Happy Birthday To the Income Tax!

Did you know the federal income tax celebrated its 92nd birthday on October 3rd?

In February of 1913 the 16th Amendment was ratified by the required two-thirds of the states. The amendment gave Congress the power to “lay and collect tax on incomes, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration. ” On October 3, 1913, Congress passed the Revenue Act of 1913, which created the first permanent federal income tax.

Congress has made two previous attempts at instituting a federal income tax. The first, in 1861, was an emergency measure to fund the Civil War, and was repealed in 1872. In 1894, in response to complaints that an excessive reliance on tariffs as a source of revenue caused the price of imported goods to rise, Congress again passed an income tax law, which the Supreme Court ruled unconstititional in 1895.

In celebration of this special occasion, here are some facts about the very first Form 1040:

* The tax applied to salaries and wages, interest, dividends, rents, royalties, pensions and annuities, income from estates, trusts, sole proprietorships and partnerships, and gains from the sale of most types of property.

* The salaries and wages of state and local government employees were exempt from income tax.

* Interest from federal, as well as state and local, government bonds were exempt from income tax.

* Deductions were allowed for “personal” interest, federal excise taxes, taxes paid to state and local governments, casualty and theft losses, bad debts, business expenses, and depreciation of property used in business.

* There was an exemption of $3, 000. 00 for single persons and $4, 000. 00 for married couples.

* A “normal” tax of 1% was applied to the first $20, 000. 00 of taxable income. Dividends were exempt from this “normal” tax. An additional or “super” tax of from 1% to 6% was applied to income, including dividends, in excess of $20, 000. 00.

* The return was due “on or before the first day of March”.

* There was only one page of instructions!

* In the first year of the income tax only 1 out of every 271 American citizens were taxed and $28 Million in revenue was raised.

Over the years the federal income tax has evolved into the complicated “mess” that it is today, with 54, 000 pages of code. According to former Treasury Secretary Paul O’neill, “Our tax code is so complicated; we’ve made it nearly impossible for even the Internal revenue service to understand. ” Here are some of the landmarks of this evolution:

* A personal exemption allowance for dependents and a deduction for charitable contributions were added in 1917.

* Capital gains were singled out for preferential treatment in 1922, although profits on the sale of certain types of property received special tax treatment as early as 1918.

* A deduction for medical expenses was introduced in 1942.

* The standard Deduction was added in 1944 as an alternative to requiring taxpayers to itemize qualified expenses.

* An income Averaging method of tax compution was initiated in 1964, to be taken away by the Tax Reform Act of 1986.

* A “minimum” tax on specified “tax preference” items first appeared in 1970, and was replaced by the dreaded Alternative Minimum Tax (AMT) in 1979.

* An individual Retirement Account for taxpayers not covered by an employer pension plan was introduced in 1974.

* The refundable Earned Income Credit for low wage earners with dependent children was created in 1975.

* Unemployment compensation was made partially taxable in 1979, and was eventually made fully taxable. I remember saying at the time, “The next thing you know they will be taxing Social Security! ”

* Social Security and Railroad Retirement benefits became partially taxable in 1984.

By the way, if you think taxes are too high today, from the end of World War II through the early 1960s the top tax rate was more than 90%!

Advantages of Filing Income tax Returns Online

In order to fulfill your duty as a responsible citizen of the nation, one of the primary tasks you need to do is to pay for your income tax returns in a timely manner. Failing to do so can add to the taxable amount you need to pay, thereby putting a dent on your pockets, as well as degrade your image in the banking sector, which may lead to rejection of loans, etc. due to lowering of your credit score. This means that filing up for income tax returns should be a priority for every individual, and should be completed well within the given time period in order to avoid interest or penalty payment at a later stage.

In order to provide aid to your tax return filing related woes, technology has provided some great resources. With the advent of the internet era, it is now possible to do e-filing of your income tax returns. This comes as a great boon for most tax payers, as they can simply file for the returns from the comforts of home, after a hard day’s work. And the best part is that it’s totally free of cost. Income tax filing websites provide a simple platform for you to fill in your details and file for income tax.

