Saturday, December 23, 2006

Second Homes - Tax Benefits and Potential Tax Pitfalls

Many people are buying a second home. They might do so to have a vacation home with the possibility of selling it at a substantial gain in the future. Another reason people buy a second home is to use it in the future as a primary home, perhaps in retirement. They might prefer to purchase the second home now to avoid the possibility of having to pay considerably more for it in the future.

What are the tax benefits and potential tax pitfalls in purchasing a second home? The first benefit is that the real estate taxes on a second home are deductible as an itemized deduction. However, a potential pitfall exists if the taxpayer is subject to the alternative minimum tax (AMT). Real real estate taxes are not deductible for AMT purposes.

The mortgage interest is also deductible as an itemized deduction on mortgage loans up to a maximum of $1,000,000 on loans used to acquire, construct, or substantially improve the taxpayer's primary home and the taxpayer's second qualified home. A refinancing of acquisition debt is considered acquisition debt to the extent that it does not exceed the balance before refinancing.

Another tax benefit for owning a second home is that the taxpayer may deduct interest on home-equity loans up to a maximum loan amount of $100,000. A home-equity loan is considered as an acquisition debt if the taxpayer uses it to make a substantial improvement to the primary home or second home. The loans may be secured by the primary residence and/or the second home. For tax purposes, a home-equity loan includes the excess of the balance of a refinanced acquisition loan over the balance before the refinancing unless the taxpayer uses the excess to make a substantial improvement to the home.

A tax pitfall is that the interest on a home-equity loan is generally not deductible for AMT purposes. An exception applies if the taxpayer uses the proceeds of the loan of the loan to make a substantial improvement to the property.

If a taxpayer rents a second home to a tenant for 14 or fewer days during the year, the rent income is not taxable. The taxpayer may still deduct the real estate taxes. The taxpayer may deduct the qualified mortgage interest as long as the taxpayer used the second home for personal purposes for a number of days that exceeds the greater of 14 days or 10 percent of the number of days the taxpayer rented the house to a tenant at a fair rental. If the taxpayer does not meet this test, the second home might be considered as rental property.

A potential tax pitfall on a second home is that any gain on the sale of a home that is not the taxpayer's principal residence is taxable. It would be taxable as a capital gain because a personal use asset such as a second home is a capital asset.

The exclusion of gain up to $250,000 ($500,000 on a joint return) on the sale of the taxpayer's home applies only to the sale of a home that that the taxpayer owned and used as the taxpayer's principal residence for at least two of the five years before its sale. A taxpayer may have only one principal residence at a time.

A taxpayer could sell the primary home and exclude the gain up to the limit and then move into the second home and use it as a primary residence for at at least two of the five years before the taxpayer sells it. By doing so, the taxpayer could use the exclusion of gain provision on both homes. The potential to exclude the gain on the sale of both homes up to the limit using this strategy is a major tax benefit.

Another potential tax pitfall on owning a second home is that any loss on the sale of a home used as the taxpayer's residence, whether as a primary home or as a second home, is not deductible because the loss is on the sale of an asset used for personal purposes.

An individual should consider many factors before buying a second home, such as cost, convenience, and potential gain. The tax benefits and potential tax pitfalls are some other key factors to consider before buying a second home.

Many people are buying a second home. They might do so to have a vacation home with the possibility of selling it at a substantial gain in the future. Another reason people buy a second home is to use it in the future as a primary home, perhaps in retirement. They might prefer to purchase the second home now to avoid the possibility of having to pay considerably more for it in the future.

What are the tax benefits and potential tax pitfalls in purchasing a second home? The first benefit is that the real estate taxes on a second home are deductible as an itemized deduction. However, a potential pitfall exists if the taxpayer is subject to the alternative minimum tax (AMT). Real real estate taxes are not deductible for AMT purposes.

The mortgage interest is also deductible as an itemized deduction on mortgage loans up to a maximum of $1,000,000 on loans used to acquire, construct, or substantially improve the taxpayer's primary home and the taxpayer's second qualified home. A refinancing of acquisition debt is considered acquisition debt to the extent that it does not exceed the balance before refinancing.

Another tax benefit for owning a second home is that the taxpayer may deduct interest on home-equity loans up to a maximum loan amount of $100,000. A home-equity loan is considered as an acquisition debt if the taxpayer uses it to make a substantial improvement to the primary home or second home. The loans may be secured by the primary residence and/or the second home. For tax purposes, a home-equity loan includes the excess of the balance of a refinanced acquisition loan over the balance before the refinancing unless the taxpayer uses the excess to make a substantial improvement to the home.

A tax pitfall is that the interest on a home-equity loan is generally not deductible for AMT purposes. An exception applies if the taxpayer uses the proceeds of the loan of the loan to make a substantial improvement to the property.

If a taxpayer rents a second home to a tenant for 14 or fewer days during the year, the rent income is not taxable. The taxpayer may still deduct the real estate taxes. The taxpayer may deduct the qualified mortgage interest as long as the taxpayer used the second home for personal purposes for a number of days that exceeds the greater of 14 days or 10 percent of the number of days the taxpayer rented the house to a tenant at a fair rental. If the taxpayer does not meet this test, the second home might be considered as rental property.

A potential tax pitfall on a second home is that any gain on the sale of a home that is not the taxpayer's principal residence is taxable. It would be taxable as a capital gain because a personal use asset such as a second home is a capital asset.

The exclusion of gain up to $250,000 ($500,000 on a joint return) on the sale of the taxpayer's home applies only to the sale of a home that that the taxpayer owned and used as the taxpayer's principal residence for at least two of the five years before its sale. A taxpayer may have only one principal residence at a time.

A taxpayer could sell the primary home and exclude the gain up to the limit and then move into the second home and use it as a primary residence for at at least two of the five years before the taxpayer sells it. By doing so, the taxpayer could use the exclusion of gain provision on both homes. The potential to exclude the gain on the sale of both homes up to the limit using this strategy is a major tax benefit.

Another potential tax pitfall on owning a second home is that any loss on the sale of a home used as the taxpayer's residence, whether as a primary home or as a second home, is not deductible because the loss is on the sale of an asset used for personal purposes.

An individual should consider many factors before buying a second home, such as cost, convenience, and potential gain. The tax benefits and potential tax pitfalls are some other key factors to consider before buying a second home.

posted by zzzzzzzzzzz at 10:30 PM

Debt and Denial - During the Tax Season

With the tax filing date quickly approaching, you must prepare your taxes again, and on time. This time of year, finances are always a priority for us, but did the thought ever occur to you that cheating spouses are spending money without telling you?

“Once a cheat always a cheat” as the old adage goes. If they will cheat on you, count on it - Uncle Sam is next. “And this means possible IRS problems. The problem for most victims of infidelity is denial. Coping with powerful feelings of trust and mistrust keep many in the dark.

Cheating spouses account for millions of dollars each year in travel, gifts, phone charges, and more as they philander. Taking an assessment of your income and expenses columns, especially in the ‘miscellaneous category,’ will unearth cheating spouses’ wrongdoings.

Tax season can also serve as time for damage control. Start by investigating credit card and bank statements and phone bills - especially cell accounts. Next, turn your attention toward any disappearing acts or business trips during the past year. Make certain you don’t overlook holidays such as Valentine’s Day and Christmas and your spouse’s birthday. These events are just a few important dates to include as you audit your finances.

Each case depends upon the nature of the income, methods of payment, how and where assets are hidden. For example, does the potential exist for your spouse to hide assets through the assistance of a family member, business partner, or out-of-state relative? If your answer to any of these questions is yes, you might consider using spyware and a device called the Phone Accountant to track call data and trace email transactions. In some cases, computers may need to be forensically analyzed for erased data on the hard drive.

Another safeguard for anyone suspecting an affair is to check your credit report. Obtaining your credit report may provide information and evidence such as hidden credit history, accounts, or debts. This approach can be used to identify transactions your spouse made without you. Look for banking and routing information revealing any trails to hidden assets or financial surprises.

Use this tax season to secure your financial future, avoid debts, and verify the facts. A troubled relationship brings more than pain. It normally brings debt! You shouldn’t be the last one to know if your spouse is cheating on the government and you.
With the tax filing date quickly approaching, you must prepare your taxes again, and on time. This time of year, finances are always a priority for us, but did the thought ever occur to you that cheating spouses are spending money without telling you?

“Once a cheat always a cheat” as the old adage goes. If they will cheat on you, count on it - Uncle Sam is next. “And this means possible IRS problems. The problem for most victims of infidelity is denial. Coping with powerful feelings of trust and mistrust keep many in the dark.

Cheating spouses account for millions of dollars each year in travel, gifts, phone charges, and more as they philander. Taking an assessment of your income and expenses columns, especially in the ‘miscellaneous category,’ will unearth cheating spouses’ wrongdoings.

Tax season can also serve as time for damage control. Start by investigating credit card and bank statements and phone bills - especially cell accounts. Next, turn your attention toward any disappearing acts or business trips during the past year. Make certain you don’t overlook holidays such as Valentine’s Day and Christmas and your spouse’s birthday. These events are just a few important dates to include as you audit your finances.

Each case depends upon the nature of the income, methods of payment, how and where assets are hidden. For example, does the potential exist for your spouse to hide assets through the assistance of a family member, business partner, or out-of-state relative? If your answer to any of these questions is yes, you might consider using spyware and a device called the Phone Accountant to track call data and trace email transactions. In some cases, computers may need to be forensically analyzed for erased data on the hard drive.

Another safeguard for anyone suspecting an affair is to check your credit report. Obtaining your credit report may provide information and evidence such as hidden credit history, accounts, or debts. This approach can be used to identify transactions your spouse made without you. Look for banking and routing information revealing any trails to hidden assets or financial surprises.

Use this tax season to secure your financial future, avoid debts, and verify the facts. A troubled relationship brings more than pain. It normally brings debt! You shouldn’t be the last one to know if your spouse is cheating on the government and you.

posted by zzzzzzzzzzz at 10:30 PM

Friday, December 22, 2006

Common Tax Mistakes

Well, its tax season again. That means millions of people will be rushing to file before the deadline and just as many will be eagerly awaiting their return. Tax returns are a funny thing. People tend to treat them differently than any other money. The rest of the year they will save, pinch pennies, and budget. When they get their tax return, they go wild.

