The 3 biggest implications of new tax laws in 2013

 Image attribution: J3net; CC BY 2.0

By Emma Underwood

There are changes on the 2013 1040 form that will affect the amount of federal income tax many people pay this year. Just about every taxpayer will be affected one way or another by these changes to the tax codes.

What specifically are those changes, and who will be affected the most by each individual change?

1. Payroll taxes:

Most working people took home less money in January 2013 than they did in December 2012, even if they were earning the same amount of money. That's because Congress allowed the payroll tax holiday to expire.

The Social Security tax withdrawn from paychecks has traditionally been 6.2 percent. In December 2010, however, Congress enacted a two percent payroll deduction. There is some political controversy over whether or not this cut was intended to be temporary. Most Democrats argue that the payroll reduction was a temporary measure; some Republicans argue otherwise. Be that as it may, the entire 6.2 percent is now being withheld, and the Social Security wage ceiling has been raised to $113,700.

Additionally, high earners will see a raise in the amount of Medicare tax withheld from their paychecks. For people earning more than $200,000 a year, an additional 0.9 percent will be withheld.

Finally, self-employed individuals who have been paying a self-employment tax of 10.4 percent since 2010 will see their self-employment taxes rise back up to 12.4 percent in 2013.

2. Higher capital gains taxes for higher earners:

Gains from the sale of assets held for one year or less will no longer qualify for long-term capital gains tax treatment.

For single individuals who earn $400,000 a year or more, and for married couples filing jointly who earn $450,000 a year or more, capital gains taxes will now be 20 percent instead of 15 percent.

This may have a visible effect on the purchases and sales of stocks and other financial assets. Higher taxes means less money to invest in the stock market and other investment opportunities, which in turn means less opportunity to benefit from asset appreciation.

Additionally, households with adjusted gross incomes of $200,000 (single filer) or $250,000 (joint filer) are now subject to the 3.8 percent surtax that was passed in 2010 as part of the new health care legislation. This could conceivably drive capital gains taxes for some individuals up to a rate of 23.8 percent.

The new tax bracket for individuals earning $400,000 or more, and couples filing jointly earning $450,000 or more, is now 39.6 percent, up from 35 percent. However, this will not affect people filing their 2012 taxes.

3. Changes in deductions and exemptions:

Congress also enacted a great many changes in the ways that deductions operate. People at the high end of the earning spectrum will no longer be allowed to take all their itemized deductions. Those cut off points are $250,000 for single individuals, $275,000 for individuals filing as heads of households, and $300,000 for married couples filing jointly.

The itemized deductions that are subject to this phase-out include:

• Charitable contributions
• Job-related expenses
• Other taxes
• Interest (but not investment interest)

The rules for calculating the new rates for itemized deductions as they are being phased out are very complicated. Higher income earners will also be hit by a reduction in the personal exemption to which they hitherto have been entitled.

About the author: Emma Underwood is an economist and guest author at How Do I Become A..., where she contributed to the online How Do I Become An Economist guide.

Cutting tax costs with offshore investing

 US-PDGov

By Thomas Spencer

A lot of U.S. citizens are getting fed up with the ever-increasing taxes that are enforced on business profits and more and more of them are turning to offshore options to maximize their profit potential. People are starting to see that they can see a drastic increase in income just by switching to an offshore business. With the way that the economy is going at the moment, a lot of business owners have no other choice but to do so if they want to stay in operation. If you’re unfamiliar with why you should move your business offshore; read on, you may be surprised.

A lot of people have the notion that making profits with an offshore company is illegal or malicious, but this is just a misunderstanding. Utilizing the benefits of an offshore company is absolutely legal and there is nothing wrong about doing so. You’re able to benefit from an offshore company by setting up your products or services with them, have them distributed throughout the world to utilize the advantages of taxation requirements that are enforced in different locations. 

Offshore service providers are able to profit from this by charging a small royalty fee for offering their services. Asset protection is associated with using an offshore. In this day and age, asset protection can be a lifesaver with all of the risks of being sued by money-hungry lawyers. Your risks can be minimized by allowing your assets to be inaccessible and you’re able to do this by using an offshore company. 

The reason that your assets are more secure with offshore entities is because of the privacy structure of offshore banking. This means that if you ever face a lawsuit of any type, your assets will not be at stake. This can be very beneficial for anyone who is currently in a legal battle.

If you have a family and want to ensure their financial well-being after you’ve passed on, using an offshore service can be a great way to do so. You can easily setup your assets or bank accounts to pass over generation to generation all while avoiding costly tax requirements. There’s no reason to pay the middle man when all you want to do is ensure that your family is able to be financially stable after you’ve passed.

You should take some measures to ensure that you’re picking a good offshore company before you allow them to take your business. It’s not extremely common, but from time to time there are some offshore companies that simply pocket your money. You can avoid this by spending some time researching and checking out the financial and legal history of the company in question.

You want to make the most of your company, and using offshore services will allow you to do so. Follow the trend of many other successful business owners and start using offshore companies to your advantage.

About the author: Thomas Spencer has spent more than 20 years in a Cyprus holding company and has continued to achieve much financial success.

5 money saving tax tips for small businesses

By Steven Ellis

When you are running a small business, you want to save funds, especially around tax season. By following these tips, hopefully you will be one step closer to lowering your costs in terms of taxes, in your small business.

 

1. Write it off

You can write off specific costs of your business on your tax returns. For instance, if your business is teaching the ukulele, you can write off the mileage you drive, in order to drive to recitals, or to purchase equipment, or for other business-related purposes. Additionally, you can also write off purchases you make that are directly related to your venture.

 

2. Cross your “T’s”

Make sure that you fully check and double-check all of the steps that you take when filing your tax return. Additionally, you can meet with a tax advisor in order to go over all of your purchases and tax obligations, and how you can work to ensure that you are paying no more than you properly owe.

 

3. Use research and development (R&D) tax credits

You can also use certain U.S. Government programs that work to sponsor research and development among businesses. Not just for high-growth, high-tech startups, these programs work to benefit businesses, through research to find the most optimal solutions to problems that ventures face. You can inquire with the Small Business Administration for more information. By working to develop innovative solutions to problems, you also can possibly save on your taxes as well.

 

4. Donate

As a small business, you are an integral part of your community. If you ever want to give back, you can do so, and then write it off when your taxes become due, as long as it is tax deductible. Through your donations, you are working to better your community while also showing what you are doing locally as a small business, aside from your venture itself. Also, ensure that you are correctly documenting these donations, to write off during the tax season.

 

5. Stay in order

An often-overlooked point that can save you a great deal of money is to be sure to have your books in order, financially. Be sure that you have everything documented, so that you do not miss out on any possible deductions that you may otherwise have missed. Also, you should keep your books in order so, when tax season rolls around, you do not have any missing records, or gaps in your tax documentation. By keeping your books ordered correctly, you can ensure that you are only paying what you need, and that there are not any ways that you could lower your tax obligation, that you missed.

Steven Ellis a writer focusing on small business tips as well as business degree programs. Steven has written extensively on online business degree programs as well as college marketing programs.

What to consider before taking out international tax advice

By Michael Forbes

When we talk about international tax advice, many of you may have the vision of Jimmy Carr talking to his dodgy financial advisor asking him what country he’s never been to before so he can take the majority of his fortune to next.

In fact, you start to pay international tax when you have been earning income from two different countries. The tax laws within the country where you earn the most income will take precedence. For example, if you earned £5,000 in Germany, then income tax should be first calculated according to German law. In other words, income tax laws will apply if you were physically present in that country when you earned it. Exceptions do apply however, for instance, if you have earned rental income from a house in the USA, it is very unlikely Germany will try charging tax on this income whilst you were overseas in that country.