In addition to saving your time and money, there are a number of other advantages of filing your returns online. Some of these have been shown in the list below:

Intuitive application procedure: This is a highly intuitive online application procedure, which is customized according to the tax payer’s income tax situation.

Income tax Calculator Tools: If you want to make an estimate of the refund you’ll be receiving, it is a good idea to make use of income tax calculator tools available online. You have to enter your basic details such as Name, Age, Residential Status, etc. After this, you need to make use of your pay slip to give the details of the income you have earned. Please note that you only need to enter your taxable income for the particular year, which is calculated after deducting the various savings and other non-taxable investments you may have invested in. In case if you did not apply these already, the income tax calculator will give you an option to add any tax deductibles at a later stage. You can apply these and calculate your tax refund accordingly.

Free Software programs: There are various free online programs that are available over the internet to allow you to calculate your tax deductibles for free. New users need to sign up for creating a new account. These free filing programs are much more in-depth than the income tax calculator and these will calculate your return automatically.

Secure Gateway: The payment gateway is secured by Verisign, and you could be certain that your details are in safe hands.

Auto-Read forms: The Form 16 could automatically be read by the website, this helps you save on a lot of time as there’s no need to enter every small detail.
So start filing your tax returns online today!

What is Income Tax – An overview of Taxation in the us

An often asked question is, “What is income tax and why do I have to pay it? ” It is very obvious that if people had a choice of either paying or not paying income tax, then nobody would opt in and contribute their part.

An income tax is a percentage of earned income, and it is levied on both individuals and businesses. For individuals, the tax is calculated based on the total income of the taxpayer, with some allowances made in the way of deductions.

Corporate taxes are generally figured based on the business net income, which is the amount of gross receipts for the year less allowable write-offs and expenses. Partnerships are different in that they are not taxed; instead, the partners are held accountable and the amount is based on how many shares of the partnership each one owns. Naturally, a partner holding 60% of the shares will be taxed more than one holding only 40%.

Many people immediately think of the IRS when they think of income tax, but there are other kinds of income tax as well. There is a state tax that applies, and this gets a bit complicated for those who work in one state and live in another. There are many cities that also collect a local tax.

The funds that are collected are used for many different things, but in a very broad picture, income tax is what the country runs on at the federal, state, and local levels. There are not very many countries that don’t use taxes collected from their citizens for funding.

There was not an official income tax in the U. S. until a tax law was created by Congress in the year 1914. Prior to that, citizens fell victim to corrupt corporate execs and thieving land and cattle barons. The intent of the law was so that those with the most money, and usually the greediest, would be forced to contribute their share.

The law evolved over time, and eventually income tax was collected from the lower and middle working classes as well. While income tax is structured to be progressive, which means that as earnings increase so does the rate of taxation, there are still some accepted exemptions that offer relief for the wealthiest people and businesses.

There’s an old saying most everyone has heard, and that is “there are but two things certain in life — death and taxes. ” While it is a legal requirement and a duty of citizenship to pay taxes in the U. S., there are a large number of individuals who attempt to avoid paying any more than they have to by fraudulent means, and some that don’t even file at all.

Eventually the piper comes a piping, or the IRS if you will, and the penalties and interest they charge will surely put a damper on what someone thought they “saved” by tinkering with their taxes.

2011 Guidelines on Income That one Needs to follow to File Returns

Filing returns is an obligation of most American citizens and entities. However, there are a group of people who are exempted from filing returns based on their level of income. The IRS provides an annual guideline for tax returns that includes the income levels that different groups of people need to have earned in a given year to require filing returns. People who earn below this starting income are freed from the hustle of preparing and submitting returns. The minimum income for filing returns differs depending on one’s age, marital status, head-of-household status, and the choice on filing separate or joint returns for married couples. The IRS guidelines for the minimum incomes for filing 2011 returns are provided below:

Citizens Below 65 Years of age

For people who are under 65 years of age, the starting income to qualify for tax returns differs depending on marital and household head status. Singles are expected to file returns if they earn above $9, 350. 00 while a married couple that chooses to file jointly will need to file if their income for 2011 exceeds $18, 700. 00. A head of household needs to file returns if they earned over $12, 050. 00 in 2011 while widows with dependents are expected to file returns if their income exceeds $15, 050. 00.