In fact, I’ve seen people go so far as to make sure extra taxes are withheld throughout the year just so that they can have a large return! One person I talked to said that they did this as part of their saving plan. This does not make good financial sense though. First of all, as I mentioned, people tend to spend the money from their returns more freely. Second of all, you are allowing the government use of your money throughout the year. You are not paid interest or anything like that on your oversized return. Had you invested the extra money, or even just deposited it in your savings account, you would have earned interest on it through the year. By paying too much in taxes through the year, you are losing the chance to earn interest.

I’ve also heard people say that they want to make sure that they don’t owe money at the end of the year. This is probably the most reasonable train of thought, however, it still does not hold water. When you file your tax return, you are telling the government how much money they should have taxed you on. If you either forget about a deduction, or are not aware of one, you will not get that extra money back. It would be financially smarter to pay less throughout the year, and then establish what if any more you owe at the end of the tax year.

With the advent of the Internet, taxes have taken on a whole new life. You are now able to file online, as well as use different computer programs to help you calculate your return and even register to have your tax return deposited directly into your bank account.

Well, its tax season again. That means millions of people will be rushing to file before the deadline and just as many will be eagerly awaiting their return. Tax returns are a funny thing. People tend to treat them differently than any other money. The rest of the year they will save, pinch pennies, and budget. When they get their tax return, they go wild.

In fact, I’ve seen people go so far as to make sure extra taxes are withheld throughout the year just so that they can have a large return! One person I talked to said that they did this as part of their saving plan. This does not make good financial sense though. First of all, as I mentioned, people tend to spend the money from their returns more freely. Second of all, you are allowing the government use of your money throughout the year. You are not paid interest or anything like that on your oversized return. Had you invested the extra money, or even just deposited it in your savings account, you would have earned interest on it through the year. By paying too much in taxes through the year, you are losing the chance to earn interest.

I’ve also heard people say that they want to make sure that they don’t owe money at the end of the year. This is probably the most reasonable train of thought, however, it still does not hold water. When you file your tax return, you are telling the government how much money they should have taxed you on. If you either forget about a deduction, or are not aware of one, you will not get that extra money back. It would be financially smarter to pay less throughout the year, and then establish what if any more you owe at the end of the tax year.

With the advent of the Internet, taxes have taken on a whole new life. You are now able to file online, as well as use different computer programs to help you calculate your return and even register to have your tax return deposited directly into your bank account.

posted by zzzzzzzzzzz at 10:31 PM 0 Comments

Your Mutual Fund and Tax Consequences

If you own a mutual fund as a regular savings account, you may be subject to paying taxes on your mutual fund. If you had a substantial income or capital gain distribution, you may have substantial taxes.

Mutual funds that buy and then sell securities at a profit are called high turnover mutual funds. Their owners could be subject to taxes yearly. Those who do not turnover or sell the securities in their mutual fund have low turnover and their owners will not be subject to high taxes.

Most mutual funds pay the capital gains and dividends once a year in October or December, read your prospectus, because this could be different for your mutual fund. There are a few that have quarterly payouts.

The turnover of a mutual fund is listed on most mutual fund reports so you will know if you are getting a low turnover or high turnover mutual fund. Read mutual fund reports before investing in a mutual fund so you will have this information. An example of a low turnover mutual fund is 80%, an example of a high turnover mutual fund is 400%.

If you purchase a mutual fund right before the payout date and you placed a lot of money in a high turnover mutual fund, you will still be responsible for the taxes for that tax year. You must wait until after the dividend and capital gain payout to avoid the taxes.

The tax consequences on your mutual fund profit can be significant if 1. You have a lot of money in one mutual fund, and 2. You have a mutual fund manager who is engaged in high turnover of his securities. Get all of your facts before you purchase a mutual fund, read online report about the mutual fund you are interested in and then read the prospectus.
If you own a mutual fund as a regular savings account, you may be subject to paying taxes on your mutual fund. If you had a substantial income or capital gain distribution, you may have substantial taxes.

Mutual funds that buy and then sell securities at a profit are called high turnover mutual funds. Their owners could be subject to taxes yearly. Those who do not turnover or sell the securities in their mutual fund have low turnover and their owners will not be subject to high taxes.

Most mutual funds pay the capital gains and dividends once a year in October or December, read your prospectus, because this could be different for your mutual fund. There are a few that have quarterly payouts.

The turnover of a mutual fund is listed on most mutual fund reports so you will know if you are getting a low turnover or high turnover mutual fund. Read mutual fund reports before investing in a mutual fund so you will have this information. An example of a low turnover mutual fund is 80%, an example of a high turnover mutual fund is 400%.

If you purchase a mutual fund right before the payout date and you placed a lot of money in a high turnover mutual fund, you will still be responsible for the taxes for that tax year. You must wait until after the dividend and capital gain payout to avoid the taxes.

The tax consequences on your mutual fund profit can be significant if 1. You have a lot of money in one mutual fund, and 2. You have a mutual fund manager who is engaged in high turnover of his securities. Get all of your facts before you purchase a mutual fund, read online report about the mutual fund you are interested in and then read the prospectus.

posted by zzzzzzzzzzz at 10:02 PM

Protesting Commercial Property Taxes

Are you accustomed to seeing large numbers in the “property taxes due” column of tax statements? Property owners in Texas, a state with notoriously high property taxes, may be forced to budget a “big chunk” of their operating budgets each year for property taxes. You should always be looking for a way to increase the return on your investment, and reducing property tax expenses can have a significant impact on your bottom line.

Market Value vs. Assessed Value

Many investors have asked why Texas property taxes keep increasing even though their revenue has declined and operating expenses have increased. Since appraisal districts value so many properties, they are often not aware of “softness” in a submarket. In addition, some appraisal districts have been slow to recognize the huge increases in insurance expenses. Since property taxes are such a material expense, investors have realized they need to review assessments annually. Most Texas real estate investors appeal their property tax assessment annually.

Why Property Taxes are Important

Property taxes are one of the largest line item expenses incurred by property owners. When attempting to cut excess property taxes, even sophisticated property owners may not know all their rights. For instance, the current Texas Property Tax Code allows property owners to seek an equity adjustment based on comparable properties that are appropriately adjusted.

Does Unequal Appraisal Apply at Informal Hearings?

The legislature also introduced a provision in 1997 attempting to allow property owners to appeal on unequal appraisal during the administrative hearing process (informal and appraisal review board hearings). Unfortunately, the wording of the statute was not clear. Some appraisal districts have chosen not to consider appeals based on unequal appraisal at the administrative hearings. It’s a shame that many appraisal districts rebuff administrative appeals based on unequal assessment. Property owners become very angry when they feel they have been taxed unfairly. Fortunately, most cases of inequitable assessment can be resolved through a judicial appeal.

Why Aren’t Properties Assessed Equally?

You may be wondering why properties aren’t assessed equitably. Reasons include data errors, focusing on recent sales and inconsistencies in the informal and appraisal review board hearings due to the personal element. Since an appraisal district may track over a million real property accounts, it is unrealistic to expect all of the data to be accurate (the large number of properties also affects their ability to accurately estimate your property’s value). Overstating the quality of one property while understating the quality of another property could lead to an inequitable assessment. At times, some appraisal districts have focused on recent sales without reassessing all the properties in the surrounding area.

Once the preliminary research is completed, the owner should determine the market value of the property and whether it is in line with the total assessed value. There are three approaches that are employed in concluding market value: cost, income and market. The property’s occupancy rate, rental rate, operating expenses, net operating income and other factors, as well as sales prices of comparable properties, are valuable sources of information in determining market value. If the property owner determines that the assessed value is higher than the market value of his property, he should file a protest with the local appraisal district. This can be done either by the property owner or his designated agent. Property tax protests must be filed by May 31 in Texas; deadlines vary by state.

Preparing for Your Hearing

Once a protest has been filed, a protest hearing will be scheduled. Four types of data should be compiled for the hearing: pictures of the subject property, an income analysis, comparable sales data and assessment comparables. Pictures of the subject property should indicate the quality and condition of the improvements on the property. If there is deferred maintenance, document it with pictures and bids. An income analysis should include a profit and loss statement for the previous year and a rent roll for a date near January 1 of the current tax year (most states use January 1 as the effective date for assessment.) The analysis should also detail market rent, market vacancy and market expenses (including reserve for replacement) to derive net operating income for the property (neither depreciation nor debt service should be deducted when calculating net operating income).

If your property has above-market occupancy or rental rates or below-market operating expenses, you should make adjustments when calculating net operating income. If you operate your own property, your income analysis should include an allowance for labor and management fees (if they are not in the profit and loss statement). Revenue not directly related to real estate rental (box sales, truck rentals, etc.) should be excluded. Related expenses should also be excluded. The net operating income is then capitalized to derive an indication of value for the property.

An appraisal may be appropriate to support the value conclusion. Comparable sales are given strong consideration at the hearing because they are an indication of market value. Data from sales of comparable properties for the past year or two should be collected and reviewed. Assessment comparables are given strong consideration at some appraisal districts but not considered at others. Pictures of competing properties that are assessed for less than your property can be an effective tool for cutting your property taxes. Prepare a table summarizing your property and the assessment comparables.

Attending Your Hearing(s) (Informal and Appraisal Review Board)

Once all the pertinent data has been collected and analyzed, the protest hearing process begins. The initial protest hearing is called an “informal” hearing. The informal hearing involves a meeting between the owner, or his designated representative, and an appraiser from the appraisal district. If the owner is not satisfied with the offer made by the appraiser, he may proceed to the next level of the protest process, an appraisal review board hearing (in some states this is referred to as the board of equalization). The appraisal review board hearing, also referred to as the “formal” hearing, involves a meeting with members of the appraisal review board, an appraiser from the county appraisal district (who may be different from the appraiser at the informal hearing) and the owner or his designated representative. The Appraisal Review Board panel may set a value which is equal to, lower than or higher than the level proposed by the staff appraiser at the informal hearing; therefore, the offer made at the informal hearing deserves careful consideration.