Different countries will apply different tax rates to you depending on whether you are a resident of that country; many countries adopt a physical test when applying tax onto a person, stating that if the person has been in the country for 183 days or more than they are eligible for resident’s tax. Other countries will base their residency tax on what type of visa you held at the time.

When you have earned tax abroad, most countries will exempt part or all of your tax from home country taxation, this is where manipulations have occurred in the past through non-taxable locations such as Luxembourg, Monaco and Malta. Countries such as the USA will actually put a limit on how much tax you are allowed to claim in a year from abroad before you have to pay taxation back home. At the moment this accounts for income taxation on the first $87,000, however this figure does rise year on year. This amount also factors in the time spent abroad. For example, if you spend just six months abroad, this figure will be cut in half and accumulate to $43,500.

Tax treaties act as a way of avoiding double taxation, (this is when the same taxpayer is held liable for his income that he earned by two different countries) as they are bilateral as opposed to multilateral, meaning that only two countries may enter the account.

Overall, international tax laws are massively complex and can often contain hidden traps or restraints, so we do recommend that you should take up the option of getting international tax advice, should you be earning abroad and confused by the options available to you.

This article was written by Michael Forbes, for international tax advice visit www.lubbockfine.co.uk

Guest post: How to manage your business debt

US-PDGov

 By: Mickey Colon

Managing your business debt wisely is a top priority if you want to run your company efficiently. In some cases the debt is tied to the business entity instead of the owner. But even though the creditor can only go after business bank accounts and assets, poor management of the account can negatively affect your business reputation.

In other cases creditors will hold you, the owner or representative, personally responsible for a debtyou accrued while running the business — particularly if you signed a personal guarantee to start the account. Either way it’s important to stay on top of your business debt accounts and make every effort to get them under control.

Create a Business Budget

Whether you’re a large tech conglomerate with over 100 employees or the owner of a small main street flower shop, you must have a business budget in place. Lack of a budget is one of the top reasons why many business owners get into debt in the first place and also why they continue to stay in debt.

Your business budget should accurately list your estimated monthly business income and expenses. That includes employee wages, office rent, office supplies and other costs to operate the business including your monthly debt expense. Your income may vary each month depending on the type of company you run, so estimate the revenue for each month in advance.

Pay Down Plan

Make a commitment to funnel your business profits (income less expenses) to your debt accounts until your balances are more manageable. If necessary, be prepared to make major sacrifices to put your business in a better position debt-wise in the short-term. For instance, you may have to pay yourself a lower wage or no wage at all for a few months until your accounts are paid off.

If you find yourself with a shortfall (loss) or breaking even every month it’s time to make some tough decisions on how to run a more lean and mean operation. In the meantime, avoid continuing a pattern of accumulating debt — if your past expenditures haven’t helped you turn a profit, it may be time to re-evaluate your entire business strategy.

New Habits

Once you get back on track with your business debt, make it a habit going forward to try to pay off your balances before each billing period ends. So for instance, if you charge $1,000 at the beginning of the billing cycle for inventory, make it a point to pay off that $1,000 as soon as you receive the proceeds from the associated sale. This way you avoid interest expenses.

Also, as a savvy business owner you should constantly be on the lookout for a better credit deal. Shop for new business card deals periodically and talk to your local credit union.

Bio: This article was provided by America’s debt help Organization, serving the public with unparalleled content about a range of topics, such as reducing debt, credit card consolidation help, mortgage modifications, planning retirement and helping Veterans get out of debt.

Offshore tax shelters explained

Offshore Tax Shelters Around the World 

 Image attribution: Arkyan, GFDL, CC BY-SA 3.0

An offshore tax shelter is a legal mechanism or entity by which income that would normally be earned and taxable in one tax district is only taxable within the domicile of that tax shelter's registration. In other words, when capital is transferred to another legal jurisdiction and is subject only to that jurisdiction's taxation system, then income earned from use of that capital is no longer considered taxable in a higher taxed jurisdiction.

Several criteria must apply for offshore tax shelters to be legitimate. For example, if income is earned for purposes other than tax avoidance, it is more likely to be considered legal. This is more the case when the income earned through that tax shelter comes from the country that holds tax sheltered assets. Moreover, this is because income earned in a higher tax zone can still be taxable even if earned from a foreign registered entity.

Some entities attempt to avoid taxable income earned from offshore entities by taking advantage of rules that don't require taxes from foreign registered entities. For example, a Senate committee report chaired by Senator Carl Levin found that certain hedge funds were avoiding taxes on dividends earned within the U.S. This abusive practice was accomplished by restructuring the transaction so the money would not be taxable under the rules of the new transaction. The transactions were still considered tax evasion because they were believed to not serve the purpose of the transaction, but rather the intent of tax evasion.

In some cases, tax treaties are signed into law between two countries. The Internal Revenue Service (IRS) states these treaties often do not protect residents or citizens from U.S. Taxes due to a 'savings clause'. However, also according to the IRS, there are exemptions to the savings clauses of tax treaties. In such case, the saving clause exemptions of a tax treaty can serve an offshore tax shelter by allowing income to be earned within the United States through the tax shelter in so far as tax exemptions apply. Filing of specific tax forms may still be required by the IRS in order to claim the tax exemption.

With our without tax information sharing treaties between countries, tax that is illegally sheltered is still illegally retained income. In other words, tax shelter fraud and misuse of offshore portfolio investment strategy are considered tax evasion and not tax shelters as distinguished by the IRS. For this reason it is necessary to understand the basic tax laws that classify income as either taxable or non-taxable, and the difference between tax shelter fraud and tax shelters.

For most individuals that earn income in an offshore account, that income must still be reported to the IRS. However, if that income is not earned by an individual, but rather an entity that is legally separate from the individual, new rules apply. Even this can be considered tax evasion if that entity is established solely to avoid taxes. In other words, the motive of an offshore tax shelter should not be tax avoidance, but rather tax sheltered income according to  US Legal. When considering offshore tax shelters, consulting with the IRS or contacting a skilled tax professional that is also accurately knowledgeable in the area of offshore tax shelters may be advisable.

Best Tax Free Investment Options

Reducing taxes through 'tax free investments' may be a good idea when one wants to increase financial leverage of one's income and/or lower taxable income for a given year via a lower tax bracket ex 15% instead of 25%. Moreover, the income that would have been taxed that is invested, can also increase either free of tax or tax deferred through the tax free investments. A few of the investments commonly used as a hedge against taxes are described below.

• Tax Free Mutual Funds

Money invested in tax free mutual funds is not taxed because the mutual funds themselves invest in tax free investment vehicles. Depending on which type of investments the mutual funds the income earned in this type of investment instrument is not taxable as the federal level and sometimes the state and local levels.

• Individual Retirement Accounts (IRA's)

There are several types of IRA's including spousal, individual, and the Roth IRA. Some of these are tax deductible while others are tax free investments. Either way, investment in retirement accounts is a way to avoid taxes either in the present or future.

• Municipal Bonds

Municipal bonds are bonds issues by States and local governments. Income earned from these investments is often free of Federal tax but they may also have a lower interest yield than other forms of investment.

• Treasury Bonds

The Federal government also issues bonds, at least two of which can earn tax deferred income. The series I and E/EE bonds are not taxed until redemption making them a possible investment option for those seeking to lower short term taxable income on investments.

• Life Insurance Policies

Money invested in life insurance policies accumulates and increases in value without tax. Examples of such policies include universal and whole life policies through which an account value is added to over and above the monthly premiums paid on the policy. In certain instances the distribution of life insurance after the policy holder's death may be tax free and should the holder survive the maturity of the policy, the proceeds are then subject to tax i.e. tax deferred.

