India will finally become a developed nation with GST

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GST Bill India

India will finally become a developed nation with GST

Aug 14, 2016 Posted by Sanjiv 1 Comment

It has been hailed as the biggest tax reform in India’s 70-year history as an independent nation. The good and services tax (GST) bill was passed into law by Rajya Sabha last August 3. With its implementation starting on April 1, 2017, it will create a national value added tax in India and create a common national market in the country of 1.2 billion people.

The GST has been billed as a game changer for the Indian economy. It will develop a common Indian market, minimize the cascading effect of the tax on the cost of goods and services, and affect almost all aspects of the business operation in the country—from the pricing of products and services, supply chain, accounting, and tax compliance.

The GST is basically a ‘destination based tax’ meaning it will be levied on where the goods or services as consumed, and not where they are produced.  It puts an end to the complicated, indirect tax system in India where the Center and the State levy overlapping taxes.

There have been proposals to amend the Constitution and change India’s  tax system with the GST. Then Prime Minister Atal Bihari Vajpayee had initiated the discussions on the GST.  In 2006, Congress had looked into it. In March 2011, a constitution amendment bill was introduced but was lapped with the dissolution of the 15th Lok Sabha.

The enactment of the GST is definitely one of the highlights of Prime Minister Narendra Modi’s reign.

Why GST will move India Forward ?

  1. The GST is a single tax levied on goods and services, from the manufacturer to the consumer. It subsumes various Central level taxes such as Central Excise duty, additional excise duty, service tax, countervailing duty, and special additional duty of customs. It also subsumes state-level taxes like sales tax, entertainment tax, purchase tax, entry tax, taxes on a lottery, betting, and gambling.
  2. GST is defined as any tax on goods and services other than alcohol for human consumption. It won’t also include taxes on petroleum products and stamp duty on an immovable property because these provide substantial revenue to the states.
  3. A centralized GST council will be set up. It will decide which taxes can be levied by states and which can be subsumed into the GST.
  4. The GST will be composed of central and state minister in charge of the finance portfolio. A dispute resolution mechanism will be established to resolve disputes regarding the GST.
  5. Petroleum products like crude, high-speed diesel and natural gas shall be subject to GST on a date to be determined by the GST council.
  6. Taxes on entertainment at panchayat, municipality, or district level will continue to be levied by states.
  7. States will continue to levy stamp duties which are typically imposed on a legal agreement by the central government.

Benefits

The following are the expected benefits of GST on the Indian economy:

  1. Simplify taxation. GST will replace 17 indirect taxes that various states and the Central government levy on goods and services. It is also expected to reduce compliance costs.
  1. Reduce tax evasion. With a simplified taxation system, more traders will be encouraged to pay taxes.

For instance, a mobile phone distributor buys mobile phones from a manufacturer and sells it to a wholesaler.  In the present system, the distributor has to bear the burden of paying excise duty. Thus, he’d rather pay without invoice as it can add up to his total costs.

But with the GST in full effect, the distributor will gain credit for all the taxes paid at the previous stage. This would encourage him to pay with an invoice. Thus, it is expected that all traders will opt for taking a bill for their purchases.

  1. No more long queues at a checkpoint. Long queues of trucks at interstate checkpoints are one of the familiar sights in India. State authorities would have to review and examine freight then apply the relevant taxes and fees.

In fact, Indian trucks average a mere 80,000 kilometers a year no thanks to these delays and gridlocks. In comparison, trucks bringing various commodities across the US average 400,000 a year.

With the GST in full effect, those long lines at interstate checkpoints would be a thing of the past.

  1. Encourage growth of small entrepreneurs. Because of the simplified taxation system, small entrepreneurs can set up a business in any state of the country without having to worry about tax differences. GST basically removes location bias, and can encourage enterprising citizens to set up businesses in undeveloped locations.
  1. Improve GDP. The Finance Commission had commissioned a study that showed India’s GDP will improve to about 2 percent after the implementation of the GST.
  1. Goods/Services to become cheaper. For consumers, the GST will also mean lower prices of most goods and services except for liquor and tobacco. With the GST, overlapping taxes will no longer affect the prices of commodities. For example, the construction and building materials industry are projected to be one of the biggest beneficiaries of the GST thus products like paints and cement are absolutely going down. Moviegoers, meanwhile, will be paying less for a movie ticket as the GST will bring down the high 27 percent entertainment tax.

Effect on Key Industries

Many key sectors of India’s economy are projected to benefit from GST. Among these are:

  1. The Information technology sector will benefit from the elimination of multiple levies, and this is projected to result to deeper penetration of digital services in the country.

In India, most IT firms have different delivery centers and offices servicing a single contract. But with the GST rolled out, there’s a possibility that firms would require each delivery center to issue a separate invoice to a contracting party. The costs of electronic products like mobile phones and laptops are also anticipated to rise as duty on manufactured goods could go up to 18 percent from the current base of 14 percent.

  1. Fast moving consumer goods. On the positive side, companies in the FMCG market will see a substantial reduction in their logistics and distribution costs. It has been shown that FMCG firms pay as much as 25 percent in taxes due to various levies like VAT, entry tax, and excise duty. With the GST, there could be significant reduction in taxes of up to 17 percent.

On the flip side, however, prices may increase by 20 percent if the recommended 40 percent GST for tobacco and aerated beverages is approved.

