The 3 biggest implications of new tax laws in 2013

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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The Social Security tax withdrawn from paychecks has traditionally been 6.2 percent.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

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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.

Everything you need to know about surviving a tax audit

By Zach Pierson

If you are a small business, audits are going to be part and parcel of the way that you move forward. An audit does not mean that anything is wrong, or that you have to pay more money. Typically, it just means that the IRS wants to touch base with you and to learn more about what is going on. If you are going into your first audit, there are a few things that you can do to make things easier on yourself.

 

Be neat

If you are called in for an audit, you may be feeling a little pressured or tense. You may even be angry because you think they are questioning your honesty. No matter how you feel, you should not bring all of your records to the event and drop them in a big pile in front of the auditor. This will not make the process go more quickly, and it might make the auditor think that you are trying to hide something in the mess. If you keep things neat, you’ll find that in many cases, the auditor is willing to give you the benefit of the doubt on questionable items.

 

Knowing about books 

The auditor may ask to see your books. Remember that as a small business owner, you do not necessarily need to have them. If you are a small business, there is a good chance that you only keep your checkbook records and your cash register tapes. There is nothing illegal about this, but if you do have books, the auditor has a right to see them. If you do not have them, be up front about saying so. Have a print-out prepared if you keep records on your computer.

 

Entertainment receipts

No matter how large or small the business, a certain amount of entertaining is likely. Perhaps you end up taking people out, or perhaps the business held a holiday party. Entertainment is one area where auditors can spot mistakes, so it is worth your while to keep track of these receipts as a priority. Keep the receipts, and include any notes on them that might be useful. Remember that the key is to prove that you were not abusing the system.

 

Providing a work space

The auditor will be coming to your office to do his or her work. This means that they need a space to work, and they will be there for at least a few hours. Setting aside a workspace for them and providing some good light can make their job much easier. Some people offer the auditors their own work areas if there is no other space.

 

Cooperate

Auditors face a great deal of distrust and anger, but you can make a good impression if you treat them as professionals who are just there to do their job. They are not out to get you, and they want to come to a satisfactory solution as much as you do. Treat them with respect, ask what questions you want, and do not be accusatory.

 

Understanding the results

After the findings, the auditor will discuss the consequences with you. In some cases, this means that he or she will tell you do need to pay more in taxes; in other cases, they will say that there will be no further payments necessary. This will happen before they leave, so be ready to talk this over.

About the author: Zach Pierson is a tax blogger with the State Tax Help advisors.

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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

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.

Income taxes 101

Image attribution: Arvind Balaraman. Standard royalty free license

 Income is categorized into approximately 24 types according to the Internal Revenue Service (IRS). Although there are several different types of income, they all can be labeled as taxable income. However, not all kinds of income are taxable at the same rate. Tax rates can also change between tax years due to changes in tax law that can affect how tax is calculated, when tax is calculated and what is or isn’t tax protected.

• Wages and salaries

A common type of taxable income described by the IRS is wages and salaries. This income is reported on the Form W2 that is sent to income recipients near the beginning of tax filing season. Even though this is one type of income, it is taxed at differing rates determined by total taxable income; for the 2010 tax year, these tax rates can range from around 10 percent to 39 percent. Total wages and salaries is not usually the final amount of income that is considered taxable because it doesn’t take into account exemptions, deductions and credits.

• Capital gains

Tax on capital gains varies on whether those capital gains are offset by capital losses and if the capital gains are acquired through a tax protected financial vehicle such as  a Roth IRA. According to the Tax Foundation, the maximum capital gains tax for the 2010 tax year is 35 percent. This amount applies only to short-term capital gains and not long-term capital gains which have a 15 percent maximum rate for the same year.

• Interest and dividends

People also often receive Form 1099s that provide a record of other income such as income from interest and dividends. Tax on dividends can vary and may not be taxable at the same rate as normal income. These types of dividends are called qualified dividends and must meet certain requirements to qualify for the lower tax rate. These qualifications can be reviewed at the University of Connecticut Business School. Interest on financial securities is often taxable unless those financial instruments are non-taxable as is the case with some types of municipal bonds.

• Social Security

Income from social security entitlements may or may not be taxable depending on the individual circumstances. The IRS states persons whose only income for a given tax year is social security may not even need to file a tax return. Income from social security is recorded on Form SSA-1099 and is reported on Form 1040. If social security is taxable, it is usually taxed at the same rate as income from wages and salaries or the standard tax rate that applies to the given taxable income amount.

