What Do You Need to Know about Deductions?
May 24th, 2010 | Posted by taxAs an employer, you are responsible for calculating and deducting the correct amounts from your employees’ paychecks. Doing your homework in this area is a necessary evil that will pay off in terms of avoiding penalties and other troubles with tax authorities.
Payroll deductions cover a wide range of items such as federal, state and local income taxes. Rules vary from time to time and state to state, so it is important to keep abreast of new IRS and state government mandates. Who pays the deductions also varies — some deductions are paid by the employer, some by the employee and some by both.
Both the employee and the employer contribute to Medicare and Social Security. Make sure your business adheres to the correct payment schedule (quarterly, monthly or semiweekly), which varies according to how much your business collects in employment taxes.
Employers pay for federal unemployment insurance, which funds the federal unemployment program.
State unemployment insurance is a tricky area. Some states view this solely as an employer tax, meaning you do not have to deduct this amount from payroll. Other states impose this tax on employers as well as employees. The same goes for workers’ compensation insurance, which also depends on what type of business are you in.
State and local tax liabilities are just as complicated — if not more so. Start by recognizing that not all states require withholding of state taxes and not all states have local taxes. Things get even more complicated if your business operates in more than one state or if some of your employees live in one state and work in another.
Payments for disability insurance also vary widely according to the state in which you operate. Employers and employees share the responsibility differently in different states.
Since deductions vary from state to state, be sure to check with your tax advisor or state and local tax authorities to determine your specific deduction requirements.
For more useful information on business taxes, read Special Report: Top 10 Tax Tips for Small and Growing Businesses.
Adjusting Your Tax Withholding
May 24th, 2010 | Posted by taxThe act of withholding taxes is supposed to provide an accurate picture of how much you’ll pay in taxes for a given year. Nonetheless, like everything else related to paying taxes, we can (and do) find ways to try to make the system more beneficial for our needs. This being said, you should increase or decrease your withholding if you are having too little or too much withheld from your paychecks.
By filling out a new W-4 Form for your employer, you can make the necessary adjustments to your withholding. On line 5 of the W-4, you can decrease the number of allowances, or on line 6, you can add the amount you wish to have withheld. The more you have withheld, the more likely your tax bill will be covered and you will not owe money at tax time. In fact, you may benefit from a refund check. For those who are not very good at setting money aside for taxes, having more taken out of your weekly or biweekly paycheck is a benefit.
For a married couple where one person has a steady income and the other is an independent contractor or freelancer, adjusting the withholding can be very helpful. Claiming more withholding for the person with the steady salary will be beneficial when the spouse with the independent income has higher earnings. This can be adjusted, should the independent working spouse have lower earnings, and can help ensure that they are covered at tax time.
While you certainly want to make sure you have enough withheld to cover your tax obligations, you do not want to have too much money withheld. While many people look forward to receiving a big tax refund check, this is actually not sound financial planning. The money that appears in the refund check is your money; the government has been holding it because you’re paying too much in withholding. This money could be invested and earning interest for you, rather than just sitting with the government and showing up in your refund check.
Events throughout the year can also alter your tax status at the end of the year. For this reason, it’s important that you review your exemptions at least once during the course of the year, allowing you time to make adjustments. Among the many life situations that can raise or lower the amount of withholding include: buying or selling a home, marriage, divorce, death, birth or adoption of a child, taking care of a parent, and a situation where one spouse starts or stop working.
Make sure to look at income from other sources, which might include the sale of real estate or capital gains from investments. Consider this when adjusting your tax withholding or when paying estimated taxes.
In short, stay on top of your tax withholding. Do the calculations — use online calculators if necessary — to try to get the accurate amount you should have withheld, which should be slightly more than your tax bill.
Claiming Dependents on Your Tax Returns
May 24th, 2010 | Posted by taxWhile it’s easy to look at your two young children sitting across from you at the breakfast table and know that they are indeed your dependents, it’s not always as simple to define who does and does not qualify as a dependent on your tax return. Today, there are numerous living situations that can present gray areas when trying to determine whether someone is a dependent for whom you can claim an exemption.
