California's state revenue is heavily reliant on tax liens

By Tax Relief Systems

The governor of California is making a bet that the rich will grow and become richer. As all financial markets have been doing well, this particular state helps finance its treasury via profits gained from individual income taxes.

Those income taxes where liens are used are forecasted to yield approximately 62.7% of the total fund revenue within Governor Brown's budget plan for the succeeding financial year of the state. This was slightly higher than the 62.4% fund plan shown in the previous year. California's Franchise Tax Board claims its annual tax gap from delinquent income tax is $10 billion dollars.

In 2010, almost 3 of every 4 dollars of California's revenue came from individual income taxes. These taxes were from the leading 10% of income earners who have IRS liens on properties. This statement is based on information from the state's tax agency. The leading 1% of the income earners gave 40.9% of the revenue of the state from the personal wage taxes in the year 2010. It was lower than the 48.1% prior the recession of the year 2007 to 2009.

California's high reliance on personal salary taxes is a more volatile funding source than sales. Property taxes also echo the disaster throughout the financial crisis. Brown who was nominated in 2010 proposed the lean budget of the state in the earlier part of this month. The budget plan would be for the following fiscal year.

Brown plans to restrain expenditures to sway the budget up to a modest surplus for the upcoming financial year. The plan he endorses faces some risks from insecurity all over the financial recovery, health care fees and the national budget.

His new budget plan cited the risks within the financial markets. The changes on the income rate of the relatively small amount of tax payers who use IRS liens could have a substantial effect on the state's revenue. To be specific, the capital gains salary is focused on the high profit earners. It could fluctuate at a substantial amount every year.

A particular example of volatility would be the revised income target for the remaining May’s rocky IPO for the Menlo Park. It was California-based Facebook that declined at 1.3 billion dollars from 1.9 billion dollars. The plan of Brown predicts the bump within the revenue coming from the tax increase in November.

The measure formed the new tax rates that range from 10.3% to 12.3% for incomes between 250, 000 to 1 million dollars. Incomes in excess of $1 million will be subject for a surcharge to raise funds for psychological health services.

The famous demographer Joel Kotkin said the fabulous wealth of Californians was cause for the tax increase. However, there is a doubt that there will be sustained income gains. Kotkin also said  he knows the affluent residents of the state who can earn more than 250,000 dollars from properties with IRS liens are sorting out the ways on how they can minimize the tax liabilities.

About the author: Do you need help with your IRS Liens? TaxReliefSystems.net is a great source for help.

5 useful facts about the taxation system in the UK

US-PDGov

The majority of taxes assessed in the UK are at the national level. Taxes paid that are paid at a regional or local level include property taxes. The tax year for citizens in the UK are from April 6 of the current year to April 5 of the following year. Five facts may help to explain how the taxation system in the UK is set up for residents.

Assessment basis

Residents of the UK are taxed on capital gains and income they earn in and out of the country. The UK requires most residents to file a tax return based on a self-assessment. The only exception is for anyone who only has savings income and receives regular employment income. Individuals who are employed will be under a pay as you earn system. This is where taxes are withheld by the employer. Anyone who is self-employed will need to file a yearly tax return.

Income tax

Individuals who reside in the UK will be taxed on all income that is taxable. However, they will have a few allowances that are tax free based on their age and marital status. Certain allowable deductions are available that count against taxable income. This includes contributions to a pension and any donations to charity. If individuals or couples are over 65, then an additional tax free allowance is available.

Investment income

The majority of investment income earned by UK residents is taxable. This income will be added to all other income when an individual's tax liability is calculated. The tax rate applied to investment income will vary based on type and the applicable tax band. Tax bands are determined from the type of income and how it is earned, such as non-dividend savings and dividends.

Capital gains

This is a tax that applies when an individual sees a gain received over the annualized exception limit of the UK. Current capital gains rates are set at 18 percent and 28 percent as of June 2010. The actual rate that is applied is based on an individual's total taxable income. The higher rate will apply to a resident if their income and gains are above the base limit for the 2012/2013 tax year.

