Tag: Taxes

Categories
Budgeting

Budgeting Tips: How To Save Money On Taxes

With the holidays over, it’s now time to start preparing for taxes season. Being prepared can mean fewer headaches and potentially more savings when you file a return. The following are guidelines that can help you save money on your taxes.

Save when filing:

Filing taxes used to be a thing for accountants and professional tax preparers. Thanks to computers and tax software, it is now easier to prepare and file taxes on your own. A benefit of filing on your own is that the cost of filing is usually less. Software such as turbo tax also allows you to prepare and file taxes all in the comfort of your own home.

Save if you have children:

If you have children, your savings will be even greater. As a parent of children 17 and under, you can receive a $1,000 credit. You can also save money if your children are attending college. You may have to look into what credits apply for undergrad students as most credits have limited lifespans and are at times extended or replaced with other credit based programs.

Save money while helping out non profits:

Did you know that many charitable contributions to non profits are tax deductible. That’s right, helping others can help you save some money. Make sure that there is documented proof of your donations.

Running your own home business:

If you are one of the many Americans that works from home, there are many tax breaks that you can take advantage of. Make sure that are careful to differentiate areas in your home that are used for business. It is strongly recommended that you have a section in your home with your business as its primary function. If you are going to use your home as a tax write off, keep track of all necessary documentation in case of an audit.

Home improvements:

Have you made any recent improvements to your home? Well some improvements can end up saving you some money when you file your return. Energy saving improvements will earn you credit on your taxes.

These are a few simple ways to save money when filing your taxes. Saving money is all a matter of being aware of all possible options. This can be done with some research or having access to a good accountant.

Categories
Taxes

Irish Expats – Avoiding Taxes on Your Pension

For Irish people who chose to retire abroad, they now have the option to avoid the Irish pension levy, avoid Irish income tax, capital gains tax and make tax savings upon death with regards to your existing pensions. You can now avoid the new Irish tax on pensions via a transfer to a QROPS (Qualifying Overseas Pension Scheme). This is also known as the European Union Retirement Benefits Scheme (EURBS).

The new Irish pension levy (which started at an initial rate of 0.6% per year on pension fund assets) was announced last May in 2011 and is backdated to 1 January 2011. The Irish pension levy is targeted to raise € 450m for the Irish Revenue Commissioners, every year, for at least the 4-year period 2011-2014. The Irish tax on pension payments applies to individual pension policies ("retirement annuity contracts"), company pension schemes, personal retirement bonds, (non-vested) PRSAs and buy-out bonds.

The new pensions levy is basically a tax on savings and jobs. This is a tax on your average working man. We can help you transfer your pension pot offshore to avoid these new taxes. If you have a pension pot of 100,000 Euros or more, it may be beneficial to transfer into an EURBS or QROPS.

Irish Expats and Tax Avoidance on Pensions

For those who are resident in Ireland and have an Irish pension scheme or those who have pension schemes in Ireland and have left, there are significant advantages to transferring those schemes to a safe EU Jurisdiction such as Malta. Malta is a former British colony and member of the European Union. It has a Double Taxation Agreement (DTA) with Ireland which means that your pension can be transferred to Malta and paid out gross. It also has DTA's with over 60 other countries around the world, which means you can improve tax efficiency for many countries you may retire in abroad.

Benefits of a QROPS Pension Transfer:

• Avoid the Irish pension levy
• Greater Investment choice
• Consolidation of pension schemes. Manage all your pensions under one umbrella
• Income tax savings
• Capital gains tax savings
• Tax savings upon death
• Entire pension pot is passed to loved ones upon death
• Currency options. Choose to keep in Euros or convert to GBP or USD
• Increased lump sum and income options available

The Irish Pension Levy

If you live in Ireland or have previously lived in Ireland and have an Irish pension scheme you can transfer it using a Malta QROPS (Qualifying Recognised Overseas Pension Scheme) which is recognized by HMRC in the UK and approved in Malta.

The pensions levy announced in May 2011 and retrospectively enforced from 1st January 2011, applies to individual pension policies, company pension schemes, personal retirement bonds, (non-vested) Personal Retirement Savings Accounts and buy-out bonds.