Due to the many possible scenarios, the IRS has come up with a few simple tests to determine whether you can claim someone as a dependent on your tax return:
1. Relationship: You can claim relatives even if they’re not living with you. You can also claim a nonrelative if he or she has been living with you for the entire year.
2. Citizenship: To qualify for an exemption, your dependent must be either a U.S. citizen or a resident of Canada, Mexico, or the United States for part of the year. If you have adopted internationally and the adoption is not yet finalized, or the child did not automatically become a citizen through the Child Citizenship Act of 2000, you can still claim the child as a dependent if he or she was living with you as a member of your household for the year. Foster children fall under special exemptions.
3. Joint return: If you file a joint return with your spouse, you cannot claim him or her as a dependent. If, however, your spouse meets the other four requirements and files a separate tax return, he or she can be claimed as a dependent.
4. Gross income: For the 2008 tax year, a person’s income must be under $5,350 for you to claim that person as a dependent. All income in the form of money, goods, property, or services that’s not exempt from tax is considered gross income. If your children are under the age of 19, or if they’re under the age of 24 and are full-time students for at least five months during the year, they are exempt from this rule.
5. Support: The person must receive more than half of his or her support for the year from you. Again, this is not the case for children under age 19 or a child who is a full-time student under the age of 24. Children of divorced parents, or parents who have been living apart for some portion of the year, are generally dependents of the parent who has custody or has provided more than half the child’s support for the year.
Using these five tests, you should be able to qualify your deductions. For special situations where you’re unsure of someone’s status, you can find more detailed information by looking at IRS Publication 501. When claiming dependents, remember to include their Social Security numbers on your tax form.
How to Calculate the Tax Savings of Owning a Home
May 23rd, 2010 | Posted by taxOne of the big advantages of buying a home
is that the IRS allows you to deduct, within limits, the property taxes and mortgage interest on your annual tax return. Here’s an easy way to figure out how much you’ll be able to save.
Calculate your monthly mortgage payment and property taxes
Multiply by 12 (if you are paying monthly) or 26 (if you are paying biweekly) to arrive at your annualized payment.
Multiply this annual amount by your federal income tax rate to arrive at a very reliable estimate of your tax savings.
How to Calculate your own tax return refund
May 23rd, 2010 | Posted by taxBy laura lozano
Gather all of your documents. If you had not received the w-2 from employment or 1099′s you should contact the employer. By law they are required to report you as an employee or a contractor and should give you any of these forms. If they dont comply and give it to you, you can report them to the IRS.
Do internet research on tax refund calculators on the internet. There are websites like Turbo tax or HR Block and they are excellent.
Select a website. After selecting a website start filling the information accurately and carefully. Be truthful since this information is actually going to be in the actual tax return.
You will see the amount calculated on the screen as you enter the information. That amount should be the same if you calculate the tax refund calculator in different websites.
Is there a right way to promote health insurance through the tax system?
May 22nd, 2010 | Posted by taxINTRODUCTION
The private health insurance system in the U.S. has been erected on a foundation of tax incentives that promote employment-based coverage over the individual purchase of insurance. In 2006, persons taking advantage of tax breaks for health insurance will save about $150 billion in federal and state income taxes and an additional $75 billion in payroll tax contributions (Sheils and Haught, 2004; Sheils, 2006). (1) Most Americans–some 174 million people, or about 70 percent of those with insurance–are covered by employment-based health insurance (DeNavas-Walt, Proctor and Lee, 2005). Included in that count are about 12 million seniors covered by Medicare who also have supplementary retiree coverage through a former employer.
Although tax incentives have helped millions of people buy health insurance through their employers, this policy approach brings a host of problems. Millions of people do not have access to tax-favored employment-based insurance, and many go without coverage. Many who are offered such insurance turn it down because it is too expensive or does not meet a worker’s individual financial and health needs. Employees may find themselves locked into their current jobs to retain coverage, especially if someone in their family develops a serious medical condition. Even then, there is no guarantee that the employer will not reduce benefits or drop coverage in the future.