The majority of protests are resolved during the informal and formal hearings. However, in a small portion of protests the property owner believes the assessed value can be cut further by filing a judicial appeal. Although few owners pursue the final opportunity to reduce their taxes, owners have the option to file a lawsuit to contest the assessed value. It is probably financially feasible to file suit if the judicial appeal will reduce the assessed value by at least $200,000 to $300,000. This rule of thumb is for Texas; it may be higher or lower in other areas. In Harris County (Texas), for example, about 500 to 800 property owners annually determine there is still enough discrepancy after completing the informal and formal hearings to further pursue an adjustment in the assessed value by filing suit. Litigation in Texas must be filed within 45 days of receiving written notification of the value set at the formal hearing. This process can result in additional reductions in the assessed value; however, it typically takes 12 to 24 months and requires services from both an attorney and an appraiser. Although relatively few owners under-stand how to pursue judicial appeals, they can be a very effective tool in lowering property taxes.
Are you accustomed to seeing large numbers in the “property taxes due” column of tax statements? Property owners in Texas, a state with notoriously high property taxes, may be forced to budget a “big chunk” of their operating budgets each year for property taxes. You should always be looking for a way to increase the return on your investment, and reducing property tax expenses can have a significant impact on your bottom line.

Market Value vs. Assessed Value

Many investors have asked why Texas property taxes keep increasing even though their revenue has declined and operating expenses have increased. Since appraisal districts value so many properties, they are often not aware of “softness” in a submarket. In addition, some appraisal districts have been slow to recognize the huge increases in insurance expenses. Since property taxes are such a material expense, investors have realized they need to review assessments annually. Most Texas real estate investors appeal their property tax assessment annually.

Why Property Taxes are Important

Property taxes are one of the largest line item expenses incurred by property owners. When attempting to cut excess property taxes, even sophisticated property owners may not know all their rights. For instance, the current Texas Property Tax Code allows property owners to seek an equity adjustment based on comparable properties that are appropriately adjusted.

Does Unequal Appraisal Apply at Informal Hearings?

The legislature also introduced a provision in 1997 attempting to allow property owners to appeal on unequal appraisal during the administrative hearing process (informal and appraisal review board hearings). Unfortunately, the wording of the statute was not clear. Some appraisal districts have chosen not to consider appeals based on unequal appraisal at the administrative hearings. It’s a shame that many appraisal districts rebuff administrative appeals based on unequal assessment. Property owners become very angry when they feel they have been taxed unfairly. Fortunately, most cases of inequitable assessment can be resolved through a judicial appeal.

Why Aren’t Properties Assessed Equally?

You may be wondering why properties aren’t assessed equitably. Reasons include data errors, focusing on recent sales and inconsistencies in the informal and appraisal review board hearings due to the personal element. Since an appraisal district may track over a million real property accounts, it is unrealistic to expect all of the data to be accurate (the large number of properties also affects their ability to accurately estimate your property’s value). Overstating the quality of one property while understating the quality of another property could lead to an inequitable assessment. At times, some appraisal districts have focused on recent sales without reassessing all the properties in the surrounding area.

Once the preliminary research is completed, the owner should determine the market value of the property and whether it is in line with the total assessed value. There are three approaches that are employed in concluding market value: cost, income and market. The property’s occupancy rate, rental rate, operating expenses, net operating income and other factors, as well as sales prices of comparable properties, are valuable sources of information in determining market value. If the property owner determines that the assessed value is higher than the market value of his property, he should file a protest with the local appraisal district. This can be done either by the property owner or his designated agent. Property tax protests must be filed by May 31 in Texas; deadlines vary by state.

Preparing for Your Hearing

Once a protest has been filed, a protest hearing will be scheduled. Four types of data should be compiled for the hearing: pictures of the subject property, an income analysis, comparable sales data and assessment comparables. Pictures of the subject property should indicate the quality and condition of the improvements on the property. If there is deferred maintenance, document it with pictures and bids. An income analysis should include a profit and loss statement for the previous year and a rent roll for a date near January 1 of the current tax year (most states use January 1 as the effective date for assessment.) The analysis should also detail market rent, market vacancy and market expenses (including reserve for replacement) to derive net operating income for the property (neither depreciation nor debt service should be deducted when calculating net operating income).

If your property has above-market occupancy or rental rates or below-market operating expenses, you should make adjustments when calculating net operating income. If you operate your own property, your income analysis should include an allowance for labor and management fees (if they are not in the profit and loss statement). Revenue not directly related to real estate rental (box sales, truck rentals, etc.) should be excluded. Related expenses should also be excluded. The net operating income is then capitalized to derive an indication of value for the property.

An appraisal may be appropriate to support the value conclusion. Comparable sales are given strong consideration at the hearing because they are an indication of market value. Data from sales of comparable properties for the past year or two should be collected and reviewed. Assessment comparables are given strong consideration at some appraisal districts but not considered at others. Pictures of competing properties that are assessed for less than your property can be an effective tool for cutting your property taxes. Prepare a table summarizing your property and the assessment comparables.

Attending Your Hearing(s) (Informal and Appraisal Review Board)

Once all the pertinent data has been collected and analyzed, the protest hearing process begins. The initial protest hearing is called an “informal” hearing. The informal hearing involves a meeting between the owner, or his designated representative, and an appraiser from the appraisal district. If the owner is not satisfied with the offer made by the appraiser, he may proceed to the next level of the protest process, an appraisal review board hearing (in some states this is referred to as the board of equalization). The appraisal review board hearing, also referred to as the “formal” hearing, involves a meeting with members of the appraisal review board, an appraiser from the county appraisal district (who may be different from the appraiser at the informal hearing) and the owner or his designated representative. The Appraisal Review Board panel may set a value which is equal to, lower than or higher than the level proposed by the staff appraiser at the informal hearing; therefore, the offer made at the informal hearing deserves careful consideration.

The majority of protests are resolved during the informal and formal hearings. However, in a small portion of protests the property owner believes the assessed value can be cut further by filing a judicial appeal. Although few owners pursue the final opportunity to reduce their taxes, owners have the option to file a lawsuit to contest the assessed value. It is probably financially feasible to file suit if the judicial appeal will reduce the assessed value by at least $200,000 to $300,000. This rule of thumb is for Texas; it may be higher or lower in other areas. In Harris County (Texas), for example, about 500 to 800 property owners annually determine there is still enough discrepancy after completing the informal and formal hearings to further pursue an adjustment in the assessed value by filing suit. Litigation in Texas must be filed within 45 days of receiving written notification of the value set at the formal hearing. This process can result in additional reductions in the assessed value; however, it typically takes 12 to 24 months and requires services from both an attorney and an appraiser. Although relatively few owners under-stand how to pursue judicial appeals, they can be a very effective tool in lowering property taxes.

posted by zzzzzzzzzzz at 10:01 PM

Understanding Capital Gains Tax

To understand the capital gains tax, we must begin by understanding exactly what is meant by "capital gains". Capital gains is the income that a person gets from the sale of an investment. These investments may take the form of a piece of real estate property like a house or a farm. It can also be a family business or even a work of art. The capital gain is basically defined as the difference between the money that is realized from the sale of an asset and the price that was paid for it.

The amount of the tax that is imposed varies and actually depends on a variety of factors, which even include how long the seller has owned the investment/property as well as what type it is. The capital gains tax will not be asked for until the investment/property is actually sold. For instance, if the stocks in your portfolio have been appreciating in value, you can rest assured that you won’t have to pay any type of taxes on them unless you have actually sold the stocks.

Investors should also remember that unlike other taxes, the rate imposed on the capital gains tax is not fixed. The rate imposed will depend on how long the asset has been owned. A good example would be an asset that has been owned for less than year. The capital gains tax that will be imposed on the sale of this property will be at the same rate as an ordinary income. On the other hand, the tax rates that will be given on the sale of a property that has been in the possession of the owner for more than a year can end up being lower.

As with all other tax impositions, there are a few rules that you need to be aware of in order to prevent any kind of major tax liabilities.

One rule that you should remember is that in most cases you can completely avoid capital gains tax if the house that you are planning to sell is considered as your principal residence. In order for a house to be considered as the principal residence you must have taken residence there for two of the last five years. The two years imposed don't necessarily have to be sequential years or even the most recent two years. Just as long as you fulfill the two-year rule the government will consider the house your principal residence. In fact, you don’t even need to be living at the house at the time that you sell your property
To understand the capital gains tax, we must begin by understanding exactly what is meant by "capital gains". Capital gains is the income that a person gets from the sale of an investment. These investments may take the form of a piece of real estate property like a house or a farm. It can also be a family business or even a work of art. The capital gain is basically defined as the difference between the money that is realized from the sale of an asset and the price that was paid for it.

The amount of the tax that is imposed varies and actually depends on a variety of factors, which even include how long the seller has owned the investment/property as well as what type it is. The capital gains tax will not be asked for until the investment/property is actually sold. For instance, if the stocks in your portfolio have been appreciating in value, you can rest assured that you won’t have to pay any type of taxes on them unless you have actually sold the stocks.

Investors should also remember that unlike other taxes, the rate imposed on the capital gains tax is not fixed. The rate imposed will depend on how long the asset has been owned. A good example would be an asset that has been owned for less than year. The capital gains tax that will be imposed on the sale of this property will be at the same rate as an ordinary income. On the other hand, the tax rates that will be given on the sale of a property that has been in the possession of the owner for more than a year can end up being lower.

As with all other tax impositions, there are a few rules that you need to be aware of in order to prevent any kind of major tax liabilities.

One rule that you should remember is that in most cases you can completely avoid capital gains tax if the house that you are planning to sell is considered as your principal residence. In order for a house to be considered as the principal residence you must have taken residence there for two of the last five years. The two years imposed don't necessarily have to be sequential years or even the most recent two years. Just as long as you fulfill the two-year rule the government will consider the house your principal residence. In fact, you don’t even need to be living at the house at the time that you sell your property

posted by zzzzzzzzzzz at 10:01 PM

Thursday, December 21, 2006

Your Business and Your Estate - Succession Planning

As Penn State professor William Rothwell ominously points out in the forward to Exit Right: A Guided Tour of Succession Planning for Families in Business Together, more than 40% of the people who run the closely held operations that comprise 80% of the North American economy will retire by 2007. Those businesses will either be sold to a third party or management team, closed down, or passed on to the next generation.

In this article I will focus on passing the business on to the next generation.