How much would the Irish levy be? How much would be the tax on Irish pensions?

The Irish government has unveiled plans to cut public spending by € 2.1bn, and almost € 1.4bn of this will be achieved by requiring public sector workers to pay a new pension 'levy' averaging 7.5% towards their Irish pensions.

The government said the new 'pension-related deduction' would apply to the total earnings of all public servants, though not those already receiving a pension, and would be "graduated so that the effect is somewhat less at lower income levels and greater at higher levels ".

The average deduction will be 7.5% of total earnings, although the contribution will be made up of 3% on the first € 15,000 of pay, 6% on the next € 5,000 and a 10% levy on the remainder of earnings.

A table showing the effect of the contributions means the lowest paid public sector workers, on € 15,000 a year, would contribute 3%, or € 450 a year, while those earning € 25,000 would pay 5% or € 1,250 per year on their Irish pensions.

Peter McLoone, general secretary at Impact (the largest public service union in Ireland), said the government decision would mean a public servant earning € 770 a week before tax "would have to pay an extra € 52 pension hike a week on top of their existing tax, pension contributions and the new 1% levy "- the income levy announced in the 2008 Budget.

Who qualifies for a QROPS or EURBS pension transfer?

A state pension cannot be transferred. But, most other types of pension, even final salary schemes can be transferred to a safe jurisdiction such as Malta which is within the EU and would avoid Irish taxes once you are offshore for 5 years or more.

Categories
Taxes

Tax Codes – Understanding Them In Order To Avoid Paying The Wrong Taxes

When you part with your hard-earned savings to pay your taxes, are you convinced that you are paying the right amounts? Or do you suspect that you may be paying more than what you should? Understanding your tax code and knowing what it means give you a sigh of relief that you are indeed paying what is due the government.

What is a tax code?

The computation of income tax may seem complicated if you do not have a clear understanding of your assigned code. Your code is composed of numbers and letters issued by the HM Revenue and Customs (HMRC) to your employer. It is used to determine the right amount of income tax that your employer will deduct from your salary each month. Some tax codes would look like these: 434L, 323P, 456V, K345, DO, NT, BR, and OT.

What do the numbers mean?

The numbers represent your tax allowance or the total amount allowed to be deducted from your total income for the year. Your tax allowance is derived by using the following formula:

Tax allowance = Number X 10 + 9

To illustrate, a code of 434L means that you are entitled to a tax allowance of 4,349 that can be deducted from your income for the year to arrive at your taxable income. Thus, if you have earned 30,000 for the year, your income that is subject to tax would be 25,651.

What do the letters mean?

The letters indicate certain conditions why you have to pay certain amounts that are different from what others are paying. Let’s take a look at some of the letters and what they mean:

L – This is the most common code that refers to basic personal allowances.

P – This applies to people with ages between 65 and 74 who are eligible for full personal allowances.

Y – This is for people who are more than 75 years old and eligible for full personal allowances.

K – This means that the amount of allowances is less than the amount of deductions.

T – This indicates that there are things that need to be reviewed by the appropriate Inspector of Taxes.

BR – This stands for basic rate and this means that your total income will be subject to the basic tax rate for the current year but you will not be entitled to personal allowances.

NT – This is used when no amount is to be deducted from your income or pension.

D0 – This indicates that you have to pay at a higher rate like 40% because of a second job or pension.

D1 – This means that you have to pay at a higher rate like 50% for multiple income or pension.

Virtually every citizen in the UK is eligible for a personal allowance, which entitles them to a corresponding tax free income. Earnings above the tax free income are subject to the basic tax rate up to a certain limit while higher earnings are subject to higher taxes according to the income brackets set by the HMRC. Thus, knowing how your tax code as determined by HMRC is important to be able to know if the government is imposing the right amount of assessment on you.

Categories
Taxes

3 Simple Steps To Paying Your Property Taxes On Time

After buying or building your dream home in Houston Texas, and enjoying the peaceful yet exciting community experience that it offers, there are other annual matters of equal importance that you need to take care of. And that is paying for your property taxes.