  1. E-commerce. The Indian e-commerce industry is seen as one of the biggest beneficiaries of the GST. The sector’s growth has long been hampered by an archaic tax regime. After all, the old tax structure was created long before the e-commerce industry was born. Industry experts believe that the unified tax system will help the e-commerce sector to expand and spur the growth of online retail startups.

With the GST, dual taxation will be avoided. In the old system, states often have to ask where to levy the tax—the place where the seller is located, or the place where the buyer is located.

With the GST everything is clear now—the tax will be in the state where the consumer resides. Thus there will be no need to pay for other taxes like entry tax, VAT on sales, and excise on manufacturing.

The GST also means there will be no complicated paperwork that buyers online would have to accomplish. In 2015, several e-commerce firms like Amazon India and Snapdeal ceased delivering products in the northern Indian states of Uttar Pradesh and Uttarakhand because tax authorities in those states required the filing of VAT declaration form at the time of delivery.

  1. Buying Cars will become cheaper – Prices of vehicles could drop by as much as 8 percent as a result of lower taxes. However, the demand for commercial vehicles like trucks and delivery vans may be affected in the medium term because companies would no longer need to expand their fleet due reduced time at checkpoints which translate to greater efficiency of their fleet.
  1. Expect More Movies Soon – Film producers and multiplex players are among the most taxed sectors in the country, having to deal with service tax, uniform tax, and entertainment tax. But with the GST, there will be uniformity in taxation and it is projected that taxes could go down by as much as 4 percent.

However, the new law will not be beneficial to all sectors of the economy. It will hurt certain industries such as the following:

  1. Airline industry. Flying will become more expensive in India. GST will replace service tax on fares which range between 6 and 9 percent, depending on the class of travel. But with GST, that rate will be between 15 and 18 percent.  Meaning, it will better for you to purchase tickets from the United States.
  1. Insurance/ financial sectors. Insurance firms are likely to hike their premiums as taxes will go up to 300 basis points. Investors, meanwhile, will have to pay more for mutual fund products given that taxes would push it by 3 percent.
  1. The rollout of the GST could lead to the higher price of medications in the country. The GST can likely increase indirect tax by 60 percent, which pharmaceutical firms will likely pass on to consumers.

Challenges

Aside from the negative impact of the new tax system on certain sectors of the Indian economy, there are also other challenges that need to be hurled such as:

  1. It can hurt the country’s own manufacturing industry – With Modi’s Government big push towards the “Make In India” Campaign – this might be a setback 

One of the worries of those who opposed the GST is that it can lead to imports being cheaper compared to goods produced in India. Under the GST imports are entitled to a set-off against the final selling price which is not permissible under the existing tax regime.

Once the GST has been rolled out, it would replace taxes like countervailing duty, a special additional duty of customs, among others. With lesser taxes, the prices of imported goods in the market will likely go down as well.

That would have a detrimental effect on the manufacturing sector in India, which is beset by cumbersome labor, high taxes and various regulatory laws in most states. As such, there is a fear that the GST would hurt the Make in India campaign.

  1. India will be implementing a complicated tax regime.

India will have the most complex version of a GST in the world. In most countries, GST pertains to one tax for all commodities and service. It is also applied throughout the nation.

In India, the central government and the states are allowed to concurrently levy GSTs.  States can also levy service tax, which is a central levy. In effect, there will be 31 GST enactments (for the 29 Indian states and the territories of Delhi and Puducherry) needed.

Moreover, states will be able to levy sales on potable alcohol, aviation fuel, diesel, and petrol. On the other hand, the central government can levy excise duty on all other goods including tobacco and tobacco products.

  1. Other issues to be addressed.

There will also be a lot of issues that need to be addressed on e-commerce transaction and restricted credit. Although each state will have its own GST, there will be multiple rules for each act. Moreover, there will be separate credit rules for integrated GST, central GST, and state GST. Studies also suggest there will be a substantial increase in the costs of paperwork and compliance.

With these issues to be addressed, many quarters are calling for the implementation in stages. The argument that this strategy will reveal possible hurdles in need of attention, as well as improving the IT infrastructure that is vital to a successful GST.

Although there are apprehensions on the implementation of the GT one thing is for sure—many sectors of the economy are looking forward to the day when the GST will be finally implemented. From the looks of it, this could be one way to help the third largest economy in Asia expand even further.

Tax Deduction Strategies for Small Businesses

Apr 12, 2015 Posted by Sanjiv No Comments

As a small business owner, you can utilize a proactive approach and seize all opportunities available for conducting tax deductions as provided for under the law. Overlooking certain crucial write-offs leads to a bloated tax bill. Changes to the recent tax law have altered how Section 179 on deduction on bonus depreciation works. You can maximize write-offs for your home office and get deductions for business travel and automobiles, along with tax shelters for real estate property.

  1. Tapping into Major Tax Savings as per Section 179 Depreciation

A small business can benefit through huge increment in First-Year depreciation allowance as covered by Section 179. Following this law, you can deduct full cost of most used and new business personal property. The maximum amount provided for here got gradually boosted for 2009 from $25,000 to $250,000. Later on, the 2012 American Taxpayer Relief Act (ATRA) preserved the $500,000 maximum deduction adopted by the 2010 Small Business Jobs Act for two years. This provision was backdated to 1st of January 2012 and remained effective through 31st December 2013.

