Tag: tax tips

Thing You Want To Know About Education Loan Deduction ?

Sanjiv Gupta CPA - 9 years ago
Educational loans have become quite popular these days. Students who cannot fund their education independently are facilitated by such loans. This article deals with education loan deduction or the grants that are applicable only for higher education.  Loan whatever be the kind, educational or for business has to be repaid with interest. This is a basic understanding. Interestingly educational loans (tuition and fees deduction) can cut down your tax liabilities by almost $4,000. And yes, this is true! This deduction is treated as an adjustment to income. You can claim it without having to categorize deducible contents. Let’s analyze points one by one.                                                                            How to calculate education loan deduction?Deductions are stipulated on the basis of Modified Adjusted Gross Income (MAGI). MAGI is calculated on the federal tax returns. Student loan interest deduction is calculated much after. This will definitely reduce your tax amount payable on your income ($2,500 by 2010) What makes an institution eligible to apply for a student’s aid program?Us Department of Education’s Federal Student aid programs is available to those institutes which can comply with federal rules of participating in student interest loan program. This includes centers offering higher secondary, graduation and post-graduation degrees on general, engineering and health care domains. Institutions must bear proper affiliation certification as per the terms of the US Department of Education. Who is eligible for the deduction?Loans are acquired as for personal studies, financing study of a spouse or other dependents. Students who have a High school diploma or General Educational Development credential can apply for the loan. For students who are both guarantors and applicants, they need to submit authentic employment papers (containing the name of the organization, duration of the employment period, salary). If the guarantor is a relative then he/she should produce the same.   The loan must be able to suffice just the academic period of the student. Institutions can guide fairly on eligibility and filing procedure. The following points are to be complied with when claiming for a deduction: No third-party tax exemption claim with reference to a student loan.Legal obligation to pay interest on a qualified student’s loanPaid interest for a qualified student loan. Fields of education:Work-related education, skill-enhancing education, education required by the employer, post-grad degrees, research, and higher studies: a student can choose from the above list when applying for the deduction. Expenses covered: At this point we will summarize all those expenses that are covered by educational loans until the end of the academic session. This will include:Tuition feesLodging and boarding expensesTextbooks, provisions and necessary tools and equipmentOther allowances (transportation, workshops, presentations, etc) Tax Benefit: Section 80ESection 80E of the Income Tax Act lays down certain filing parameters (student’s interest deduction). The limitation was extended. No tax deduction is calculated either onOn the total expenses paid during the entire academic career of the studentRs 40,000 whichever is less.However please note here that there would be no deduction on principal re-payment. A considerable amount of interest will be deducted as according to the new regulation generated by the US Government. Closed assets for repaying expenses:A student cannot use the below-stated funds when repaying academic expenses (tax-deductible):Salaries/wagesLoanGrant/ giftInherited assetsPeriodic withdrawal from saving accounts Student loan interest:Student loan interest is the interest paid during the period of qualification. As stated earlier such loans are issued only to support educational expenses: personal or of any dependent’s, acquired between the time before/after loan proposal, for the higher education of an eligible student.  However loan from a relative or sanctioned by an employer is not considered to be authentic student loan, which can be applied to attain deduction on the tax return. Loaning for a dependent:Loans are sanctioned on the basis of a guarantor’s income. The annual income report is screened by the authority who determines whether a guarantor will or will not be able to meet re-payment terms. Commonly the dependent is either a qualifying child or a qualifying relative. Certain exceptions are observed here:The guarantor can be dependent on another taxpayerAn individual can be your dependent even if the individual files a joint return with a spouse.Individuals those that have a Gross income equivalent to or more than the taxable amount can be dependent. Who can claim dependent’s expenses? To claim tuition and fees deduction on a dependent’s expenses you are to meet two requirements:You must have paid the total expenses until the completion of the student’s final academic sessionClaim exemption for the student as a dependent Tax benefits for education:There are several programs that offer a deduction on interest and on tax payable against educational loans.  To name some, there are Section 529 plans; more like a savings account that enjoys certain tax-exemption, the American Opportunity credit, Publication 970, incentives for higher education, Lifetime Learning, and Hope credits, student loan interest deduction, Educational Assistance Plans, and American Recovery and Reinvestment Act.  Tax breaks are meant to aid eligible students to continue their studies. The deduction procedure pivots on the income group of the guarantor. Scholarships, however, are more like favors sanctioned after the student appears for certain types of merit test. Overviewing Plans:Colleges saving plans are funded by the State government. If such funds are not used for educational purposes, then the state will impose a direct tax on the amount with an extra 10% as surtax. Tuition and fees deduction is calculated directly on the tax return without having to itemize the deductions. A single course application can also qualify a student to apply for such a deduction. Lifetime learning credit offers a straight $2000 deduction for any graduate-level course with minimum qualification for enrollment. The other credit, AmericanOpportunitycredit offered $2500deduction. Unfortunately, this scheme will be rendered inactive from 2012. Student loan interest deduction though offers a $2500 cut-out, it slowly phases out as the income level of the loan-holder increases. The IRS has published a detailed report on the several tax-benefit schemes that a student can apply for. Browse the net to know more about related topics.