• Retirement income

If income is received from retirement accounts such as Individual Retirement Accounts (IRAs),and 401(k)s, whether or not that income is taxable can also depend on the individual situation. For example, if the income is directly transferred to another retirement plan, i.e. not received but redirected there’s a good chance it may not be taxable. However, if the income is paid to the retiree, and is from a tax deferred retirement account such as a traditional IRA, then the income is more likely to be taxable.

Several additional types of income tax exist and it is always a good idea to verify tax questions and information with the IRS at 1-800-829-1040, or a qualified tax professional before sending a completed tax forms to the IRS for processing. This is because there may be overlooked tax rules, better ways to reduce tax and possible errors in the tax documents to be sent to the IRS.

How a C Corporation is taxed

C corporations are the largest of U.S. corporations and also subject to the most extensive tax reporting requirements and documentation. C corporations may include a private company with 200 shareholders or a large publicly traded company with market capitalization in the billions of dollars. C corporations are subject to reporting a lot of financial activities and thus require strong bookkeeping and documentation throughout the tax year.

Tax forms required

There is a considerable amount of required documentation for filing as a C corporations. The primary IRS form is the 1120 which is different from the 1120S, a tax form required for S-Corporations which are small businesses with 100 or less shareholders. The form 1120 also includes several schedules that are used for calculating cost of goods sold, tax credit, total officer compensation, balance sheet items and dividends. The necessary documents to fill out and their complete instructions are freely available through the Internal Revenue Service.

How tax is calculated for C corporations

A primary factor in the calculation of how much a corporation will be taxed is retained income. The higher the retained income, the higher the tax imposed on the corporation will be. Since retained income is the bottom line after expenses and costs have been deducted this number can end up being quite a bit lower than revenue from sales and sometimes even negative in which case no tax is applied.

The idea that a C corporation is subject to double taxation is theoretically true but in cases where the shareholders do not sell their shares of the company they are not taxed capital gains tax. In other words, capital gains taxes are only charged following sales of shares and dividends are both deductible from taxation before earnings and taxed a lower rate than capital gains to shareholders.

C corporation tax lowering strategies

There are several ways to lower the tax of a C corporation. Specifically, since state taxation is also a factor, choosing to headquarter and/or operate a C corporation out of state with favorable business laws can be advantageous. For example, operating out of Nevada can be beneficial for a C Corporation because there are no state taxes or franchise fees imposed on the businesses. For C corporations that don't mind operating out of the U.S. mainland, the territory of Puerto Rico also offers significant tax advantages.

Additional strategies include the paying out of dividends or redirecting profits into a dividend reinvestment program (DRIP), profit sharing plans and./or pensions, both of which are tax deferred to participants and tax deductible to the corporation. Other options can include forming a different corporation altogether, for example a non-profit corporation or a MREIT in the case of real estate investment companies. The latter of these pays no taxes because the profits are either reinvested into the company or distributed among shareholders in the form of deductible dividends.

Another interest tax fact about C corporations is that in tax years where the company experiences a net loss, not only does the company not pay taxes, but the loss can be carried over to the following year and deducted from the total earnings of that year or any other year up to 5 years after the year of the loss. This is an incentive to assist struggling C corporations or C corporations in financial readjustment regain profitability without tax burden.

Summary

C corporations are one of several types of businesses identified within the United States tax code. C corporations are the largest type of corporation and subject to the highest amount of tax reporting requirements. However, C corporations are also able to deduct significantly more from revenue numbers than smaller corporations and the double taxation often associated with C corporations can be avoided with drips, long term holding of shares, and various other tax strategies including but not limited to net loss carry over from previous years, state or territory of operation and profit sharing plans.

Sources:

1. http://www.irs.gov
2. http://www.expertlaw.com/library/business/c_corporation.html

Filing Taxes on Interest and Dividends

Interest and dividend income comes in a variety of forms and even with special terms, as is the case of non-taxable distributions. Each type of interest and dividend income is taxable in a different way and some interest income is tax exempt altogether. 

Figuring out how to record interest on tax forms can involve a few steps, a little research and some time with paperwork a calculator and a pencil. This article will attempt to simplify that process by illustrating the types of taxation on interest and by providing tips on dealing with and reporting interest and dividend income.

Taxable interest   

Taxable interest is reported on form 1099-INT's unless it is under $10.00 for the year in which case a financial institution is not obligated to send a form 1099. All interest income from savings, checking, money market or similar types of accounts, whether it be reported or not, should be reported as taxable interest to the Internal Revenue Service when tax filing.

Tax exempt interest

Some financial instruments such as U.S. Treasury bonds may be tax deferred meaning interest accumulated on the bonds is not taxable until the bond's value is redeemed. This interest is tax exempt but is still required to be recorded on tax filing documents. Tax exempt interest is also reported to a form 1099-INT. Dividend income obtained through certain retirement accounts may also be tax exempt if not redeemed during the tax year.