  1. Claiming Bonus Depreciation for All Qualified Assets

A business can lay claim to “bonus depreciation” for assets which are qualified and placed in service during the whole year. This business tax credit applies to the following:

  • Property with 20 years or below of cost recovery period
  • Qualified leasehold improvements
  • Depreciable software which is not amortized for over 15 years
  • Water utility property

 

  1. Triggering Quicker Write-Offs as per Section 179 Depreciation

It is possible to maximize Section 179 expensing deduction by undertaking some shrewd planning of your taxes through the ways below:

  • You can claim the allowance accrued through compensation payments if your company zeroes out its taxable income. The tax law limits annual deduction to amount of income taxable.
  • Boost the limit of your business income, which should include that accrued from your active businesses.
  • Maximize business percentage if claiming allowance for assets partially utilized for non-business reasons.

 

  1. Larger Deductions for ‘Heavy’ SUVs according to Section 179

If you opt to deduct annual expenditure as opposed to using standard mileage allowance, take note of an appreciably large tax advantage if owning heavy-duty vans, pickups and SUVs. These vehicles have gross vehicle weight rating or GVWR of over 6,000 pounds from the manufacturer and are viewed as “trucks” for purposes of taxation.

Such heavy-duty vehicles depreciate more rapidly than regular passenger vehicles, when used intensively for business purposes.

  1. Deductions of Fuel Tax for Business Vehicles

You may deduct automotive expenses via a standard mileage rate, set each year by the IRS. Doing this sets you free from having to account for actual expenditure incurred. For instance, business drivers got 56.5 cents for each mile in 2013.

  1. Tax-Free Family Vehicles as part of Business Deductions

Operation and maintenance costs are deductible for cars utilized in doing business, which includes depreciation. Your auto repair firm may provide cars for the whole family in this case. The business you own can deduct the entire amount of operating costs if your family members are employed by the enterprise. Car expenses which are deductable include:

  • Cost of gasoline
  • Repairs,
  • Insurance
  • Interest on car loans
  • Depreciation
  • Licenses
  • Taxes
  • Garage rents
  • Parking tolls and fees

 

  1. Writing off Home Furniture and Computer as part of Self-Employed Tax Deductions

Under Section 179, many taxpayers who are self-employed may deduct purchases for equipment, as opposed to capitalizing them. This section applies to the vast number of business assets, including furniture and computers meant for domestic use.

  1. Owning Your Business Premises

Once profits of your company start growing and business stabilizes, consider owning as opposed to renting your quarters. When evaluating the comparative costs, think of a reasonable time-period, such as of 10 years and factor into your calculations purchase price of your desired building at a prime location.

  1. Sheltering Real Estate Property of up to $25,000

Prices of real estate have recently gone down in many places, presenting great opportunities for investment. As well, business owners can enjoy tax shelters for investing in property. One has to own a 10 percent minimum portion of such investment property without involving limited partnership interests, apart from actively managing it. Business tax credit of 10 percent is available too for fixing old buildings, which changes to 20 percent if the building has historic significance.

  1. Turning Home into Rental Property

Many home owners have been adversely affected by recent devaluation in real estate property. This even gets worse due to inability of deducting loss from selling your principal residence.

Turning your home into rental property is a brilliant strategy in such situations. You only require holding it out for rent while relocating, before deducting losses once the place is sold. This is a shrewd tax move which capitalizes on an important distinction that applies to business or investment property.

Tax Credit on Car Expenses: Standard Mileage Rate vs. Actual Expenses

Apr 8, 2015 Posted by Sanjiv No Comments

Many people are still confused on what amount to deduct from their tax for expenses incurred on a personal vehicle’s repairs. They are given two options: deducting the actual expenses incurred, or deducting the amount computed by using the standard mileage rate. Which one is better? Which will benefit the taxpayer more?

In order to answer these questions, it would be best to get a clearer understanding of the two methods.

Using Actual Expenses

This is straightforward enough: deduct the amount actually spent or incurred on the operation, repairs and maintenance of a car or vehicle.

There must be a clear indication on which part of the amount was used for personal purposes and which part was for business use.

To come up with the final amount, the following are included in the computation:

  • Expenses on gas, oil and lubricants
  • Toll fees paid
  • Lease payments made
  • License fees
  • Insurance premiums paid
  • Rental and other fees directly related to the car, such as garage rental and parking fees
  • Cost of repairs (includes cost of spare parts and labor)
  • Cost of tires
  • Depreciation

Using the Standard Mileage Rate

Individuals will use a standard mileage rate set by the tax authorities. For tax year 2014, the rate was $0.56 for every mile. Only the miles used for business will be allowed as tax credit. This means that, in this method, the individual must keep track of the miles driven by the car, especially the miles driven for business.

The following are exclusions in this method; meaning, they cannot be claimed as deductions if the individual chooses to use the standard mileage rate, since they are already considered to be part of the rate set forth by the IRS.

  • Fees incurred on registration of vehicle
  • Insurance premiums on the vehicle
  • Fuel and maintenance expenses, including repairs
  • Lease payments on the vehicle, if any

A Comparison

In both cases, there is a need to divide the expenses between personal and business expense. An individual can only claim expenses on cars, including for auto repairs, if they have been used for business purposes.

Compared to the actual expenses method, choosing the standard mileage rate comes with several limitations or restrictions. For example, once it was chosen and clearly stated on the individual’s tax return, it is irrevocable, at least until the following tax year. Any amendments of the return within the year will also have to follow this method, even if the individual wants to switch to using the actual expenses.

Experts recommend that owners of new vehicles go for the standard mileage rate method during the first year that they use their car for business purposes. In the succeeding years, it would be up to the individual whether he wants to switch to using the actual expenses, or stick to the standard mileage rate.

