Tax Preparation Blog

Title: 

What Is The Fair Tax And Why Should You Care?

Word Count:

779

Summary:

The U.S. Federal Income Tax Code is a tax on the income of American companies and citizens enacted by the government. The U.S. Constitution gives Congress the power to impose taxes, duties, imposts, and excises.

The purpose of the Tax Code is to provide income for the operation of the government. The Tax Code is found in Title 26 of the U.S. Code of Federal Regulations (CFR).

Any U.S. citizen who has filled out a federal tax return knows how confusing the current U.S. T...

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Article Body:

The U.S. Federal Income Tax Code is a tax on the income of American companies and citizens enacted by the government. The U.S. Constitution gives Congress the power to impose taxes, duties, imposts, and excises.

The purpose of the Tax Code is to provide income for the operation of the government. The Tax Code is found in Title 26 of the U.S. Code of Federal Regulations (CFR).

Any U.S. citizen who has filled out a federal tax return knows how confusing the current U.S. Tax Code is. Additional layers of complexity appear if the taxpayer itemizes deductions, deducts home business expenses, or has a profit or loss due to investments. 

When the convolutions of corporate tax law are considered, it is no wonder that companies hire teams of accountants to prepare their income tax returns.

What Is The Fair Tax?

The Fair Tax is a proposed income tax system intended by its founders to replace the current Tax Code. The Fair Tax Bill was proposed by Representative John Linder (R-GA) in July 1999 to the 106th Congress.

One definition of the Fair Tax is "a proposed change in United States tax laws to replace all federal personal income taxes, payroll taxes, corporate taxes, capital gains taxes, self-employment taxes, gift taxes and inheritance taxes with a national retail sales tax and monthly tax rebate to all households."

At the time of this writing, the Fair Tax proposes to apply a tax of about 23% on purchases. This purchase tax would replace the current income tax paid by Americans. Generally, those who spend or purchase more would pay more taxes. Conversely, those who spend less would pay less or even nothing.

Differences Between The Tax Codes

The current Tax Code is based on the income of a person or corporation. The proposed Fair Tax would be based on the purchases of a person or corporation. The expectation of the proposed Fair Tax is that those who are more wealthy generally purchase more, and will therefore would likely pay higher taxes than they do now. 

Another major difference is the complexity of the two Tax Codes. As the Fair Tax Bill sponsor Representative Linder states on his website:

"I would also encourage everyone to review the Fair Tax, as it is only 132 pages, which stands in stark contrast to the more than 50,000 pages of tax code laws and regulations currently in effect."

Furthermore, the proposed Fair Tax Code would be administered by the States. Most states already enact a state income tax, and therefore have the infrastructure in place to collect the Fair Tax revenues. This would also mean greatly reducing, or even eliminating, the Internal Revenue Service (IRS)!

Monthly Tax Rebate Checks

Under the Fair Tax plan, each household would receive a monthly tax rebate check, paid in advance. The amount of the check would be estimated as the amount of Fair Tax owed on poverty level spending. The goal of the monthly rebate check is to prevent anyone from being taxed on household necessities, especially those under the poverty level.

Will The Fair Tax Provide Enough Government Income?

The feasibility of the proposed Fair Tax is the topic of endless discussion. On one hand, the entire taxation process would be greatly simplified. Wealthy persons and corporations would pay a greater share of taxes.

On the other hand, a Tax Code change of this magnitude will require massive reeducation of the public. People are resistant to change, and would no doubt cry foul at being denied many of their usual tax deductions.

Finally, the only way to accurately assess the effectiveness of the proposed Fair Tax Code is to see it in action over a period of years. That does not look likely in the very near future, although the Fair Tax proposal is gaining support.

Tax Your Brain

Whether you are for it or against it, you must agree that the proposed Fair Tax would represent a dramatic shift in U.S. taxation policy if enacted. Proponents and opponents of the Fair Tax Bill will no doubt continue to generate tax estimates that are supportive of their arguments. 