• Real estate

While personal residences are subject to property tax regulations, capital gains on the sale of homes after 2 years of residence are tax free up to a certain dollar amount. If the home value is above 250K, capital gains on it are taxable if there is only one owner. This tax cap amount doubles for homes with more than one owner/resident.

• Education

While education is not an investment that pays solid returns, the investment made into and education is tax deductible on the Internal Revenue Service form 1040 as of the date of this article. The tax deduction may be enough to lower one's taxable income into a lower tax bracket.

There are many ways to invest and avoid paying taxes on those investments. In many of the cases the tax benefit is tied to a provision the money will not be used for an extended period of time or it is only taxed upon withdrawal. Whatever the investment one makes, the benefits can add up either as tax deferred income growth and/or increased financial leverage via a higher tax return or money saved through a lower taxable income.

The pros and cons of filing taxes electronically

Taxes can be filed electronically either through a tax preparation software or directly via the online version of tax software producers or accounting service providers. Electronic filing of taxes has been an official method and accepted by the U.S. Internal Revenue Service since 1986 (irs.gov). There are many advantages to both Government and tax filers when tax information is filed electronically.

The Internal Revenue Service Restructuring and Reform Act of 1998 was enacted as law for the purpose(s) of modernizing and streamlining the tax authority's operations in addition to assisting tax payers with their tax preparation and making adjustments to other tax filing rules. However, even with the many advantages, there are also some disadvantages of electronic tax filing that may sometimes by overlooked. This article will discuss the pros and cons of filing taxes electronically.

Pros of electronic tax filing

The number of tax filers who have used electronic tax filing has increased steadily for several years. This is due to the pros of electronic tax filing in addition to the U.S. Department of the Treasury's administrative goal of making the tax filing process digital. For the government, a predominantly digital tax filing process saves the government money in data entry expenses and shifts responsibility of finding errors to the tax preparation software, and individual tax filer. The tax filer pros of filing taxes electronically are listed below:

• Faster refund: Refund processing time may take as little as 2 weeks
• Efficient: Recording and transmitting of tax information is faster
• Less paperwork: Paper tax forms such as form 1040 do not need to be mailed
• Digital copy: Digital copies can be stored on a computer or disk
• No mailing costs: Transmitting of data itself is included in the service
• Can transfer federal information on to State tax application
• Math check and guided completion aids in tax filing accuracy
• Reduces need for expensive "anticipated refund loans"
• Online payment of taxes via multiple methods

Con of electronic tax filing

• Not always free: For high income earners and State tax returns a fee may be charged
• Will owe taxes faster if tax is due: If a tax filer owes taxes, the more efficient method could lead to faster processing of official acknowledgement of owed taxes.
• May not accommodate some complex tax filing procedures: 2% of tax forms and/or procedures cannot currently be accommodated by electronic tax filing.
• No paper copy unless one is printed: Paper copies may be desirable in some cases
• Personal information transferred through a third party: When intermediary services are used, their database may store personal tax information.
• Increased risk of computer identity theft: Stored tax information may exist on 1) personal storage devices, 2) a financial services firm and 3) the tax authority.
• Computers may inaccessible by some segments of the population

Disadvantages of electronic tax filing are sometimes overlooked in the interest of acquiring a faster tax return. Some of the cons of digital tax filing may be minor as data encryption become more advanced and there may always be people who are either located to remotely to have internet access or do not have access to a computer. Despite these cons of electronic filing, the availability of electronic tax filing is useful if not beneficial to many tax filers for the reasons illustrated in this article.

The U.S. Department of the Treasury has actively promoted electronic tax filing for several reasons which include 1) reducing costs 2) modernizing the tax processing system and 3) reducing paper requirements of the IRS. The number of electronic tax filings have become a major form of tax filing in recent years and are likely to continue as such in the future if past tax filing statistics trends remain strong indicators.

Source(s):

1. http://www.irs.gov/efile/article/0,id=120353,00.html
2. http://www.treas.gov/press/releases/rr1915.htm
3. http://www.irs.gov/newsroom/article/0,id=170407,00.html
4. http://www.pmstax.com/gen/bull9808.shtml

Estate Planning Tips for the District of Columbia

If you like being near the legislative center of the United States, or have a charitable interest in the numerous non-profit associations in the area, The District of Columbia (DC) might be a good place to plan an estate in. A few items to consider when estate planning in D.C. are the D.C. estate tax code, taxes and planning techniques and tips that may be useful for the estate planner. D.C.'s estate laws are contained within Title's 18-21 and 47 of the District's codified laws. 

Several relevant aspects of the codified law may be of use when planning an estate because they may 1) inform the estate planner of the validity of an estate plan, 2) reveal estate planning options, and 3) answer and/or clarify estate planning questions. A few points with the aforementioned code are listed below:

• Next of kin qualify for $10,000 tangible property exemption.
• Estates under $40,000 in value qualify for small estate probate.
• Probate may not be necessary for estates with only 2 vehicles or less
• Valid creditors may continue to make claims after the probate process
• The estate tax exemption for D.C. is $1 million

District of Columbia (D.C.) estate planning tips:

1. Since the District of Columbia does not charge an inheritance tax, cash inheritance can be transferred tax free if the estate value falls below the minimum taxable amount. Moreover, since inheritance is not subject to income tax according to Kipinger.com, an estate planner may consider it irrelevant to protect liquid accounts from estate, inheritance and income tax.

2. Generation skipping trusts are tax-exempt in D.C. This means any trust that passes estate assets to a generation other than the estate holder's and/or his or her children i.e. grandchildren, then there is no taxable estate limitation. This may be to the estate planner's advantage when trying to allocate estate assets to avoid D.C. estate tax.

3. Another way to avoid estate tax is to give away assets or reallocate assets from the estate prior to the estate administration or probate procedure. Ways to do this include gifts, college tuition savings plans, charitable trusts, and transferable retirement accounts.

4. As per Title 20, Chapter 3.57 D.C. estate code referenced above, vehicular property MAY be used to bypass probate. Moreover, if estate assets are sold, the proceeds of such sale may be used to purchase vehicles of high expense that could in theory be transferred without probate. However, transfer is dependent on the Mayor of D.C.'s concurrence.

Planning an estate can be a complex and important part of one's financial life. There are many financial vehicles and instruments that may suit the needs and requirements of an estate and the State in which the estate is planned and administrated. Since circumstances, values and conditions surrounding estates vary, so to may the documents, asset allocations and conditions of the trust, or will. 

When neither wills or trusts are used, the estate laws of the District of Columbia apply to the distribution of the estates assets. For more information on estate planning in the District of Columbia you may consult the sources below and/or a certified estate planner, licensed attorney or certified public accountant.

Cited Washington D.C. estate related sources 

1. http://government.westlaw.com/linkedslice/default.asp?SP=DCC-1000
2. http://www.finance.cch.com/pops/c50s15d170_DC.asp
3. http://otr.cfo.dc.gov/otr/site/default.asp
4. http://www.willsandtrustslawfirms.com/regional-content.cfm/state/dc/Article/13941/
5. http://articles.directorym.com/Tips_on_Estate_Planning_DC-r1140980-DC.html

Disclaimer: The information in this article is not intended to substitute that of an estate planner. The author of this article assumes no liability for decisions and/or consequences, financial or otherwise related to the information in this article.

Taxes on Life Insurance Death Benefits

Lump sum payments from life insurance payments, payable upon death are not taxable so long as they do not exceed the present value of the policy. For example, if person X holds a life insurance with beneficiary Y listed to receive $100,000.00 in the event of death before a certain age and under certain circumstances only, then the present value of the policy is $100,000.000 and will be not taxable. However, any cash value the policy has accumulated will be surrendered in the event of a face value payout.

