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when a property owner defaults on their property taxes the municipality sends a notice advising them of the upcoming tax lien if the owner doesn t bring the tax payments up to date the tax lien is then put up for auction | the lien is transferred to the highest bidder who pays the outstanding tax amount to the municipality in order to remove the lien the property owner must pay the new lien owner the outstanding amount plus interest foreclosure auctions are typically conducted once a year for example the sale date for foreclosures begun in 2023 in king county seattle wa is sept 18 2024 7example of a tax deed saleassume that the value of a property in a tax deed sale is assessed at 100 000 and has 5 700 in back taxes owed the highest bid on the property is 49 000 the county will take 5 700 from the bid amount to cover the property taxes due and the remainder will be paid to the original owner so 5 700 is remitted to the county and 43 300 49 000 5 700 is remitted to the original owner the bidder gets title of the home and an equity profit of 100 000 49 000 51 000 | |
what is the difference between a tax deed and tax lien | a tax deed is the full transmittal of the title of a property due to property tax payment delinquency a tax lien is a legal designation that one party has rights to collect proceeds or value from a property all liens are subsequent rights to receive value from an asset | |
how do i clear a tax deed | a tax deed or tax deed sale arises due to unpaid property taxes if all tax obligations are cleared and associated penalties interest and fees are paid a tax deed will often clear prior to auction and remain with the original property owner | |
what happens if i do not pay property taxes | property taxes are sanctioned by municipal government bodies and are legal obligations for owning real estate if you do not pay your property taxes the government has the right to seize your property claim rights over proceeds to cover the owed obligations and dispose of a property to a new owner the rules around this tax deed process vary between government entities the bottom linea tax deed is a legal document pertaining to real property ownership it conveys that ownership to a government entity when the property owner fails to pay property taxes that are due the government entity may sell the property deed via public auction to obtain the taxes owed plus amounts for any interest and costs associated with the process the auction winner then pays that total and takes legal possession of the property the original owner may receive net proceeds above the amount for taxes interest and costs | |
what does tax deferred mean | tax deferred status refers to investment earnings that accumulate tax free until the investor takes constructive receipt of the profits some common examples of tax deferred investments include individual retirement accounts iras and deferred annuities interest dividends and capital gains are earnings that can be considered tax deferred earnings understanding tax deferralan investor benefits from the tax free growth of earnings with tax deferred investments the tax savings can be substantial for investments held until retirement when the retiree will likely be in a lower tax bracket and no longer be subject to premature tax and product withdrawal penalties investing in qualified products such as iras allows participants to claim some or all of their contributions as a deduction on their tax returns 1 the benefit of declaring deductions in current years and incurring lower taxation in later years makes tax deferred investments attractive qualified tax deferred vehiclesa 401 k plan is a tax qualified defined contribution account offered by employers to help grow their employees retirement savings companies employ a third party administrator tpa to manage contributions which are deducted from employee earnings 2employees choose to invest these contributions among various options such as equity funds company stock money market equivalents or fixed rate options contributions to qualified savings plans such as 401 k accounts are made on a pre tax basis this reduces taxable income received by the employee in the year the contributions are made which typically equates to lower tax liability 3distributions from qualified plans are taxable as ordinary income if the owner is under the age of 59 when they take the money the irs may assess a 10 premature withdrawal penalty in this case 4 tax deferral and employer dollar matching provisions encourage employees to set aside wages for retirement savings nonqualified tax deferred vehiclescontributions to a nonqualified plan are made from post tax income so they don t reduce taxable income in the year they re made 1 however the earnings may accumulate tax free if the plan is tax deferred the contributions establish a cost basis for interest calculations many annuities and other nonqualified tax deferred products don t restrict contribution amounts but individual retirement accounts such as traditional iras limit annual contributions | |
are any retirement accounts not tax deferred | contributions made to designated roth accounts are not tax deferred you pay taxes on this money in the year you earn it and you can t claim a tax deduction for these contributions but roth accounts aren t subject to required minimum distributions rmds and you can take the money out in retirement including its earnings without paying taxes on it some rules apply 7 | |