If you haven’t settled it already, then you should make arrangements right after you read this article.

Property taxes are of two basic kinds: Real property (for land and improvements on land) and personal property (for movable man-made objects like vehicles). The percentage or amount of tax charged upon a property depends on its value, as well as the state or province in which it is located.

Your tax bills are normally sent around October, giving you ample time to pay your property taxes before January 31st of the following year. This year, the deadline remains the same which is on January 31 2012. Penalties will be added on to what you have to pay after February 1st.

If you haven’t settled yours yet, quickly follow these three simple steps:

1. Do the math.

Before you start scrambling for paperwork, you must first know the appraised value of your property as well as the tax rate in your county. If you have received the tax bill that was sent out last October, you may want to review that for the figures. You can also check with your realtor (for the appraised value of your property), or your local appraisal authority. No need to worry about getting the figures wrong though, as information on values and tax rates can be found online. For those living in the Harris County area, just go to this link http://www.hcad.org/records/Real.asp?search=name to search your property records and pull up property tax rate computations. For those in the Fort Bend area, visit this link https://actweb.acttax.com/act_webdev/fbc/index.jsp.

2. Deal with the paperwork.

Now that the numbers are in order, it’s time to fill out the year’s property tax forms. You should have received it in the mail, but if you haven’t yet, these are available at your local tax office. If you’re not sure on how to properly fill out the information required, you can use the tax billing that was mailed to you, or consult your local tax assessor/collector.

3. File and make payments ASAP.

Stress and hassles from property taxes can be avoided with early preparation and filing. If you’ve been busy on the last quarter of the year, start the year right by settling your property taxes early January. While you can still make payments after the January 31st deadline, remember that this would incur you penalty charges.

Paying online through credit or debit cards as well as over-the-phone payments are a couple of ways which you can utilize to easily settle your property dues. Simply visit Fort Bend County and Harris County website for more details.

Categories
Taxes

Market Volatility and Taxes – How to Minimize Both to Double Your Returns

As a recovering CFO, I find helping people with their financial planning especially fascinating. I recently conducted a Retirement Income Class here locally, where I had the chance to sit down with one of the students to answer some questions she had a little more thoroughly. It was quickly discovered that our conversation had a lot more merit to becoming a formal meeting so we scheduled a time for us to visit at her home where she would feel more at ease and would have access to any documentation she would need. Our friend, let’s call her Mildred, is a 70 year old lady, who like most working class her age has all of her assets in IRAs. She has her social security and a small pension that she lives on and like most people who grew up with Depression Era parents, lives quite comfortably within the confines of her ‘fixed income’. Mildred came to our class because one of our emphasis is minimizing taxes throughout retirement and since she now has Required Minimum Distributions, she wanted to learn all she could about how to lower her annual income tax bill.

Our conversation was fruitful in that we learned she was replacing her windows at approximately $14,000. This was important for her to do because she plans on giving her daughter the house once she passes. Mildred does not like to owe money so she called her Certified Financial Planner out in Maryland and told him to liquidate enough money for her RMD and a little extra so she can pay for the windows in cash. So Bob, the financial adviser suggested that she liquidate and distribute about $26,000 out of her IRA where they would hold back about 30% for taxes to the federal and state governments.

Now that sounds like it’s no big deal, right? Well, my CFO training told me to look to mitigate the costs of doing business, especially as slippery as taxes. We projected her taxes for next year by completing this transaction Mildred would be on the hook for over $11,000. The tax laws have become pretty complex especially when it comes to Social Security Income. Any income coming from IRAs is going to be counted 100% when you calculate the “Provisional Income” or how much of your benefit is going to taxable. So not only does the effective rate go up because you received more income, but more of your Social Security Income gets taxed. There are three levels, 0%, 50% and 85% and once you reach those thresholds your tax bill increases at a 46% clip. By pouring income out of her IRA, she went from a 14% effective tax rate to one that was over 20%.