The government has also encouraged the passing of a business from one generation to the next with several favorable estate and gift tax rulings. Estate planning attorneys have utilized IRS ruling 5960 to minimize the estate and gift tax owed for a business either gifted to or inherited by the next generation.

The business is often placed in one or more LLC’s and divided up into minority pieces to take advantage of very substantial and legal minority discounts, often as high as 40%.

As is often the case, a business owner will have, for example, 4 children. Two sons will be actively involved in running the businesses and two daughters have built lives totally separate from the business. Because 85% of the value of the estate is tied up in the value of the business, to be “fair” the business is gifted and willed to the four siblings in almost equal proportion. Because the sons are running the business, they will get slightly more of the business and slightly less of the remaining estate.

This gives them majority interest in the business. After dad leaves the business, the two sons will continue to run and grow the business without any input or participation from their two sisters. Typically the business does not pay any dividends and the two sisters’ portions are non-liquid because there is not a good market for selling minority stakes in a privately held business.

Also, there is generally a very restrictive buy sell agreement that favors the majority holders. The sisters have no idea what the “fair value” of the business is and the only indication they have ever gotten is an official IRS gift tax or estate tax return with 40% discounts applied. If the enterprise value were, for example, $50 million and the two sisters owned a combined 40%, you would think that they had an asset worth $20 million. The only document they have seen, however, is the gift or estate return, valuing their portion at only 60% of that number, or $12 million.

The brothers feel entitled to the lions share because Ann and Julie had nothing to do with building this business. The brothers pay themselves big salaries and benefits and pay out little of no dividends. They may approach the sisters with gift tax return and restrictive buy sell agreement in hand and offer to generously buy out the sisters for a combined 8 million, because that is “all the company can afford to pay.”

After this transaction takes place, let’s look at the result of how dad’s estate was fairly divided. Originally the brothers were left with 60% of the $50 million business, or $30 million and a minor portion of the remaining estate. The sisters were left with 40% of the business, or $20 million and the bulk of the remaining estate of $10 million.

That appears to be fair. However, the buyout of the sisters for a combined $8 million results in an effective estate distribution of $42 million to the brothers and $18 million to the sisters. This is not what dad intended, but it happens all the time.

As Penn State professor William Rothwell ominously points out in the forward to Exit Right: A Guided Tour of Succession Planning for Families in Business Together, more than 40% of the people who run the closely held operations that comprise 80% of the North American economy will retire by 2007. Those businesses will either be sold to a third party or management team, closed down, or passed on to the next generation.

In this article I will focus on passing the business on to the next generation.

The government has also encouraged the passing of a business from one generation to the next with several favorable estate and gift tax rulings. Estate planning attorneys have utilized IRS ruling 5960 to minimize the estate and gift tax owed for a business either gifted to or inherited by the next generation.

The business is often placed in one or more LLC’s and divided up into minority pieces to take advantage of very substantial and legal minority discounts, often as high as 40%.

As is often the case, a business owner will have, for example, 4 children. Two sons will be actively involved in running the businesses and two daughters have built lives totally separate from the business. Because 85% of the value of the estate is tied up in the value of the business, to be “fair” the business is gifted and willed to the four siblings in almost equal proportion. Because the sons are running the business, they will get slightly more of the business and slightly less of the remaining estate.

This gives them majority interest in the business. After dad leaves the business, the two sons will continue to run and grow the business without any input or participation from their two sisters. Typically the business does not pay any dividends and the two sisters’ portions are non-liquid because there is not a good market for selling minority stakes in a privately held business.

Also, there is generally a very restrictive buy sell agreement that favors the majority holders. The sisters have no idea what the “fair value” of the business is and the only indication they have ever gotten is an official IRS gift tax or estate tax return with 40% discounts applied. If the enterprise value were, for example, $50 million and the two sisters owned a combined 40%, you would think that they had an asset worth $20 million. The only document they have seen, however, is the gift or estate return, valuing their portion at only 60% of that number, or $12 million.

The brothers feel entitled to the lions share because Ann and Julie had nothing to do with building this business. The brothers pay themselves big salaries and benefits and pay out little of no dividends. They may approach the sisters with gift tax return and restrictive buy sell agreement in hand and offer to generously buy out the sisters for a combined 8 million, because that is “all the company can afford to pay.”

After this transaction takes place, let’s look at the result of how dad’s estate was fairly divided. Originally the brothers were left with 60% of the $50 million business, or $30 million and a minor portion of the remaining estate. The sisters were left with 40% of the business, or $20 million and the bulk of the remaining estate of $10 million.

That appears to be fair. However, the buyout of the sisters for a combined $8 million results in an effective estate distribution of $42 million to the brothers and $18 million to the sisters. This is not what dad intended, but it happens all the time.

posted by zzzzzzzzzzz at 9:32 PM

How To Qualify As A Dependent On A US 1040 Tax Return

Other than fitting the description of a constant liability, what other qualifying attributes must one have, to be classed as a dependent, and how do you determine this for tax purposes? The following paragraphs explain the qualifying tests for determining dependency as it relates to your tax status, liability and available credits. First, we need to make you aware that there are two different types of dependents.

There are several “qualifying tests” an individual must pass, in order to be qualified as a dependent on a US 1040 tax return. The tests for dependency are centered around the actual support tests that the candidate must pass; first, the qualifying individual must be the taxpayer’s child, stepchild, foster child, sibling or stepsibling, or a descendent of one of these (such as a niece or nephew), second the qualifying individual must have the same principal residence as the taxpayer for more than half the year and there are exceptions for children of divorced parents, kidnapped children, and for children who were born or died during the year, third the qualifying individual must be under the age of 19, or 24 if a full-time student and fourth, the qualifying individual must not have provided for more than one-half of their own support during the year. There are some additional rules that a dependent must pass, that really have nothing to do with the amount of support provided, but do determine their eligibility as US citizens and the ability to be considered for dependency. First, the qualifying individual must be a US citizen or national, and their marital status must be single, unless the are married but did not file a joint return for that year, or there was no tax liability that existed for either spouse had they filed separately.

If the qualifying individual can pass all four of the above described qualifying tests, as well as the additional rules, then any of the deductions, exemptions, and credits that are available can be used. For instance, child care expenses, child tax credits, dependent care expenses, earned income credit, and any associated itemized deductions may be claimed if the qualifying individual is determined eligible.

Determining eligibility in many cases means the difference between owing tax on your return, and the eligibility to file as head of household, and receive a refund that would include earned income credit. The earned income tax credit is a negative tax, and an attempt by the government to provide lower and poverty level income families with the opportunity to receive much needed assistance with caring for and supporting their families. Today, however, the earned income credit is becoming an opportunity for some segments of the public to abuse the goodwill of their government and falsify claims of dependency qualifications.

The child and dependent care expenses cover things like daycare, after school care programs, and any other form of paid care that is necessary for the qualifying individual to receive while the taxpayer is away at work. The only thing to watch here is that all qualifying individuals for the child and dependent care expenses must be under the age of 13.

The child tax credit is comparable to the earned income credit, in that it is a straight credit, dollar for dollar deduction of your tax liability. The child tax credit may only be taken by individuals with a qualifying dependent that is under the age of 17.
Other than fitting the description of a constant liability, what other qualifying attributes must one have, to be classed as a dependent, and how do you determine this for tax purposes? The following paragraphs explain the qualifying tests for determining dependency as it relates to your tax status, liability and available credits. First, we need to make you aware that there are two different types of dependents.

There are several “qualifying tests” an individual must pass, in order to be qualified as a dependent on a US 1040 tax return. The tests for dependency are centered around the actual support tests that the candidate must pass; first, the qualifying individual must be the taxpayer’s child, stepchild, foster child, sibling or stepsibling, or a descendent of one of these (such as a niece or nephew), second the qualifying individual must have the same principal residence as the taxpayer for more than half the year and there are exceptions for children of divorced parents, kidnapped children, and for children who were born or died during the year, third the qualifying individual must be under the age of 19, or 24 if a full-time student and fourth, the qualifying individual must not have provided for more than one-half of their own support during the year. There are some additional rules that a dependent must pass, that really have nothing to do with the amount of support provided, but do determine their eligibility as US citizens and the ability to be considered for dependency. First, the qualifying individual must be a US citizen or national, and their marital status must be single, unless the are married but did not file a joint return for that year, or there was no tax liability that existed for either spouse had they filed separately.

If the qualifying individual can pass all four of the above described qualifying tests, as well as the additional rules, then any of the deductions, exemptions, and credits that are available can be used. For instance, child care expenses, child tax credits, dependent care expenses, earned income credit, and any associated itemized deductions may be claimed if the qualifying individual is determined eligible.

Determining eligibility in many cases means the difference between owing tax on your return, and the eligibility to file as head of household, and receive a refund that would include earned income credit. The earned income tax credit is a negative tax, and an attempt by the government to provide lower and poverty level income families with the opportunity to receive much needed assistance with caring for and supporting their families. Today, however, the earned income credit is becoming an opportunity for some segments of the public to abuse the goodwill of their government and falsify claims of dependency qualifications.

The child and dependent care expenses cover things like daycare, after school care programs, and any other form of paid care that is necessary for the qualifying individual to receive while the taxpayer is away at work. The only thing to watch here is that all qualifying individuals for the child and dependent care expenses must be under the age of 13.

The child tax credit is comparable to the earned income credit, in that it is a straight credit, dollar for dollar deduction of your tax liability. The child tax credit may only be taken by individuals with a qualifying dependent that is under the age of 17.

posted by zzzzzzzzzzz at 9:31 PM

Wednesday, December 20, 2006

The Most Frequently Asked Questions about Buy to Let Tax?

Is the income earned from renting out your property taxable?

Yes buy to let tax is applicable on the income which you earn from a buy to let property and will need to be declared in full when filling out your tax return. However, you will be able to deduct certain expenditures from the amount of income you have earned. The valid deductions may include a variety of letting expenses which you have run up during the course of the tax year. Once you have deducted this amount you should then be left with a net rental profit or loss for the relevant tax year.

What kind of expenses are eligible for buy to let tax deductions?

Broadly speaking, the expenses which are eligible for deductions must be incurred:

1) With the purpose of letting the property (and not for personal reasons)

2) Within a seven year period previous to the start of the rental period

3) As revenue rather than capital

If the expenses comply with the above criteria then you will be able to deduct them from the buy to let income on your tax return.