Citizens Over 65 Years of age

For people who are 65 years and above, the tax returns incomes will generally start at a higher amount. For singles who are in this age bracket, one needs to file a tax return if his or her income for a given tax year exceeds $10, 750. 00. Head of households over 65 years of age need to file if they earned an income of $13, 450. 00 and widows aged 65 and above with dependent(s) will file tax returns if they earned over $16, 150. 00. A couple that chooses to file jointly, if one of the spouses is over 65 years of age, will file tax returns if they jointly earned over $19, 800. 00 in 2011.

Married Filing Separately

For individuals who are married but choose to file their tax returns separately, the starting income amount that one needs to have is $3, 650. 00, irrespective of one’s age or whether they have dependents. The low amount encourages couples to file returns jointly as opposed to separately.

Returns for Dependents

The guidelines for filing for dependents is more detailed. For passive incomes such as dividends and interests, a dependent is required to file returns if such incomes exceed $950. 00 a year. For wages, salaries, tips, and other earned incomes, the dependent is required to file returns if such incomes exceed $5, 700. 00. If a dependent has both earned and unearned incomes to report, they will need to file a return if the unearned income exceeds $300. 00 irrespective of the amount of earned income that one makes.

However, even if you qualify not to file returns under the above 2011 guidelines, there are still other conditions that could require you to file a tax return. This includes self-employment income that exceeds $400. 00, if one has an advance Earned Income Credit in a given year, and if anyone owes taxes on their IRA withdrawal. Furthermore, even if you are not required to file tax returns under the above guidelines, it may be beneficial to file tax returns if you qualify for tax credits and deductions that may give you a refund.

Taxes, Taxes and more Taxes

How can i avoid income tax! The answer is simple, “you can’t! ”

However, you can reduce the amount of tax you pay and keep more of your after tax dollars. As an example, consider the average family which spends $800 annually on health care, such as prescription drugs, chiropractic and physiotherapy. The following scenarios detail the significant impact of income tax on health care expenses.

Scenario one:

In order for you to pay the $800 in expenses, you must earn $1, 333 in gross income, pay taxes (assume 40 per cent marginal tax rate) and the net $800 would be used to pay the bill.

Scenario two:

Let’s assume you have a Group Insurance plan in which the claims are submitted and the eligible expenses are reimbursed. Simply put, you pay the $800 health care bill and the plan pays you back $800. Your cost is the premiums paid into the plan, which are deductable as a business expense for the company. Let’s review – you pay $800 ($1, 333 gross income) in medical bills OR you pay Group Insurance plan premiums (which are business deductions). Which would you prefer to pay?

Another legal and very effective way of reducing income taxes is utilizing “spousal RRSPs. ” A spousal RRSP is a long-term income splitting strategy that shifts income to the spouse with the lower tax rate. A taxpayer may split the RRSP deduction limit for the year between contributions to the taxpayer’s own RRSP for his/her spouse. In this way, the taxpayer can create an RRSP in the other spouse’s name, even though that spouse may have little or no earned income. Income tax is payable based on the amount of income received in a calendar year. When planning for retirement, the key is to determine the level of income required and how this can be accommodated in the most tax effective manner.

As an example, consider a retired couple that needs $60, 000 annual income.

Scenario A:
One spouse withdraws $60, 000 from his/her RRSP which will result in income tax at the marginal tax rate.

Scenario B:
Each spouse withdraws $30, 000, in which both spouses now receive their basic personal exemption and the income received will result in being taxed at the lowest marginal rate. Why pay more tax than you have to?

Note: Revenue Canada has a three year attribution rule which states that spousal contributions must not be withdrawn by the spouse in the year of contribution or two years following. Should this occur, the income will then be attributed to the contributor.

Hiring an income Tax Attorney

Filing your income tax can be frustrating, especially if you are used to having somebody else do it for you. For an average taxpayer, it can be difficult to keep track of all the tax laws and their changes. As a result, one can unknowingly commit mistakes in filing their income tax. When the IRS finds that there is a discrepancy in your tax declaration, you would be given a notification of an audit. Although this is just to clarify the figures, an audit can be very intimidating and would leave you feeling helpless. To avoid such unnecessary problems, one can benefit from hiring an income tax attorney.