My first thought was to divide up the payment to the window company using this year’s RMD and then again using next year’s RMD. This would keep her effective tax rate closer to 14% that she would incur anyway. Mildred had two options, one is use her home equity line of credit she had at 4% and since she itemized, the effective cost to her would be closer to 3% annually and to consider that she would pay it off in less than 6 months it would have only cost her about $600 in interest. Her other option was of course, using the window company’s interest-free financing that she could pay off in a year. Either way, this would save her $6,000 in taxes.

But our story doesn’t end there… during our conversation we discovered that gives to charity quite a bit, about $13,000 annually. So we talked about a tax law called “Tax Increase Prevention Act” that allows people who a required to distribute earnings out of their qualified accounts to donate directly to their charity while being counted as their Required Minimum Distribution. Mildred is required to distribute $11,000 this year which would be added to her income and at a 14% effective tax rate that is about $1,500 in taxes, instead she can transfer $13,000 directly to her charitable organization, satisfy her RMD and bring her entire tax bill from $5,000 down to just over $1,100. In other words, by understanding the tax laws Mildred is able to increase her ‘take home pay’ from $3,200 to over $3,600. Who couldn’t appreciate a $400 per month increase, especially on a “fixed income”?

Now, the last piece of the puzzle, her current portfolio. An allocation made up of 75% stock mutual funds and 25% bond mutual funds. Never mind how expensive mutual funds are or the fact that someone in their 70’s on a fixed income with minimal assets is allocated so heavily into the stock market, let us talk about distribution. If we go along with the RMD schedule, there will be a time every year that Mildred will have to sell her mutual funds in order to get her distribution. Now, the mindset is to have the entire portfolio making enough money where she can live off the interest and capital appreciation. That is great in theory but when you factor in the embedded fees of about 3%, the market would have to do very well in order to stay that course and we all know the markets don’t always go up (except of course the last 6 years, but I digress). Historically speaking, there is a bear market 3 out of every 10 years and if Mildred lives another 30 years, she will have to sell her assets when they are in decline at least 10 times during her retirement. I have been helping people and businesses for over 20 years and nothing brings a portfolio to its knees faster than having to take money out while the assets are declining in value. Simple math tells us if I start with $1,000 and the market takes $100 and I have to withdraw $100 I am left with $800 and if the market regains what it lost, I am now holding $880 and if we did that math again? 4 years from now it would be $750.

So our student becomes a client when we discover that it would be in her best interest to implement and manage two strategies. The first plan is called “Sequence of Returns” where essentially we pare off Mildred’s portfolio into 3 parts; short term (3 years), medium term (5 years) and long term (longer than 5 years, built to be forever). The basic financial planning fundamental is you never distribute assets out of a volatile account. By placing 3 years of distribution in a non-volatile (doesn’t lose money) account Mildred can be assured that the income will be there if needed. The expected rate of return is something small, about 1 – 3% but it’s guaranteed and will never lose its principal. Her medium allocation would carry a percentage of her assets with 5 years as her minimum but on average about 25% of her assets. This account would carry very minimal volatile assets that should garner between 4 and 7%, we use 6% as a benchmark. The long term allocation can be engaged in the market if needed or can be simply placed in a guaranteed investment so there is no loss of capital (why take the risk if you don’t have to?). In fact, we projected that her standard deviation (amount of volatility) will decrease from where it was originally at 17% down to 3.5% for her overall portfolio while we increased her average rate of return from 3.58% to over 10.5%. The second plan was to convert half of her qualified assets (IRAs) into tax free savings investments. By implementing this tax conversion plan, Mildred is in line to save at least $30,000 in taxes throughout her retirement and increase her assets by $143,000 with no costs to her.

Good financial planning is about being prudent with your financial decisions and not just about “staying the course” when markets go south, re-balancing when things get too good or about diversifying your portfolio allocation to mitigate risk while capturing upside potential. It is about identifying the costs of doing business, the risks associated with a financial decisions and the unknowns that can strip away all the gains just like a CFO for your household.

If you would like a 10 minute, hassle-free private conversation regarding your tax situation or portfolio, send an email to chuck@pinnacletaxadvisory.com and we will get to work for you. Take the next step, it’s time.