Who Can You Cliam On Your Tax Return ?

Sanjiv Gupta CPA - 9 years ago
How much taxes you pay largely depends upon how much you earn.  However, it is equally dependent upon how much you can deduct to lower your taxable income. Even though the deduction taken by each individual is different, some tax rules affect every person.  Rules including dependent deductions and exemptions apply to all of us.According to the Internal Revenue Services, there are six important facts about dependents and exemptions that will help you file your 2011 tax return.Exemptions:  There are two types of exemptions: personal exemptions and exemptions for dependents. For the year 2011, you can claim a $3,700 exemption for each dependent including yourself.Your spouse is not your dependent, At least not on your Tax Return.  If you are filing jointly, you can claim one exemption for yourself and one for your spouse. However, If you’re filing a separate return, you may only claim the exemption for your spouse if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.Dependent Exemptions. As stated earlier you can take a $3700 exemption for your dependents. However, you need to make sure dependent is qualified as per the IRS guidelines. IRS defines the dependent is your qualifying child or qualifying relative.  You can learn more about Dependent Qualification by visiting IRS Dependent Tax Tutorial.If someone else claims you as a dependent, you may still be required to file your own tax return.  Some taxpayers do not file the tax return just because they were claimed as dependent by their parents of someone else.   Filing a tax return is based upon many factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe. If you are a dependent, you may not claim an exemption.  Exemption of each person can be only claimed once.  If someone else—such as your guardian or parent—claims you as a dependent, you may not claim your personal exemption on your own tax return.Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year.Exemptions are Deductions that can help you reduce your tax liability but you must do your homework.  Incorrectly claimed exemptions may result in higher taxes and huge penalties.  Fraudulently claimed exemptions and deductions can also result in criminal charges.

2012 and 2013 Tax Tips

Sanjiv Gupta CPA - 9 years ago
Considering the uncertain global conditions and economic downturn, federal tax rules in the US have not been formulated beyond the year 2012. In this context, it has become very difficult to prepare a final layout for estate and gift tax. In the face of such a situation, some important tax tips have been discussed below, which can efficiently help plan income tax propositions.In the first case, it is suggested that income should be deferred to the subsequent year, secondly, tax deductions should be enjoyed and last of all if there is any such tax provision that has expired, it must be taken into account. In the following passage, we have discussed the federal tax rules, which have been implemented by the U.S. government in the year 2012 and the proposals, which have found a place in the 2013 US budget.Transfer tax rules in effect for the year 2012The transfer tax rules, which have been put into effect for the year 2012, are as follows:1. In the event of a person’s death in 2012, an exemption limit of $5,120,000 has been set which is a revised and adjusted figure compared to the one that had been fixed in 2011. Other than the exemption limit, the landed properties will be taxed at a 35% rate.2. A tax enactment plan for married couples implies that if in the event of the death of one spouse the other person can utilize the unused portion of the dead partner’s deduced amount. Such a provision is called portability and this will remain in operation only for the year 2012. To get the fullest advantage of portability or deceased spousal unused exclusion amount, as it is technically known as there is the need to produce federal estate tax return of the dead partner’s estate. It does not matter even if the gross value of the estate is marked below $5,120,000 because whatever the case may be the estate tax return of the deceased person’s estate has to be filed.3. There are other spheres, which are subjected to the same amount of exemption limit and are known as lifetime gift tax and generation-skipping transfer tax. The exemption amount stands at $5,120,000 and like in the first two cases and the taxable amount for the lifetime and generation-skipping transfers remains the same at a flat 35% tax rate.4. The deductible amount remains the same at $5,120,000, which is applicable for lifetime gift tax. Like in the earlier cases, a 35% tax rate has been decided for all taxable gifts over the exemption amount. On a whole, the gift tax and the estate tax have been brought under a single section.New tax proposals indicated by President Obama in the 2013 budget If the tax proposals, planned for the 2013 US budget are finally implemented and brought into effect then there will be notable changes in estate tax payments, generation-skipping transfer, and gift taxes.1. Talking about exemption limit the new exemption amounts that have been fixed for estate and generation-skipping transfer tax are kept at $3.5 million and $1 million respectively.2. The new taxable amount has been increased from the earlier 35% to a new flat 45% tax rate.3. Coming to the section, which talks about the provision of portability where the earlier facility that allowed a surviving spouse to utilize a deceased partner’s unused exempted amount, has been made permanent.4. Valuation discounts have also been talked about in the 2013 budget plan. In the present scenario due to the absence of good control and proper marketing techniques, the interests of business organizations suffer heavily. However, according to the 2013 plan module, the value of interests will only be discounted in the case of family businesses.5. Grantor retained annuity trusts will face several changes as per 2013 tax rules. Going by the present condition laid down in the rule book, a person can save that extra money which he has to shell out for paying transfer tax costs by using grantor retained annuity trust. Two different conditions have been mentioned in the 2013 budget plan, which will bring the earlier provision of zeroing out the gift in the trusts to a permanent stop.Some other significant changes that have been noted in the tax evaluation rules applicable for grantor trust are that unlike before landed property owned by the grantor trusts will be included at the time of evaluating the grantor’s total estate under his possession. In addition, all kinds of distributions that will be made in the lifetime of the grantor will be indicated as gift tax.