Current tax incentives for health insurance also fail on equity and efficiency grounds. The tax expenditure is regressive, providing a greater subsidy to those with good jobs and high incomes and much less to the unemployed and disadvantaged. In addition, the tax system promotes the purchase of excessive insurance coverage that blunts the incentive for efficiency in the production and use of health services. The resulting cost escalation in our health system affects everyone, but its greatest impact is arguably on the uninsured, many of whom do not have the option to take advantage of current tax benefits.
Those flaws in our current system of subsidizing employment-based health insurance are well known. Experts inside and outside government have advanced a variety of policy reforms intended to improve the performance of tax incentives for health insurance. Recent proposals include capping the tax exclusion for employment-based health insurance, tax credits for the purchase of private insurance, tax subsidies for the purchase of high-deductible insurance and health savings accounts (HSAs), and expanding tax subsidies for out-of-pocket health spending. The proposals address different problems in our current system of tax incentives for health spending, and they represent only part of broader health system reform.
Limitations on taxpayers’ ability to disavow tax consequences of contract terms.
May 22nd, 2010 | Posted by taxA fundamental principle of federal income taxation is that the tax consequences of a transaction are determined based on its substance rather than its form. To this end, the government has the ability to look beyond the form of a transaction to its economic substance in determining its tax consequences. Taxpayers have also asserted the substance-over-form argument to disavow the tax consequences of contracts into which they entered. Often these taxpayers bargained away tax advantages as part of the underlying transaction and then attempted to reclaim the tax benefits by recharacterizing the transaction for tax purposes on their income tax return. While the government is entitled to look through the form of a transaction to its economic substance, taxpayers are generally not allowed to disavow the form of their transactions.
Much of the case law addressing this issue developed in the purchase price allocation context. Consider the following scenario: A seller of stock agrees with the buyer to allocate a portion of the purchase price to a covenant not to compete, which is amortizable to the buyer but taxable to the seller as ordinary income. The seller subsequently takes the position that the entire purchase price should be treated as a capital gain, arguing that the agreement to allocate a portion of the purchase price to a covenant not to compete bore no relationship to economic reality.
The circuit courts have split on the issue of when a taxpayer should be able to disavow the form of his or her transaction and assert that the substance of the transaction controls. Some courts have adopted the “strong proof” standard and others the more strict Danielson standard. In a recent case, the New Hampshire District Court applied the strong-proof standard and ruled that a former consulting partner at Ernst & Young U.S., LLC (E&Y), who agreed to exchange her interest in E&Y for stock in Cap Gemini, S.A. (Cap Gemini), was bound by the valuation of her Cap Gemini restricted shares specified in the exchange transaction documents (see Berry, No. 06-CV-211-JD (D.N.H. 10/2/08)).
The Danielson Standard
The Danielson standard has been adopted by the Third, Fifth, Sixth, Eleventh, and Federal Circuits (with some acceptance in the Second Circuit). In Danielson, 378 F.2d 771 (3d Cir. 1967), the stock purchase agreement entered into by the seller and the purchaser allocated a portion of the purchase price to a covenant not to compete. When filing his individual tax return, the seller ignored the purchase price allocation to the covenant not to compete set forth in the purchase agreement and treated the entire proceeds as a capital gain on his return. The seller argued that he could disavow the terms of the stock purchase agreement because the allocation to the covenant not to compete bore no relationship to economic reality. The Tax Court agreed with the seller and round that the covenant did not effectively preclude the seller from competing; thus, the seller appropriately ignored the purchase price allocation set forth in the stock purchase agreement and treated the entire proceeds as a capital gain on his return.
