are prohibitedwithout our consent.
Source: articleage.com
According to a new survey carried out by Alliance & whereID_NUM=9270; Leicester, one in five small business owners viewtax as their greatest concern. The Chancellor has announced inhis last budget that companies with profits below œ10,000will not have to pay any corporation tax with effect from 1April 2002. The question to be asked is: does that announcementmake incorporation a more attractive option compared to being asole trader?The answer is that from a tax point of view, it is advantageousto trade through a limited company as long as the income isdrawn from the company by the owners as dividends from theirshares and the amount of dividends drawn is restricted below the40% band rate (i.e. œ31,063 for tax year 2002/03). Thatway, the owners have no further personal tax ("income tax") topay. Moreover, dividends are not subject to national insurancecontributions. This is excellent news of course. But, ifdividend income falls within the higher rate bracket of incometax (i.e. above œ34,515), they will be taxed at 22.5% onthe excess, which of course will increase the tax burden. Thecompany profits are subject to corporation tax rates. Those arelower than income tax rates.The most catastrophic scenario is when the director takes hisreward from the company as salary. Then his/her salary is taxedat income tax rates (like a sole trader's income). That isbecause, unlike sole traders, the tax system treats companies asseparate from their owners because a company is a separate legalentity. The problem is that the income taxes are higher thancorporation tax rates. On top of that, they will be subject toemployee and employer national insurance contributions, which ofcourse increase the tax burden and render his position worsethan even an unincorporated business ("sole trader"), becauseNIC Class 1 on payroll are higher than NIC Class 2 paid by selfemployed.In contrast, a self employed person ("sole trader") is taxed atincome tax rates on the profits from his business, which areadded to his other sources of income. As it has already beenmentioned, income tax rates are overall higher than corporationtax rates. On top of income tax, national insurancecontributions class 4 are payable on the business profits withina specified band (7% on profits between œ4,615andœ30,420). National insurance contributions Class 2 are alsopaid by self-employed people, although those are lower thanthose payable by company directors on their salaries.To illustrate the above, let's take a simple example. We have alimited company and a sole trader. They both make œ60,000profits each in the tax year 2002/03. We assume that the companydirector takes a salary equal to the amount of his personalallowances (untaxed income) of œ4,615 and the balance asdividends. The company will pay corporation tax at 19% equal toœ10,523 and nothing else. The sole trader will pay incometax œ16,542, National insurance Class 2 œ104 andNational insurance Class 4 œ1,806. Total œ18,452. Thebottom line is that the person that has incorporated hisbusiness into a limited company will make a tax saving ofœ7,929 compared to a sole trader! Isn't that fantastic?Somebody might be wondering: why is this entire happening? Theofficial explanation is that, this government, to help theeconomy grow, encourages people to leave as much profits withintheir businesses to be reinvested, instead of being taken outand spent.The "unofficial line" is that, as a matter of fact, for yearsthe Inland Revenue has tried to reclassify the self-employed.The 1% in NIC hike on staff salaries above the NIC thresholdfrom next April adds to both the employees' and employers' taxburden and may more than offset the saving from the corporationtax zero rate on the first œ10,000 of profits.Aren't there any other matters to consider in deciding whetherto incorporate or not?Higher administration costs to comply with company law, payrolland bookkeeping is one factor. Another issue is pensionplanning. Extracting profits out of the company as dividendsrather than salary means that there will be no "net relevantearnings" and therefore pension contributions can't be made. Butthe advent of stakeholder pension plans has meant thatcontributions up to œ3,600 per year can be made without theneed for any earnings. If a person does not wish to transferfunds in existing plans into stakeholder because of highcharges, there is a way out: the best net relevant earnings(i.e. salary) in five consecutive years can be used for makingcontributions for the next five years, even if there were nosalaries in the remainder four years. It is comforting to knowthat entitlement to basic state pension is not affected bytaking a salary from the company at the level of a person'spersonal allowances i.e. œ4,615.Furthermore, an individual may decide not to bother with pensionplans and instead invest in ISA. Often, these can be moreefficient than pensions but that's beside the scope of thisarticle. If that option is taken, no salary is necessary.Another factor is business motoring. It might be taxadvantageous for an unincorporated business that owns many carsnot to incorporate because if these cars have some private usethere will be benefits in kind taxed on the users. These aregenerally higher than the straight apportionment between privateand business for all car running costs in the case of soletraders.The conclusion is that there can be considerable tax savingswaiting the sole trader who decides to go down the road toincorporation. But, one needs to proceed with caution andcareful planning. And don't forget the biggest advantage ofincorporation, which is Protection from Personal Liability.Incorporating is one of the best ways to protect a businessowner from personal liability. Shareholders of a company aregenerally not liable for the obligations of the company.Creditors of a company may seek payment from its assets, but notthe assets of the shareholders. This means that business ownersmay engage in business without risking their homes or otherpersonal property.Thank you for taking the time to read this Article. I hopeyou've found it useful. If you have, please drop me an email andlet me know what you think. You can email me at...constantinesavva@accamail.comAlternatively, you can visit our website athttp://www.tax-accounting-london.info and read a series of otherfull length articles that present the complete picture on avariety of interesting topics.If you would like to know how to save tax and make sure thatmore of your hard earned cash stays with you to expand yourbusiness and increase your profits, we have a Free SpecialReport addressed to small businesses either starting up oralready in business. This Exclusive Free Special Report isavailable automatically when you subscribe to our regular seriesof Free Newsletters on finance advice and tax planning byvisiting our subscription area on our websitewww.tax-accounting- london.info. It is complied from real lifesituations dealing with small business tax affairs for over 10years and it is loaded with down-to-earth advice and practical,understandable examples.LEGAL NOTICE Whilst every care has been taken in the preparationof this article, the author cannot accept responsibility for anyerrors or omissions. Proper professional advice should be takenat all times.We retain copyright for the contents of this article. Anyunauthorized copying or onward distributions are prohibitedwithout our consent.
Subscribe to:
Posts (Atom)