There are instances in which life insurance death benefits are taxable. Specifically in cases of 1) interest earned and 2) estate taxation benefits. Since payout of insurance death benefits may be received in installments, additional interest may accumulate on the value retained by the life insurance company. Additionally, in the case of estate taxation, the death benefits are not taxable as income ,but rather as estate taxes.

Taxation of interest on death benefits

Any amount of interest earned and paid out to the life insurance beneficiary that is over and above the face value of the insurance policy is taxable as income. Depending on how that interest is accumulated i.e. through which financial instruments can have an influence on the taxation levels of the additional income. For example, if the interest is earned through ownership of company stock that pays qualified dividends, that interest may be taxed at either 5% or 15% depending on the income level of the recipient. Or the interest may not be paid out, in which case it could be classified as tax deferred income.

Estate taxation on benefits

If an insured person dies an the face value of the insurance death benefits are less than $1-$3.5 million depending on the year, no estate taxes may be payable. However, if there are other assets in the estate, any amount over the tax exempt amount may be taxable.

When an insurance holder passes away, an Estate tax return may have to be filed prior to the nearest following tax filing deadline. Specifically, an IRS form 706 Schedule D may be needed to be filled out along with the other required information of the form 706.

In some cases, estate taxation may be avoided through the use of specific trusts such as an AB Trust, QTIP trust or Life Insurance trust. In the case of a life insurance trust, life insurance proceeds may be withdrawn without estate taxation and in the case of an AB trust, the value of the state is divided making the total estate value lower for the surviving relatives and hence less likely to be taxable under estate regulations.

Multiple insurance policy death benefits and additional tax tips 

In some cases there may be a number of insurance policies in existence including but not limited to auto insurance, employer insurance, and one or more types of life insurance. In such cases, the amount of the total proceeds may exceed the tax exempt estate limit, making any amount above that limit potentially taxable. To limit taxation in such instances as above, it may be advantageous to utilize one or more of the following techniques:

• Establish Trusts: i.e. charitable, AB, or life insurance, credit
• Hold assets in a family owned business
• Life insurance benefits may be payable into a shared annuity insurance policy, in which case the payments are distributed as an annuity  and avoid estate tax and/or are tax deferred income.
• Charitable contributions up to $12,000 per beneficiary may lower the estate value enough to be non taxable.
• Consult an attorney practiced in Estate law
• Seek the advice of a licensed Tax Accountant
• Contact the Internal Revenue Service for answers to additional questions.
• Research applicable laws, tax code, forms and methods of taxation.

Summary

Taxes on life insurance death benefits are for the most part payable through estate taxation, rather than income taxation except in cases of interest income on deferred payments. Additionally, if the total face value of death payout insurance is less than the pre-determined estate tax minimum taxable amount, then the death payout may not be taxable assuming no other income that causes the estate value to rise above the taxable minimum is realized through the estate. It may be possible more than one insurance benefit becomes payable in which case the use of trusts such as Life insurance trusts may be beneficial from a tax perspective.

Sources:

1. http://www.irs.gov/publications/p525/ar02.html#d0e5141
2. http://www.irs.gov/pub/irs-pdf/f706.pdf
3. http://www.ins.state.ny.us/que_top10/que_life_who.htm
4. http://www.irs.gov/businesses/small/article/0,id=108143,00.html
5. http://www.nolo.com/article.cfm/ObjectID/DAC2BB31-35E4-43B2-9BDFA70AD3775418/
6. http://law.freeadvice.com/estate_planning/asset_protection/techniques_estate_taxes.htm

Taxes on the Exchange of Stocks

Taxes on the exchange of stock are only incurred if 1) the exchange leads to positive gains and 2) the transaction(s) do not take place within tax deferred financial instruments such as a Roth IRA. When earnings are made from the exchange of stock they are called capital gains and come in two types short term and long term. Capital gains are reported on an IRS form 1040, schedule D. There are several rules, and techniques that are relevant to and have the potential to lower taxation of profits arising from the sale of stock.

Short-term capital gains

Short-term capital gains are acquired through positive exchange of stock held less than one year in time. The taxation rate for short-term capital gains is the same as ordinary income taxation rates. For example, if one's total taxable income inclusive of short-term capital gains is between $30,650-$74.200, then income over $30,650 including the capital gains is taxable at 25% . Short -erm capital gains not held and/or exchanged in a tax deferred financial instrument are reported in part 1 of schedule D. This form is available at www.irs.gov.

Long-term capital gains

Long-term capital gains are gains made from the sale of stocks and/or other assets such as property that have been owned for longer than one year. The taxation of long term capital gains is lower than short term capital gains and is determined by completing part II of a schedule D in addition to part III of schedule D and the capital gains worksheet contained in the IRS 1040 instruction manual. The current tax rates for individually held long term stock capital gains as of the writing of this article is 5% for tax filers under the 25% taxable income bracket and 15% for taxable incomes at or above 25%.

Stock tax tips

There are several ways to legally avoid taxation of capital gains i.e. taxes on the exchange of stock. While these methods may not allow free and immediate access to the funds, they may serve as a viable tax hedge in instances where annual income is too high to make net worth and or leveraging outside of tax deferred financial instruments too costly in terms of taxation. It is also important to be aware of any special stipulations or rules within the tax code that may be helpful.

• Stock Transfers: Stocks transferred but not sold, from one account to another can allow the sale of stock in the new account to be taxed at a lower rate if the individual or organization receiving the stock is a child, has lower taxable income or is a non-profit organization.

• Donated Stocks: Transfers may also be considered tax deductible charitable contributions in the case of stock transfers to non-profit organizations or trusts.

• Wash Sales: If stocks are traded more than once within a 30 day period and at least one of the sales resulted in a capital loss, that loss is not deductible as a capital loss and is known as a "wash sale".

• Non-Taxable Distributions: For stocks that also pay special dividends or qualify for dividends to be distributed as non taxable, capital gains can be offset by the cost of stocks in so much as the non taxable distributions have a value equal to or less than the original cost of stock.

• Retirement Accounts: Exchange of stock through a retirement account can be tax deferred meaning any capital gains acquired through the account will not be taxable until withdrawal of that income.

• Irrevocable Trusts: If a stock owner gives stocks to trust before the stock increases in value then 1) one's taxable income will be lowered by the amount of the trust donation if the trust is non-taxable 2) the stocks within the trust may be tax free after sale, if they are less than the estate tax minimum taxable amount and 3) Dividend income earned through the stocks in the trust may also avoid taxation.

• Capital Losses: In cases where net taxable income is just over a new tax bracket for a given year, it may be advantageous to sell at a capital loss if one's investments in tax deferred instruments such as deductible IRA's have been maxed out and if the capital loss is likely to be unavoidable. This in a sense lowers the amount of the capital loss via tax savings between approximately 10%-33% on each dollar of capital loss provided a taxable income exists.

Taxation of capital gains can be thought of as quite straightforward in comparison to some other taxation concerns. Generally, short-term capital gains are not as cost effective as long-term capital gains and in the case of investments sold through a retirement or tax deferred financial vehicle. Some exchanges of stock, such as "wash sales" may not be deductible and capital losses may be offset through certain non -taxable dividend distributions. Other ways to reduce tax on stocks is to transfer ownership of them to a child or non-profit organization before the exchange.

Sources:

1. http://www.irs.gov/publications/p550/ch01.html#d0e4968
2. http://taxes.about.com/od/capitalgains/a/CapitalGainsTax_4.htm
3. http://www.msnbc.msn.com/id/7070269/
4. http://www.inc.com/magazine/19970901/1322.html

How to Determine the Cost Basis for Tax Exempt Funds

The cost basis of tax-exempted funds pertains to 1) earnings yields through mutual funds and/or retirement and/or insurance instruments that incur income from tax free investments, 2) Accumulation of earnings that are reinvested within a fund and 3) sale of funds that garner tax exempt dividend income. In other words, yield, ownership and capital gains of tax-exempt funds are subject to different taxation rules and cost basis calculation.