Clearly, the simpler option would be using the actual expenses, provided you have documentation (e.g. receipts, toll tickets) to back it up. It also has the advantage of letting the taxpayer have his expenses for car repairs as a deduction. This method is also more advantageous for those who drive only a few business miles.

When trying to decide which of the two would be better, try performing mock-computations. The one that gives you a greater amount of deduction is surely the better option.

 

Theft Loss Deduction -Should you claim it ?

Mar 14, 2015 Posted by Sanjiv No Comments

Theft Loss Deduction – Understanding what you can and can not deduct

The very thought of paying Uncle Sam becomes cumbersome. But again thinking of the benefits that you receive from tax deduction gives you relief. Out of the many areas where tax deduction can help, loss of uninsured properties due to theft is a significant one. In case you are a theft victim, there is no need to worry a lot. In order to know more about tax deduction pertaining to losses on account of theft, the following information will surely help.

As a taxpayer, you are provided deduction by the IRS in case you have suffered sudden loss of substantial properties without any negligence from your end. But you need to ensure that you meet all the requirements in order to avoid reporting any wrong deductions on tax returns.

As per the Federal Law, theft refers to confiscation of property by any individual with the intention of depriving another individual of that property. This act is undoubtedly illegal and is certainly punishable. Some of the known instances of theft are blackmailing, burglary, kidnapping for ransom, larceny, extortion and robbery. However, if you lose money and property i.e. if you have misplaced those, then that does not fall under the category of theft. But if you get threatened by a person with physical coercion when you are attempting to get back your wallet, this kind of loss gets elevated to category of theft and becomes deductible.

You need to produce the proof that you have lost your property on account of theft and the monetary amount of deduction should also be substantiated. In order to do this, as per the IRS, you need to show the precise time of loss and also provide ample proof that you own the pilfered properties. In case you fail to provide minute details of the event and your property, IRS would consider certain other types of proof that support the deduction.

The deductible loss for the money that has got stolen is equal to the sum of money you are unable to recover. In case of property thefts, the basis has to be determined by you. The IRS says that it requires you as a taxpayer to not receive any reimbursement from any insurance company if you are taking the deduction. Insured properties that get stoned are not eligible for tax deduction.

Tax deduction can help in losses due to theft if you follow the steps mentioned below in reporting the loss on tax return.

  • You need to download a copy of IRS form 4686.
  • You are required to complete the first item in Section A of the form and then list every piece of property that has got stolen. The detailed description of every property should be provided by you along with the location from where it had got stolen and also the date of originally acquiring the property.
  • Next, you need to move on to the item 2 of the form. This means that now you have to list the price that had to pay for every item that has not got stolen. Every detail should be provided and should be original.
  • The item 3 talks about the reimbursements. The list of reimbursement covers insurance payment that you have received for your property that got stolen.
  • Next you need to check if the totals listed under Item 2 and item 3 vary. If you find that the totals pertaining to item 3 are more than those under item 2, then you are required to list the increase under item 4.
  • In item 5 you need to list the probable market value of the items before the theft took place. Then after you come to item 6, you need to inform about the properties that are of no value to you. Against those stolen properties, you have to list $0 meaning that those are of no value to you.
  • In the line 7 you need to re-enter the figures from line 5. Again in line 8, you need to re-enter figures either from line 7 or line 2, depending on whichever figure is lower. Then you need to deduct or subtract item 3 from item 8. The result that arrives has to be entered on line 9.
  • Next, complete line 10 by adding the total of all the items on line 9. Line 11 is meant for entering the lower line of number 10 or $500. In line 12, you need to subtract line 11 from line 10 following which you need to enter the result.
  • Line 13 is complete when you enter the total of line 12s from all the form 4684 in total that you are filing. You need to enter the sum of line 4s from all the form 4684 in total in line 14 that you are filing with your taxes.
  • You should determine if the amount that you have entered in line 14 is greater than line 13. If it is, then you will get a capital gain from your losses due to theft and again the difference has to get added in line 15 and on Schedule D of your tax return. In case you enter a capital gain, you need not complete the test of the form.
  • Line 14 has to get deducted from line 13 and the result needs to be entered in line 16. You need to list in line 17 entering $0 in case the theft loss is not disastrous. Similarly you need to enter $0 on line 18 as well. The figure from line number 16 has to be entered in line 19.
  • Then you need to calculate 10% of your gross earnings from Form 1040 and also line 38 and then enter that figure in line number 20. The figure that you would get by subtracting line 20 from line 19 has to be entered in line 21.
  • After adding the lines 18 and 21 the result that comes has to be entered in line 22. All these would reveal you capital loss in total from the theft for income tax reasons. This result should be entered on Schedule a, line 20.
car deduction

How to Make Tax Deductions for Cars and Trucks ?

Mar 5, 2015 Posted by Sanjiv No Comments

Cost of operating a truck, car or other kind of automobile is tax-deductible when moving and relocating or driving for medical, business or charity purposes. The deduction made corresponds to the mileage driven for such tax credits. You may opt for standard rate of mileage in place of calculating actual car expenditure for these individual tax credits.

Medical Purpose

Driving in order to obtain medical care for either yourself or your dependents is what Medical Purpose covers. This kind of drive must primarily cater for medical care, as indicated by IRS (Publication 502) and the deduction is reflected on Schedule A and comprises part of medical expenses for an individual.