what is an elective deferral limit | an elective deferral is money that your employer contributes to your retirement plan your employer is effectively giving you this money but it s not included in your taxable income the irs therefore sets limits as to how much you can receive usually toward 401 k 403 b sarsep and or simple ira plans the 2023 elective deferral limit for these plans is 22 500 this increases to 23 000 in 2024 anything in excess of these amounts is included in your taxable income for that year the limit increases by 7 500 if you re age 50 or older 6 | |
what is a required minimum distribution | a required minimum distribution rmd is the government s way of ensuring that it will eventually be paid taxes on your investments and the irs doesn t want to wait forever to collect its money federal law therefore imposes rmds ages by which you must begin taking money out of certain retirement accounts such as iras and 401 k s and paying the taxes on the money that you didn t pay before you must begin taking rmds by age 72 if you were born before dec 31 2022 you have until age 73 if you reach age 72 after this date 8the bottom line deferred literally translates to delayed you ll pay taxes on this money eventually some individuals might prefer to pay those taxes in the current year in exchange for other perks such as those provided by roth accounts others would rather pay taxes on the money at a later time in life when they ll presumably be in a lower tax bracket speak to an investment advisor or a tax professional if you have any questions about which option is best for you | |
what is the tax equity and fiscal responsibility act of 1982 tefra | the tax equity and fiscal responsibility act of 1982 tefra is a law passed in 1982 that was designed to reduce the federal budget deficit through a combination of tax increases spending cuts and tax reform measures the legislation reversed some elements of the economic recovery tax act of 1981 erta also known as the kemp roth act both pieces of legislation were passed early in the presidency of ronald reagan understanding the tax equity and fiscal responsibility act of 1982 tefra shaped by republican senator robert dole then chair of the senate finance committee tefra was meant to raise more revenue by closing loopholes in the tax system introducing stricter compliance and tax collection measures increasing excise taxes on cigarettes and telephone services and increasing corporate taxes adjusted for inflation tefra remains the biggest tax increase in u s history it was largely a repudiation of the erta which had passed a year earlier and remains the largest tax cut in u s history at the time tefra was being debated in congress the u s economy was in the middle of a recession some called it a double dip recession because the economy fell to recessionary levels recovered and then fell again into recession all in the single 12 month period between the summer of 1981 and the summer of 1982 government revenues fell by about 6 due to a combination of erta tax cuts and normal recessionary effects 1the result was a budget deficit that grew to a then record 110 7 billion in 1982 in 2021 the federal budget deficit was 2 8 trillion 23tefra also rescinded some erta reductions in personal income tax rates that had not yet gone into effect an obscure provision of tefra came back to haunt the legal marijuana industry decades later the provision probably inserted as a political throwaway line forbids those trafficking in controlled substances from using most business tax deductions 4other elements of tefratefra ultimately touched a vast number of americans in its efforts to reduce federal spending and increase government revenues for example many of the reimbursement rules for the medicare and medicaid programs were revised to rein in their costs procedures for payments of social security and unemployment compensation were altered 5the bill temporarily doubled the federal cigarette tax and tripled the telephone service tax it also had an impact on businesses and investors tefra abolished some of the tax breaks businesses received under erta such as accelerated depreciation it also instituted a 10 withholding tax on dividends and interest paid to individuals who did not have certified tax identification numbers 5historic tax increase under tefrapresident ronald reagan had campaigned on tax cuts and limited government early in his first term he had won a then substantial 28 3 billion in tax cuts for business through the passage of erta 6many were puzzled that he would agree to undo some of the tax breaks created in erta which had been a significant legislative achievement but he could not ignore the growing deficit 7in fact reagan resisted any tax increases for a time but eventually relented in exchange for a pledge for even bigger spending cuts as part of the deal | |
when he finally signed the bill into law on sept 3 1982 reagan stressed that the measure increased taxes largely by closing loopholes and that it would raise more than 98 billion over three years while cutting spending by 280 billion during the same period | that figure was disputed the heritage foundation claimed at the time that the bill would actually increase spending by 21 cents for every dollar brought in through tax increases 8 | |