Inheritance tax

Individuals who receive gifts or assets from a family deceased family member will be assessed the UK inheritance tax. This is tax on the total value of an inheritance received by a beneficiary and will be set at a rate of 40 percent. However, the first 325,000 pounds are subject to this tax until 2015. If there is a sum of the estate of a deceased person left to charity, then a 36 percent tax rate will apply. The transfer of gifts between spouses will typically be exempt from the inheritance tax.

Additional information

The value added tax in the UK is added to the price paid for goods and services and increased on January 4, 2011 to 20 percent. Individuals who have rental income will have it applied to their income tax.

About the author: Sally is a content writer for Francis Clark Tax Consultants, a business based in South West England who provide a UK tax advice for their clients, visit FCTC.co.uk to find out more about their tax services.

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.

IRS Audit Preparation Tips

Image attribution: US Internal Revenue Service, US-PDGov

In 2010, 1,581,393 IRS audits were performed by the U.S. Internal Revenue Service according to Syracuse University federal tracking data. Of these audits 78.3 percent were by correspondence and 21.7 percent involved in person contact with an IRS agent. Depending on whether or not the audit takes place via correspondence or in person influences how a taxpayer prepares for the IRS audit. In either case, there are several pro active ways to prepare for an IRS audit that can potentially save time, money and reduce tax related stress.

Awareness of audit probability

Being aware of what triggers an audit, and the chance of an audit occurring are a good way to ready oneself for an audit. For example, in a March, 2011 article in Forbes magazine, Tax Lawyer Robert W. Wood states of total 2010 IRS audits 30 percent claimed the Earned Income Credit meaning at least 30 percent of audits occur for the lower end of the income scale. Knowing this, taxpayers might choose to exercise more caution when claiming this particular tax credit. Furthermore, reviewing IRS publications such as the Fiscal Year 2012 Annual Audit Plan provides insight into the direction and focus of IRS audits.

Familiarize with audit process

Knowing how IRS audits work can help expedite the process and avoid unforeseen consequences. Lesson four of The IRS audit video series guide is helpful in audit preparation and provides information about what is required of taxpayers during an audit. For example, during an audit, a taxpayer may receive either an IRS Form 4564 or Form 886-A detailing what specific documents the IRS requires from the tax payer. Additional videos in this series provide a comprehensive overview of the audit process as well as audit tips. IRS Publication 556 provides further information about taxpayer privileges such as mediation during an audit dispute.

Understand the IRS Audit Information Management System

The IRS keeps track of its audit activities via what is identified as the Audit Information Management System (AIMS). This system records the total number of audits, and IRS agent hours spent on audits in addition to audit results according to Syracuse University's Transactional Records Access Clearinghouse (TRAC). Understanding how the AIMS  system works and the audit process can be helpful in gaining insight about how to best handle an audit.

Review IRS audit statistics

The IRS publishes its audit information and this can be directly reviewed by taxpayers to get a sense of what the IRS examines in an audit and how they do it. To illustrate, the 2010 IRS Data Book claims that of the total 1,735,083 individual tax filing 'examinations' that took place in 2010, 92 percent of international tax filings required changes. This indicates international tax filers have a high probability of having their tax filing changed by the IRS if they are audited pointing to a higher level of scrutiny, error or both with these types of audit.

Know taxpayer audit rights

If the IRS selects a specific tax filer for audit, it is important to be aware of the rights granted before proceeding with the audit. For example, according to IRS audit information, taxpayers may record an audit interview or relocate the location of an audit upon prior notice and are also afforded the right to representation. Taxpayers may also appeal audits if they disagree with the changes requested by the IRS.

How To Buy a Tax Lien Certificate

Tax lien certificates are issued to bidders at auctions where repossessed property and/or homes have unpaid taxes. The tax authority sells tax lien certificates to bidders to raise funds quickly whereas investors buy the liens to receive interest on the unpaid taxes or the property itself if the allowable period for reacquisition of property is forgone by the original property holder. (taxsales.com) There are approximately 20 states that have counties that sell tax lien certificates, a complete list of those states can be found at the following link. This article will discuss the tax lien certificate buying process and also illustrates advantages and disadvantages to acquiring tax lien certificates.