A To Z Of Home Office Tax Deductions

Sanjiv Gupta CPA - 9 years ago
If you have a home-based business you can save money by availing home office tax deductions. The IRS allows you to save money on insurance, mortgage, repairs, and other utilities if you have an office at home. Home office deductions are applicable for all kinds of homes irrespective of apartments, flats, and even mobile homes. So if you are wondering how to claim a home deduction this article will provide you with all the basic information.Requirements for home deductionsThe internal revenue service or the IRS has created certain specific requirements that must be met with to claim home office deductions. They are as follows:Regular use: For you to claim home office tax deductions you have to work from your home on a period of over two years.Exclusive use: You can also be eligible for home office deductions if you use your home exclusively for work. You can either have a separate area for work or a room within your house but it must only be used for work-purpose.The principal place for your work: Your home must serve as a principal area for your work. You cannot claim tax deductions if you use your house occasionally for the purpose of your business. But even if you have another office at some other location but use your house regularly for client meetings and other administrative and executive purposes you can easily be eligible for home office tax deductions.What percentage of the house is being used: Another requirement that will decide the deductible amount is what percentage of the house is being used for work. So before you file your house deduction claim you need to understand what percentage of the house is used for work if you are using more than one room or only a portion of a room as your home office.Rules for employeesThe IRS has specified a couple of other rules for employees claiming home office deductions. So if you are an employee in addition to the above-stated rules you would also have to comply with these other criteria.For an employee looking for home deductions, he must show that he's working from home is actually more beneficial for the employer. You can easily claim home office deductions if your office does not provide any space for you to work in their location and you have to work from home. However, the IRS does not have any specific rules to judge if your work is actually beneficial for your employer. They base their decision on facts and circumstantial information.You cannot be eligible for tax deductions if you rent a part of your home to the employer and use that part to work for that same company.What can you saveFiling for a home office tax deductions can reduce your tax bills considerably. If you meet all the required compliance criterion you can easily save a lot by home tax deductions. The IRS will deduct mortgage insurance, rent, repair, real estate taxes, depreciation and any other type of utilities.However, your deductible amount will depend on the percentage of the house you are using for your work.Also if your income is lesser than the expenditure incurred for your business your deductions will be constrained.How to file your claimIf you are thinking of claiming your home office deductions and you are meeting all the compliance criterion you can easily reduce a considerable portion of your tax bills. Here is how you can claim your home office deductions. Self-employed: For those who are self-employed and using their homes as the office they have to fill Form 8829 to understand the amount of deduction they will be eligible for. Then this amount has to be stated in Schedule C.Employees: Employees have a different procedure for filing home office deductions. If you are an employee you can calculate your deductible amount using the worksheets of IRS publication 587. Once you have calculated your deductions you can then claim them as itemized deductions on Schedule A.These are the basic information that one needs to know and follow to file a home office tax deduction. Successfully filing your claim can easily reduce a considerable amount of tax burden from your shoulders.