Ordinary dividends

Dividends include payments from companies, of which the tax filer is or was a shareholder during the tax year. Ordinary dividends are not tax exempt are recorded on a form 1099-DIV which is sent to the tax filer. Ordinary dividends are taxable at the income tax rate of the taxable income and are thus treated as ordinary income for tax purposes.

Qualified dividends

Qualified dividends are not currently taxed at ordinary income levels. These types of dividends are taxed between 5%-15% and are consequently potentially advantageous to tax filers in higher tax brackets. Certain requirements determine whether or not ordinary dividends are treated as qualified dividends. More complete qualification criteria can be referred to using the source references in this article.

Tips on how to report interest on tax forms

• Forms and Documents: Having all the necessary forms before completing either the online or paper tax filing can be helpful. The forms and documents that may be needed include form 1099-INT's, 1099-DIV's, account statements, form 1040A, Schedule D, Schedule B, form 1065 or 1120S, and form 4952. Some of these forms i.e. the 1120S and 4952 are for business dividend income only.

• Non-dividend Distributions: Certain companies such as Mortgage Real Estate Investment Trusts allow for dividends to be treated more like a cost adjustment for capital gains. What this means is the income received as non taxable distributions is only taxable as a capital gain once it reaches a dollar amount higher than the initial cost of investment. These types of distributions can hold significant tax advantages in high volumes of cost. Non-taxable distributions will also offset tax benefits of capital losses.

• Qualified Dividends: To ensure the correct taxation of qualified dividends complete the qualified dividends and capital gain tax worksheet in the form 1040 instruction manual. These instructions are available through the IRS website.

• Tax Strategy: Developing a tax strategy can offset taxation of interest income through tax hedges such as deferred dividend income accounts or instruments i.e. some Government bonds, and/or retirement accounts. Insuring an acceptable level of income i.e. unneeded income remains in such accounts can help keep one's taxes more reasonable.

• Resources: Making use of free resources such as the Internal Revenue Service question line, online resources and free access publications can assist with minimizing and managing taxation of interest income. If necessary and in the case of doubt, a tax accountant or professional may provided additional insight and information.

To summarize, interest and dividend income is complicated by tax regulation that treats different types of income differently. That is to say, some interest income is taxable while other interest income is tax deferred or tax exempt. This article provides information on the types of interest rate based and dividend income, however does not replace the advice of a tax professional. Knowing the differences between each is not only essential to proper taxation, but also in developing an advantageous tax strategy that may help a tax filer achieve a lower tax payment and/or reduce taxable income.

Sources:

1. http://www.irs.gov
2. http://www.usa-investment-tax.com/taxation_dividends.asp
3. http://www.missouribusiness.net/irs/taxmap/pub17/p17-041.htm
4. http://www.irs.gov/pub/irs-pdf/f4952.pdf
5. http://www.googobits.com/articles/p2-1371-how-are-dividends-and-other-corporate-distributions-taxed.html

Tax Deductibility of IRA Contributions

Tax deductibility of Individual Retirement Accounts (IRA's) is one of the primary features of these types of investments. These benefits can not only save a person and/or organization money, but also lead to greater income potential.

There are several types of IRA's and the tax benefits of each is unique. For individuals the benefits can mean added financial security in older age and for organizations/employers contributing to IRA's , the tax relief can lower payroll tax i.e. money paid to the Government. A brief description of various types of IRA's and the associated tax benefits are as follows:

• Traditional IRA: Contributions to traditional IRA's are tax deductible so long as the amount put into the account complies with federal tax regulations. This tax deduction lowers overall adjusted gross income allowing one to pay less taxes in a tax year or receive a larger tax return. Tax is applied to the contributions and earnings in this type of account at the time of withdrawal. Example: If monthly paychecks are $4,000/month, Monthly contribution from paycheck is $166.676therefore annual taxable income is reduced by $2000 saving $200 at the 10% income tax level.

• Roth IRA: Contributions are made from taxable income, however the withdrawals made after age 59.5 years of age are not taxed and neither are the earnings generated through the Roth IRA. Example: An individual contributes $4000/year to a Roth IRA, that contribution is not deductible, but over 10 years the 4K per year earns 10% each year. Compounded, the 10% tax free earnings yield ($74,124.67-$44,000)=$30,124.67. The $30K in tax free earnings saves one $4500.00 in taxes.