To illustrate what a tax-exempt fund is, the example of a mutual funds that itself invests tax-exempt financial instruments can be used. Such a fund may invest, trade or reinvest in a number of financial instruments that may yield earnings that are taxable, non-taxable or a combination of both. Such being the case, not all yields through tax-exempt funds may be tax free as this depends on the types of investments within the fund, the management of the assets within the fund, and local, state and federal laws.

Earnings from a tax-exempt fund that themselves are non-taxable and re-invested into the same fund do not increase cost basis but rather market value if the value of the fund stays the same, falls less than the value of the reinvested earnings or rises. This increase in market value is an unrealized capital gain and only become taxable following realization.

Furthermore, while earnings within a tax-exempt fund may be taxable, potential gains made from the sale of the fund are usually not. However, in the case of certain retirement and insurance products, capital gains may either be tax deferred or tax exempt due the tax protection provided within that retirement instrument.

Determining the cost basis for tax-exempt funds is a multi-tiered process involving 1) the determination of tax exemption and 2) the cost of those tax-exempt funds. And 3) the realization, un-realization or re-investment of income earned with a given tax year (www.investopedia.com).

Cost basis is a calculation that can be useful in a number of financial scenarios that may benefit an individual, tax payer or business depending on if the cost basis of an asset, investment, capital expenditure, income after cost etc. are favorably valued. A few of the areas in which cost basis can be beneficial in terms of tax exemption are as follows:

• Tax planning for individuals, businesses and non-profit businesses
• Investment valuation in deferred or non-taxable retirement instruments
• Bookkeeping of cost basis of transactional proceeds through non-taxable instruments
• Asset management and cash-flow cost determination
• Preparation of quarterly, annual, personal or business financial documents

Determining tax exemption status

There are several types of tax-exempt funds and financial instruments, some of which may have differing yields. The first step in determining cost basis of these funds is to clarify what, how and why certain funds are tax-exempt. The following list of tax-exempt financial instruments illustrate the various type and reasons for tax exemption.

• Tax-exempt mutual fund: Invests wholly or in part, in tax exempt financial instruments
• IRA or retirement plan that incurs income through a tax-exempt fund
• Hedge fund(s) that invests in tax-exempt funds
• Exchange traded funds with tax-exempt earnings
• Insurance policies with cash value from investment in tax-free instruments/funds

While tax exemption on earnings may be a good thing, they are not necessarily more cost effective than other funds if 1) the fees and charges associated with the funds management offset the tax savings and 2) other funds managed by the same company yield a higher after tax return for the same investment risk level.

Calculating cost basis

Cost basis can be calculated in terms of yield and capital investment. Applying cost-basis calculations to both can better determine the quality, value, and opportunity cost of the investment. The following illustrates cost basis calculations based on 1) taxable cost basis of yield, and 2) tax-exempt cost basis of investment.

• Taxable cost basis

Calculating the taxable cost basis of a tax-exempt fund yield cost basis can be determined by taking one's taxable income rate, for example 28% and then using that to determine the pre-tax yield if the fund where taxable (money.cnn.com) For example, Fund A yields an annual not taxable return of 2.88%.

If the earnings were to be taxed at 28% an equivalent taxable yield of 4% would be required to create the same 2.88% return i.e. 2.88%/1-.28=2.88/.72=4%. Alternatively, a funds that's earnings are taxable with a yield that is also 2.88% would have an after tax earnings lower than the tax exempt fund i.e. 2.88% * .28=.8064; 2.88%-.8064=2.07% actual return.

• Tax-exempt cost basis:

Since cost of an investment is also relevant for taxation matters, this original cost basis is also useful in addition to taxable and not-taxable cost basis of yield. Since market prices of tax-exempt funds can vary with fluctuations in market conditions such as bond price movements, interest rates, economic growth rates etc. actual values of funds can vary.

However, cost basis of tax-exempt funds is not based on market value hence the purchase price is usually used in determining cost basis (investopedia.com). There are of course exceptions to this rule of thumb, particularly in the case of reinvestment of capital gains and/or non-taxable dividends into taxable funds. Calculating the tax-exempt basis of such a fund is thus a simple matter of purchase price.

Cost basis adjustment on reapplication of income after unrealized reinvestment of earnings

In situations in which capital gains are realized after realized tax-exempt earnings of tax-exempt funds are reinvested in the same fund within the same or a following tax year, the cost basis of the reinvestment will reflect a higher amount. (investopedia.com) For example, on January 1, Mr. Jones buys 1000 shares of XYZ tax-exempt fund at a price of $27.50/share with a $25.00 commission. The funds are within a non-retirement investment account that consequently is subject to taxable earnings.

If the fund increases in market value by $1.00/share and incurs a non-taxable dividend income of .50 cents /share and Mr. Jones holds the fund until the following year in which he earns another $500.00 non taxable dividend income and a $1000.00 qualified end of year income redistribution. Since the non-taxable earnings were reapplied to the fund through income reinvestment, the cost basis of that investment rises to $27,500 +$2000=$29,500.00. Jones then sells 1071.42 shares (averaged reinvested dividend of 28.00/share) at $28.50 for a price of $30,535.71. Since the cost basis was adjusted up to $29,500 and the fund was held for longer than a year, the tax rate and total taxable income declines.

Summary

In summary, cost basis can be calculated on yield, investment and reinvested earnings. Calculating cost basis in terms of yield allow for financial comparison with similar taxable related investments. Moreover, cost basis varies with investment vehicle the tax-exempt is bought through, and the investment status of the fund i.e. original or reinvested capital. Since taxation of funds differ based on what tax free instruments are invested in, earnings on tax-exempt funds may be either partially or completely tax free.

Determining exactly how earnings will be taxable depends on the fund itself, the tax laws within one's state, tax bracket and investment strategy. Additionally, reinvestment of earnings and capital gains can lead to a higher overall cost basis that can be reflected in individual tax calculations. Such increases in cost basis of tax-exempt funds that also reinvest dividends and qualified distributions may consequently be beneficial to lowering taxable income within some tax planning strategies.

Sources:
1. http://www.investopedia.com/terms/c/costbasis.asp
2. http://www.fairmark.com/mutual/exempt.htm
3. http://money.cnn.com/2004/12/10/pf/expert/ask_expert/index.htm
4. http://www.ehow.com/how_2006650_invest-triple-tax.html
5. http://www.prudential.com/view/page/12608?param=12624

How Long Should You Keep Tax Records?

Knowing how long you should keep your tax records involves understanding 1) legal requirements, 2) personal finances and 3) tax record keeping systems. In some cases records from may years past can have bearing on a tax reduction claim many years into the future. For example, capital gains from long-term capital holdings are not taxed until the transaction incurring the capital gain is made.

Additionally, according to IRS Publication 523 tax reductions having to do with home renovations may not incur tax reductions until after selling the home. In other cases, tax records become of no legal, financial or personal use. For example, a tax return filed 20 years ago for which all taxes due were paid and accurately recorded may be of no present use legally, contractually or personally. This may be due to limitations in statutory law, completed tax transactions, financial irrelevance to lenders and personally.

Reasons why tax records are kept affect their retention

Since tax records help demonstrate income earning history, tax filing data, credibility, and tax payments made and received, keeping tax records can be useful in a number of situations. For example, in terms of disputed tax payments, having tax records can help justify your case. In other instances lenders may require tax records to justify loans with banking policy.