Other expenses which can be claimed against tax, include:

•Utility Bills – such as water rates

•Advertising Fees – incurred when trying to find appropriate tenants

•Letting Fees – such as those incurred by the use of a letting agency

•Insurance – such as buildings insurance, house insurance and contents insurance

•Maintenance Costs – such as gardening and cleaning costs

•Repairs – such as general maintenance repairs. Furnished properties may also be able to claim for a “wear and tear” allowance

When will the buy to let expenditure count as capital and when as revenue?

If you have substantially improved the property to a level which goes above and beyond a simple repair, such as totally fitting out the kitchen, then it will count as capital. However, if the work carried out is fairly minor, such as re-wallpapering the lounge, then it will be viewed as revenue and will therefore be eligible to count as lettings expenditure and can be deducted from the rental income gained.

Is the income earned from renting out your property taxable?

Yes buy to let tax is applicable on the income which you earn from a buy to let property and will need to be declared in full when filling out your tax return. However, you will be able to deduct certain expenditures from the amount of income you have earned. The valid deductions may include a variety of letting expenses which you have run up during the course of the tax year. Once you have deducted this amount you should then be left with a net rental profit or loss for the relevant tax year.

What kind of expenses are eligible for buy to let tax deductions?

Broadly speaking, the expenses which are eligible for deductions must be incurred:

1) With the purpose of letting the property (and not for personal reasons)

2) Within a seven year period previous to the start of the rental period

3) As revenue rather than capital

If the expenses comply with the above criteria then you will be able to deduct them from the buy to let income on your tax return.

Other expenses which can be claimed against tax, include:

•Utility Bills – such as water rates

•Advertising Fees – incurred when trying to find appropriate tenants

•Letting Fees – such as those incurred by the use of a letting agency

•Insurance – such as buildings insurance, house insurance and contents insurance

•Maintenance Costs – such as gardening and cleaning costs

•Repairs – such as general maintenance repairs. Furnished properties may also be able to claim for a “wear and tear” allowance

When will the buy to let expenditure count as capital and when as revenue?

If you have substantially improved the property to a level which goes above and beyond a simple repair, such as totally fitting out the kitchen, then it will count as capital. However, if the work carried out is fairly minor, such as re-wallpapering the lounge, then it will be viewed as revenue and will therefore be eligible to count as lettings expenditure and can be deducted from the rental income gained.

posted by zzzzzzzzzzz at 3:00 AM

Give Yourself an Instant Pay Raise of $200-$1,000/Mo Tomorrow! Courtesy of the IRS!

Most people have never heard of an Instant Pay Raise. They do not even know how much income tax they paid last year!

How much tax did you pay last year? See! If you are like most people, you will say the amount of tax you paid on April 15. Others will say none, they got a refund!

It is amazing that so many people are unconscious of the fact that taxes are their biggest expense. In most households, it totals more than housing, clothing and food.

To figure out how much tax you really paid, look at your pay stub and multiply the total taxes taken out, federal, state, local and social security, then multiply by 12 or 52, depending on whether you are paid monthly or weekly. Add or subtract any additional payments you made on April 15 or deduct your refund from the annual total.

Shocked? You should be.

Ever heard of “Tax Freedom Day?” That is the day in the year when the average American has made enough money to pay his taxes for the year.

For most of the country, it is, ironically, approximately April 15. For heavily taxed North East states like New York and Connecticut, with their heavier tax burdens, it can be as late as May, 25!

Think about it. You are working on your job as much as 40% of the time, just to pay your taxes. That translates to working Monday, Tuesday and until 3:15 PM on Wednesday, every week, just to pay your taxes!

Looked at another way, each day you work from 9AM-12:20PM just to pay your taxes!

How would you like to be able to stuff a lot of that money back into your wallet? You worked hard for it, don’t let the government confiscate it, especially when you see the preferential treatment others get from our friend, Uncle Sam.

The business owner, as opposed to you, the lowly employee; is under a very different, very lenient income tax system!

Don’t believe it? What percentage of all of the income taxes paid in this country by individuals and businesses is paid by corporations, you know, big businesses, Exxon, Halliburton, Mobil, etc?

Seven (7) percent!

How do they get away with that? Don’t get me started! But rather than complain, join them. As Robert Kiyosaki, the author of the Rich Dad series says, it is easier to bend the system your way than to break it

If you are a business owner, you can write off all of your necessary, reasonable and ordinary (IRS lingo) business expenses. If there is any money left in the business, you pay taxes only on that amount.

That means the business owner has paid all of her salaries, travel, transportation, benefits and entertainment with before tax income. If she has actually spent more than the business brought in, as happens most of the time in a new business, she not only has no income tax to pay, she can write off the “loss” against other income!

Whoa! Did you get that? A business pays all of its expenses and if they exceed its income, can deduct that amount from other income.

OK, how does that affect you?

You must have a business, even a home based business, such as a Network Marketing business, "The Affordable Franchise," I call it. An Internet based business is probably best.

As long as you are trying to make a profit and you follow the IRS’s Byzantine rules on taking and documenting your business expenses; which means you should not try this without professional tax help, you can write off your business expenses (necessary, ordinary and reasonable, of course).

The irony of this approach is that you are already paying most of these expenses now; the use of your car, entertaining, vacationing, etc. When you perform the same activities with a business objective, they magically become business deductions.

Example. You drive your family to the mall on Saturday. That is clearly not a business expense. However, you stop to make a sales call or deliver product to a client near the mall. That trip now becomes primarily a business use of your car and the government will allow you to write off approximately 36 cents per mile for business use of your car. 1,000 miles equals a $360 write off.

You go out to dinner with friends or do you take prospects or clients out to dinner, see the difference? The government will let you deduct ½ of the dinner’s cost, providing you properly support the expense with documentation.

Certainly in the beginning, when you are getting your business off the ground, or you suddenly wake up and figure out how to re-characterize more of your personal expenses, you will probably lose money, at least on paper.

You will actually spend the same money you were already spending on cars, entertainment, travel, etc. but you cleverly gave them a business twist, so now they are deductible.

Remember, when a business loses money the government allows it to write it off against other income. Can you think of any other income you might have to write off your losses against? Come on, think really, really hard!

What about your salary. Your job or self-employment income! Right on!

You can deduct your business losses against that income.
Most people have never heard of an Instant Pay Raise. They do not even know how much income tax they paid last year!

How much tax did you pay last year? See! If you are like most people, you will say the amount of tax you paid on April 15. Others will say none, they got a refund!

It is amazing that so many people are unconscious of the fact that taxes are their biggest expense. In most households, it totals more than housing, clothing and food.

To figure out how much tax you really paid, look at your pay stub and multiply the total taxes taken out, federal, state, local and social security, then multiply by 12 or 52, depending on whether you are paid monthly or weekly. Add or subtract any additional payments you made on April 15 or deduct your refund from the annual total.

Shocked? You should be.

Ever heard of “Tax Freedom Day?” That is the day in the year when the average American has made enough money to pay his taxes for the year.

For most of the country, it is, ironically, approximately April 15. For heavily taxed North East states like New York and Connecticut, with their heavier tax burdens, it can be as late as May, 25!

Think about it. You are working on your job as much as 40% of the time, just to pay your taxes. That translates to working Monday, Tuesday and until 3:15 PM on Wednesday, every week, just to pay your taxes!

Looked at another way, each day you work from 9AM-12:20PM just to pay your taxes!

How would you like to be able to stuff a lot of that money back into your wallet? You worked hard for it, don’t let the government confiscate it, especially when you see the preferential treatment others get from our friend, Uncle Sam.

The business owner, as opposed to you, the lowly employee; is under a very different, very lenient income tax system!

Don’t believe it? What percentage of all of the income taxes paid in this country by individuals and businesses is paid by corporations, you know, big businesses, Exxon, Halliburton, Mobil, etc?

Seven (7) percent!

How do they get away with that? Don’t get me started! But rather than complain, join them. As Robert Kiyosaki, the author of the Rich Dad series says, it is easier to bend the system your way than to break it

If you are a business owner, you can write off all of your necessary, reasonable and ordinary (IRS lingo) business expenses. If there is any money left in the business, you pay taxes only on that amount.

That means the business owner has paid all of her salaries, travel, transportation, benefits and entertainment with before tax income. If she has actually spent more than the business brought in, as happens most of the time in a new business, she not only has no income tax to pay, she can write off the “loss” against other income!

Whoa! Did you get that? A business pays all of its expenses and if they exceed its income, can deduct that amount from other income.

OK, how does that affect you?

You must have a business, even a home based business, such as a Network Marketing business, "The Affordable Franchise," I call it. An Internet based business is probably best.

As long as you are trying to make a profit and you follow the IRS’s Byzantine rules on taking and documenting your business expenses; which means you should not try this without professional tax help, you can write off your business expenses (necessary, ordinary and reasonable, of course).

The irony of this approach is that you are already paying most of these expenses now; the use of your car, entertaining, vacationing, etc. When you perform the same activities with a business objective, they magically become business deductions.

Example. You drive your family to the mall on Saturday. That is clearly not a business expense. However, you stop to make a sales call or deliver product to a client near the mall. That trip now becomes primarily a business use of your car and the government will allow you to write off approximately 36 cents per mile for business use of your car. 1,000 miles equals a $360 write off.

You go out to dinner with friends or do you take prospects or clients out to dinner, see the difference? The government will let you deduct ½ of the dinner’s cost, providing you properly support the expense with documentation.

Certainly in the beginning, when you are getting your business off the ground, or you suddenly wake up and figure out how to re-characterize more of your personal expenses, you will probably lose money, at least on paper.

You will actually spend the same money you were already spending on cars, entertainment, travel, etc. but you cleverly gave them a business twist, so now they are deductible.

Remember, when a business loses money the government allows it to write it off against other income. Can you think of any other income you might have to write off your losses against? Come on, think really, really hard!

What about your salary. Your job or self-employment income! Right on!