2012 Year End Tax Implications

Sanjiv Gupta CPA - 8 years ago
The fat lady is almost singing to signal the end of the current gift and estate tax exemptions and rates. To start with, the so-called “fiscal cliff”, which is the estate tax exemption, is on course to fall precipitously in 2013 while at the same time the maximum estate tax rate is expected to rise. The net result of all these changes in tax thresholds is that many high net worth clients are being requested to consider giving away part of their wealth in order to take advantage of the current exemption just before this period lapses. The thing is with most of the exemption strategies in gift-giving often the least effective means is to give the gifts as cash. On the other hand, one can also use some of the other strategies such as the use of Family Limited Partnership (FLP) to acquire a valuation discount for the assets being gifted may be used. Some of the other ways to give away gifts include using the Intentionally Defective Grantor Trust (IDGT) and then use the trust as seed money to purchase different assets from the estate.However, this is not usually the situation in most cases as there are different things that come into play when gifting away part of your estate. For instance, there are many important caveats that include the risk of an estate tax clawback as well as the affordability of the gift itself. You must also take care of the state estate tax laws that may be due on the estate. As such, it is very important for the high-end members of the population to determine whether they would rather give away part of their wealth or simply sit back and endure the tax burden that will be coming at the turn of the year.Taking Advantage of the Current Gift Exemption: To start with, for a person to take advantage of the gifting it is important to know a few things. In essence, the basic principle that is behind gifting is to start by making a gift while the exemption is currently at $5.12 million. At the end of the year, the exemption will drop from $5.12 million to only $1 million. While, the exemptions that are set to expire at the end of the year, it is quite possible that the tax burden that an individual will have at the start of the next year will be very huge. Gifting is a way through which individual spread their wealth, not only to the people around them but also help themselves take care of the financial aspect of their estates. Gifting can also be done to a member of the family as well as to charities and other less fortunate members of the community.While on the case of gifting away wealth, it is usually advisable to gift away pieces of property instead of cash. This is because it is a better way of spreading the wealth to future generations who may not be old enough to handle huge sums of money.

IRS Response to Identity Theft Lawsuits

Sanjiv Gupta CPA - 8 years ago
Like any government office that deals with refunds, the norm has been that those seeking refunds are given the run around until such a moment that they give up. In fact, for years those seeking refunds especially after suffering from identity theft normally end spending more on the follow-up process than the amount that they actually stand to gain from the refund. That has been the IRS and its way of dealing with the identity theft tax refunds that they are required to give. Until the other day when they were sued for the costs of the refund, little had changed at the IRS. However, right now the tide seems to be turning in favor of those looking for their refunds after suffering from identity theft. The IRS seems to have adopted a new policy in which these cases are expedited and solved within a reasonable time. A few of the people we contacted have pointed out the fact that the IRS seems to be more willing to settle the tax issues that they have been facing for a while now. Some people in this category have tax refunds that go as far back as the year 2007.The main question that seems to bug pundits and observers in tax issues is what exactly has changed the tide of things at the IRS? Well, a look at the bulk of the cases now being expedited seems to show a trend in which the IRS is responding to suits from the courts of law. A large number of the people being assisted by the IRS to get their refunds to seem to have at one point sued the IRS for these amounts. As such, it can easily be pointed out that this appears to be the jolting card that changed the tide at the IRS.Do you have to sue them to get your to refund? Bluntly speaking NO; you are not required to sue the IRS before you can be assisted to get your tax refund after a period of identity theft. At least, in theory, this is the law of the land. Those seeking refunds only have to provide the proper documentation and the refunds would be submitted to their accounts of choice within the scheduled time. However, the reality on the ground is a whole different matter. Most of the people who simply fill in the requisite forms and submit them often have to wait for long before such applications are taken care of. Some of them have to make a number of follow-ups before they can be attended to. In some cases, the applicants have resorted to using the court system in order to assure themselves of quick response and in essence, justice for themselves. This option, those in most cases spared for extreme cases, was taken by 16 plaintiffs recently ad of the 16, at least 3 have already received their refunds. A few other refunds were still being processes to be delivered before mid-December.

Planning To Pay Tax Bill With Credit Card ?