In other words, the nature and necessity that your personal finances make on your tax record keeping practices will partially determine how long you should keep tax records. A list of the situation in which tax records may be used and/or required is below along with length of time the records are suggested to be kept.

• Mortgages and personal loans: 3-5 years
• Long term capital gains tax: Indefinite
• Internal Revenue Service audits and claims: 3-6 years
• Other Statutory limitations: Up to 10 years
• Individual record keeping: 3 or more years
• Tax disputes: Determined by financial scenario

Factors influencing how long tax records are kept

In some cases the laws governing taxes can change which can also affect how long and if you should keep tax records. For example, the Statute of limitations for tax cases may vary depending on the exceptions to the rules regulated and noted by the IRS, and type of tax involved. Moreover, some home improvements that met have qualified for tax credits in the past, may not in the present of future, an example being the Non-Business Energy Property Credit valid for 2009 and 2010.

In some cases some the improvements may affect medical expenses in which case the tax records can be used for the same tax year in which they were incurred. Additionally, in the case of home improvement financed via mortgage loans, the interest on the loans may qualify for tax deduction.

Tax record keeping and retention

Having a tax record system can assist with filtering and processing tax records so they don’t accumulate, but remain steady at a fixed rate of documentation thereby minimizing filing and storage requirements. The system may also involve digital record keeping on flash drives, hard drives etc.

With a good record keeping system, knowing how long you should keep tax records can also be facilitated. For example, a 1 box record system with 11 files, one for each tax year can never exceed 10 years of records with one file for time exempt records such as home expenses. To keep the files from getting too chunky an enhancement to the record keeping system can be used.

To illustrate the aforementioned tax record keeping enhancement, a tax record system may have two levels of importance and divide tax records into primary, secondary and tertiary levels of relevance. The primary documents may include things like Form 1040’s filed with the IRS, W-2’s and 1099-Miscs; the secondary tax records might include bank statements between 6-12 months old, major purchase receipts and mortgage statements older than 6 months.

Tertiary tax records might include previous tax year 1040 instructions from the IRS, IRS informational letters, or 1099’s and bank statements from previous tax years. Then for additional organization, the tax records in these three categories may be divided into two levels, the first of which contains legally required and/or financially beneficial tax records, and the second of which contains less important and/or non-required tax records.

Summary

The question of how long you should keep your tax records is determined by multiple factors such as tax law, statutory law, personal finances and record keeping systems. Some people may only keep the bear minimum of tax documents if they keep any tax records at all. Others may pay closer attention to possible situations in which the tax records may be required, needed or beneficial for tax deductions, disputed claims or audits. In any case, tax records are a part of living in a society in which taxation is institutionalized. Such being the case tax records may be kept, may be required to be kept, and may be kept for varying amounts of time.

Source: http://www.irs.gov

Guide to Tax Filing Forms

A number of tax return forms may be needed for your tax return, but this depends on your unique tax situation and may only require a Form 1040 EZ tax return. The most common tax form for individual tax filers is the Internal Revenue Service (IRS) Form 1040 which belongs to the 1040 series.

The 1040 has different formats based on complexity of taxpayer financial information and is the primary tax filing form on which information from other forms is recorded. In addition to the Form 1040 are literally hundreds of other forms and publications for different aspects of personal finance as they relate to taxation. Examples of just a few of the many IRS tax forms are below:

• IRS Form 1040A, 1040EZ, 1040 (Individual Income tax return forms)
• Schedules A, C & D (Itemized deductions, Business profit or loss and Capital gains)
• Form 8829 (Home business expenses)
• Schedule SE (Income from self-employment)

There are different IRS tax return forms for different scenarios such as calculating and/or reporting tax credit, estate taxes, tax filing extension request, profit or loss from business or sale of assets and more. There a good chance if an activity involves money, there's a related reporting requirement in addition to an IRS form that facilitates this. In some cases, no forms are required to be filed with the IRS by the tax filer. For example, in years in which no income was received, and no other family or household income applies, a tax return may not have to be filed.

The difference between a 1040a and a 1040

The IRS tax return Form 1040 is an individual tax filing form but can also be used for households and married couples. The Form 1040 comes in three types making it a 'series'. These three types are the 1040EZ. The difference between these three forms is how much information goes on them.

The Form 1040 has the most information and the Form 1040 EZ has the least. Essentially, for tax filers with less complicated finances, the 1040A or 1040EZ can be used. There are also pre and post 1040's i.e. the 1040ES for estimating taxes and the 1040X for amending previously filed 1040s. Types of 1040s can be found at the IRS Forms and Publications page.

When choosing and completing a tax return Form 1040, the 1040 instructions can be quite helpful in illustrating what each line of the from means, and how to use it. The 1040 instructions also provide Schedule forms and worksheets so as to simplify the form search and acquisition for the tax filer. IRS Forms and publications can be acquired in 3 ways, via mail, via internet and via internet download. Some forms and publications may also be picked up at public government administered establishments such as libraries and tax assistance centers.

Knowing which tax return forms to use

To choose the right Form 1040 involves knowing what kind of income, deductions and credits you can report. For standard deductions, with one primary source of income from an employer, and no retirement accounts, mortgages, investments, educational expenses etc. a Form 1040A or EZ may be all that is needed. Essentially, identify your income source(s), then determine which deductions and/or credits you may qualify for. Following this, the form that best facilitates the reporting of this information is probably the better choice.

Some forms and their instructions may not include space to report income or credit that may reduce taxes. This is one of the reasons why it is important to use the correct forms. For example, if a U.S. citizen works overseas and qualifies in a reduction to Adjusted Gross Income through a Modified Adjusted Gross Income, a space may not be available on the Form 1040 to report this.

When there is no clearly marked space to report a tax deduction, adjustment or credit an IRS official should be contacted to determine the proper form to use and the ideal location to put the information. In some cases, information can be written onto the 1040.

Source: http://www.irs.gov (U.S. Internal Revenue Service)

How to Do Your Taxes Online for Free

If you want to do your taxes online for free, the Internal Revenue Service (IRS) ‘Free File’ program may be right for you. Tax filers with net incomes below approximately $57,000 and younger than 50 years of age can file Federal tax returns for free using a number of online tax filing services.

These online tax venues have software that allows tax filers to input tax information and then forwards this information to the IRS. Some accounting firms that specialize in tax filing preparation charge for that service, but may also offer a free online e file as a courtesy to their clients.

The catch with several of these services is that the State filing free may not be free. For a fee however, the federal tax information can automatically be transferred over to the state tax return saving the time of duplicating and recalculating tax information.

Some State Department of Revenue Websites may offer free efiling of state taxes, however these sites may not be as fast, efficient or available as the federal free file process. However, if you just want to file a Federal tax return online for free this can be done with online tax services such as H&R Block’s ‘Free File’, ‘TaxAct’ and ‘Turbo Tax’. A more complete listing of free online tax filing platforms is available at the Internal Revenue Service starting January 15, 2010.

Free file requirements

To file taxes online for free still requires the same documentation as a paper filing, however these documents do not need to be physically submitted with the free online tax filing. Rather, the information on the tax forms and applicable paperwork for the tax year is inputted into the free online tax filing software.

Tax forms can still be mailed to the Internal Revenue Service (IRS) after filing taxes online. The information that is required is the same as for paper tax returns and may include one or more of the following tax documents or online tax forms.

• Online form 1040
• Personal information
• Account numbers
• Pin code
• Supplementary tax forms ex. Schedules A and C

The free online tax filing process can last approximately between 30 minutes and 2 hours depending on how prepared you are, and how simple or complex your taxes are. It may also take some time to acclimate with the website and software, enter all the information that is needed and properly save or print out the completed free tax filing.