Business Purpose

Business purpose pertains to driving away from your regular employment location to a different work site in order to meet with client or travelling for a business engagement. Commuting from home to office does not qualify for this category of individual tax credits. This kind of incentive is captured by Schedule C for self-employed individuals, Schedule F for farmers or as itemized deduction that forms part of unreimbursed business expenses provided in Form 2106 for an employee.

Moving and Relocating

You can deduct the driving cost for relocating to a new place of residence as part of moving expense deduction. To qualify for this incentive, it will be necessary to cover a distance of at least 50 miles away from the old home more than what you earlier covered in-between the old home and old job. The deduction is present on Form 3903.

Charitable Purpose

Individual tax credits are available for any vehicle used for providing services to charitable organization. The corresponding deduction is covered by Schedule A as part of charitable donations. It may involve driving for volunteer causes for a charity, church or hospital.

Actual Expenses

Various elements count as truck or car expense including:

  • parking fees and tolls
  • vehicle registration fees
  • interest on loan
  • rental and lease expense
  • vehicle registration fees
  • personal property tax
  • fuel and gasoline
  • insurance
  • depreciation
  • repairs including tires, oil changes and such routine maintenance

However, fines and tickets such as for parking may not be deducted. In addition, expenditure relating to commuting or personal use is not deductible. Various car expenses may also be deducted depending upon why you are driving. One cannot claim interest, insurance and depreciation as well as auto repairs for medical expense and charity deductions.

Standard Mileage Rates

Rather than tally up all actual car expenditures, you may utilize a standard mileage rate to aid in calculating deductions. There are standard mileage rates to achieve this goal. It is multiplied by the mileage drive to establish the dollar amount deductible for car expenses as obtained from Notice 2014-79 of IRS.

Standard Mileage Rates
Type of use Year 2015
Business 57.5 cents per mile
Medical or moving 23 cents per mile
Charitable service 14 cents per mile

 

In addition to standard mileage rate, taxpayers may also deduct tolls and parking fees as stipulated by the IRS in chapter 4 of Publication 463.

Comparing between Actual Expenses and Standard Mileage Rate

You may use any method that will lead to a larger amount of your tax deduction. This varies with individuals depending upon the number of miles driven, amount of depreciation claimed and other expense variables. Claiming standard mileage rate provides results with less paperwork. It is suited best for situations where the car is driven at times for charity, work or medical appointments and the owner is avoiding lengthy scrutiny of all car-related expenditure.

 

You will require selecting the standard mileage rate option within the first year of using your automobile for business purposes in order to claim the corresponding deduction. If you start by claiming actual expenses, it will be necessary to retain the actual expense option for the entire time duration of using your vehicle for business. IRS Publication 463 offers further clarity on this situation.

Where to Make Claims for Car and Truck Expenses

Expenses for vehicles get reported on Schedule C for self-employed individuals and Form 2106 for the Employee Business Expenses. In particular, this deduction is miscellaneous itemized deduction that is subject to 2 percent of the adjusted gross income limit. It implies that unreimbursed employee expenses may be deducted, although the tax payer does not benefit from the full deduction dollar-to-dollar on tax returns.

Vehicle expenses get reported on Schedule A for medical vehicle uses, together with other medical expenses.

For charitable car use, the expense gets reported on Schedule A, together with related charitable donations.

Practicing Good Record-Keeping

Ensure keeping a mileage log as it will demonstrate your eligibility for car and truck individual tax credits. This document should show date of each trip made that is tax-deductible. It will be necessary as well to record the total mileage covered for the entire year, which makes it pivotal indicating the odometer reading as each year begins at the first.

premium tax credit

Premium Tax Credit

Mar 2, 2015 Posted by Sanjiv No Comments

Premium Tax Credit

Recently, the U.S. government has made some adjustments to the way health care coverage plans are administered to the people. One of these adjustments became feasible in 2014, the Premium Tax Credit.

Background Information

There are dozens of tax credits out there, what makes Premium Tax Credit so important? Premium Tax Credit was established in early 2014 as part of the new Affordable Care Act and is designed to make health insurance more affordable. Premium Tax Credit is available through the Health Insurance Marketplace, which provides thousands of health insurance plans to people with low income.

What is Premium Tax Credit?

 Basically, Premium Tax Credit is an amount of money given to your insurance company via the government in order to make paying for health insurance easier and more affordable.

How do I Receive the Premium Tax Credit?

The first step in receiving the Premium Tax Credit is to obtain a health insurance plan, preferably through the Health Insurance Marketplace (average enrollment period runs from November to February). Once you have selected a plan that works within your budget, Marketplace will check to see if you qualify.

Qualifications for Receiving the Premium Tax Credit

 There are several qualifications you must meet in order to be eligible to receive this tax credit. To qualify, you will need the following:

  • You must be within the average income range
  • You should not be filed as a dependent
  • Cannot file a Married Filing Separately form
  • You should have applied for health insurance through Marketplace
  • You should be unable to qualify for health insurance through work or other health insurance company

Upon confirmation that you are eligible for Premium Tax Credit, the Marketplace will display an amount of money that the government is willing to offer you. If you are satisfied with this tax credit, you move on to selecting how/when you want to receive these benefits.

What are the Options for Claiming My Tax Credit?

There are two ways in which you can claim your tax return amount.

Get It Now

The Get It Now option is designed to lower the monthly premiums that are required to pay, instantly. This means that the tax credit you received is transferred directly to your health insurance company – in increments or all at once – upon acceptance of the credit.

Get It Later

 Get It Later option is designed to pay you back a fixed amount of money towards your health insurance expenses upon the completion of the tax return. This means that you pay your premiums and health insurance cost as expected and then receive your tax credit all at once when the tax return form is completed.