Categories
Taxes

Save Money on Taxes

Want to strike fear in people’s hearts? Just mention the IRS! It’s one of the most misunderstood government agencies. Our taxes support government operations, and social programs. Indeed without income taxes our health, education, national security and public welfare would be severely compromised or fail. Income taxes are the largest source of federal income and through transfers are a significant supplement to states, counties and municipalities. According to the US Government, income taxes represent approximately one third of all tax revenues collected in United States in 2010. Taxes affect many different aspects of business, government, personal and political decisions. A solid understanding of tax functions is fundamental and extremely useful for taxpayers. It’s important to pay your taxes, but it’s even more important to not pay too much.

A Tale of Three Accountants

Once upon a time there were 3 accountants. Each was successful and ethical. Our hero, John Taxpayer goes to the first one, and the result is he owes $1,000. He decides to get a second opinion, and the result is a $500 overpayment. His friend recommends yet another tax preparer, and the outcome is a $2,500 refund. How can this happen? The answer is, it happens every day, although the taxpayer doesn’t have the benefit of comparison, because he will typically go to one accountant and not know if his return was filed accurately, and to his benefit. In our example, each return was legally prepared and fully in compliance with the tax code.

Who cares about taxes?

Every taxpayer should care about taxes because they influence everyday decisions including all kinds of investments, estate planning, educational commitments, amount and timing of expenses and even prospective job offers. Moreover, the role of taxes is not only limited to personal financial decisions; taxes play an extremely important role in business world. For example: if the taxpayer considers opening a business. The organizational form of the business should be decided at least partially, on the tax implications, because taxes represent significant transaction costs and can have a considerable impact on reported profits. Individuals and businesses should factor potential tax implications into their individual and business economic and financial decision-making processes. Decisions should consider costs and benefits from tax strategy and tax implementation in everyday life or the business cycle.

Complicated Laws and Rules

The tax codes are intentionally complicated. This is the result of congressional actions to benefit certain categories of individuals and businesses. The tax laws reflect a patchwork of special interests; they’re more political than business-like or fair. Your task is to use every exemption, deduction, and rule to your advantage so that you will minimize your tax liability. The government’s job is to make sure you comply with the law and pay your “fair share.” Every taxpayer should be aware that tax laws in United States are based on the all-inclusive income concept. The all-inclusive income concept means that every taxpayer is obligated to include as taxable income all realized income from whatever source, and then claim applicable treatment/adjustment/exemptions/preferences.

Civil Penalties Imposed for Tax Violation

The most common tax penalties are the civil tax penalties and they are the result of violating the tax statutes. Unfortunately, non-compliant taxpayers will be subject to penalties, and in most cases, have to pay interest on the underpayment. However, it is important to remember that the taxpayer will not be a subject to an underpayment penalty if there is a substantial authority that can support the taxpayer’s position. The most common civil violations are: failure to file the tax return, failure to pay tax owed, understatement of tax, fraud, failure to pay estimated payments and claiming false withholding information.

Preparing Your Taxes and Selecting a Tax Preparer

The best way to reduce the taxes you pay is to engage in tax planning, keep accurate records, and perhaps most importantly select a qualified, knowledgeable accountant who will work hard to minimize your tax liability. Unless your tax situation is very uncomplicated it will generally be to your financial advantage to hire a professional tax preparer. Few people are capable of doing themselves justice when it comes to tax preparation. And the seasonal store-front tax-preparer may not be that much better. Unfortunately there are many unqualified tax preparers in United States, and they frequently make mistakes in preparing taxpayer returns. The most common errors made by tax practitioners result in understatement of tax. Remember that tax practitioners are not liable for the additional tax due from the taxpayer. And, only occasionally can the practitioner be held legally responsible for some related penalties and interest on taxpayer unpaid taxes.

Here are some tips:

–Get recommendations for an accountant/tax preparer from your friends, and respected colleagues.

–Exercise a similar level of care in selecting your accountant/tax preparer as you would in selecting a doctor or minister.

–Registered (with IRS) Tax Preparers, CPA’s and Enrolled Agents are typically well-qualified and have demonstrated their competency.