In some cases live help may be available during the free online tax filing process. When filing using free file, tax refunds can be received in as little time as 2-4 weeks. Theoretically, this means someone completing an online free tax filing could have a refund as early as late January or early February if they have all the proper documentation required to file.

Additional information on free filing taxes

When an account number and routing number are given using an online tax free file service your tax return may arrive faster with no additional filing charge. Filing taxes online for free may also allow you to download a copy of the submitted tax return so that if a hard copy is needed, one is available and on record for future use such as loan applications.

Free file may also allow tax filers encrypted tax return preparation for security of financial information such as bank account number, personal information and income data. Filing taxes online for free can also simplify the process of accurately arriving at Adjusted Gross Income (AGI) and total itemized deductions numbers .

Filing taxes online for free may not be advantageous unless you 1) are owed a tax return and 2) are filing close to the tax filing deadline. Online free filing also assumes digital security which is different from paper storage of information. A sudden surge in electricity could potentially fry all the information on your tax return if not disable its submission. Server problems from the free filing provider could also slow the data submission to a very slow pace.

Another potential disadvantage of free efiling is that documentation may still need to be sent to the Internal Revenue Service in effect duplicating the effort to an extent, and sometimes the online tax return can be so lengthy that it ends up using more paper than a traditional tax return if printed. These however, are scenarios that may be avoidable in some cases. If they are avoidable, the advantages of free filing taxes may outweigh the disadvantages.

Summary

If you are confident enough in the security of doing your taxes online for free, qualify for the free filing and are owed money by the U.S. Federal Government , filing taxes for free might be a good choice. The free file program is endorsed by the U.S. Internal Revenue Service and is operated in collaboration with several online financial software providers such as those listed above.

The free file program is available to qualified tax filers within income and age limitations. According to the IRS tax returns may be received in less than 14 days in some cases. Some states may offer free online tax filing through their own websites, but this may not be as easy or an option in all cases. Nevertheless, to do taxes online for free may be a good option for some tax filers as determined by the tax filer, tax preparer or accountant.

Source:
http://www.irs.gov (U.S. Internal Revenue Service)

Common Tax Deductions for Individuals

Tax deductions save taxpayers money by allowing them to list certain expenses, losses and cash out-flow as reductions to total taxable income. The lower the taxable income, the less tax a tax filer must pay. Deductions can be separated into three types, deductions to gross income, standard deductions and itemized deductions. In the United States, most individual tax deductions can be listed on either the Internal Revenue Service form 1040 or the IRS schedule A.

Deductions to gross income

After reporting total income with any losses subtracted on the IRS form 1040, tax filers have a chance to lower their taxable income using reductions in the adjusted gross income section. These reductions can be thought of as deductions to gross income and include items such as alimony, individual retirement account contributions, student loan interest, employee moving expenses and certain self-employment deductions such as health insurance, and self-employment tax reductions. If applicable, these deductions can be entered on the tax form regardless of whether the standard deduction or itemized deductions are utilized.

The standard deduction

If a single taxpayer, head of household or married couple file a form 1040 with the Internal Revenue Service and elect not to itemize deductions, a standard deduction can be used instead. The highest standard deduction is over $10,0000.00 for married couples filing jointly. Depending on whether a tax filer is single or head of a household, the married filing jointly amount is either reduced to half or three quarters for former and latter status' respectfully.

When deciding whether a standard deduction is the right course of action, an important question to ask is would itemized deduction's total be higher than the standard deduction? If itemized deductions don't add up to more, the standard deduction is the better choice for lower taxes because it will add up to less taxable income.

Itemized deductions

Itemized deductions are listed on the IRS Schedule A, which is filed along with a form 1040. On the schedule A, one will find deductions such as mortgage interest, charitable donations, sole proprietorship expenses, state, local, real estate, property and other taxes paid out. As mentioned, if these deductions add up to more than the standard deduction for an individual's tax filing status, it is advantageous to file itemized deductions for the purpose of reducing taxable income, lowering taxes or increasing tax return.

Tips for filing taxes

Tax season is often feared, loathed and avoided by many tax payers but it doesn't have to be such a terrible experience. There are ways to not only improve the tax filing experience, but also potentially benefit from it. The following paragraphs illustrate a few tips that may be useful to tax filers.

• Organize: Keeping important paperwork which will be needed by the April tax filing deadline is an important step in simplifying the taxation process. The easier it is to locate files with bills, expenses and taxes paid out, the better prepared one should be for the tax filing process.

• Maximize: If something is deductible, find out at the beginning of the tax year and not the end. The earlier one knows what is deductible, the more possible it is to stay on the look out for, and document tax filing deductions.

• Calculate: If single, the chances may be higher that filing itemized deductions may yield greater reductions especially if one runs a sole proprietorship out of home and pays mortgage interest and utilities on that home. If a charitable contribution places one in a lower tax bracket, and that contribution is less than 2-10% in additional taxes, it might be worth it in terms of lowering taxes and keeping income.

• Consult: Sometimes tax situations can be complicated by a divorce, estate settlement or complex finances related to business operations. In such instances it may be prudent to consult a tax attorney, accounting professional, the IRS, or any combination thereof. This can help make a potentially stressful situation easier, save valuable time, and give tax filers more peace of mind.

Tax deductions quite possibly are one of the best features of tax preparation because they assist tax filer's retained income to grow, not shrink. Additionally, if the deductions do lead to a tax return at the beginning of the following tax year, those returns, if not claimed, can be applied to the following year's tax filings as either a reduction to taxes owed, or an increase to tax returned.

Filing taxes as sole proprietor

Sole proprietors are pass through businesses that are taxed a flat rate of 15.3% (Social Security and Medicare) by the U.S. Internal Revenue Service for business income up to $106,800, and half the tax is deductible from regular income. Sole proprietors are individuals who work as contractors, sub-contractors and otherwise provide a product and/or service as a company that is not a partnership, limited liability corporation, small business or corporation.

Sole proprietorships are directly liable for business expenses and legal actions taken against the sole proprietors. Sole proprietors do not have to be incorporated and may or may not have employer identification numbers. In such cases, social security numbers are required for tax identification.

Specific tax implications exist for sole proprietors that do not necessarily exist for regular income earners. For example sole proprietors are subject to self-employment tax, and additional tax reporting requirements such as employer filings and business income and expense reporting. These additional responsibilities necessitate the use of additional tax forms to be filed alongside an Internal Revenue Service form 1040. Despite the necessity for additional tax forms, the financial benefits for filing taxes as a sole proprietor may be advantageous and worth the time it takes to fill out the extra forms.

Sole proprietor tax forms and their implications

A sole proprietor can file with a regular 1040 and a Schedule C or C-EZ. The income or loss that is incurred through the sole proprietorship is then reported on form 1040 as business income or loss. Typically a schedule C includes information such as the nature of business, employer identification number if any, address, income, expenses, vehicle expensing etc. Part II of Schedule C includes 23 expenses from lines 8-27 including 16,20, and 24 b. Examples of these expenses are advertising, employee benefits, office expenses and utilities. Business expenses incurred through a sole proprietorship can lower taxable income for the sole proprietor.

Sole proprietors are subject to self-employment tax of approximately 15.3% which is reported on the form 1040 Schedule SE. Half of the self-employment tax is deductible from regular income in the adjustments section of the form 1040. Self-employment tax is not reduced by standard or itemized deductions.

If a sole proprietorship has employees, form W2's should be submitted to the IRS and the employees indicating income and withholdings for the employees. A sole proprietor may also have income from other sources of income outside the business that should be filed along with the 1040 as regular income. Such income may include capital gains, interest income and wages from regular employment.