What Forms do I Need to Fill Out?

 Once you have chosen what option you want to engage in, you are required to fill out a couple of forms.

The first one is Form 8962, which is the Premium Tax Credit form. You will confirm that you have received a tax credit from said insurance company as well as the amount of that credit. This form is to be completed along with your Tax Return form.

If you received a health coverage plan through the Marketplace, you will fill out Form 8962 with the information listed on Form 1095-A. Form 1095-A is the Health Insurance Marketplace Statement form that confirms all of your information.

* We strongly suggest that you speak with your CPA to ensure proper calculations.

Penalty Relief

 There may be a time or two where you owe a fee to the government for a late payment or unpaid bill. However, if you have received a premium tax credit, those fees are waivered if the reasoning behind your late payment relates to advance payments made by the government.

If you choose to have your Premium Tax Credit split up and given to your insurance company month by month to lower premium costs, and the payments don’t add up to the amount of credit you are entitled to, you receive a refund of the amount that was not credited to you. If you are unable to make a payment due to this unequal payment method, you do not need to pay any late fees.

You are required to let the IRS know about your circumstance by filing out Form 4868 before the required due date.

Record All Changes

 During a tax year, if there are any changes to the information you provided the IRS with, you are required to make those changes as soon as possible through the Marketplace. These changes can affect the amount of Premium Tax Credit you are given so it is crucial that you keep the IRS updated.

Conclusion

Premium Tax Credit, although new to tax payers, has influenced the lives of thousands of people and helped make health insurance much more affordable. By using the Health Insurance Marketplace, you are almost guaranteed a health plan that fits within your budget and the additional tax credit offered to you will make that price even lower.

Take a few minutes to see if you can receive a Premium Tax Credit and keep you and your family healthy for an affordable price.

 

tax shelter for business

Tax Shelter Ideas

Feb 23, 2015 Posted by Sanjiv No Comments

Tax Shelter Ideas for Small Business Owners

In general, a tax shelter refers to a program which allows business enterprises or individuals to either defer or reduce payment of income taxes. Such programs may not suit everyone and legitimate ones do involve some level of risk, which not all investors are comfortable to undertake. However, with the correct information, the process of taking advantage of these shelters becomes less involving.

The Internal Revenue Service (IRS) applies huge discretion when applying tax shelters as this area has traditionally been prone to abusive practices by both individuals and businesses.

How IRS Views Tax Shelters

Tax shelters are defined by the IRS as investments that normally requires making substantial contributions which oftentimes are associated with commensurate risk levels. For an individual, tax shelter implies an investment which involves liability incurred within the short-term, with hopes of making appreciable gains across the long term.

For instance, if someone invested in property situated within a low-income environment, depreciation benefits of such property would be termed as legitimate tax shelter.

The losses or tax deductions which a person can take on potential tax shelter gets limited to total worth of investment or amount at risk. The amount viewed as being “at risk” for example might get limited to:

  • Adjusted basis of property
  • Cash invested
  • Loans taken for which someone bears personal responsibility to repay

Treatment of Losses

It is vital gaining the understanding that business activity losses or credits are easily considered passive activity losses or credits. These may only be utilized for offsetting income from different passive activities. You cannot utilize them for offsetting income sources like wages, dividends or interest. Passive losses generated in excess from any tax shelter can be carried forward, or till the investor sells off the asset.

Take care of tax shelters which get marketed with promises of write-offs being more significant that the invested amount. IRS considers such as Abusive Tax Shelters. People generally make investments with hopes of generating huge amounts of profits. Legitimate shelters involve a certain level of risk, cut down fairly on taxes and generate income. If IRS takes note of someone operating an abusive scheme, the individual is then required to pay tax owed along with penalties and interest.

Legitimate Tax Shelters

It is vital knowing how to identify a questionable program. You may achieve this goal by adhering to three primary rules in order to distinguish between legal and illegal tax shelters as follows:

  • If the primary purpose of a given transaction is lowering taxes and not offering other economic gains to parties involved, consider such a business deal unethical or questionable.
  • Transactions involving exchange of goods, assets or even services at prices which lie well below the fair market value should be viewed with suspicion.
  • If the interest rate paid to a different party is unusually high or low, with the sole intention being sheltering income from taxes, such an arrangement should be seen as unethical.

Tax Accrual Work-Papers

The IRS maintains a policy of requesting tax accrual along with other financial audit work-papers that relate to tax reserves. This applies to deferred tax liabilities and footnotes which disclose contingent tax liabilities that appear in audited financial statements.

Owning a legitimate auto repair business enables you take advantage of numerous tax deductions, which are unavailable to mere employees. This includes partial deductions to expenses incurred on housing, automobile, entertainment and meals as well as cell-phone expenditure.

While some expenses get deducted within a year, others get spread out over a number of years.

You can write off full cost of new furniture and computers within this year as per IRS Code Section 179. This might not be significant to a relatively new business that may not generate a lot of income within at first. A wiser strategy therefore might be deferring some portion of deductible expenditure to years in future, which accountants call “depreciation”.

You may deduct some portion of “start-up costs” if this year is your first in business. However, beyond a certain level you will require spreading the remainder of associated costs across your tax returns for the next several years. This practice is termed “amortization” in accounting.