It is up to you as an American taxpayer to become educated on the Fair Tax Bill. Determine whether the proposed changes and tax payment methods would benefit you and the country more than the current system. 

Once you've made a decision about the proposed Fair Tax, contact your Senators and Representatives and tell them how you feel about it. Regardless of the tax system in place, you are still paying their salary.

The website below provides free information about income tax preparation tips and tax assistance articles and resources.

Title: 

What to Do If You Can’t Pay Your Taxes

Word Count:

438

Summary:

The end of tax filing extensions is quickly approaching. What do you do if you can’t pay the amounts you owe? You should still file your return by the due date and pay as much as you can. There are, however, additional steps that might help.

Keywords:

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Article Body:

The end of tax filing extensions is quickly approaching. What do you do if you can’t pay the amounts you owe? You should still file your return by the due date and pay as much as you can. There are, however, additional steps that might help.

Credit Cards

You can charge your taxes on your American Express, MasterCard, Visa or Discover cards. If you go in this direction, you can use either of the following two sources:

Official Payments Corporation

1-800-2PAY-TAX (1-800-272-9829)

www.officialpayments.com

Link2Gov Corporation

1-888-PAY-1040 (1-888-729-1040)

www.pay1040.com

If a credit card is out of the question, you may be able to pay any remaining balance over time in monthly installments through an installment agreement. If you are completely wiped out and the future looks grim, you may also want to consider getting the tax amount reduced through the Offer in Compromise program.

To apply for an installment payment plan, fill out and attach Form 9465 to the front of your tax return. The IRS has streamlined the approval process if your total taxes (not counting interest, penalties or other additions) do not exceed $25,000 and can be paid off in five years or less. Be sure to show the amount of your proposed monthly payment and the date you wish to make your payment each month. Make absolutely sure you can make the payments.

The IRS charges a $43 fee for setting up an installment agreement. You will also be charged interest plus a late payment penalty on the unpaid taxes. The late payment penalty is usually one-half of one percent per month or part of a month of your unpaid tax. The penalty rate is reduced to one-quarter of one percent for any month an Installment Agreement is in effect if you filed your return by the due date (including extensions). The maximum failure to pay penalty is 25 percent of the tax paid late.

If you do not file your return by the due date (including extensions), you may have to pay a penalty for filing late. The penalty for failing to file and pay timely is usually five percent of the unpaid tax for each month or part of a month that your return is late. The maximum penalty for failure to file and pay on time is 25 percent of your unpaid tax.

In Closing

The IRS wants you in the system, even if you are broke. Whatever you do, file your tax return in a timely manner. Once filed, the IRS will work with you on payment issues. Do not get stressed. Keep in mind that millions of Americans have the same problem.

Title: 

What Is A Dependent For Tax Purposes?

Word Count:

364

Summary:

What are the qualifying characteristics of a dependent for tax purposes? Following is a general explanation on how to determine dependents, and how it relates to your tax status, liability and the credits you can claim on your tax return.

There are a few assessments that a person must pass in order to qualify as a dependent on a U.S. tax return. For starters, individual must be the taxpayer’s child, stepchild, foster child, sibling or step-sibling, or a relative of one of t...

Keywords:

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Article Body:

What are the qualifying characteristics of a dependent for tax purposes? Following is a general explanation on how to determine dependents, and how it relates to your tax status, liability and the credits you can claim on your tax return.

There are a few assessments that a person must pass in order to qualify as a dependent on a U.S. tax return. For starters, individual must be the taxpayer’s child, stepchild, foster child, sibling or step-sibling, or a relative of one of these, and the individual must live at the taxpayer’s residence for greater than 6 months of the tax year. There are exceptions for children of divorced parents, kidnapped children, and for children who were born or died during the year. 

The individual must be under the age of 19, or 24 if a full-time student. Finally, the individual must not have contributed more than one-half toward his or her own support during that year in order to qualify as a dependent. Other qualifying points include, U.S. citizenship and single status or married filing as a single person. 