–Keep receipts, bank statements, mortgage and tax records, any professional or business expenses, etc., so that you will be prepared to file your return.

–Organize your records to facilitate preparation of tax forms. Deductions can be overlooked or understated as a result of messy or incomplete information.

–Be sure to accurately report all of your income. Tax evasion is a serious offense. (And failure to report all of your income is even worse than overstating deductions.)

–Be sure to have an in-depth conversation with your tax preparer. They will ask you about all your financial matters to ensure that you are getting every deduction and favorable treatment you are entitled to.

— Ask your tax preparer if you qualified for following tax credits: child tax credit, dependent care credit, earned income credit, education credit, foreign tax credit, making work pay credit, and refundable tax credit.

— Past and future income and projected expenses are equally as important as the current year when you’re developing tax strategies. View tax-preparation as an ongoing, year-round process, not a single event.

–The fee you pay to your preparer is not as important as the net result. (Amount owed or refund minus the fee.)

–Either file by the deadline or file for an extension so that you don’t incur penalties.

–You sign your tax return and you are responsible for the content.

Krzysztof Bryniuk, MBA, MM, MEd, has over 7 years of experience in finance, marketing, banking, and accounting. He is a Professor of Accounting, Finance, and Economics. His firm, Bryniuk & Co., LLC specializes in individual and corporate accounting services.

Categories
Taxes

Does a Teenager Owe Taxes?

The United States federal government income tax system is complex and so naturally there is no simple answer to this question:do teenagers owe taxes? There are so many ways that a teenager can make money today. They can have a part-time job or even several jobs. They can be self-employed like my daughter who is giving piano lessons. They can be what the IRS calls a household employee doing babysitting or mowing grass. Sometimes they are not employees but independent contractors like my local newspaper carrier. Some teenagers have unearned income from savings accounts or investments in their name.

Here are some guidelines (based on 2011 amounts) to help you determine if a teenager may owe taxes.

  • If a teenager has EARNED income over $5,8000 (in 2011), they owe federal income tax. Earned income is money from a job where the worker gets a W-2 (as an employee) or 1099MISC (as an independent contractor) or from being self-employed. The dollar threshold of $5,800 is adjusted annually.
  • If a student has UNEARNED income over $950 (in 2011), they owe federal income tax. Unearned income is income from investments such as interest on savings account, dividends from stock and mutual funds owned in a custodial account, and capital gains for the sale of stock or mutual funds. The dollar threshold of $900 was adjusted (increased) $50 in 2009.
  • If a student has SELF-EMPLOYMENT income over $400, they owe Self-Employment tax (called SE Tax). Self-employment income is the profit from a business. SE Tax is the same a Social Security (FICA) and Medicare for self-employed people. The dollar threshold of $400 has not been adjusted in decades.
  • If a teenager (under age 18 at anytime during the year and a student) was a household employee, they do not owe Self-Employment tax. A household employee is a housekeeper, maid, baby-sitter, gardener, and others who work in or around a private residence as employees. This income is reported on Line 7 of the 1040 along with W-2 wages, but include a note “HSH” with the dollar amount of the household employee income earned.

These guidelines may be confusing. That is because there is more than one type of tax covered on the Form 1040. Both the income tax and self-employment tax are on the 1040. There is also more than one type of income that is taxed. There are forms and schedules for unearned income, self-employment income, investment income, etc. The thresholds vary depending on the type of income and type of tax. Some of the thresholds are adjusted every year, but some have not been adjusted in decades (like $400 threshold on self-employment tax).

Here are examples from real life of teenagers earning money and their tax situation.

Real Life Examples

Earned Income

Lauren works at Sears and makes $3,100. Lauren does not owe federal income tax because her wages are under $5,800. She could file a return to get a refund of any federal income tax withheld. She may file a state return to claim a refund too!

Lauren works two jobs and together earns $6,000. She must file a 1040 with both her W-2s. She will owe federal income tax and possibly state income tax.