what u s senator championed tefra in congress | sen bob dole s name is inextricably linked with tefra the kansas republican served in the u s senate for 30 years including three years as senate majority leader as the chairman of the senate finance committee dole was the legislator most responsible for shaping tefra and pushing it through the senate this outraged many conservatives then freshman house rep newt gingrich for instance called dole the tax collector for the welfare state his association with the biggest tax increase in u s history would come back to haunt him in 1995 when he ran unsuccessfully for the presidency 9 | |
what are the key provisions of tefra | tefra s proponents emphasized toughening tax enforcement in order to close the so called tax gap this was based on assumption that one in five tax dollars never made it into the government coffers due to unreported income or overstated deductions expenses and exemptions many of the provisions hit individuals not businesses the bill also increased penalties for non compliance 10 | |
how did tefra provisions impact the u s healthcare system | tefra includes many changes to the medicaid and medicare reimbursement systems that were intended to save the government money 11however one of the most durable and significant provisions of tefra is known to this day as tefra medicaid this provision allows states to extend certain in home medicaid services to children with disabilities regardless of their family income 12 | |
why did congress increase taxes in 1982 | public concern over the size of the federal budget deficit tends to wax and wane over time in the early 1980s concern was high oddly the deficit was not all that high historically speaking although it did decline after the passage of tefra 13the bottom linethe tax equity and fiscal responsibility act was an attempt to raise government revenue without raising income taxes its focus was on toughening tax enforcement to close the so called tax gap of unreported and under reported income ultimately tefra had a broad impact on the incomes of millions of americans from waitresses dependent on tips to retirees dependent on pensions | |
what is tax equivalent yield | the tax equivalent yield is the return that a taxable bond needs to possess for its yield to equal the yield on a comparable tax exempt municipal bond this calculation is a tool investors can use to compare the returns between a tax free investment and a taxable alternative tax implications are a complicated and important part of any financial strategy and are often overlooked the tax equivalent yield calculation is a useful tool for investors especially those in higher tax brackets investopedia jiaqi zhouunderstanding tax equivalent yieldthe tax equivalent yield is the yield on a taxable bond that an investor would have to earn to match the return on a comparable tax free municipal bond in general municipal bonds have a low expected return so the full impact of investing in them is often not quantified completely while the tax free advantage municipal bonds offer can be hard to match with other investments it is not the end of the story additional tax considerations are relevant for example while municipal bonds are free of federal taxes some states tax the earnings the liquidity of municipal bonds may also be limited tax equivalent yield formuladepending on an investor s tax bracket a municipal bond may not be the best investment decision for their portfolio an investor s tax bracket will depend on their filing status and income the federal income tax brackets for 2023 and 2024 are 10 12 22 24 32 35 and 37 1to calculate the taxable equivalent yield of a tax free municipal bond use the following formula be sure to include any state taxes along with your federal tax rate return tey return tx 1 t where return tey return on fully taxable equivalent yield return tx return on tax exempt investment t investor s marginal tax rate begin aligned text return text tey text return text tx div 1 t textbf where text return text tey text return on fully taxable equivalent yield text return text tx text return on tax exempt investment t text investor s marginal tax rate end aligned returntey returntx 1 t where returntey return on fully taxable equivalent yieldreturntx return on tax exempt investmentt investor s marginal tax rate this formula can be reversed to determine the tax free equivalent yield of a municipal bond that would match the return on a taxable bond tax equivalent yield calculationsan investor s tax rate plays a significant role in the resulting tax equivalent yields for example assume there is a tax free bond that is yielding 7 a decision to invest in this particular bond or any of the many taxable choices available greatly depends on the investor s marginal tax bracket in 2023 there are seven different marginal tax rate brackets in the u s 10 12 22 24 32 and 35 the tax equivalent yield calculations for these brackets are as follows given this information assume there is a taxable bond that is yielding 9 75 in this situation investors in the first four marginal tax brackets would