Sanjiv Gupta CPA - 8 years ago
It is the time of the year to pay taxes, again. Have you planned for your tax payment? If you are thinking about the various options available to pay your taxes, you should certainly consider paying taxes using your credit card.Don’t panic!! After all, paying your tax using your credit card is not a bad idea at all.Let me explain how you can benefit by paying tax using your credit card.Credit cards are extremely dangerous if they are not used with due care. Caution should be exercised about the payment date and the amount. Nevertheless, if they are used wisely there is no better option than a credit card to manage your payments. By paying your tax through a credit card, you can buy time to repay the money. Though making payments through a credit card will lead to paying interest, the rate of interest charged by the credit card company is way lower than what the IRS would charge for defaulting on tax payment.Let us consider this classic example. Assuming that the last date for payment of tax is April 20th, IRS would start charging interest on any outstanding tax from the due date to the date the tax is paid in full. The current rate of interest is 3%, which is revised quarterly, and the additional interest rate for late payments is another 0.5% a month. If a taxpayer is late by one year, the total interest rate would work out to approximately 9%. On the other hand, for a credit card with an interest rate of 4% annually and another 2.4% interest rates as a one-time convenience fee, that a third-party service provider charges for using a credit card, the total interest rate still works out to around 6.5%. So, on a $20,000 bill, the savings would be approximately $500. For someone using a 0% credit card, the savings could still increase. But the point of concern here is the due date for the credit card bill payment. If the credit card dues are not cleared in time, all the savings accumulated here will go down the drain.For people, who are unable to avail of a credit line, this option may make no sense. Such people may approach the IRS and set up payment options with the department. Of late, IRS has unveiled schemes for taxpayers who need less than 4months to settle their tax amounts. Under this arrangement, tax filers can avail of a certain grace period where they can still pay their taxes, penalty-free. But the details of this arrangement need to be checked with the department as these rules and programs are not fixed and may vary from each tax year to the next.All said and done, it is very important to pay taxes on time. Considering that the penalty rate may go up to as high as 9%, it is very important for tax filers to figure out ways and means that are cheaper and affordable to them. For all those who hold a credit card, the above-mentioned option could prove beneficial and worthwhile to give it a try and pay taxes on time.

Common Last Moment Errors While Filing Taxes

Sanjiv Gupta CPA - 8 years ago
It is not uncommon for people to delay filing up their W2 forms for the tax return, till the eleventh hour and thus, end up making last moment errors. Even though this makes the entire process a lot more inconvenient and unpleasant, it is a fact that several residents do this every time. Thus, thanks to the last-minute rushing, there are often a number of small errors that if made, can potentially delay a person’s tax returns. Some, of these common and usual last moment errors, are listed here so as to remind people that they need to avoid making these, in order to assure that their return is deposited on time.Common Last Moment Errors While Filing Taxes:The most common of all the mistakes is perhaps the most obvious one. People, in their hurry to finish filing their taxes and tax returns, often end up writing an incorrect spelling of their name. It should be remembered that the spelling written on the form should match the one that is provided on the ‘Social Security Card’. Also, another point to be kept in mind is that the ‘Social Security number’ must be correctly written.The next problem that many encounters are a mistake in writing the filing status. Now, as it often happens, people who are married file their taxes together or jointly. However, people may file the same separately, in spite of their married status. This is more logical or better option in several cases. The only thing that must be kept in mind is that care should be taken while putting the status down on the form.The next common last moment mistake on the list is perhaps the hardest one to avoid. This is, the mistakes made during calculating the returns. If a person is trying to file the taxes at the eleventh hour, it is quite sure that he or she will not be able to devote too much time to check if the calculation and mathematics are correct. However, these mistakes can sometimes be avoided by using special software hat is designed to calculate taxes.Signing the returns is very important. Many couples who decide to file their taxes together (jointly) often forget that both of their signatures are required on the form. People who are filing online can ask for a unique identification number from the site (irs.gov).Another very common but absolutely terrible mistake is writing the wrong address for the place were the tax form has to be sent! Now, needless to say, unless the address is written correctly, the form won’t reach on time. So, people should check the list that the IRS decides to help people understand which address they must send their returns to.People should also remember to include all the forms that need to send. It is a very common last moment mistake to just send in the w2 or 1040 form and nothing else. But people often require another form too, e.g., the people who have requested a ‘payment agreement’, need to make sure that they also attach a 9645 along with the standard W2.If a person feels that he or she requires some amount of extra time then that has to be separately requested for using the 4868 form.So, these are the most common problems or last moment mistakes that people make while they are trying to file their taxes in a hurry.