Remember not to overlook the expenses below when filing tax returns:

  • Legal and Accounting Fees
  • Website/ Advertising costs
  • Association Dues
  • Truck and Auto Expense
  • Computer Expense
  • Bank Charges
  • Subscriptions and Dues
  • Training and Education
  • Furniture and Equipment
  • Home Office Expense
  • Gifts
  • Insurance
  • Permits and Licenses
  • Postage and Delivery
  • Meals and Entertainment
  • Printing
  • Office Administration Fees and Rent
  • Maintenance and Repairs
  • Start Up Costs
  • Retirement Savings
  • Materials and Supplies
  • Telephone
  • Travel
  • Taxes (Payroll Tax, Property Tax etc)

Knowing the tax code is important for anyone who owns a business and IRS Publication 463 spells out on available business tax credits relating to travel, entertainment, gift as well as car expenses. Think about hiring services of a tax professional to aid in preparing tax returns for your auto repair business.

child care tax credit

Child Care Tax Credit

Feb 19, 2015 Posted by Sanjiv No Comments

Child Care Tax Credit and Its Advantages

Children on their own are miracles. They make life more exciting and put a smile on your face every single day. In addition to these, having a child (or children) can also reduce your tax payments by up to $1,000/child. There are several qualifications needed to receive the child tax credit, but most are easy to meet. If you and your child can meet all 7 qualifications, you can receive a child tax credit in a very short amount of time.

Qualifications for a Child Care Tax Credit

 There are seven qualifications you must meet in order to receive this tax credit.

  • Age test
  • Relationship Test
  • Support Test
  • Dependent Test
  • Citizenship Test
  • Residence Test
  • Family Income Test

The age test requires your child or children to be no more than 17 years old upon your claim of the tax credit.

The relationship test requires that your child or children belong to you. This means that the child or children must be biologically yours, yours by marriage (step child), or lawfully placed in your care by the foster care system. You are also allowed to apply the child tax credit to your brother, stepbrother, sister, or stepsister if they have been lawfully placed under your care.

The support test requires that your child or children be unable to supply more than half of his/her own financial support over the course of the tax year.

The dependent test required that your child or children must be claimed as a dependent under your care. Being claimed as a dependent means that the child is yours, under the age of 19 or permanently disabled, and must have lived under your care for at least 6 months.

The Citizenship test requires that your child or children be born U.S. citizens, a U.S. resident alien, or a U.S. national.

The residence test requires that your child or children must have lived with you for at least 6 months. However, if your child was born during the tax year or fits into one of the exceptions listed below he/she is considered a resident under your care.

  • School
  • Vacation
  • Medical care
  • Business
  • Juvenile facility
  • Military services

The family income test applies only to the parents asking for the child tax credit. The MAGI limit for a married couple (filing individually) is $55,000. The MAGI limit for a single parent is $75,000 and the MAGI limit for married couples (filing together) is $110,000.

Common Child Care Expenses

Parents know that health care, schooling, after school activities, are all expensive and they all add up.

  •  Doctor’s visits can be costly, with or without insurance. Paying for check ups, getting your child the appropriate shots, medications, emergency hospital visits, can cost you anywhere from $20 to $1000 per visit.
  •  Schooling can be equally as expensive, if not more so. Preschool, kindergarten, grade school, high school, college, that’s hundreds of dollars as it is. When you add in school supplies and the type of school you want you child enrolled in, you’re looking at the thousands.
  •  After school activities, if you plan on enrolling your child in some, add up as well. Taking on karate lessons, gymnastics, cheerleading, school clubs or sports teams can cost you around $100 or more.
  •  Food/Clothing, although not as costly individually, can take a toll on your total as well. Buying enough food to support your child or children tends to cost the average person around $50-$100/week per child. Add onto that the cost of clothing and you are again looking at the hundreds.

How Child Tax Credit Can Help

The childcare credit will give you a cut on those expenses and give you a portion of your money back.

  • One child – parent will receive 35% of up to $3,000 back on expenses paid for their child, at the end of each tax year.
  • Two children – parent receives 35% of up to $6,000 back on expenses paid for their child, at the end of each tax year.

This percentage will vary depending on your income, but the average is around 35%.

Basically, with each child you have, the amount of money being taxed from increased by $3,000 and the parent will receive 35% of their childcare costs back.

Consider Applying

 Regardless of whether or not you could use the money back, have tax credit on your children ensure that your child is protected and taken care of financially. You are free to purchase health care for your kid(s) knowing that a percentage of it will be given back to you every year.

You can save money for those family vacations and splurge on an extra toy every so often. Save yourself the expenses and apply for a Child Tax Credit as soon as you can.

Am I Going To Have To Work Forever Because I Am Self-Employed?

Apr 28, 2014 Posted by Sanjiv No Comments

When you are self-employed you rely on yourself to pay your paychecks and insurance. Without any employer, retirement funding and saving falls on you entirely. That can be a lot to take on all by yourself. Unfortunately, more than 70% of self-employed people are not saving regularly for their retirement.

Irregular income is one or the largest challenges for self-employed people; therefore, opening up a retirement savings account is not always top priority.

The first step is to set up your retirement foundation. You should open up a retirement account as soon as you know which type of retirement account would be best for you. Just because you have an account open does not mean you have to start putting money in it right away. Having an open account will make it easy for you to be able to contribute money when you find yourself with extra cash flow.

Retirement Tips

Financial advisors offer several retirement tips that will help get self-employed people started with their retirement savings.