be better off investing in the taxable bond because even after paying their tax liability they would still earn more than a 7 non taxable bond investors in the highest three brackets would be better off investing in the tax free bond however none of this is investment advice a tax or financial advisor should be consulted example of tax equivalent yieldan investor in the 22 federal income tax bracket with no state taxes owns a tax exempt municipal bond with an 8 coupon rate to calculate the fully taxable equivalent yield that a taxable bond would have to earn to match the municipal bond s yield use the above formula return tey 0 08 1 0 22 10 26 begin aligned text return text tey 0 08 div 1 0 22 10 26 end aligned returntey 0 08 1 0 22 10 26 in other words a taxable bond would have to earn an equivalent yield of 10 26 after taxes are deducted this bond would match the 8 return of the tax free municipal bond if the marginal tax rate is higher the required fully taxable equivalent yield will also be higher than 10 26 so if all else remains the same the only difference being that the investor is in the 37 tax bracket the fully taxable equivalent yield would have to be return tey 0 08 1 0 37 12 70 begin aligned text return text tey 0 08 div 1 0 37 12 70 end aligned returntey 0 08 1 0 37 12 70 | |
why are municipal bonds tax exempt | interest earned on state and local bonds has been tax exempt since the introduction of the federal income tax in 1913 initially this was because many people felt the constitution prevented the federal government from taxing this income since then the justification for tax exclusion has been supported by the idea that local infrastructure projects serve the common good and therefore federal tax policy should support those projects 2municipal bonds are not always tax free federal taxes may apply to a municipal bond if the internal revenue service irs does not interpret a project as good for the entire public taxable municipal bonds are rare but they can be issued for projects such as a sports stadium or a pension shortfall the irs can also treat municipal interest income as taxable if a bond is purchased at a significant discount to par value 3a mutual fund composed of tax free bonds is still subject to capital gains tax 4the bottom linethe tax equivalent yield is the return that a taxable bond needs to possess for its yield to equal the yield on a comparable tax exempt bond such as a municipal bond the way a bond s interest income also called coupon payments is taxed varies according to the type of bond and where it s issued coupon payments from a u s treasury bond are free from state and local taxes coupon payments from municipal bonds are also exempt from regular federal income tax | |
what is tax equivalent yield | the tax equivalent yield is the return that a taxable bond needs to possess for its yield to equal the yield on a comparable tax exempt municipal bond this calculation is a tool investors can use to compare the returns between a tax free investment and a taxable alternative tax implications are a complicated and important part of any financial strategy and are often overlooked the tax equivalent yield calculation is a useful tool for investors especially those in higher tax brackets investopedia jiaqi zhouunderstanding tax equivalent yieldthe tax equivalent yield is the yield on a taxable bond that an investor would have to earn to match the return on a comparable tax free municipal bond in general municipal bonds have a low expected return so the full impact of investing in them is often not quantified completely while the tax free advantage municipal bonds offer can be hard to match with other investments it is not the end of the story additional tax considerations are relevant for example while municipal bonds are free of federal taxes some states tax the earnings the liquidity of municipal bonds may also be limited tax equivalent yield formuladepending on an investor s tax bracket a municipal bond may not be the best investment decision for their portfolio an investor s tax bracket will depend on their filing status and income the federal income tax brackets for 2023 and 2024 are 10 12 22 24 32 35 and 37 1to calculate the taxable equivalent yield of a tax free municipal bond use the following formula be sure to include any state taxes along with your federal tax rate return tey return tx 1 t where return tey return on fully taxable equivalent yield return tx return on tax exempt investment t investor s marginal tax rate begin aligned text return text tey text return text tx div 1 t textbf where text return text tey text return on fully taxable equivalent yield text return text tx text return on tax exempt investment t text investor s marginal tax rate end aligned returntey returntx 1 t where returntey return on fully taxable equivalent yieldreturntx return on tax exempt investmentt investor s marginal tax rate this formula can be reversed to determine the tax free equivalent yield of a municipal bond that would match the return on a taxable bond tax equivalent yield calculationsan investor s tax rate plays a significant role in the resulting tax equivalent yields for example assume there is a tax free bond that is yielding 7 a decision to invest in this particular bond or any of the many taxable choices