Where and how to buy tax lien certificates

Tax lien certificates are sold in several U.S. States and can be obtained through auctions held by local government authorities. Since property taxes are often paid to State counties, the taxes due are frequently due to this level of Government. Some counties don't sell tax lien certificates but rather tax deeds that are sales of repossessed property to redeem taxes due. To purchase a tax lien certificate some basic information is required prior to purchase. Some factors investors might want to consider before investing in tax lien certificates include the following:

• How much money will be set aside for investment
• What is the expected return on investment
• Is the tax lien certificate riskier than another investment yielding the same amount
• Where is the property underlying the tax lien certificate located
• Is the property worth anything, or will it be worth anything in the future

Determining these first pieces of information are useful in both preparing for and reducing risk in tax lien certificate investments. This is so as knowing the above information can assist an investor in selecting a suitable tax lien certificate i.e. if the tax lien certificate is a good investment choice, and where the investment fits in the investors overall investment strategy. If the investor has gathered the above information and is ready to invest in tax lien certificates, the next steps involve 1) identifying the local auction(s) where tax lien certificates are sold and 2) preparing for and attending said auction(s).

Advantages and disadvantages of tax lien certificates

As with all investments, there is a risk to investing in tax liens. Specifically, the non-payment of taxes on unused, non-construction land or legally unattractive property can lead to little or no return on investment (ROI). In other words, the investment in the lien may be worthless if 1) the tax and interest on the tax is never paid and 2) if the property the tax lien is issued for is worthless.

Advantages of tax lien certificates include the potentially very high interest rate on the taxes that is paid to the tax lien certificate holder after either 1) payment of back taxes or 2) repurchase of the property. Moreover, since new buyers of property assume tax liens, the taxes must be paid in order to acquire the property. The tax lien certificate holders are given preference when receiving payments and may be paid first in the case of incomplete or partial payment of taxes.

Interest rates on tax lien certificates vary from state to state and can be as low as 5% or as high as 36%. For this and the reasons mentioned above, choosing tax lien certificates to invest in is ideally done carefully and with property background research. Tax lien certificates can be profitable but can also be no more profitable and more risky than some certificates of deposit.

Summary

Tax liens are back taxes due on property. When taxes aren't paid, local government sell the taxes with fixed interest rates to bidders for the purpose of acquiring what is owed to them upfront at the expense of possible interest on taxes. This process is similar to the selling of debt by banks to other financial institutions and is a money raising financial instrument. Tax lien certificates sold are consequently liquidated government assets. 

Tax lien certificate investing does involve some risk as outlined in this article but does have the potential to add value to one's investment portfolio. Acquiring tax lien certificates is a matter of identifying local tax lien certificate auctions and bidding at said auctions. The preparation for and understanding of the tax lien sales process in addition to awareness of the underlying property is also helpful to investors when considering the purchase of tax lien certificates.

Sources:

1. http://www.investopedia.com/terms/t/taxlien.asp
2. http://www.taxsales.com/
3. http://www.wikihow.com/Buy-a-Tax-Lien-Certificate
4. http://www.creonline.com/articles/art-267.html
5. http://tinyurl.com/6d2wq8 (Ezine.com)
6. http://ezinearticles.com/?Where-is-the-Best-Place-to-Invest?&id=595906
7. http://www.tax-lien-certificates.com/

Things to Look For in Tax-Preparation Software

When looking for tax-preparation software a few things that can save you time and money may already be included in the software. Most online tax-preparation software is encrypted for data security which is an important feature in addition to user friendliness of the software. A complicated and difficult to use tax-preparation software can be cumbersome and contradicts the intended functionality of the software.

Good tax-preparation software also helps make tax filing easier by walking the tax filer through the tax return with ease. Additionally, some tax preparation software also comes respectably close to "doing it all" with regard to data security, online and telephone user support, online storage of information and transmission of tax information to the Internal Revenue Service.