You can deduct your business losses against that income.

posted by zzzzzzzzzzz at 2:59 AM

Tuesday, December 19, 2006

The Business Tax Basics

Your required business tax issues can be complicated and overwhelming. The first thing you must do is consult your tax professional for all tax questions. This article is not intended to be a complete list of required forms. It is an overview of the most frequently required tax forms and issues you may need. First, you must obtain a federal tax ID online at the IRS website, www.irs.gov.

If you have employees, there are certain tax forms that you must file: Form I-9 verifies that each employee is legally eligible to work in the U.S.; Form W-4 is completed by each employee to indicate their withholding tax; Form W-2: is the Wage and Tax Statement you prepare every year for each employee and give copies to employees and file a report with I.R.S; and Form 1099 must be prepared for payments of $600 or more paid to non-employees in one year such as independent contractors. You give copies to the payee and mail a copy to IRS.

There are other tax forms that you may be required to file if you give your employees bonuses or make certain kinds of sales. Form 1099-MISC is required for prizes or awards of $600 or more or for sales of consumer goods for $5,000 or more to a person who intends to sell the goods retail, but does not conduct the sales in a permanent retail establishment. In addition, you are required to file Form 8300 for cash payments you receive in one transaction that are more than $10,000.

The I.R.S. website, www.irs.gov, has many inexpensive small business products that you can order on line. The publications are: Tax Calendar for Small Businesses and Self-Employed, A Virtual Small business Tax Workshop DVD, Small Business Resource Guide CD, Recognizing Illegal Tax Avoidance Schemes Brochure, and Home-Based Business Tax Avoidance Schemes Brochure. There are numerous small business and self-employed resources offered on the I.R.S. website. There are even small business classes and workshops.

As a business entity, you will have to pay income tax and file a Form 1040 or self-employment tax and file Schedule SE (Form 1040). On behalf of your employees, you will have to withhold from salary and pay to IRS and the state federal and state withholding tax. You will be required to withhold from salary and match the amount from the business’ funds to pay social security and medicare tax. You also must pay federal unemployment tax.

If you sell certain kinds of products or engage in certain business activities, you will be required to pay excise tax. If you sell a product, you will have to pay sales tax usually to the city in which you operate. There are numerous schedules that business entities or self-employed persons are required to file with their 1040. One of the most important is Schedule A which itemizes your business deductions.

You may deduct your business expenses which are the cost of operating a business. If you manufacture products or purchase them for resale, you can deduct the cost of goods sold. The I.R.S website explains how to calculate the deductible cost of goods sold. Other types of business deductions are the expense of using your car in business, salaries and payments to independent contractors, your contribution to employees’ retirement plans, rent expense, insurance, and interest on any business loans. There are additional allowable deductions that you can discuss with your tax professional.

Capital expenses are not deductible. You must capitalize, rather than deduct, some capital costs. These costs are a part of your investment in your business. There are generally three types of costs you capitalize: going into business, business assets, and improvements. You cannot deduct personal expenses. If you use your Home for your business, you can deduct a prorata share of the expenses you incur on your home. You must file a Form 8829 stating you home’s total square feet and the percentage of your home used exclusively for business. The Form 8829 instructions explain how to calculate a deduction for your home office.

Your required business tax issues can be complicated and overwhelming. The first thing you must do is consult your tax professional for all tax questions. This article is not intended to be a complete list of required forms. It is an overview of the most frequently required tax forms and issues you may need. First, you must obtain a federal tax ID online at the IRS website, www.irs.gov.

If you have employees, there are certain tax forms that you must file: Form I-9 verifies that each employee is legally eligible to work in the U.S.; Form W-4 is completed by each employee to indicate their withholding tax; Form W-2: is the Wage and Tax Statement you prepare every year for each employee and give copies to employees and file a report with I.R.S; and Form 1099 must be prepared for payments of $600 or more paid to non-employees in one year such as independent contractors. You give copies to the payee and mail a copy to IRS.

There are other tax forms that you may be required to file if you give your employees bonuses or make certain kinds of sales. Form 1099-MISC is required for prizes or awards of $600 or more or for sales of consumer goods for $5,000 or more to a person who intends to sell the goods retail, but does not conduct the sales in a permanent retail establishment. In addition, you are required to file Form 8300 for cash payments you receive in one transaction that are more than $10,000.

The I.R.S. website, www.irs.gov, has many inexpensive small business products that you can order on line. The publications are: Tax Calendar for Small Businesses and Self-Employed, A Virtual Small business Tax Workshop DVD, Small Business Resource Guide CD, Recognizing Illegal Tax Avoidance Schemes Brochure, and Home-Based Business Tax Avoidance Schemes Brochure. There are numerous small business and self-employed resources offered on the I.R.S. website. There are even small business classes and workshops.

As a business entity, you will have to pay income tax and file a Form 1040 or self-employment tax and file Schedule SE (Form 1040). On behalf of your employees, you will have to withhold from salary and pay to IRS and the state federal and state withholding tax. You will be required to withhold from salary and match the amount from the business’ funds to pay social security and medicare tax. You also must pay federal unemployment tax.

If you sell certain kinds of products or engage in certain business activities, you will be required to pay excise tax. If you sell a product, you will have to pay sales tax usually to the city in which you operate. There are numerous schedules that business entities or self-employed persons are required to file with their 1040. One of the most important is Schedule A which itemizes your business deductions.

You may deduct your business expenses which are the cost of operating a business. If you manufacture products or purchase them for resale, you can deduct the cost of goods sold. The I.R.S website explains how to calculate the deductible cost of goods sold. Other types of business deductions are the expense of using your car in business, salaries and payments to independent contractors, your contribution to employees’ retirement plans, rent expense, insurance, and interest on any business loans. There are additional allowable deductions that you can discuss with your tax professional.

Capital expenses are not deductible. You must capitalize, rather than deduct, some capital costs. These costs are a part of your investment in your business. There are generally three types of costs you capitalize: going into business, business assets, and improvements. You cannot deduct personal expenses. If you use your Home for your business, you can deduct a prorata share of the expenses you incur on your home. You must file a Form 8829 stating you home’s total square feet and the percentage of your home used exclusively for business. The Form 8829 instructions explain how to calculate a deduction for your home office.

posted by zzzzzzzzzzz at 2:58 AM

UK Resident Doctors and Dentists - 7 Tax Saving Tips for the Next 12 Months

Well, here we are again.

The start of a new tax year is upon us, bringing with it many opportunities to save tax (legally) and keep as much of your money in your hands, and away from Gordon Brown's.

The budget was a bit of a damp squib, so let's look at some of the best ways to save tax!

Now, it's possible you've heard of some of these ideas, but are you actually using them? I've heard many clients say they've heard of something, then admit they've done nothing about it. Don't let this be you...

On with the tips.

1. Use an offset mortgage to reduce the amount of tax you pay on your deposit savings. If you have, say, £20,000 in a deposit account and it's earning interest of 3% AER, the gross amount is £600. There's a further £120 (20%) taken in income tax at source, plus another £120 tax if you're a higher rate taxpayer. Therefore, the net interest is only 1.8%.

Now let's say you have a mortgage of £100,000 at 5% interest, meaning you're paying £5,000 pa to service the loan.

Now you place the £20,000 in an offset account, which means that you're now paying interest on £80,000, which is £4,000 pa.

Let's see what you've achieved. You WERE earning £360 pa interest on the £20,000. Now you're saving £1,000 pa on the mortgage payment, giving you a net gain of £640! You would actually need another £36,000 in deposit savings to equal the offset savings.

The other plus is that you now don't have savings interest to declare on your tax return.

2. If you don't want a flexible mortgage, or don't have a mortgage, you can still save tax. If your spouse is not working and has no income you should place the deposit savings in their name. For example, if you have £50,000 in a deposit account and are paying 40% tax on this, you'll only be earning £900 pa on 3% gross interest. If this is in the name of the non-earner you'll get another £600 in interest. The non-earner can apply for the money to be paid gross by completing form IR85, available from your tax office.

3. Linked to the above tip, you should also make sure you're getting the best interest rate on any deposit savings. ING are currently paying 4.5% AER. So, if you duplicate the example above, you'd earn £2250 pa. When compared to the original figure of £900 pa, this is an increase of 150%!

4. If you employ your spouse in your practice, there's a way in which they can potentially qualify for a basic state pension, without paying National Insurance. If you pay them less than £84 pw they don't qualify for the pension. If you pay them more than £84 and less than £97 pw they will qualify for basic state pension.

Any employment of a spouse must be done on a commercial basis and you should qualify and confirm this with your accountant or the Department of Work and Pensions.

5. Use the new pension rules to boost your retirement funds. For the 2006/07 tax year you can contribute up to £215,000 to your pension and receive full tax relief, or 100% of your earnings if lower. If you're self employed this is particularly useful to reduce your tax bill. Remember, if you're a higher rate taxpayer you'll get 40% relief on your contributions.

6. Buy Pension Term Assurance instead of 'normal' life assurance. If you have, or are considering buying life cover, you can now get tax relief on your contributions. So, instead of paying £100 pm for protection, you may be able to get the same level of cover for £60 pm. Over a 20 year term this amounts to £9,600!

7. Observe what your accountant is doing for you. Is your accountant simply following your orders and producing your accounts, or is he/she proactively working with you to increase your profits by either helping you to increase turnover or reduce costs?

Ultimately, it's YOU who signs off the accounts and YOU who the taxman will chase with any queries, so make sure you're claiming for everything you should, and not for items you shouldn't.

The Financial Tips Bottom Line:

Saving tax is really about being organised and working alongside the right tax professionals over the long term. By structuring your affairs to your advantage, it's possible you could give yourself a pay increase without earning any more money. Take the time to think how you can save more money and then take the necessary action!

Well, here we are again.

The start of a new tax year is upon us, bringing with it many opportunities to save tax (legally) and keep as much of your money in your hands, and away from Gordon Brown's.

The budget was a bit of a damp squib, so let's look at some of the best ways to save tax!

Now, it's possible you've heard of some of these ideas, but are you actually using them? I've heard many clients say they've heard of something, then admit they've done nothing about it. Don't let this be you...

On with the tips.

1. Use an offset mortgage to reduce the amount of tax you pay on your deposit savings. If you have, say, £20,000 in a deposit account and it's earning interest of 3% AER, the gross amount is £600. There's a further £120 (20%) taken in income tax at source, plus another £120 tax if you're a higher rate taxpayer. Therefore, the net interest is only 1.8%.