available greatly depends on the investor s marginal tax bracket in 2023 there are seven different marginal tax rate brackets in the u s 10 12 22 24 32 and 35 the tax equivalent yield calculations for these brackets are as follows given this information assume there is a taxable bond that is yielding 9 75 in this situation investors in the first four marginal tax brackets would be better off investing in the taxable bond because even after paying their tax liability they would still earn more than a 7 non taxable bond investors in the highest three brackets would be better off investing in the tax free bond however none of this is investment advice a tax or financial advisor should be consulted example of tax equivalent yieldan investor in the 22 federal income tax bracket with no state taxes owns a tax exempt municipal bond with an 8 coupon rate to calculate the fully taxable equivalent yield that a taxable bond would have to earn to match the municipal bond s yield use the above formula return tey 0 08 1 0 22 10 26 begin aligned text return text tey 0 08 div 1 0 22 10 26 end aligned returntey 0 08 1 0 22 10 26 in other words a taxable bond would have to earn an equivalent yield of 10 26 after taxes are deducted this bond would match the 8 return of the tax free municipal bond if the marginal tax rate is higher the required fully taxable equivalent yield will also be higher than 10 26 so if all else remains the same the only difference being that the investor is in the 37 tax bracket the fully taxable equivalent yield would have to be return tey 0 08 1 0 37 12 70 begin aligned text return text tey 0 08 div 1 0 37 12 70 end aligned returntey 0 08 1 0 37 12 70 | |
why are municipal bonds tax exempt | interest earned on state and local bonds has been tax exempt since the introduction of the federal income tax in 1913 initially this was because many people felt the constitution prevented the federal government from taxing this income since then the justification for tax exclusion has been supported by the idea that local infrastructure projects serve the common good and therefore federal tax policy should support those projects 2municipal bonds are not always tax free federal taxes may apply to a municipal bond if the internal revenue service irs does not interpret a project as good for the entire public taxable municipal bonds are rare but they can be issued for projects such as a sports stadium or a pension shortfall the irs can also treat municipal interest income as taxable if a bond is purchased at a significant discount to par value 3a mutual fund composed of tax free bonds is still subject to capital gains tax 4the bottom linethe tax equivalent yield is the return that a taxable bond needs to possess for its yield to equal the yield on a comparable tax exempt bond such as a municipal bond the way a bond s interest income also called coupon payments is taxed varies according to the type of bond and where it s issued coupon payments from a u s treasury bond are free from state and local taxes coupon payments from municipal bonds are also exempt from regular federal income tax | |
what does it mean to be tax exempt | tax exempt refers to income or transactions that are free from tax at the federal state or local level the reporting of tax free items may be on a taxpayer s individual or business tax return and shown for informational purposes only the tax exempt article is not part of any tax calculations tax exempt may also refer to the status of a business or organization which has limits on the amount of income or gifts which are taxable these organizations include religious and charitable institutions 1common tax exempt earningsnot to be confused with a tax deduction tax exemption frees the taxpayer of any tax obligation to submit taxes on the tax free transaction or income whereas the use of a tax deduction is to reduce the tax obligation by lowering gross income 23one common type of tax exempt income is interest earned on municipal bonds which are bonds issued by states and cities to raise funds for general operations or a specific project when a taxpayer makes interest income on municipal bonds issued in their state of residence the profit is exempt from both federal and state taxes 4taxpayers receive irs form 1099 int for any investment interest they earn during the tax year 5 the reporting of tax exempt interest is in box 8 of the 1099 form this information is only data and is not included in the calculation of personal income taxes 6other tax exempt incomethere s a range of types of income that may be tax exempt based on your specific situation in addition tax rules may continually evolve and change when crafting your personal tax strategy consult with a tax prepared to best understand the latest news and widest scope on other tax exempt income the list below contains other common tax exempt income sources the list is not meant to be exhaustive and some of those additional items may include capital gains tax exemptiona taxpayer may buy an asset and subsequently sell that asset for a profit the profit is a capital gain which creates a taxable event however several types of capital gains are exempt from taxation a taxpayer can offset capital gains with other capital losses for the tax year for example an investor with 5 000 in profits