Household Employee

Emily earns $800 babysitting and $200 giving piano lessons. Social Security and Medicare taxes do not apply to the $800 because she is a household employee. Her $200 from teaching piano lessons is self-employment income, but under the $400 threshold to pay Self Employment tax. She should still file a Schedule C (Profit or Loss from Business)

Kurt earns $2,000 mowing lawns for neighbors. Kurt will not owe Social Security and Medicare taxes because he is under 18 and a household employee. He will not owe federal income tax because $2,000 is under the threshold of $5,700 for federal income tax (for 2009).

Self-employed Income

Kurt mows grass for a cemetery and gets paid $1,000 on a 1099 MISC. He is considered an independent contractor and will owe Self Employment (SE) tax. He will not owe federal income tax because his income is under the $5,8000 earned income threshold (for 2011). Kurt should file a 1040 to pay his Self Employment tax.

Phil does web design and earns a profit of $6,000. Phil owes Self Employment tax and federal income tax, and, likely, state income tax.

Unearned Income

Tom has a large savings account. He earned $600 in interest. Tom does not have to file a tax return, nor owe any income tax because his investment income is under the $950 threshold for unearned income.

Tom’s dad manages his college fund. He sold stock for a capital gain of $5,000. Tom must file a 1040 and include Schedule D (Capital Gain or Loss) and Form 8615 Kiddie Tax. He will pay federal income tax at his parents’ tax rate.

Categories
Taxes

How Taxes Might Be Affected By Long Term Care Benefits

Long term care insurance policies offer a great deal of benefits that are exempted from federal taxation and most state income taxes. Premiums paid on the policies are treated like health insurance premiums, so they qualify for federal income tax deductions. However, there are limits based on age.

The federal government’s tax deductible limits are based on total annual premiums paid and the age of the policyholder. For people age 40 and under, the maximum annual deduction on long term care insurance is $360 for 2013. Those aged 41 through 50 have a maximum annual deduction of $680 while people from age 51 through 60 have a maximum deduction of $1,360. The deduction for people from age 61 through 70 is $3,640 while those over age 70 have a current maximum deduction of $4,550.

The tax-exempt status on premiums paid for long term care policies is different from those paid for life insurance plans. Life insurance premiums often times only are tax exempt when the benefits paid out from them qualify for income taxation. If a life insurance plan qualifies for tax exempt status when paying premiums, the benefits typically are taxed by the federal government and some state governments as income.

To qualify for federal income tax breaks and most state income tax breaks, a long term care insurance policy must be guaranteed renewable and not grow cash value over time. Such policies are underwritten by life insurance companies. The federal government currently does not tax benefits paying no more than $320 per day. Amounts above $320 might be taxed as income, but the amount is adjusted each year to account for inflation.

Generally, daily benefits that exceed the current $320 federal limit but do not exceed the daily cost of extended care will not be taxed due to the fact they are spent on care instead of amounting to additional income. Total insurance benefits are reported to the federal government by life insurers, who issue 1099 tax forms to policyholders. Policyholders then must claim any taxable amounts on a federal Form 8853.

The benefits can be exhausted quickly when looking at the average cost of care. A semi-private nursing home charged an average rate of more than $220 per day in 2012, which is equal to more than $80,000 per year and easily could exceed even the best year of earnings for most people during their working careers. An assisted-living facility is more affordable at about $44,000 per year in costs with other services costing more. Home health care costs ran about $21 per hour in 2012, making in-home care the most affordable of long term care services.

Categories
Taxes

Maine State Income Taxes – Get To Know & Make The Difference!

Taxes are an inevitable fact of life. Where ever you may reside paying taxes is indispensable for each and every earning individual! This justifies clearly that most of the individuals do not mind paying taxes of any sort! After all it’s us who get the benefits of these taxes in return in form of the infrastructures and civic amenities in the country!

Especially, Maine state income taxes seem the easiest of all!

Many a times when people migrate to the Maine, the state income taxes seem to be lost. You often stop worrying about them. To be precisely honest, almost all of us forget about the taxes all round the year and click on to them as emergencies close to the due dates!

Here are a few important factors determining and defining the Maine state income taxes:

1. Due date

Due Date – that’s an interesting and real alarming term. As paying taxes is indispensable until & unless you are unemployed, people often miss out the due date! And to avoid the fines it is almost unquestionable to file the taxes before the due date.