Sole proprietor tax tips

When filing taxes as a sole proprietor it can be a good idea to be aware of as much as the tax rules and regulations as possible. When in doubt contacting a tax professional, Government tax specialist or tax help guides may be beneficial in gathering the appropriate information, minimizing tax paid and accurately filing taxes. A few tips about filing taxes as a sole proprietor are below, however these tips do not replace the advice of a tax professional.

• Gross Income: If gross income is below the minimum required for filing taxes with the IRS, a sole proprietor still has to file a tax return with the IRS if the business income is more than $400.00.

• Amendments: If self-filing and errors are realized on tax forms following submission of the original tax filing and amendment may be filed. An amendment can be sent to the IRS using a form 1040X.

• State Taxation: Taxation of sole proprietorships may vary from state to state. Some states may require separate reporting and/or taxation for income earned through a sole-proprietorship.

• Home office deductions: Making use of a designated home office may lower taxable business income through higher expenses. Paying bills during the tax year and keeping records of such bills can assist in recording and reporting of such expenses. An IRS form 8829 can be used to deduct such expenses.

• Non-Home office Expenses: If a sole proprietorship does not qualify for home office deductions, legitimate office expenses and supplies can be reported and deducted from total income on a schedule C.

• State and Federal Contacts: Contacting federal and state tax authorities with tax questions may be more cost effective than hiring a tax accountant or tax preparation professional.

Summary

Sole proprietorships are self managed businesses that are not classified as other types of businesses. Sole proprietors are directly responsible for actions, consequences and taxation of income earned through the proprietorship. Tax filing for a sole proprietorship makes use of a few additional forms but is less complicated than larger businesses in terms of tax reporting. Self-employment tax is a responsibility of sole proprietors and can add up to approximately 15.3% of total business income which cannot be reduced through standard deductions.

There are advantages and disadvantages to sole-proprietorships. An advantage is the income earned through such a business can be reduced through legitimate expensing such as home office deductions that are reported on IRS form 8829 and then transferred onto a schedule C and then onto a schedule SE in the case of home office deductions. Otherwise, expenses can be reported directly onto a schedule C. The tax rate for sole proprietorships is lower than the normal income tax rate for income between $30,650- $97,500. That is to say self-employment tax is a flat rate up to $97,500. Consequently, there are recognizable tax benefits of earning income through a sole-proprietorship.

Sources:
1. http://www.irs.gov (U.S. Internal Revenue Service)
2. http://www.ebtax.com/income/sole_proprietorships.htm
3. http://www.sbinformation.about.com/cs/accounting/a/aa121502a.htm

What happens if you don't file your taxes?

If you're not required to file a tax return, there may be no consequences at all for not filing a tax return, however, those who paid more in taxes than they owe will not receive a refund without filing taxes.

If a tax filer is under 65 and has a gross income below $9,350.00 then he or she is not required to file taxes according to the U.S. Internal Revenue Service, however taxes may still have to be filed if withholding were not made during the tax season; for example, income from self-employment without witholdings.

If one does not file taxes with gross income below this amount, there should be no penalties associated with not filing unless other conditions apply. If you are not sure if you must file, contact the IRS at 1-800-829-1040. The minimum filing amount varies with filing status i.e. married couples who file separately must file with a minimum gross income of $3400 or greater, yet married couples filing jointly, do not have to file with gross incomes below $18,700.00.

The penalties of failing to file tax returns vary from individual to individual and organization to organization. Generally, filing a tax return avoids stiffer penalties such as huge fines and criminal charges however penalties in the form of later fees may be incurred in addition to interest accumulated on taxes. In the case of businesses, the fines and process may be larger and more drawn out.

Federal penalties for failing to file taxes

The penalties for not filing taxes can range from mild to harsh depending on the offense and burden of proof is up to the Internal Revenue Service. A tax filer can sidestep the harsher penalties by filing tax forms without payment. This informs the internal revenue service the tax filer acknowledges the amount owed and is legally notifying the government of money owed. Some of the consequences associated with not filing taxes are as follows:

• Payment plan eligibility: Failure to file and/or pay taxes may eliminate or damage eligibility for payment plans on future taxes owed. Payment plans can reduce the tax shock of unplanned, mismanaged or unforeseen future taxes.

• Financial Penalties: Charges as high as 25% or more can be applied to existing taxes due if the taxes aren't reported and filed. The larger the tax owed, the greater the financial damage can end up being.

• No Refund: In the event a refund is owed to the tax filer, this refund may be given up if not claimed in time. A similar case is true with earned income credit i.e. if it is not reported, which it must be, a tax filer may not receive the credit for a given year on future tax returns.

• Social Security Credit: If one is self employed and fails to report income and taxes due one may not receive credit of money paid into the social security system in addition to incurring other charges and/or penalties associated with not filing.

• Delinquency Investigation: If the IRS finds that taxes are owed and have not been paid and/or reported, a "delinquency investigation" may follow shortly thereafter.

• Criminal Investigation: A formal investigation may be initiated by the Internal Revenue Service. In such cases, the IRS deems the non-filer to have deliberately not informing the IRS of tax responsibilities with the intent of fraud or tax evasion.

• Criminal Charges: The IRS may charge a tax filer with criminal offenses that could lead to imprisonment. These types of charges are very serious and should not be taken lightly.

• Fines: Fines can be as high as $25,000.00 in some cases. Such fines may be continual until the amount of taxes owed is acknowledged and paid in some manner deemed acceptable and according to the requirements of the Internal revenue Service.

• Correspondence: Multiple warnings, letters and/or phone calls may be received from the IRS if one has not filed the necessary tax documents.

Tax filing tips

In the event the April 15th deadline has passed and one has still not filed taxes contact the IRS and inform them of what has happened. They will probably be willing to assist and inform one of the necessary steps to avoid worse consequences. A few tips a tax filer may consider are as follows:

• File on time: Even if the amount owed cannot be paid, filing on time at least demonstrates the willingness to cooperate and can reduce a potential criminal offense to a civil offense or less.

• Form 9465: If taxes can't be paid right away file a form 9465 along with a 1040. This can spread out the payments if approved. A complete list of payment plans and costs can be found at the IRS website http://www.irs.gov

• Contact the IRS: If one has doubts or questions call the IRS at 1-866-829-1040. There are many representatives and specialized professionals who can assist.

• Tax plan: Planning for taxes can be a year round activity. It does not have to take too much time, but keeping an eye on one's income, tax withholdings, filing status etc. in addition to good record keeping and tax code awareness can better prepare one once tax season rolls around.

• Tax services: In some cases tax filing can be free as is the case with "freefile". Freefile is free federal tax filing service for tax filers with income levels below $54,000.00 There are also other services such as "Volunteer tax assistance" that a tax filer may be eligible for.

Summary

In summary, failing to file taxes can have no penalty or very large penalties depending on if one is required to file a tax return, if money is owned to the tax filer or the government revenue service and the magnitude of the offense. Tax fraud and tax evasion are illegal can lead to serious charges and penalties whereas failing to pay taxes but still filing can lead to less damaging consequences but still incur financial charges.

It is generally not worth it to not file taxes if one is required to do so. The psychological, financial and legal implications can be quite broad and the IRS understands not everyone can afford to immediately pay taxes. In such cases it is likely the government agency will help a tax filer to find a payment plan that is realistic. Furthermore, tax professionals and tax advisers may also be consulted prior to contact the IRS for additional insight into the situation.

Sources:

1. http://www.irs.gov/ (U.S. Internal Revenue Service)
2. http://articles.moneycentral.msn.com ('What If You Can't Pay The IRS')
3. http://ezinearticles.com ('Consequences of Not Filing a Tax Return Will I go to Jail)