• Data Security

Taxes involve detailed financial information and sensitive personal information making data safety an important feature of any tax preparation software. Data safety can be accomplished though file data encryption provided by the software itself and this secures the data from third party misuse. Also, if the software is online, firewall protection and online safety features are important.

• Low Cost and Fees

Some tax preparation software is literally free with the exception of a filing fee charged to a client for e-filing tax forms with the U.S. Internal Revenue Service. An example of this type of software is H&R Block's e-file software. The software is free to use but a fee is charged prior to submitting the tax return to the I.R.S. In some case, depending on one's income level, the Federal tax return may be free leaving only a fee for filing a State tax return.

• User Support Services

A good tax preparation software will also have an accessible technical support staff who can answer user questions. In some cases, the software provider may also be able to provide some level of tax advice and guidance when filling out information on the forms. The quicker and more helpful the user support services are, the greater the commitment of the software provider is to the user.

• Online Database and Storage

Another feature of tax-preparation software may include online storage of tax filing data for a certain amount of time. This can be useful if one is required to file amendments to the tax return at a later date or loses the tax file on one's personal computer. There should be no charge for this service as the cost can be incorporated in the price of the software or use of the software online.

• Accommodation of Complex Tax Filings

Tax filing can get quite complicated especially if one has multiple itemized deductions, capital gains, business expenses etc. A good tax filing software will allow for various levels of filing complexity. An example of this is Turbo taxes basic, deluxe and premier versions that can be downloaded or used online to e-file simple and more complicated tax returns. Some of the higher end versions also facilitated small business tax filing situations.

• Ease of Use and Online Processing Speed

How user friendly the software is, is also an important feature of tax preparation software. The easy to use software applications will ask all the necessary questions and automatically walk the user through the tax return saving the data as one proceeds through the questions. If one is unable to finish all the questions at once, the software should be able to save the partially completed tax return at any time and return to the point that was left off.

Additionally, if the tax return is completed using online software, the processing time should ideally not be too slow. While this may also be a function of one's individual Internet connection speed, a good online software will not require too much download and processing capacity.

Summary:

Tax preparation software can improve and facilitate the tax filing process. It is important to note the software can't answer all tax questions and one must have the right tax filing information to enter into the computer. The software should be able to do most if not all the adding and calculating for you and this helps guarantee the accuracy of the filing.

Online tax preparation software can also lead to expedited tax returns as soon as a couple of weeks. When considering tax-preparation software considering the items contained in this article can assist with choosing a software that will be helpful, effective and functional in the tax filing process.

Website Reviews: IRS.gov

The U.S. Internal Revenue Service website (IRS) is a website designed to assist the public in becoming informed about the tax filing process and rules associated with that process. The IRS website has navigation and search options that help visitors locate the information they are looking for. The IRS also provides explanations of rules derived from the Internal Revenue Code via online publications. While some of the underlying tax codes and tax preparation service providers are linked out to other websites, a great majority of information is contained within the website. This article will discuss some of key aspects of the IRS website.

Key features of the IRS website

There are several key features of the IRS website that make it quite useful and potentially beneficial. The website is quite full of useful information that can help make the tax filing process easier, more informed and potentially more accurate. A few of the key features of the website are listed as follows:

• Refund status lookup on the home page
• Ample access to forms and publications needed in the filing process
• English and Spanish navigation options
• Guides to efiling, freefiling and other online filing methods
• Search features that
• Category tabs to distinguish between types of filers ex, individual or business

IRS forms and publications

Whether one is navigating on behalf of oneself, a client, business, government agency or other relevant tax concern, the U.S. Internal Revenue Service home page has the choice of two languages English or Spanish and quickly enables one to access the table of forms and/or publications needed for tax preparation. The forms and publications can be downloaded or viewed online as either pdf files or html. What's more, the forms and publications table allows browsers to match the form numbers with the form name making the search for the correct form quicker.