Now let's say you have a mortgage of £100,000 at 5% interest, meaning you're paying £5,000 pa to service the loan.

Now you place the £20,000 in an offset account, which means that you're now paying interest on £80,000, which is £4,000 pa.

Let's see what you've achieved. You WERE earning £360 pa interest on the £20,000. Now you're saving £1,000 pa on the mortgage payment, giving you a net gain of £640! You would actually need another £36,000 in deposit savings to equal the offset savings.

The other plus is that you now don't have savings interest to declare on your tax return.

2. If you don't want a flexible mortgage, or don't have a mortgage, you can still save tax. If your spouse is not working and has no income you should place the deposit savings in their name. For example, if you have £50,000 in a deposit account and are paying 40% tax on this, you'll only be earning £900 pa on 3% gross interest. If this is in the name of the non-earner you'll get another £600 in interest. The non-earner can apply for the money to be paid gross by completing form IR85, available from your tax office.

3. Linked to the above tip, you should also make sure you're getting the best interest rate on any deposit savings. ING are currently paying 4.5% AER. So, if you duplicate the example above, you'd earn £2250 pa. When compared to the original figure of £900 pa, this is an increase of 150%!

4. If you employ your spouse in your practice, there's a way in which they can potentially qualify for a basic state pension, without paying National Insurance. If you pay them less than £84 pw they don't qualify for the pension. If you pay them more than £84 and less than £97 pw they will qualify for basic state pension.

Any employment of a spouse must be done on a commercial basis and you should qualify and confirm this with your accountant or the Department of Work and Pensions.

5. Use the new pension rules to boost your retirement funds. For the 2006/07 tax year you can contribute up to £215,000 to your pension and receive full tax relief, or 100% of your earnings if lower. If you're self employed this is particularly useful to reduce your tax bill. Remember, if you're a higher rate taxpayer you'll get 40% relief on your contributions.

6. Buy Pension Term Assurance instead of 'normal' life assurance. If you have, or are considering buying life cover, you can now get tax relief on your contributions. So, instead of paying £100 pm for protection, you may be able to get the same level of cover for £60 pm. Over a 20 year term this amounts to £9,600!

7. Observe what your accountant is doing for you. Is your accountant simply following your orders and producing your accounts, or is he/she proactively working with you to increase your profits by either helping you to increase turnover or reduce costs?

Ultimately, it's YOU who signs off the accounts and YOU who the taxman will chase with any queries, so make sure you're claiming for everything you should, and not for items you shouldn't.

The Financial Tips Bottom Line:

Saving tax is really about being organised and working alongside the right tax professionals over the long term. By structuring your affairs to your advantage, it's possible you could give yourself a pay increase without earning any more money. Take the time to think how you can save more money and then take the necessary action!

posted by zzzzzzzzzzz at 2:57 AM

It's Tax Time! Do You Work at Home on the Computer? Use Your Home Office As a Deduction

This coming tax season you may be able to deduct more than you thought. If you operate a home-based business, especially if you work at home on the computer then you can use your home office as a deduction. This applies whether you own or rent and the deduction extends to utilities, insurance, and repairs to name a few. There are of course some general requirements as to whether or not your home-based business qualifies as a deduction that the IRS has imposed.

First of all whatever area you designate as your home office must be exclusively and regularly used as an office. You can’t put your desk and your computer in your bedroom and write a few emails and call that a home office. It has to be a functioning area set aside for your business where you work at home on the computer every work day. Secondly, the place that you designate for your home office must be where you principally do business in order for it to qualify as a deduction. In other words all of your administrative activities must be done in your home office and can only be done at that location.

When you are preparing to utilize your home office as a deduction you can only deduct a percentage of the rent, utilities, taxes, and others based on the percentage of your house that you use for your office. So, if you know the square footage of your house then measure the square footage of the room that acts as your office, calculate the percentage of that room compared to the whole house and use that percentage to calculate the deduction. For example, if your office is 25% of your house than deduct 25% of your rent and 25% of your phone bill.

Of course you will want to remember to save all of your receipts for purchases like office furniture and computer components. A filing cabinet is a great way to keep all of your records in an organized manner. You’ll want to save your utility bills also in order to calculate how much was used towards your home-based business. Remember when you work at home on the computer, using computers as a deduction you will deduct a percentage per year since they depreciate throughout the years. A good accountant can help you with all of these intricate details.

This coming tax season you may be able to deduct more than you thought. If you operate a home-based business, especially if you work at home on the computer then you can use your home office as a deduction. This applies whether you own or rent and the deduction extends to utilities, insurance, and repairs to name a few. There are of course some general requirements as to whether or not your home-based business qualifies as a deduction that the IRS has imposed.

First of all whatever area you designate as your home office must be exclusively and regularly used as an office. You can’t put your desk and your computer in your bedroom and write a few emails and call that a home office. It has to be a functioning area set aside for your business where you work at home on the computer every work day. Secondly, the place that you designate for your home office must be where you principally do business in order for it to qualify as a deduction. In other words all of your administrative activities must be done in your home office and can only be done at that location.

When you are preparing to utilize your home office as a deduction you can only deduct a percentage of the rent, utilities, taxes, and others based on the percentage of your house that you use for your office. So, if you know the square footage of your house then measure the square footage of the room that acts as your office, calculate the percentage of that room compared to the whole house and use that percentage to calculate the deduction. For example, if your office is 25% of your house than deduct 25% of your rent and 25% of your phone bill.

Of course you will want to remember to save all of your receipts for purchases like office furniture and computer components. A filing cabinet is a great way to keep all of your records in an organized manner. You’ll want to save your utility bills also in order to calculate how much was used towards your home-based business. Remember when you work at home on the computer, using computers as a deduction you will deduct a percentage per year since they depreciate throughout the years. A good accountant can help you with all of these intricate details.

posted by zzzzzzzzzzz at 2:57 AM

A Simple Introduction To Filing Electronic Taxes

Nowadays, every department in the governmental or private sector boast a digital nervous system – as Bill Gates put it in his best seller Business at the Speed of Thought – through which it interfaces with the public, listen to the grievances and carries out or facilitates various services. Our current topic of discussion, is electronic tax filing, it makes use of the digital nervous system of the tax department, and in simple terms, it is the World Wide Web’s way of filing your tax returns.

In a way, Internet has revolutionized the way people have access to information. It virtually eliminated the unending delay that used to associate with the process of getting services done from governmental bodies in a big way. In the present context, long gone are the days of unending queues and taxing paper works. The electronic filing has made the submission of tax returns a customer friendly exercise. Let us have a look from close quarters the advantages of electronic filing as opposed to the conventional way of filing returns and study what sizeable change it had made in the whole process.

· The first and foremost reform electronic filing had brought about is that it virtually eliminated the need for going through the exhaustive steps of filling the forms and rushing to the nearest post office to get it posted before the due date.

· Not only the paper work, electronic filing in fact has eliminated all sorts of physical movement required in completing the filing of returns. No more office hopping is required. The only thing you needs is a PC and a reliable Internet connection.

· In electronic filing, any mistake that has invariably crept in is corrected in less time. As every bit of data of the tax payer is available online, there is no wastage of time searching dossiers.

· Electronic filing has also reduced the time lag before receiving your tax refunds. Also, with the online submission, it is possible to take a printout of the filed return at the time of submission to keep it as record. No more requests or visiting offices for the same.

· Electronic filing facilitates payment by credit card.

Also, with electronic filing, the back office processing time has reduced by days. For example, even if the customer had waited till the last day before filing his/her returns, still it is possible to get the filing processed within hours of submission as opposed to the 10 odd day’s delay that used to occur during the days of paper returns. As a result, as mentioned earlier, it has become possible to complete the refunds within a couple of weeks since filing.

Here is the process of filing returns by electronic means: The customer first should prepare his tax returns (by oneself or through a tax professional). Once the tax returns are in place, then the filing can be done through an IRS e-file provider. Filing can be done online as well, but if you are not sure about the technicalities, it is better to seek professional help. Generally most tax professionals will be licensed IRS e-file providers. Sign all relevant documents and get a customer copy as a record or for future reference. The IRS e-file provider will then file the returns electronically. Within 48 hours of filing the returns, the IRS will send the customer/IRS e-file provider an acknowledgement specifying the current status (acceptance or rejection as it may apply). If it is a rejection, remedial steps should be taken immediately.

Nowadays, every department in the governmental or private sector boast a digital nervous system – as Bill Gates put it in his best seller Business at the Speed of Thought – through which it interfaces with the public, listen to the grievances and carries out or facilitates various services. Our current topic of discussion, is electronic tax filing, it makes use of the digital nervous system of the tax department, and in simple terms, it is the World Wide Web’s way of filing your tax returns.

In a way, Internet has revolutionized the way people have access to information. It virtually eliminated the unending delay that used to associate with the process of getting services done from governmental bodies in a big way. In the present context, long gone are the days of unending queues and taxing paper works. The electronic filing has made the submission of tax returns a customer friendly exercise. Let us have a look from close quarters the advantages of electronic filing as opposed to the conventional way of filing returns and study what sizeable change it had made in the whole process.

· The first and foremost reform electronic filing had brought about is that it virtually eliminated the need for going through the exhaustive steps of filling the forms and rushing to the nearest post office to get it posted before the due date.

· Not only the paper work, electronic filing in fact has eliminated all sorts of physical movement required in completing the filing of returns. No more office hopping is required. The only thing you needs is a PC and a reliable Internet connection.

· In electronic filing, any mistake that has invariably crept in is corrected in less time. As every bit of data of the tax payer is available online, there is no wastage of time searching dossiers.

· Electronic filing has also reduced the time lag before receiving your tax refunds. Also, with the online submission, it is possible to take a printout of the filed return at the time of submission to keep it as record. No more requests or visiting offices for the same.

· Electronic filing facilitates payment by credit card.

Also, with electronic filing, the back office processing time has reduced by days. For example, even if the customer had waited till the last day before filing his/her returns, still it is possible to get the filing processed within hours of submission as opposed to the 10 odd day’s delay that used to occur during the days of paper returns. As a result, as mentioned earlier, it has become possible to complete the refunds within a couple of weeks since filing.