Tips to Maximize Tax Savings

Sanjiv Gupta CPA - 8 years ago
You may be working hard and earning big money but what is the use when you have not planned your taxes properly? Not planning for tax payments is as good as being unemployed because a lot of hard-earned dollars are wasted in paying taxes due to the lack of planning. So it is imperative to plan for tax payments, well in advance.Here are a few tips, from well-accomplished financial consultants, that may help you to maximize your tax savings and have more money in hand to spend for yourself.Working for a companySometimes it is good to work for someone than have your own business. Wondering why? Let me explain. By working for a company or by being on someone else’s payrolls, you may have to take a cut in your pay package. Nevertheless, you may still be left with more take-home money than what you had when you owned a business because you end up paying less in tax. For example, if you were working for a University as a professor, fringe benefits such as health insurance and worker’s compensation would take a big chunk of your salary thereby leading to lower tax payments.Combining vacations with Business TripsGoing on expensive vacations may burn a big hole in your pocket in terms of tax payments. But if these vacations are combined with business, there could be a lot of savings in terms of tax payments because hotel bills, meals, and car rentals are partly deductible from tax payments. But this is not a good practice to follow always as there could be a lot of questions from the IRS when this becomes a regular pattern. So, sometimes it is better to pay taxes fully for expensive vacations than claiming for deductions.Keeping a tab on Business related expensesNormally when on business trips we are lax and do not keep a tab on the expenses incurred during the trip. It is critical to keep track of all these expenses because, in the case of an IRS audit, it is this information that will come in handy to substantiate expenses incurred during a business trip. Also, it is a good practice to tag all business transactions to a single credit card. By using the same credit card for all business-related expenses, the expense statement from the credit card company can be used to back up claims made towards expenses incurred during a business trip.Employing your SpouseThough a little tricky, this option provides a lot of tax savings. Being your spouse’s employer you can claim for health reimbursements that cover out-of-pocket medical expenses such as spectacles, co-payments and dental costs with pretax dollars. But under these circumstances payroll tax payments are unavoidable. In order to claim for tax payments under this option, it is imperative to have an employment contract, signed by your wife and a perfect timesheet recording your wife’s working hours. It is very important to keep track of payroll tax payments because payroll mistakes can completely wipe away the tax savings.While these are just some of the many tax saving options available, it is always advisable to seek the guidance of a qualified CPA in order to maximize tax savings.

5 Important Tips For 2014 Tax Planning

Sanjiv Gupta CPA - 7 years ago
Your new goal for 2014 should be to gain a higher level of understanding about your income taxes, plan for your tax liability and get organized. This will make tax season much easier and could save you some of your hard-earned money.Below are some simple tips to help you achieve your new goal.Create a 2014 tax file. You can use a folder, bin or electronic file on your computer.  Include all transactions and documents that might affect your 2014 tax return.If you use the electronic file, all you have to do is scan all your tax documents and move them into the folder on your computer.  The great thing about using an electronic file is you can easily e-mail the folder to your tax preparer when it is time to file. An electronic file also takes up much less room and will not clutter your desk. It is important that you back up your electronic file so you will not lose your tax file if anything happens to your computer.Add important notes on your documents to help your tax preparer understand each transaction. You should include documents such as W2’s, K-1s, 1099s, property sale documents, escrow papers, property tax receipts, vehicle registration receipts, receipts for any tax-deductible purchases, and donation receipts.If your financial position will change this year, schedule a tax planning appointment halfway through the year. Financially altering events that occur in 2014 include marriage, divorce, having a baby, buying a home, selling a home or any other event that will affect your taxes. Do not try to set up an appointment in the middle of tax season. Waiting until the middle of 2014 will assure your tax professional will have enough time to spend with you help you adequately plan for your taxes.Fund your retirement plan. Check with your employer to see if you can contribute more to your retirement plan and confirm you are fully taking advantage of the employer match if you have a retirement plan with your employer.If you do not have a retirement plan, you need to open a ROTH IRA, IRA or other types of retirement plan. An investment house or bank can help you decide the best plan for your specific financial situation. This will help you plan for your future and will reduce your tax liability this year.Prepay your income tax liabilities. If you do not prepay your income tax liabilities timely, the IRS will penalize you. You should write down your estimated tax payments and the due dates on your calendar. For 2014, the installment due dates for individuals are April 15th, June 16th, September 15th, and January 15th, 2015.Keep up with current news relating to tax legislation. The tax laws are constantly changing. You might think you know the valuable credits and deductions but Congress might have obliterated them.  Keeping up with the new tax law changes will help you take advantage of all the tax credits and deductions that are available to you.