• Employer IRA: Corporations that don't utilize a pension fund may elect to use an employer IRA. These IRA's are established by an employer therefore are tax deductible for them and reduce taxable income for the employee. The affect is generally the same for the employee as taxable income declines in both instances. The contributions and earnings acquired through this type of IRA are tax deferred i.e. taxable upon withdrawal.

• Spousal IRA: Similar to traditional IRA's if contributions are made before the annual IRS mandated deadlines, the contribution is tax deductible. To benefit from a spousal IRA, the filer's tax status should be married filing jointly.

• Keogh: Keogh plans are similar to IRA's but slightly different in the sense they are for the self employed, certain types of small businesses and employees of those businesses. This money can be rolled over into an IRA and contributions are tax deferred until time of withdrawal. Unlike IRA's, Keogh's are not tax deductible because the funds are taken from gross earnings rather than net earnings i.e. pre-taxable income.

IRA contributions vary in terms of maximum amount allowed. Generally the contributions range between $4-6000 per year with contributions in the upper end being reserved for older retirement planners. This contribution amount can have a marginal influence on final tax calculations, but can be all that is needed to lower one's tax bracket from 20% to 15%.

What's more, not all contributions are deductible depending on one's income range. For Roth IRA's and Spousal IRA's incomes over 160K are either non-existent in the former, and not allowed in the latter. While an individual may own more than one IRA there are tax limits on the amount that is deductible i.e. $2000.00/year if filing singly and $4000.00 if married filing jointly.

Estate Planning 101

Estate planning manages the financial assets, both real property and personal property, that comprise the net worth of an individual that will be passed onto beneficiaries following death. Estates can exist during the lifetime of the estate owner in the form of Trusts and other estate tools where the estate owner is the primary trustee until some future point in time.

Estates are an aspect of financial planning that are most relevant in the post retirement years and often accompany end stage or end of life financial planning. Estates planning can be divided into 3 areas 1) estate tools, 2) estate planning goals, and 3) estate taxes.

Estate planning mechanisms

Estate tools are the means by which estate planning can be implemented. These tools include legal and financial instruments that allow the estate owner to allocate assets, determine who will be able to make decisions on behalf of the estate, and how assets are owned. Estate planning tools require advance preparation, often require notorization, may also need the signature of witnesses and should comply with state and federal estate law.

When planning an estate’s legal management with an attorney, information that informs the attorney of the estate owners goals, heirs, and assets are likely to be obtained; an example of this is this linked to ‘Estate Planning Checklist’ from abanet.org

• Power of attorney
• Last Will and Testament and Living Will
• Financial Trusts
• Additional financial instruments ex-IRA’s, life insurance

Estate planning

Estate planning incorporates the goals of an estate and the wishes of the estate owner into a financially viable, documented and effective way. Estate planning can achieve a number of useful purposes to all relevant parties affected by the estate. Estate planning is a fundamental aspect of financial planning in later years and becomes more relevant when the estate becomes subject to heavy taxation. In other words estate planning is essential for protecting, growing, preserving and allocating financial assets.

• Reduces or avoids potential estate taxes
• Protects estate assets
• May help ensure privacy of estate beneficiaries
• Helps preserve family legacy
• Facilitates transition of estate ownership
• May directs asset allocation during probate

The Estate tax

Estate tax law can be complex and varied across the states and is also subject to revision by changes to federal legislation. State estate laws should follow federal statutes but have latitude in the amount of estate tax and the estate value amounts at which the estate tax if any occur. Estate taxes can lower the value of an estate considerably and do not include inheritance taxes that can further reduce the value of an estate.

In order to lower an estates value so it does not qualify for estate tax a combinations of methods may be used. For example, charitable deductions, acquisition of non-qualifying assets, and jointly held assets. Some of the following IRS Estate Tax Forms and publications may be necessary or helpful in understanding how the government is informed of and records estate information.

• There are both federal and state estate taxes
• Non-existent federal estate tax for 2010 tax year
• Taxation of an estate can reduce its value by over 50%
• Estate tax does not include inheritance tax

Estate planning tips

When estate planning there may be a number of legal, financial and personal considerations to take into account. This may become complex and involve large amounts of capital, assets and financial obligations. In such cases, it may be prudent and advisable to seek the consultation of a financial professional familiar with estate planning practices. Effectively planning an estate can mean the difference of having a lot of one’s personal net worth pass onto the government or beneficiaries of choice. Several tips may be helpful when estate planning.