Here is the process of filing returns by electronic means: The customer first should prepare his tax returns (by oneself or through a tax professional). Once the tax returns are in place, then the filing can be done through an IRS e-file provider. Filing can be done online as well, but if you are not sure about the technicalities, it is better to seek professional help. Generally most tax professionals will be licensed IRS e-file providers. Sign all relevant documents and get a customer copy as a record or for future reference. The IRS e-file provider will then file the returns electronically. Within 48 hours of filing the returns, the IRS will send the customer/IRS e-file provider an acknowledgement specifying the current status (acceptance or rejection as it may apply). If it is a rejection, remedial steps should be taken immediately.

posted by zzzzzzzzzzz at 2:55 AM

Monday, December 18, 2006

3 Tips For Keeping Proper Tax Records For Your Home Business – And Keeping The IRS Happy!

The last thing most people think about when starting a business is doing taxes. But proper planning will make doing your taxes much easier - and keep the IRS happy!

Here are 3 simple tips for keeping proper records:

  1. Whenever you buy anything for your business, keep the receipt!

    Not only will this make record keeping a lot simpler, but if you are ever audited (having your tax return reviewed in detail by the IRS), you can prove your expenses, and save yourself money.

  2. Write down all your expenses and income as they happen.

    As your business grows, you'll have more and more activities to keep you busy. The last thing you'll want to do each April 15 is to organize your records for the year. So, it's a good idea to write down all your financial activities as they happen. You'll find preparing your taxes will take much less time if you are organized.

  3. Learn how to save money on your taxes.

    As you learn about taxes, you'll find that there are many deductions (expenses that reduce your income, and therefore your taxes) you can take that are not obvious. When using your home office, you may be able to deduct (at least partially) repairs you make around the house, utilities, your home's value at the time you start your business, and more.

The last thing most people think about when starting a business is doing taxes. But proper planning will make doing your taxes much easier - and keep the IRS happy!

Here are 3 simple tips for keeping proper records:

  1. Whenever you buy anything for your business, keep the receipt!

    Not only will this make record keeping a lot simpler, but if you are ever audited (having your tax return reviewed in detail by the IRS), you can prove your expenses, and save yourself money.

  2. Write down all your expenses and income as they happen.

    As your business grows, you'll have more and more activities to keep you busy. The last thing you'll want to do each April 15 is to organize your records for the year. So, it's a good idea to write down all your financial activities as they happen. You'll find preparing your taxes will take much less time if you are organized.

  3. Learn how to save money on your taxes.

    As you learn about taxes, you'll find that there are many deductions (expenses that reduce your income, and therefore your taxes) you can take that are not obvious. When using your home office, you may be able to deduct (at least partially) repairs you make around the house, utilities, your home's value at the time you start your business, and more.

posted by zzzzzzzzzzz at 11:00 PM 0 Comments

Social Security Voluntary Tax Withholding

If you receive Social Security benefits did you know that you can have income tax voluntarily withheld from your check? By signing up for Voluntary Tax withholding it could make next year’s tax liability easier to swallow. Here is how it works.

Your Social Security benefits are not exempt from Federal Income tax. If you find yourself in a tax bracket where you are required to pay each year, voluntary tax withholding could be right for you.

By requesting a form W4-V from Social Security you can specify a percentage of your benefit check to be withheld for Federal Income Tax. At the end of the year you will receive a Form 1099 from Social Security showing how much was withheld; you will be able to apply this amount towards your tax liability.

When you receive the form W4-V from Social Security, you will need to specify the percentage you want withheld. The choices available are zero percent (to stop withholding), seven percent, ten percent, fifteen percent, and twenty five percent. The form comes with a return envelope and once Social Security receives your form it takes them thirty to sixty days to process your request.

You will receive a letter from Social Security notifying when the withholding will begin. Signing up for voluntary tax withholding could make your tax liability less of burden each year.

If you receive Social Security benefits did you know that you can have income tax voluntarily withheld from your check? By signing up for Voluntary Tax withholding it could make next year’s tax liability easier to swallow. Here is how it works.

Your Social Security benefits are not exempt from Federal Income tax. If you find yourself in a tax bracket where you are required to pay each year, voluntary tax withholding could be right for you.

By requesting a form W4-V from Social Security you can specify a percentage of your benefit check to be withheld for Federal Income Tax. At the end of the year you will receive a Form 1099 from Social Security showing how much was withheld; you will be able to apply this amount towards your tax liability.

When you receive the form W4-V from Social Security, you will need to specify the percentage you want withheld. The choices available are zero percent (to stop withholding), seven percent, ten percent, fifteen percent, and twenty five percent. The form comes with a return envelope and once Social Security receives your form it takes them thirty to sixty days to process your request.

You will receive a letter from Social Security notifying when the withholding will begin. Signing up for voluntary tax withholding could make your tax liability less of burden each year.

posted by zzzzzzzzzzz at 10:59 PM 0 Comments

Sunday, December 17, 2006

Dear John Letters From The IRS

Undoubtedly, you are aware of Dear John letters. Often a young lady sent them to men in the military, often containing bad news. Well, the IRS sends them to taxpayers as well.

Dear John Letters From The IRS

The Internal Revenue Service sends out millions of Dear John letters to taxpayers every year. Instead of informing you of a break up, these letters let you know the IRS would like to get a bit closer. Before you bang your head on the wall, you should understand these letters are typically not the sign of impending doom.

Dear John letters from the IRS are technically known as correspondence audits. Instead of showing up on your doorstep, the IRS simply sends a letter regarding some aspect of your taxes. The letter may inform you the IRS believes you owe extra money because of some issue. Surprising, the IRS may also send you a notice that it believes you overpaid some aspect of business taxes. Unfortunately, it does not do this for personal returns. The letter may also contain a request for an explanation of some aspect of your return or documentation supporting the same. Regardless, you need to understand the IRS sends so many of these out that there really is no reason to panic.

Importantly, the IRS almost always asks you to take very simple steps in the letter. You are almost always asked to agree or disagree with whatever they are requesting. If you agree, you rarely have to actually do anything other than perhaps cut a check. If you disagree, you need to write a letter explaining why and then wait a few months for the IRS to get back to you. If the IRS does not agree with your explanation, a larger audit proceeding may be undertaken

Undoubtedly, you are aware of Dear John letters. Often a young lady sent them to men in the military, often containing bad news. Well, the IRS sends them to taxpayers as well.

Dear John Letters From The IRS

The Internal Revenue Service sends out millions of Dear John letters to taxpayers every year. Instead of informing you of a break up, these letters let you know the IRS would like to get a bit closer. Before you bang your head on the wall, you should understand these letters are typically not the sign of impending doom.

Dear John letters from the IRS are technically known as correspondence audits. Instead of showing up on your doorstep, the IRS simply sends a letter regarding some aspect of your taxes. The letter may inform you the IRS believes you owe extra money because of some issue. Surprising, the IRS may also send you a notice that it believes you overpaid some aspect of business taxes. Unfortunately, it does not do this for personal returns. The letter may also contain a request for an explanation of some aspect of your return or documentation supporting the same. Regardless, you need to understand the IRS sends so many of these out that there really is no reason to panic.

Importantly, the IRS almost always asks you to take very simple steps in the letter. You are almost always asked to agree or disagree with whatever they are requesting. If you agree, you rarely have to actually do anything other than perhaps cut a check. If you disagree, you need to write a letter explaining why and then wait a few months for the IRS to get back to you. If the IRS does not agree with your explanation, a larger audit proceeding may be undertaken

posted by zzzzzzzzzzz at 10:57 PM 0 Comments

Tax Deductions on Car Donation Explained

Any donation you make to help out a worthy cause can also help you with your taxes. If you have an old car parked in your garage and you don’t know what to do with it, car donation is a wonderful way to help a charity. Although the car donation laws have changed, this is still a good way to help yourself and others too.

In 2005, the laws changed regarding tax deductions on boats, vehicles or airplanes that are valued over $500. Now, the charity must provide written documentation or acknowledgement within the 30 days of processing your donation. If the charity gives an exaggerated or false statement, they can be fined or penalized.

Under the January 2005 rules, your tax break is based on how the charity uses the donated vehicle. If the car is sold, the gross sale price can be deducted. If the charity uses the donated car following the new law for “significant” charity work that is tax approved, you’ll be able to deduct the market value of the vehicle. However, some stiff penalties will be charged for falsified documents. The law is watching carefully those charities not following the rules and regulations involved with car donation.

Even though the old laws had some problems, many charities are skeptical about the new car donation laws. A lot of organizations are concerned about what might happen when the responsibility of tax deduction is put under the authority of the charity rather than the donor. Some of them have actually sent a letter to the Treasury Secretary that suggests that people may be discouraged from donating cars if they aren’t aware of the deduction amount that will be allowed. This, they fear will mean that some donors will be lost. Charities feel that donors must be able to weigh the cost of benefit in order to know if it is enough for them.

Any donation you make to help out a worthy cause can also help you with your taxes. If you have an old car parked in your garage and you don’t know what to do with it, car donation is a wonderful way to help a charity. Although the car donation laws have changed, this is still a good way to help yourself and others too.

In 2005, the laws changed regarding tax deductions on boats, vehicles or airplanes that are valued over $500. Now, the charity must provide written documentation or acknowledgement within the 30 days of processing your donation. If the charity gives an exaggerated or false statement, they can be fined or penalized.

Under the January 2005 rules, your tax break is based on how the charity uses the donated vehicle. If the car is sold, the gross sale price can be deducted. If the charity uses the donated car following the new law for “significant” charity work that is tax approved, you’ll be able to deduct the market value of the vehicle. However, some stiff penalties will be charged for falsified documents. The law is watching carefully those charities not following the rules and regulations involved with car donation.

Even though the old laws had some problems, many charities are skeptical about the new car donation laws. A lot of organizations are concerned about what might happen when the responsibility of tax deduction is put under the authority of the charity rather than the donor. Some of them have actually sent a letter to the Treasury Secretary that suggests that people may be discouraged from donating cars if they aren’t aware of the deduction amount that will be allowed. This, they fear will mean that some donors will be lost. Charities feel that donors must be able to weigh the cost of benefit in order to know if it is enough for them.

posted by zzzzzzzzzzz at 10:56 PM 0 Comments