Understanding and Avoiding California State Taxes

Sanjiv Gupta CPA - 4 years ago
There was a time when everybody seemed to dream of moving to California. It was, after all, the “Golden State.”  It had endless sunshine and incredible weather – which proved to be enough motivation for Americans who have had enough of the cold.  It also had a booming economy, pristine beaches, and yes, Hollywood.But now, many people in California would gladly trade places with Americans living in other states. There are lots of reasons behind this, from the horrible traffic in major cities, to rising criminality, and the fact that Californians are being taxed to death.According to non-partisan, non-profit research group Tax Foundation, California has one of the highest state taxes in the country. The Washington, D.C.-based group says that California has the highest state-level sales tax rate at 7.5 percent, albeit this would drop to 7.3 by the end of the year. The rate can hit as high as 10 percent in some California cities, though, when combined with local sales taxes.Here’s a breakdown of how California taxes will affect you should you work, buy a home, or just shop in the Golden State.Property TaxProperty in the state is assessed at 100 percent of its fair market value.However, Californians could qualify for a property tax break under certain conditions. For instance, homeowners are qualified for a reduction of $7,000 in the taxable value of their properties if they live in their homes as their principal residences. Senior citizens and the disabled (including the blind) are also eligible for deferring their property taxes for their principal places of residence under a new tax postponement program that started last September 1, 2016.State Income TaxThe personal income tax rates in California range from 1 to a high of 12.3 percent. These are levied not only in the income of residents but also in the income earned by non-residents who are working in the state.The highest rate is levied at income levels of at least $526,444. An extra 1-percent surcharge is also levied onto incomes of more than $1 million. Those earning $7,850 or less in taxable income are charged the lowest rate of 1 percent.It’s not surprising that a lot of Californians are moving elsewhere because of the high taxes that they have to deal with in their home state.  According to the IRS, more than 250,000 Californians have moved out of the state in 2013-2014.  This is the highest level in more than a decade.Basic RulesIf you are one of the many Californians wishing to avoid California income tax, there are two basic rules that you have to keep in mind. The first is that a resident pays California tax on their worldwide income.For instance, you are a resident of California and you own part of an LLC outside of the state. You will have to pay California tax on your distributive share of the company’s LLC income, despite the LLC having earned all of its income outside of California (say another state like Nevada).The second rule is that California will tax income generated in the state, regardless of where you live. So if you own California real estate but live in New York, you still have to pay California tax on the real estate income of your property.Defining California ResidentsThe state has an expansive definition of California residency. A person is considered a resident if he or she is in California other than a temporary or transitory purpose.  An individual is also considered a California resident if he or she maintains a domicile in the state despite being outside of the Golden State for a temporary or transitory purpose.What is temporary or transitory? Generally speaking, this purpose applies to a person who visits the state for an extended vacation of 3 months and doesn’t engage in any type of commercial activity in the state.Of course, there are several exceptions to this rule. Let’s say that a millionaire couple, Mr. & Mrs. Smith, rents an apartment in California for 3 months. They travel around the world for the rest of the year and spend parts of it living in Las Vegas where they have a mansion. It may seem like the couple are ‘safe’ from California tax laws because they only spend three months in California.But tax authorities may be able to find proof that Mr. & Mrs. Smith are residents of California. For example, they may have a closer connection to California than in Nevada, where they have a home. One factor may be their historical ties— Mr. & Mrs. Smith had long lived in California. They may also have children and grandchildren in California, which represent the closest connection to the taxpayers. The tax authorities can argue that even though the Smiths owned a hoe in Nevada, California is still their home because this is where their family and social contacts are.An individual who has been in the state for more than 9 months is presumed to be a resident.Corbett FactorsThere are 29 residency factors that the state looks into determining that a person is a resident of California. These include birth, marriage, and raising a family; preparation of tax returns; ownership and occupancy of custom-built home; ownership of family corporation; ownership of cemetery lots; service as an officer and employee of a business corporation; and church attendance and donations, among others. These are the so-called Corbett factors, coming from the California Supreme Court case Corbett vs. Franchise Tax board which listed the 29 residency factors.These 29 residency factors are most of the time used by California residents who want to escape tax from their home state. For example, a taxpayer wanting to escape California tax would argue that he has his tax returns prepared in Nevada and has a driver’s license there. He would also show that he has a condo in Las Vegas, and is a member of a