• Identify estate planning goals in advance
• Study and acclimate with both Federal and State estate laws
• Seek the advice of a financial planner, estate attorney or accountant
• Effective tax strategy can save a significant portion of the estate

Summary

Estate planning is an important aspect of financial planning that can assist retired persons or persons of high net worth in effectively managing their finances during later years in life. The implementation of an estate plan can vary based on the state(s) in which one’s estate is held, the time at which estate laws apply, the estate owner’s financial goals and objectives and the value of the estate itself.

Estate planning involves tax planning, asset management, end of life preparations. And use of both legal and financial instruments. Without estate planning, estate owners would not be able to as effectively maintain the worth of their estate and pass on the value of the estate to heirs and beneficiaries while simultaneously carrying out the goals of the estate owner or primary trustee of the estate.

Sources:

1. Internal Revenue Service http://www.irs.gov/ (U.S. Internal Revenue Service)
2. http://retirementliving.com/RLtaxes.html (RetirementLiving.com)

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

Do instant tax refunds exploit low-income earners

In a January, 2007 report by the Community Reinvestment Association of North Carolina, it states Refund Anticipation Loans i.e. 'instant refunds' cost between 36%-700% in interest. What's more, multiple national data collectors including online magazines and websites such as 'The Nation', and Children'sDefense.org among several others, claim the 'Instant Refunds' provided by some tax preparation companies are exploitive of poor persons residing in the United States.

To argue on behalf of the tax preparation services, it isn't illegal to provide refund anticipation loans. In the case of refund anticipation loan, the actual tax return is the collateral for the loan. Low income earners are essentially no less vulnerable to this type of service than are working class and some middle class earners. In all cases, those who feel they need money instantly pay a price for such loan and such a price does not discriminate among earners. What's more, several points can be made in favor of the tax preparation provider as follows:

• Tax clients are informed of the terms and conditions of the loan
• Fees Differ across Tax Preparation Companies
• An expedited service is being provided, which naturally costs more
• All recipients of instant refunds pay a fee
• States may regulate maximum tax preparation interest rates in the form of 'usury limits'

Having made note of the above points, there probably wouldn't be complaints about the refund anticipation loans without good reason(s). Specifically, statistical evidence indicates it is mostly poor households that end up paying more than middle class households for their tax preparation services.

How low-income tax filers lose money

In addition to being potentially ill-informed and/or mislead as to the financial implications of 'Instant Refunds', lower income earners who utilize the refund anticipation loan may be missing out on several cheaper and almost as fast tax preparation and filing methods.

• The IRS Vita Program is free: While the tax preparation process itself is not illegal, it may not go out of its way to inform low income tax filers of the Internal Revenue Service's Voluntary Income Tax Assistance program also known as VITA. The IRS claims that anyone unable to file their own tax returns with an income below $39,000 can receive free tax preparation assistance from the VITA program

• E-Filing is Cheaper: Additionally, filing online or e-filing taxes may take less than 14 days to deliver an electronic return to a tax filers checking account. For between $30.00 -$100.00, online tax preparation databases such as H&R Block's, and tax preparation software such as Turbo Tax can yield an effective tax filing process that costs the tax filer a fraction of the money one would pay for the Refund anticipation loan and in person tax preparation fees. These methods do take a little know how and self guidance in the tax preparation process, but are more affordable and federal fees may be waived for certain income levels making it even cheaper.

• The IRS Tax Care for the Elderly (TCE) program offers tax preparation free of charge to individuals who are 60+ years of age. Furthermore, one doesn't necessarily have to sweat to acquire such service as The American Association of Retired Persons (AARP) has many nationwide locations that operate under the IRS TCE program.

• Traditional Paper Filing is almost Free: If one is comfortable and experienced with filing taxes, the paper filing method may only cost the price of a stamp or two, and perhaps a few photo-copies is the traditional paper filing methods. With a little time and a phone call or two to the IRS, one may be able to file their own tax return especially if it isn't complicated.

It is evident from the content in this article and the research it sites, low income persons are statistically vulnerable to the 'instant tax refund' also known as refund anticipation loans. While the instant tax refund is not illegal per se, it is one of the more expensive tax preparation services available to low income and middle income earners. Such being the case, it can be considered potentially exploitative in terms of the proportionate of cost to income ratio. Individuals who utilize the instant tax refund service may be far less likely to do so had they known about the other less expensive options available to them.

Sources:
1. http://www.ncimed.com/docs/2006_RALReport.pdf
2. http://www.lectlaw.com/files/ban02.htm
3. http://www.thenation.com/doc/20060501/yeung
4. http://www.irs.gov/individuals/article/0,id=107626,00.html
5. http://www.irs.gov/newsroom/article/0,id=108104,00.html
6. http://www.childrensdefense.org/site/PageServer?pagename=tbo_vita_ca