If the individual fulfills all of these requirements, then any of the applicable deductions, exemptions, and credits can be used for them. Some of these include dependent day care expenses, child tax credits, medical expenses, earned income credit, and various itemized deductions. Determining eligibility often means the difference between owing money to the government and receiving a refund from them. 

The child and dependent care expenses cover things like daycare, after school programs, private childcare services, etc. Any qualifying children the child and dependent care expenses must be under the age of 13. 

The child tax credit is similar to the earned income credit because it is a straight credit. Taxpayers with a qualifying dependent that is under 17 years old may only take the child tax credit. 

Determining if you have any dependents that you can claim on your annual tax return might take a little work, but it can be well worth it in the long run. You could be rewarded with a nice tax refund, thanks to the credits, exemptions, and deductions that your dependent(s) will give you the opportunity to claim.

Title: 

Your Tip Earnings and Taxes

Word Count:

356

Summary:

If you work in a service where you get tips, guess what? The IRS expects you to report them and pay taxes on them.

Keywords:

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Article Body:

If you work in a service where you get tips, guess what? The IRS expects you to report them and pay taxes on them. 

Your Tip Earnings and Taxes

The internal revenue service takes a very simple approach to tips. It views all tips you make in your job as taxable income that must be reported and for which taxes must be paid. Put another way, the IRS has a simple but brutal view towards taxes 

Now tips come in different forms. Some are received directly from customers while others are automatically added to the customer’s bill. The IRS takes the position you must report and pay taxes on both amounts. This also includes taxes you earn through any group splitting where all tips are collected together and then split amongst the employees. On top of this, the IRS also takes the view that any non-cash tips such as tickets to something are also income that should be reported and taxes paid on. Put another way, the internal revenue services gets you coming and going. 

To make things a little more brutal, the internal revenue service requires you to take some steps in reporting tips. If your tips total $20 or more in any calendar month from a single job, you are supposed to report the total to the employer by the 10th day of the next month. The employer is then supposed to withhold federal income tax, social security and Medicare taxes from your paycheck. Keep in mind that the failure to do so can lead to the placement of a 50 percent penalty on your taxes. Obviously, the IRS is fairly serious about getting its money. 

Tips paid to waitresses, bartenders, bar-backs and so on are a hot spot with the IRS and always have. Since tips tend to be given in cash form, the potential for forgetting to report them is particularly high. The IRS seems to think so and has shown a generally aggressive attitude on the subject. If you indicate you are a waitress or bartender on your tax return, but fail to report any tip income, it could be audit time.

Title: 

Year End Investment Ideas and Tax Strategies

Word Count:

1040

Summary:

First thing Monday morning I'm going to march into my boss's office and demand a pay cut so that I'll be in a lower tax bracket next year. Profits are the holy grail of investing. Few people will admit just how infrequently they have experienced them or, conversely, just how frequently they have watched them disappear beneath the waves of a correction.

Keywords:

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Article Body:

First thing Monday morning I'm going to march into my boss's office and demand a pay cut so that I'll be in a lower tax bracket next year.  

Of course that's ridiculous, but isn't it about the same as the financial community's "Conventional Wisdom" (CW) for year-end tax planning? What about the long-term nature of investing, or the merits of that investment they felt so strongly about in July? What are their motivations, and what discipline thought up these strategies in the first place? 

Clearly there are many questions that require answers, but as investors, it should be crystal clear that the object of the investment exercise is to make money... just as much as possible, quickly, legally, and within a low risk environment. The faster it comes in, the more effectively it can be compounded. Otherwise, wouldn't the "CW" be to find as many downers as uppers so that there are no tax consequences? Wouldn't Zero Taxable Gain Investing be the only "smart" investment strategy? A December, 2004 New York Times Money Section article actually suggested that Investment Professionals had an obligation to lose money for clients in order to reduce the tax burden. 