Income tax problems

Scenarios that often invite an audit includes not filing of Form 1040 tax returns of the previous years, filing of the required income tax return as stated by the IRS but not having enough funds to pay, discrepancies in the figures, or a combination of any of these scenarios.

Whatever the tax problem is, there are root causes to a taxpayer’s failure to pay his taxes. One of the most common is not having enough income so the taxpayer is likely to spend his money that is set aside for tax purposes or not having enough to pay the full tax amount that is due. Another reason is poor bookkeeping habits that make a taxpayer lose track of his expenditures and as a result accidentally spends his tax money. There are also those who lose their records that is why they do not know how much tax they owe and there are also others who evade their taxes on purpose.

Dealing with the IRS

As a general rule, the IRS is never friendly with those who have discrepancies in their taxes. Their job is to collect the unpaid taxes in any legal ways possible. When you are invited to an audit, it is best that you have a representation from an income tax attorney so that you can stay rational during the whole process. The IRS can be very aggressive; putting you in great deal of stress and pressure. Their general stand is that there is never any circumstance in life that would prevent you from paying your taxes. If you fail to pay your taxes on time, you are not trustworthy and you are probably going to have a hard time paying all your other necessary bills as you are likely to just pay off the amount the IRS says you owe. When you are in a dispute with the IRS, they can hold all your assets. They can even make it difficult for you to sell real estate or get credit.

Hiring a representative

When dealing with the IRS in an audit, it is wise to just keep the talking to a minimum and refer them to your income tax attorney. Your lawyer will not only help you go through all the stress but they will also be able to come up with a fair negotiation that could reduce the amount of taxes that you owe or correct any errors that have been made.

Alternative Minimum Tax Planning Ideas – Personal Exemptions

A personal exemption deduction is allowed for a taxpayer, a spouse and any dependents such as children and other relatives. The amount for 2011 is $3, 700 for each exemption. Unlike prior years, this amount is not reduced if the taxpayer’s Adjusted Gross income (AGI) exceeds a certain amount.

In calculating the alternative Minimum Tax, however, no deduction is allowed for personal exemptions. Thus, AMT taxable income will be higher than Regular Tax taxable income by the amount of exemptions claimed. For example, a married taxpayer with two children would be entitled to a Regular Tax deduction of $14, 800 for these exemptions. If Regular Tax income for this family were $100, 000, then AMT income would be $114, 800.

There really isn’t anything that can be done to change the AMT effect of personal exemptions for the taxpayer and spouse – the tax law simply takes them away for purposes of the AMT. However, if there are dependents, a few situations exist where there may be planning opportunities to save taxes within the family unit.

One example is if the dependent is a daughter, a son, or other relative with income of her own but yet the taxpayer is still providing substantial support. In figuring out who provides more than half of the dependent’s support – the basic eligibility test for claiming the exemption – one looks to whether income of the dependent is or is not spent on her own support. So, for example, if the daughter is attending college and also at the same time working, any of her earnings that are spent on her support count towards her eligibility to take the personal exemption. Even though the student’s tax bracket most likely would be lower than the parent-taxpayer’s, any tax benefit certainly is better than the zero tax benefit the parent is getting because of the AMT.

Another example is in the case of divorced or separated parents, who may or may not have executed a multiple support agreement. The tax rules essentially allow the parties to agree which of them will take the child’s personal exemption. The planning here is simple, assuming lines of communication between the parties remain open – if one is in the alternative Minimum Tax but the other is not, why not arrange to give the one not in the AMT the exemption deduction?

Tax Issues For New business Owners – Paying Self-Employment Tax For 2009, 2010

When you begin a new business endeavor, it may take some time before you are “in the black” earning taxable income form your efforts. Once you are, however, your earnings will be subject to self-employment tax, as well as income tax. Self-employment tax is the tax a business owner must pay on income that parallels FICA, the Social Security payroll tax.

FICA tax is paid only on employees. If you are a sole proprietor, or shareholder in an S Corporation of LLC, it is unlikely that you are treated as an employee. In these situations, the income you derive from your business is passed directly through the business to you as the owner, and you are not subject to payroll taxes. Instead, the IRS requires you to make up for this difference via the self-employment tax.