Navigating the IRS website

In terms of navigation the IRS website is functional as most if not all the links are operational and the forms makes use of standardized formatting. Additionally, tabs on the home page quickly allow the website user to become orientated and finds one's way around the website without becoming too lost. The search feature is a useful way to type in keywords that may help one find a more specific piece of information cataloged within the vast website. The colors of the website are easy on the eyes, i.e. mostly white and different shades of blue with contrasting links. Help links and search tips further aid the ease of navigation on the website.

Quality of tax information

The quality of the information on the IRS website is good. While it does not give tax advice it does provide a great deal of information about the regulations and forms that one might obtain tax advice for. Thus, the website is a useful resource for tax preparation information.

The IRS website also includes contact information, legal information, tax preparation links, a site map and frequently asked questions links. The IRS website can be a useful resource to tax filers, tax preparers or persons researching tax information for other reasons. For the most, part, almost all the information one needs to file taxes is on the website and it seems though of the few things that are missing is actual advice on how to file taxes to avoid overpaying the Government.

Overall, the IRS Website,  is a functional, and useful website to persons interested in the federal tax process. The site has some useful key features that allow one to check on one's status or find contact information for the large organization. Additionally, the site is relatively easy to navigate and contains a lot of standardized tax information and sources that can be quite beneficial in becoming familiar with the tax related information. While the IRS website does not replace the advice of a tax attorney or tax accountant, there is ample information contained within the website that one may be able to forgo the use of such services in some cases.

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

The IRS's Real Estate Professional Tax Status Explained

A real estate professional is a person who actively engages in business directly related to real estate in one or more of, many parts of the real estate life cycle, such as real estate financing, real estate investing, sales and building of property.

Employees of real estate companies may not be considered real estate professionals by the Internal Revenue Service if they do not receive income outside of salary, are not real estate business owners, and do not receive taxable rental and real estate related income in accordance with the provisions of the IRS 'real estate professional tests'.

How a person is defined according to the United States Internal Revenue Service (IRS) may be different from other economic, political and/or business definitions in regard to the practice of real estate business.

The IRS status of 'real estate professional' can have implications on how a person is taxed. What's more the means by which a professional engages in the practice of real estate also has an impact on taxation. That is to say, whether one is a real estate professional as an employee, business owner, partner or shareholder all have different tax implications.

The IRS Real Estate Professional Test(s)

The Internal Revenue Service uses two tests to determine whether an individual is a real estate professional. Those tests are the 'T/B test' and the 750 hour test. In the T/B test more than half a persons business activities should be in real estate as per the I.R.S.'s definition of real estate activity. 

In the second test, the professional must spend at least 750 hours per tax year engaging in real estate business. These tests can be found directly at the IRS website, http://www.irs.gov.

IRS Tax Implications for Real Estate Professionals:

• Using an accrual method of accounting may be beneficial in reporting expenses that aren't paid by the end of a tax year. However, in this method income that has not be received is also reported. If the proportion of expenses to income, are greater using the accrual method, it may yield lower taxes than using a cash accounting system.

• If tax filing as a sole-proprietorship, earnings from real estate business will be taxed according to provisions for self employment which include self employment tax and potential deductions such as office expenses and some overheard costs.

• An IRS form 1040 Schedule E (Supplemental Income and Loss) may be used when filing tax information for a given tax year. This form may benefit individuals who rent properties and includes income such as income from rental real estate and expenses related to advertising, repairs and fees.

• Financial Insolvency excludes taxation of gain on sales of property within a partnership business. Such is the case to the extent that such tax benefits do not re-afford a real estate professional solvency. In other words, if the tax free sales allow a business partner to retain income above and beyond net loss, that gain will be taxed proportionally.

• Consultation with a taxation specialists and the Internal Revenue Service may clarify questions of uncertainty and confusion and might be advisable in a complicated tax situation.

Real Estate Professionals according to the Internal Revenue Service are not necessarily the same as real estate professionals as defined by the business community, and the real estate professional themselves. United States tax code often has its own way of defining individuals for tax purposes that may not apply in other legal and professional situations and/or contexts. How a professional is defined by the Internal Revenue Service is generally the definition, and related rules and regulations by which one should consider income, and taxation matters.

A guide to the different types of income tax

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.