Your Financial Professional's perspective may produce smart tax advice but only professional investors (not accountants, attorneys, stockbrokers, financial planners, advisors in general) should be called upon for acceptable investment advice. CPAs may look smarter if you have a lower tax liability, but many of them go too far with a calendar year focus that ignores the realities of an emotional and cyclical investment environment. Take last year's Merck for example. It has nearly doubled in Market Value since you were told to sell it last November... who'da thunk it! Why didn't you buy more (of this and many other high quality losers) instead of selling? Fortunately, not all professionals are into losing money. In fact, in nearly thirty years of dealing with hundreds of Accountants and other advisors, not even a handful have suggested that clients should take losses on fundamentally sound securities, Equity or Fixed Income. Just think if you had taken your dot.com profits in '99, purchased the downtrodden profit making companies of the time, and paid the ugly taxes. The value companies didn't crash. They've rallied for nearly seven years! 

The key issue in considering a capital loss is the economic viability of the investment... not your tax situation! A key element of The Working Capital Model (for investment portfolio management) is to eliminate the weakest security in a portfolio every time the Market Value of the portfolio establishes a significantly new "All Time High" profit level (an ATH). My definitions may be different than those you are used to: (1) Profit = Total Market Value - Net Portfolio Investment, (2) A "weak" security is a stock that is no longer rated Investment Grade by S & P, or no longer traded on the NYSE, or no longer dividend paying, or no longer profitable. Income securities whose payout has fallen to way below average (or risen to an unsustainable level) could also be culled at an ATH. Securities that have fallen considerably in Market Value for no apparent reason (other than recent news or changing interest rate expectations) are referred to lovingly as "Investment Opportunities". This is what you look for while trying to reinvest your profits... like last year's MRK. By the way, switching from the strong asset class to the weaker one as a "hedging strategy" or vice versa (as a greed motivated speculation) is simply an attempt at "market timing", not a "sophisticated" or "savvy" adjustment to your asset allocation. Asset Allocation is always a function of personal factors and never a function of asset class (Equities and Income Generators) directional speculation.

So what happens if a new portfolio ATH is achieved in February or August instead of in November or December? (Note that the financial community only preaches tax loss strategies during the last calendar quarter.) Should you unload all the weak issues at the same time, even those purchased just a few months ago? Management of your portfolio requires the disciplined application of consistent rules and guidelines, and every manager will develop his or her own style. But in a high quality, properly diversified, income generating portfolio, (1) the number of weak issues will generally be small and (2) the probability of escaping with only a minimal loss very real. Keep in mind two basic investment axioms: There is no such thing as a bad profit, regardless of the tax implications; and no matter how you may rationalize, there's no such thing as a good loss. So, sure, if a loss should be taken due to an ATH in February, bite the bullet on the one security (only one) with the declining fundamentals (A Merrill Lynch/CNN/CFP opinion is not a fundamental.) If there are none, good job!

Profits are the holy grail of investing. Few people will admit just how infrequently they have experienced them or, conversely, just how frequently they have watched them disappear beneath the waves of a correction. (Like gamblers retuning from Vegas... no one ever seems to lose!) Similarly, most financial professionals will counsel their charges to let their profits run, particularly around year-end. Surely, speak the CW prophets, these profits will hang around until next year, thus deferring those terrible taxes! (Worked real well at year-end '99, you'll recall.) Don't think for a moment that anyone knows what will happen this time around the rally pole, particularly in those ridiculously priced ETFs, which are put together with the same kind of spit and duct tape used for the dot.coms. Always take your profits too soon, because you can't get poor that way!

First thing Monday morning I'm going to: (1) Call my accountant to tell him that I'm going to help him reduce his tax burden by not paying him, (2) continue to view the Investment process in cyclical rather than calendar terms, (3) limit my tax liability by how I invest, not by taking unnecessary losses, (4) continue to make as much money as possible, as quickly and safely as possible, and (5) contact the media, my political representatives, and anyone else I can think of that will help in the fight to abolish the taxation of all investment and retirement income.