country club in Nevada.Those arguments may be true, but the California Franchise Tax Board could counter the taxpayer’s arguments by showing that the individual spends more time in California than in Nevada. This can be done by showing the person’s Internet searches and reviewing charge card receipts, for example. The person’s Internet searches could reveal that the taxpayer buys things in LA malls and shops at the Spectrum. His charge card receipts, meanwhile, could show that he frequently dines in at posh restaurants near his Laguna Beach property.Sale of a Major BusinessIt is also common for California residents to change residency to avoid being tax for the sale of a substantial business. For instance, a company based in Arizona but with assets and operations in California is to be sold for $10-million. The owner tries to escape the California tax by changing his residency.The business owner may be able to avoid California taxes if the sale of the company is consummated after he/she changes personal residency.However, in most circumstances, there will still be taxes levied on the sale of the company since its assets are in California. So even if the taxpayer has changed his residency, he will have to pay for the taxes on the California source income from the sale of the business.The key here is to plan the business sale correctly from the beginning. The business owner/taxpayer should leave and stay out of California for the sale year and several years after because the state can still argue that the individual only did so to avoid tax from the major scale.In fact, many taxation experts suggest that business owners who sold their companies with assets and business operations in California should out of the state for at least four years. The reason for this is that the return may be selected for an audit 2-3 years after the tax return is filed for the year of the sale. Franchise tax board audits in California take longer than IRS audits. These audits are also more thoroughly documented particularly in cases of residency determinations.Four years may not even be safe for taxpayers wanting to avoid taxes in California. In some cases (especially if the stakes are high enough, meaning there’s substantial money involved in the sale), then taxpayers should stay out of California in 5-6 years.And staying out of California not only means physically returning to the Golden State and re-establishing a home there years after the sale of a major business. It also means that the taxpayer should not give the tax authorities in California any hint of going back there years after completing a major business sale.For example, the FTB can access social media accounts of taxpayers in California. If a taxpayer who sold his company in California for 20 million dollars in 2014 posted on Facebook about how he can’t wait to go back to LA as a resident, then he just gave the tax authorities some great evidence to pursue a case against him.The same goes for Twitter activity. If the taxpayer makes any tweets indicating that he has plans of going back to California and re-establishing domicile there, then the tax authorities could build a case against him.In some cases, even the state where the taxpayer established residency can be a factor in the tax authorities pursuing a case against him. Obviously, the FTB is very wary of Californians who have moved to nearby states like Nevada. Because of the close proximity of Nevada to California, the FTB is very skeptical of claims of Nevada residency than residency in Florida or Massachusetts.It even becomes ‘safer’ for Californians if they move elsewhere shortly before a substantial sale of their business. This can shield the entire gain from the business sale against California taxes. The state may be skeptical of the timing of the change of residence, but if a taxpayer can prove that the sale occurred months after he had completely moved out of the state then he has a good chance of being exempted against California tax on the business sale.Retaining a Home in CaliforniaOne common question is—can a taxpayer who had left California keep a family home in the state without being considered by the state as a California domiciliary?While it may appear that California tax authorities will consider a taxpayer to be a California domiciliary because of his home in California, there are other factors that can come in to play. For instance, the taxpayer may argue that the home wasn’t really used by the family during the past year.  Tax authorities may also look into the size and value of the home in California as compared to out of state home.But retaining a family home in California can be considered by tax authorities as one good indication that the taxpayer how had left California still has plans of going back to the state.This can be compounded by the FTB conducting interviews with neighbors who would tell them that the taxpayer had told them that he intends to be back in a few years. In such a case, then the tax board will have a strong case against the taxpayer who had left California after a major business sale.Still, people who are planning to leave California for good and terminate their residency can control the facts. They can leave the state several months before completing a major business sale. They can also sell the family home to show tax authorities that their domicile has shifted. Granted that these aren’t easy decisions to make (selling the family home is certainly difficult by any standards), but the taxpayer still has the advantage of knowing what needs to be done before selling a property or a business. With that advantage, he will know what to do even before the tax authorities in California smell something fishy with the transaction he is involved in.
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