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

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

Taxation on Wills and Beneficiaries

Taxation of wills and beneficiaries of wills is dependent on state and federal tax law within ones country of primary residence. In the United States, beneficiaries of wills are potentially subject to estate tax, inheritance tax, probate court proceedings, and income tax depending on the value of assets, existence of trusts and types of financial instruments within an estate.

Estate tax is higher than income tax and does not eliminate the requirement of income tax on inherited assets, nor does it eliminate taxation of the deceased via inheritance tax i.e. income tax for the dead. These multiple layers of taxation can potentially cause taxation levels in excess of 80%. For this reason, considering tax related options concerning taxation on will related matters and their beneficiaries is an important element of financial planning.

Ways to reduce beneficiary taxation

In light of the potential for estate, income and inheritance tax a few financial instruments and tax planning techniques can be utilized to minimize and avoid potential and existent taxation of assets passed on to heirs and/or beneficiaries. A few of these tax hedging facts and methods are illustrated below.

• Estate tax limits: Estate tax is applicable only to estates valued between $1 million and $3.5 million depending on the year. The elimination or re-evaluation of estate tax is a matter of political decision and may be best considered as a possible scenario in financial planning.

• Life insurance trusts: Assets held within a life insurance trust are exempt from estate valuation and therefore can serve as a useful hedge against possible estate taxation.

• AB Trusts: AB trusts, unlike living trusts are the property of trust managers with rights to the assets passed on to beneficiaries including spouse and children. Due to the structure of AB trusts, assets held within them are not subject to estate tax.

• Charitable lead and Charitable remainder Trusts: These two types of trusts reduce taxable inheritance, possibly to the point of falling below the taxable estate value limit. These trusts also allow capital gains avoidance, annuity receipt of funds and beneficiary revocation despite the trusts being irrevocable.

• Marital deduction of IRA's: A stipulation with regulation of individual retirement accounts makes possible the deferment of taxation of IRA distributions and inherited value until the death of the beneficiary spouse. This means that if the income is 1) paid in the form of annuity and 2) Is not fully claimed before the death of the IRA owners spouses/beneficiary then taxation of the IRA will be limited and/or reduced. This marital deduction may be facilitated through the rolling over of IRA's. (unclefed.com). The rules regarding this are quite involved and may require the assistance of a financial planner, accountant or attorney.

• Income tax of inheritance: If a beneficiary receives inheritance outside of a tax protected annuity or financial instrument, that inheritance will become subject to income tax. This can be especially costly especially after an estate tax is imposed. For this reason, planning for receipt of inheritance in the form of annuity payments can potentially lower taxation of income.

• Inheritance tax: Inheritance tax is the taxation of the deceased persons estate. Not all states are subject to the inheritance tax, Rhode Island being one such state. However, for residents of other states avoiding the inheritance tax can be assisted via establishment of specific types of trusts that transfer "ownership" of assets but not rights of beneficiaries to the assets and reduction of estate value via annual gift reductions.

• Additional exemptions: To further lower estate value, an estate may be reduced in value by up to $1 million via gift exemption and $2 million for "generational pass over" of beneficiaries. (Themoneyalert.com) An estate tax schedule based on income amount and taxable year is included with the references to this article.

Summary

Taxation of assets referred to in wills, within estates and after death have the potential to be very large due to the multiple types of taxation imposed on the deceased, the estate of the deceased and the beneficiaries of the deceased. Financial planning for such taxes can be a very good idea especially in cases where the asset value of an estate is above $1 million dollars or more. The techniques in this article are not exhaustive of all the possibilities for tax planning and do no replace the advice of an accountant or lawyer but serve as a guide to the potential taxation of willed assets and ways in which that taxation can be reduced.