Shelter for the storms in Augusta
May 7th, 2010 | Posted by taxBy Keith Edwards Kennebec Journal, Augusta, Maine
Publication: Kennebec Journal (Augusta, Maine)
May 7–AUGUSTA — City councilors unanimously approved some fancy financial footwork that could save the city $350,000 a year, for 20 years — a total of $7 million.
The proposal — made by Ralph St. Pierre, assistant city manager and director of finance — would use tax increment financing to shelter funds in a special account to help pay for a major Greater Augusta Utility District storm-water upgrade project.
The utility district, a quasi-municipal organization independent of the city, would then give a credit to the city, on its annual utility bill, for the same amount of funding the city contributes to the project.
Maine law allows municipalities to shelter new tax revenues in tax increment financing, or TIF, districts to help fund certain allowed infrastructure improvements within the designated district.
Sewer and storm-water infrastructure improvements are among the eligible projects, St. Pierre said.
Sheltering the funds means they would not be added to the city’s total property valuation for state tax calculation purposes.
That’s important, because as a municipality’s total property valuation increases, its state-provided revenue — such as aid for education and revenue sharing — decreases and its county tax increases. The reason is that, if a municipality’s valuation increases, it’s less in need of help from the state.
But new value sheltered in a TIF doesn’t count toward a municipality’s property tax value during the life of the TIF.
St. Pierre said Thursday that sheltering the money to be used on the storm-water project could result in the city saving $350,000 each year, for 20 years, by delaying those impacts.
“This results in significant savings for the city,” Mayor Roger Katz said. “This plan came up because Ralph St. Pierre thought it up. Those of us up here (on the City Council podium) are grateful he thought of that.”
The city’s TIF district encompasses the downtown area, making work done within the district eligible to be sheltered. Much of the utility district’s storm-water project is within the downtown area.
The TIF district fund has been built up with funds from development elsewhere in the city, including The Marketplace at Augusta and Augusta Crossing.
TIFs are often used to give tax breaks to businesses in order to get them to locate within a municipality. In this case, the city would be the beneficiary of its own TIF.
The Greater Augusta Utility District’s approximately $17 million, two-year project is meant to prevent overflows of human waste into Bond Brook during major rainstorms. It would replace a sewer line running between Bond Brook and Mount Vernon Avenue and add a large amount of storage space underneath the city, to hold storm water and sewage during major storms until it can be treated.
When major storms hit now, storm water and sewage can overwhelm the current storm water system and overflow into Bond Brook and into the Kennebec River from there.
St. Pierre said the city pays about $800,000 in utility fees to the utility district each year.
While the utility district’s project is only expected to take about two years to complete, the city can continue to pay for some of the project with TIF funds for 20 years because, St. Pierre said, the district would borrow money for the project through a bond, and those bond payments are eligible to be paid by TIF funds.
To see more of the Kennebec Journal, or to subscribe to the newspaper, go to http://www.kjonline.com . Copyright (c) 2010, Kennebec Journal, Augusta, Maine Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com , call 800-374-7985 or 847-635-6550 , send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
Claims alleging misrepresentations about illegal tax shelter are unsuitable for class treatment
April 30th, 2010 | Posted by taxDeclining to certify the plaintiffs’ case as a class action, the U.S. District Court for the Southern District of New York ruled that variations in states’ fraud laws and in representations made to the plaintiffs in the sale of a tax shelter demonstrated that individual issues would predominate over common ones.
KPMG, an accounting firm, and Brown & Wood, a law firm, sold an illegal tax shelter known as Bond-Linked Issue Premium Structure (BLIPS). Mark Kottler, Karen Long and Robert Long sued Deutsche Bank AG and other defendants alleging fraud and unjust enrichment among other claims. The plaintiffs sought to certify a class of all persons and entities who entered into BLIPS transactions in which KPMG and/or Brown & Wood issued letters about the tax consequences of the transactions.
The district court determined that the requirements of numerosity, commonality, typicality and adequacy were met. The putative class consisted of approximately 180 members and each class member was allegedly injured by the defendants’ identical scheme to sell BLIPS. The plaintiffs’ claims and those of the putative class arose from the defendants’ course of conduct in selling BLIPS. Accordingly, the plaintiffs’ interests were not antagonistic to those of the class.