Well, this year you won’t miss it – mark it on the calendar in your room right away – for Maine state income taxes the due date is April 15.

2. What is your bracket?

Knowing your bracket is quite essential to identify as to what sort of income tax payee are you?

In order to know your bracket you primarily need to evaluate the amount of taxes you need to pay. Main state income taxes highly depend on these brackets.

The Maine state income taxes are divided into 4 key brackets.

Another factor defining these brackets is your marital status – that is, it is different for those who are single and those who are married.

As per your income levels, the brackets define the percentage of taxes that you need to file.

i. For the singles, the 4 brackets are as follows:

– 2% for first $ 4,450 income.

– 4.5% for income between $ 4,451 – $ 9,100.

– 7% for income between $ 9,101 – $ 18,250.

– 8.5% for income $ 18,251 and above.

ii. For married couples the 4 brackets are as follows:

– 2% for the first $ 9,150 income.

– 4.5% for income between $ 9,151 – $ 18,250.

– 7% for income between $ 18,251 – $ 36,550.

– 8% for income $ 36,551 and above.

3. Understand the forms you need to fill in.

Filing the taxes of course requires filling the forms. There are forms specific for all sorts of taxes. The best way of understanding the forms and knowing which one you ought to fill in is approaching the professionals. They would not only guide you the right way of filling the forms, but also help you smoothly go through the process.

Those planning an economical fining of taxes and hence doing it themselves, read through the following tips:

i. 1040-ME

1014-ME is the most common form you would be required to fill in. It is quite a long a detailed form.

ii. 1040S-ME

1040S-ME is almost a shorter version of 1014-ME.

iii. Determinants for the form

What you do all round the year to gain income determines the sort of form you would need to fill in. Those who are self employed need to fill in various other forms.

Hence, moving to Maine, you have nothing to worry about in the taxes.

State income tax system is quite similar to its Maine counterpart, except for the amounts!

Categories
Taxes

Eliminating Income Taxes in Bankruptcy

Many people assume that you cannot file bankruptcy on taxes and go on for years paying taxes that they could have eliminated in bankruptcy. This notion may stem from the prevailing belief in the United States ever since Benjamin Franklin uttered the famous quote: “In this world nothing can be said to be certain, except death and taxes.”

Tax liability is often a very stressful issue, especially for business owners. Employees usually have their taxes taken out of the paychecks each pay period, so they are prepaid come April 15th. But when it comes business owners, they pay themselves and usually do not set aside the necessary savings to cover their anticipated liability. So tax time rolls around and they stress about how they will meet their obligations to Uncle Sam.

The good news, for many people, is that if you have gotten yourself into a situation where you incurred a tax liability that you cannot pay, you may be able to discharge your liability in bankruptcy. Generally speaking, you can file bankruptcy on taxes and eliminate your income tax liability if your taxes are more than 3 years old.

More specifically, if your taxes were (1) first due more than 3 years ago, and (2) two years has passed since you filed your return, and (3) if an assessment has been made then 240 days has passed since the assessment, you can file file bankruptcy on taxes and your tax liability to the IRS can be discharged in bankruptcy.

If the IRS has not made an assessment before you file bankruptcy, it may make an assessment after you file bankruptcy, in which case that may pose an obstacle to you eliminating your income tax liability depending on your particular circumstances.

If there is fraud alleged to be involved in connection with the filing of your returns (or possibly based on a total failure to file), then your income taxes may not be dischargeable even if you meet the above described test.

As part of the pre-bankruptcy planning process, an experienced bankruptcy lawyer can properly advise you as to whether your tax liability would be dischargeable in bankruptcy in light of your particular circumstances and when you should file in order to be able to discharge your tax liability.

Note: this article does not address cancellation of debt income attributed to you, for example, when a mortgage lender writes off a debt and issues you an IRS Form 1099-C. Income tax liability based on cancellation of debt income is beyond the scope of this article. Suffice it to say, such liability is generally dischargeable in bankruptcy regardless of the year the liability was incurred.