Sources:

1. http://www.smartmoney.com/tax/homefamily/index.cfm?story=estatetax
2. http://www.nolo.com/article.cfm/objectId/426FB79B-AC11-432F-9E3204F6BAAC7FFD/309/227/QNA/
3. http://www.savewealth.com/planning/estate/charitabletrusts/
4. http://www.unclefed.com/AuthorsRow/TaxBusProf/ira.html
5. http://query.nytimes.com/gst/abstract.html?res=9B03E2D71430E733A25753C1A9679C946397D6CF
6. http://soundmoneytips.com/article/2777-tip-for-avoiding-inheritance-tax
7. http://www.nber.org/reporter/spring06/kopczuk.html
8. http://www.forbes.com/2000/12/08/1208finance.html
9. http://www.hoaglandlongo.com/practices/Federal_and_State_Tax_Planning.cfm

Taxation of Capital Losses

Capital losses are the adverse circumstance that most investors don't like i.e. a loss of capital arising out of the sale of an asset that has lost value. Examples of capital losses include the sale of a home at a lower price than one bought it for, and loss on the sale of stocks. As bad as capital losses are there is actually a good side to capital losses and that has to do with their taxation.

Capital losses are tax deductible

The best thing about a capital losses are they can be included among allowable tax deductions. When one loses money through the sale of an asset that has lost money that loss can be deducted of a tax filers annual income. For example, if John Doe earned $51,000.00 in year Y, but also lost $5,000.00 on the sale of his home, he can deduct the $3,000.00 from the $66K making his annual income $48,000.00

Another good thing about the tax deductibility of capital losses is that they may lower one's adjusted gross income to an income tax bracket they would not have been in had they had a capital gain or no capital loss. When one is close to the cusp of tax brackets, capital gains between $1-3000.00 may be redundant since a capital loss of the same amount could save one a similar amount of money in taxes. That is to, say when in the tax cusp sell at a loss to avoid higher taxes.

Illustrating cusp taxation

To illustrate how selling at a loss can be good consider the following example. Since John Doe earned $51,000.00 in year Y, it is looking like he may end up in the 25% tax bracket after deductions. Moreover, without the capital loss, John Doe may only be able to utilize his standard deductions and federal tax exemptions, which can be around $17,000.00 if John Doe has no children and is married filing jointly.

This makes is adjustable gross income $36,000 which doesn't qualify for the 15% income tax. However, with the capital loss deduction of $3,000.00, John Doe's income is now only taxable at 15% which is approximately $4650.00 of tax as opposed to $9000.00 at the $36K level. So even if John Doe had a capital gain of $3K or no gain at all, being in the lower tax bracket has saved him around $5000 in taxes which is better than $3000 in capital gains or no gain at all.

The value of capital loss

Tax filing status can have a direct impact on the maximum tax deductibility of capital losses. For example, the capital loss deduction is higher for married persons filing jointly than for singles i.e. in 2007 the maximum deduction was $3,000 versus $15,00.00 so any loss greater than these amounts is a worse loss.

Additionally, capital loss is not always a losing scenario. If one's capital loss is only $2000.00 but one is still in a higher tax range or not in the cusp, that person still saves in taxes a percentage of the amount one would have had in income had the capital loss not occurred. In other words, $250.00 in taxes if one is in the 25% range with a deduction of $2000,00 or $280.00 if in the 28% tax bracket. Thus, the tax system actually lowers the monetary value of the loss by 12.5-14%

How are Federal and State Taxes Used

Federal and state taxes are used to maintain and pursue the priority objectives of those governments. The U.S. Federal Government has one budget and the States have budgets of varying amounts and allocation based on the interests, goals and decision making within those states. Generally, federal and state taxes are used to preserve an economic, legislative and social system. This is done through tax budget allocations into parts of our society that benefit the system as a whole.

To illustrate the aforementioned, the Federal Government spends a great deal of tax dollars on national defense and social security; this serves to achieve two primary objectives 1) helps keep the nation safe, and 2) assists in sustaining contributors to society in accordance with their recorded historical taxes. When reviewing federal and state tax spending, it is important to note the possible inaccuracies, potential misinformation be it intentional or unintentional, and data discrepancies can paint a somewhat misleading or skewed interpretation of the financial reality.