The district court found that individualized proof of reliance would predominate at trial. The district court reasoned that the BLIPS’ sales presenters made different representations at different times to different people. Some consumers thought that the presentation was about a way to make money, others thought that it was a tax scheme while others may not have relied on the presentation at all.
The district court also found that differences in the 22 relevant states’ laws made a class action inappropriate. Additionally, a class action was not the superior method of adjudication. The class members were high net-worth investors with large claims that they could litigate individually. The district court observed that approximately 25 class members had already brought individual lawsuits and others settled their claims without filing lawsuits.
The district court denied the plaintiffs’ motion for class certification. (For an earlier decision in this case, see 9 Cl.Act.L.Mon. 27, Jan. 31,2009.)
Judge : Paul A. Crotty
Source: Class Action Law Monitor, 04/30/2010
Copyright © 2010 by Strafford Publications, Inc. http://www.straffordpub.com / All rights reserved. Storage, reproduction or transmission by any means is prohibited except pursuant to a valid license agreement.
In a nutshell … tax-wise saving
April 16th, 2010 | Posted by taxPhil Mileham explains how GPs can make the most of their investments by becoming more tax-efficient
In a nutshell
A quick guide to issues affecting GPs
As there were very few new tax breaks in last month’s Budget, GPs now need to make sure that the impact of tax on their personal finances is not more onerous than needs be.
Use your personal allowances
Everyone is entitled to a tax-free ‘personal allowance’ – the first part of your income that is not taxable. However, as confirmed in the Budget, some high-income people will lose some or all of this allowance.
If you are married or in a registered civil partnership and your partner pays no tax or is liable at a lower rate than you, passing some of your income-producing assets to them can reduce your tax and make full use of both of your personal allowances.
Review your investments
Individual savings accounts (ISAs) are a great way to avoid tax and there are numerous investment options available.
ISAs are exempt from income and capital gains tax, although you cannot reclaim the tax credit on UK dividends from a stock and shares ISA.
On 6 April 2010, the annual ISA investment limit increased to pounds 10,200. Furthermore, one Budget proposal was to increase this limit each year in line with inflation from April 2011 – great news if it goes ahead.
Outside of ISAs, investments are generally subject to income tax at your highest rate. For some GPs, this could be 50 per cent.
The rate of capital gains tax (CGT) applying to growth on your investments, remains at 18 per cent from 6 April 2010. By using investments geared towards growth rather than generating taxable income, you can take advantage of the difference in rates. With careful planning, make use of the annual CGT exemption of pounds 10,100 for 2010/11. Investment bonds can also be attractive for higher rate taxpayers or additional rate (50 per cent) taxpayers from 6 April 2010 You can withdraw up to 5 per cent of the amount invested each year without paying tax.
You will eventually pay tax when the investment matures if you are a higher or additional rate taxpayer at the time.
Top up your pension
Pensions offer a great way to save on income tax while saving for retirement as most people can get tax relief on pension contributions at their highest rate.
So, if you pay tax at 40 per cent, every pounds 100 invested in a pension fund could cost you as little as pounds 60. Your pension fund will also grow largely free of tax.
There are maximum limits for tax relief, so seek advice about how this affects you.
Minimise inheritance tax
When you pass away, the taxman could receive up to 40 per of your estate through inheritance tax (IHT). The Budget proposal to freeze the IHT nil rate band at pounds 325,000 until 6 April 2015 means that, increasingly, more people’s estates will be subject to IHT.
There are many ways to mitigate this tax, from gifting money (perhaps to children or grandchildren), through to more complex trust arrangements.
Planning to reduce tax is a complicated process, and given the raft of new tax changes, consider taking financial advice from a provider that understands GPs’ personal and professional needs.
- Phil Mileham is national sales manager at Wesleyan Medical Sickness, http://www.wesleyan.co.uk
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