Simplified Employee Pension (SEP-IRAs): Simplified Employee Pensions have a higher limit for contributions in comparison to Roth IRAs and Traditional IRAs. The contribution limits are calculated by a percentage of your net profit. It is a good option for small businesses and partnerships that are closely held because every participant will have the exact same benefits. These plans are very easy to maintain, have flexible funding options and a variety of investment choices. You can contribute up to 25% of your compensation up to $52,000.

Individual 401(k)s: Individual 401(k)s are best suited for self-employed people that do not have any other employees. You are able to make the employer and the employee contributions for yourself allowing you to maximize your business tax deductions and your personal contributions to your retirement. If your business experiences irregular patterns of profits, you should consider this retirement plan type. Depending on your business’ net profit, the contribution limit is up to $52,000.

Savings Incentive Match Plan For Employees (SIMPLE IRAs): If your business has a steady flow of income and the employees would like to make contributions to save for their retirement, this plan might work for you. It allows employees to have salary deferral contributions and you can match a percentage of their contribution. Using a SIMPLE IRA, you can offer employees an incentive and avoid tons of administrative work that is required with a traditional 401(k)

Profit Sharing Plans: A profit sharing plan may be a good option for business owners that have variable profit but they want to reward employees by giving employees a percentage of the profits. These plans are extremely flexible. Every year, you can decide how much you want to contribute or skip a year if necessary.

Take Control Of Your Retirement Future: Self-employed people face many decisions every day but they often do not make themselves a top priority. The decisions you make are just as important as the ones you do not make. You can take control of your future by deciding right now to start your retirement foundation so you do not have to work forever. The only person that you hurt by putting it off is yourself.

Strategies To Reduce The Net Investment Income Tax

Dec 28, 2013 Posted by Sanjiv No Comments

The goal of planning  net investment income tax (NIIT) is to manage the adjusted gross income and net investment in order to reduce the total amount subject to federal tax. The net investment income tax is calculated using the lesser of the net investment income or the adjusted gross income over the tax threshold amount for the year.

How Is The Net Investment Income Tax Calculated?

The net investment income tax is a surtax at a 3.8% tax rate of a base income. The base income is the lesser of:

  • Net investment income
  • Modified AGI above the threshold

NIIT Thresholds

Filing Status of Taxpayer                                                        Modified AGI

Single and Head of Household                                              $200,000

Married Filing Jointly, Qualified Widower or Widow           $250,000

Married Filing Separately                                                       $125,000

If you are trying to reduce your net investment income tax, you could reduce the net investment income, AGI or both. If your adjusted gross income is lowered below the threshold, the net investment income wouldn’t apply to you because it created a negative amount that becomes zero. Also, if the adjusted gross income is above the threshold, reducing the net investment income and/or AGI lowers the amount of your income that is subject to net investment income tax.

If you reduce your capital gains amount earned during the year, your income will be reduced and your AGI will be reduced. It is important to remember that the adjusted gross income is your total income less all the first page deductions on the first page of the IRS form 1040. All itemized deductions don’t reduce your adjusted gross income.

Two Basic Net Investment Income Tax Planning Strategies

  • Reduce AGI below the threshold
  • Reduce your net investment income

Tax-Sheltered Investments

  •  Life Insurance. Growth in a life insurance policy is sheltered from current income taxes. Additionally, the death benefit is also tax free. Placing assets directly into life insurance removes that investment income from net investment income and AGI. 
  • Roth 401(k) or Roth IRA plans.  Qualified distributions from a Roth retirement plan are not included as income.
  •  Deferred Annuities. Consider using deferred annuities after all 401(k) and contributions to retirement plans have been maxed out. Annuities will shelter your earnings from immediately being taxed. They will help you smooth out your income and help keep your AGI under the NIIT threshold.
  • Possibly convert Pretax Retirement Plans into a Roth plan.  Taxpayers need to determine if this will make sense for them. The amount that is converted into a Roth plan increases adjusted gross income and income which could potentially cause income tax liability and net investment income tax liability. However, future income distributions from the Roth IRA will be exempt from tax.

 Passive Income Strategies

Consider investments where your investment can be depreciated. For example, rental real estate can be depreciated. Depreciation reduces the total rental income that is taxable. Another option is gas and oil investments. These offer a large deduction for depletion that can be taken upfront and a deduction for most of the intangible drilling costs. These deductions give gas and oil investments more tax advantages than many other investments. Both of these strategies help reduce the total investment income that is taxable.

Many taxpayers own real estate and rent their building to directly to their own business (self rentals). These may be subject to a 3.8% net investment income tax.

When taxpayers own multiple passive businesses or rental properties, they should consider how these activities are grouped to calculate passive activity loss limitations. The IRS provides taxpayers an opportunity to regroup these activities which can be a better way to handle passive losses. It can reduce the amount of income that is subject to federal tax.

Strategies for Capital Gains

Installment Sales. Taxpayers that are selling major capital assets or real estate should think about using installment sales. The seller directly finances the purchase using a loan. Taxpayers will then have the choice of whether they want to spread the capital gains over loan’s life or not. This will help smooth income for the amount of years of the loan.

Charitable Remainder Trusts. Property can be placed in a charitable remainder trust and the taxpayer can draw distributions over the rest of the taxpayer’s life. The remainder will go to charity.  The distributions are subject to the net investment income tax but it can be done over many years. Taxpayers, for example, can sell appreciated assets from inside of the charitable remainder trust and income can be distributed over many years.

Charitable Lead Trusts. Taxpayers get an upfront charitable deduction and they are able to keep the gains off of their tax returns. This is a good option for extremely generous taxpayers.