Government budgets vs actual spending

It is important to note that state budgets do not necessarily reflect actual spending. Moreover, even though a state votes on and allocates funds through a budget, events during the year and/or underestimation or overestimation of costs may lead to government expenditures other than that budgeted for. This is also the case with the federal government. An example being the 2008 federal budget; at the beginning of 2008 it was not foreseen that federal aid would be spent to purchase the Mortgage Backed Securities (MBS Certificates) of large companies such as Freddie Mac and Fannie Mae.

In the 2008 U.S. Federal Government tax year, the budget was $2.902 trillion according to gpoaccess.gov summary tables. However, in 2008 U.S. federal deficit spending was $454.8 billion (cash basis) more than expected as per the U.S. Department of the Treasury. Another example is California in the 2008-2009 tax year; the State of California budgeted for a 51.9% allocation of tax revenue for education whereas usgovernmentspending.com estimates the same to be around 17%. These discrepancies between state and federal budgets and actual spending should be considered as potentially affecting the reality of government tax revenue spending. These discrepancies may be explained by reasons illustrated in sections II and IV below.

Total spending vs tax revenue

Another area of federal and state finances to be aware of is total spending versus tax revenue spent. A state may receive federal funding or spend on credit to finance systemic goals within a given year. This means that the percentage proportion of total tax dollars spent on specific areas of government operations such as education or health may not be the same or even similar to that of the total spending. For this reason it is important to have the correct data when arriving at conclusions regarding total government disbursements. Several websites contain useful information pertaining to federal and state spending and are listed at the end of this article.

Additional information may be obtained through each U.S. State’s department or executive branch that gathers, collects and distributes tax revenue. Examples of such include California’s Franchise Tax Board, New York’s Department of Taxation, Finance, Texas Comptroller of Public Accounts, and Maine’s Division of Revenue and Financial Services. In terms of the Federal Government, the above linked to U.S. Office of Management and Budget, also in the executive division of Government, compiles and publishes annual federal tax receipt information.

Where federal and state tax dollars go

There are several distinctions between federal and state tax uses. The U.S. Federal Government tends to focus on macro-economic and large scale societal agendas and goals whereas U.S. State tax budgets allocate funds for issues unique to a specific state that may not be as important in another state. For example, according to www.usgovernmentspending.com the State of New York spent 39% of its total 2007 expenditures on Health whereas the State of Montana spent 21% on the same. A general breakdown of government tax revenue spending is provided below.

Federal tax allocations

• Social Security
• Medicare
• National defense
• Interest on financing
• Infrastructure
• Administration
• Public services
• Research and development

State tax allocations¹

• Education
• Health and human services
• Penal system
• Government administration
• Law enforcement
• Transportation
• State services ¹ Varies by State

Cost classification and accounting methodology

Government tax allocations and classifications may be disputed by definition leading to further confusion about actual tax dollars spent. For example, a state may claim to have spent 35% of its annual outflow on welfare when 12% of that spending was on the salaries of government workers and overhead. Many scenarios in which government spending is spread over a range of items such as services, administration, products, and costs can be debated and identified. The reasons for erroneous, misleading or inaccurate conveyance of data can also vary and several possible explanations exist. For example, a part of the reason for this is presentation of data. If a government is aiming for financial transparency, but has too much information to make transparency easy for the public to interpret, simplification of financial data may be used. In such cases, expense categories may be grouped together under a larger category.

Lastly, accounting methods used by the government to present financial data also has an impact on what is spent where. Critics assertions of the U.S. Federal Government’s financial reporting claim official financial reports regarding budget deficits use cash accounting rather than accrual accounting which understates actual amount owed and emphasizes dollars spent. This difference can lead to a difference of trillions of dollars in Government spending, only part of which was from tax revenue in 2008 and 2009. In other words, even if tax revenue is used in a specific way, Government spending decision throughout a fiscal year may deficit spend based on future tax earnings and federal capacity to pay debt.

Sources:

1. http://www.govspot.com/
2. http://www.usgovernmentspending.com/
3. http://www.cbpp.org/
4. http://www.whitehouse.gov/
5. http://www.gao.gov/financial/citizensguide2008.pdf