An exception to this requirement applies to owners of corporations, typically called “C-Corporations”, that do not pass through income directly to their owners, but are taxed as a corporate entity. In this case, there is no self-employment tax. Income passed through a C Corporation to an owner is either in the form of a taxable dividend or to the owner as an owner-employee. In the latter case, payroll taxes must be withheld just as they are for any other employee. In either case, there is no self-employment tax to pay.

When self-employment tax is due, the tax is calculated as follows:

Social Security: 12. 4% of the first $97, 000 of self-employment earnings;
Medicare: 2. 9%: on all self-employment earnings. There is no cap on the Medicare portion of the self-employment tax.

State Income tax Refunds – AMT Adjustment

is best done with an example:

Assume a couple paid $5, 000 in state income taxes in 2008 and itemized this deduction (Schedule A), which they were allowed to do. But the state income tax return filed showed they had overpaid by $500. This $500 refund was received from the state in April, 2009.

For Regular Tax purposes, the $500 is reported as income in 2009. This is because of the tax principle that if an allowable deduction for some expense is taken in one year (e. g., 2008), but that expense is refunded in the following year, instead of amending the 2008 return to “correct” the deduction, the proper tax fix is to reverse the deduction in 2009 by reporting it as income. Note in total it actually was only a $4, 500 expense, which is the deduction of $5, 000 less the refund of $500.

For AMT purposes, both income (the refund) and deductions need to be shown on an apples-to-apples basis. Because there is no deduction of the $5, 000 state taxes for those in the AMT, any related refund amount, Tax Refunds, line 8, does not require a recovery of that item in income like you see in the Regular Tax. The $500 is deducted from Alternative Minimum Tax income in 2009, effectively netting any impact, income or deduction, to zero.

Tax and Financial Strategy for Canadians – Donate, Recover Your Taxed Income and Invest

An early start in your tax and financial planning will Canadian taxpayers to save money that later serves to invest wisely. Learning about tax credit opportunities in the beginning of the year as part of your financial planning can make you save money later on. Tax planning always involves taking decisions early that later will have a n effect in how much money do you save. One way to save in taxes and give your financial planning a boost is with the “Donate, recover your taxed income, and invest” strategy.

This strategy can help you to keep more of your hard-earned dollars and boost your family’s net worth. The Income tax Act allows Canadian taxpayers to make donations to registered charities and then claim up to 50% of the amount donated. If you take advantage of a donation, your tax refund will increase as much as twice the size you thought it was. It lets you to recover close to 30% of our salary income withheld by the government as income tax. It is like having a raise every year of 30%.

Personally, part of our tax and financial planning has been participating with Mission Life Financial, helping us to finance AIDS pharmaceuticals donated to a registered Canadian charity. After hours of research, analysis and due diligence, I decided to take part in this tax saving strategy with the following very successful results: In 2008, I got a tax credit of Cdn$8, 977. 23, and in 2009, the tax credit was Cdn$8, 544. 24. For 2010 I already donated and I’m expecting a tax credit close to Cdn$21, 729.

The questions you might have now are: What we’ve done with this money? How much of these money has used to fuel our financial planning strategy? How much our net worth has increased? I’ll tell you that the 2008 tax credit helped me to juggle the economic downturn where, thanks God, I became unemployed; therefore, we didn’t do any investment. With 2009 tax credit, I learned how to invest in tax liens in USA and started investing in tax liens in Indiana’s commissioner’s sales. We foreclosed in 4 properties, and today, our net worth increased exponentially. With 2010 tax credit, we are planning to do the same: Invest in tax liens.

Managing and building personal wealth is very important and can start with this excellent tax and financial planning strategy. Having the funds available for investment purposes it’s often a challenge but participating in a tax saving program like Mission Life Financial could be the mean of freeing capital or cash that otherwise is not available. Donating, recovering your hard-earned income, and invest; again and again, year after year, it’s very simple and an easy strategy to do. If I have been able to do it, any Canadian taxpayer can do the same. It is not rocket science. It is decision taking action.