and 3 000 in losses pays taxes on only 2 000 in capital gains the amount of capital losses a taxpayer may claim in a given year has a cap of 3 000 when capital losses exceed this cap the excess may be carried forward to offset gains in future years 11the tax code also allows taxpayers to exclude from federal taxes a specific portion of capital gains from the sale of a home 12alternative minimum tax and exemptionsthe alternative minimum tax amt is an alternative method for determining tax liability amt adds back specific tax exempt items into the personal tax calculation interest from private activity bonds exempt from regular tax for example is added to the amt tax calculation individual taxpayers must include the amt calculation with their original tax return and pay tax on the higher tax liability 1314tax exempt organizationsan exempt organization that has 1 000 or more of gross income from an unrelated business must file form 990 t an organization must pay an estimated tax if it expects its tax for the year to be 500 or more 15a 501 c 3 nonprofit corporation is a charitable organization that the irs recognizes as tax exempt this type of organization does not pay income tax on its earnings or on the donations it receives also any taxpayer donations may reduce a taxpayer s taxable income by the donation amount this incentive encourages private charity and makes it easier for nonprofits to raise money a 501 c 3 is a charitable organization involved in religious charitable educational literary preventing cruelty to animals and children fostering amateur local and international sports competitions testing for public safety and scientific activities or operations 16to gain the exemption an organization must demonstrate how the exemption will serve the public and provide a benefit to a community becoming tax exemptan entity can become tax exempt by meeting the requirements set forth by the irs there are several categories of tax exempt status for charitable religious educational and scientific organizations the type of tax exempt status needed will depend on the nature of the organization s activities 17the organization must be formed as a legal entity and the organization must obtain an ein from the irs with this ein the organization is able to file an application with the irs to obtain tax exempt status the most common form is form 1023 for 501 c 3 organizations the application must provide detailed information about the organization s activities governance finances and other relevant information 18the irs will review the application and make a determination about the organization s tax exempt status the process can take several months and the irs may request additional information or clarification during the review process 19once tax exempt status is granted the organization must maintain compliance with irs rules and regulations via filing annual tax returns and other forms meeting governance and operational requirements and avoiding prohibited activities that could jeopardize tax exempt status 20tax exempt organization vs nonprofit organizationthough often interchanged to describe the same entity there are worthwhile differences to mention between a tax exempt organization and a nonprofit organization a nonprofit organization is a type of entity that is organized for a specific purpose nonprofits can be structured in a variety of ways such as a corporation trust or unincorporated association they are not required to pay federal income taxes on their earnings a tax exempt entity on the other hand is an organization that has been granted exemption from federal income tax by the irs though this includes most nonprofit organizations not all nonprofits are automatically tax exempt in addition a nonprofit must apply to become tax exempt without the review and approval by the irs the nonprofit will technically not be tax exempt 21limitations of tax exempt statuskeep in mind there are some downsides to obtaining a tax exempt status tax exempt organizations particularly those classified as 501 c 3 organizations are subject to strict limitations and reporting requirements when engaging in political activities this includes endorsing or opposing political candidates contributing funds to political campaigns and engaging in partisan activities 22tax exempt entities must adhere to regulations regarding transactions with insiders such as board members officers and key employees these regulations are designed to prevent conflicts of interest self dealing and private inurement where individuals in positions of authority benefit personally from the organization s resources engaging in prohibited transactions can result in penalties fines or loss of tax exempt status 23last tax exempt entities are generally prohibited from distributing profits or assets to individuals or shareholders any excess ungranted funds are to be kept internally with potentially minimal flexibility though this restriction ensures that the organization s resources are dedicated to its tax exempt purpose it puts an onus on the entity to disburse funds for a specific purpose the tax exempt entity risks jeopardizing future funding from donors or grantors if disbursement is slow | |
is a tax exempt organization the same as a 501 c 3 organization | a 501 c 3 is a tax exempt organization recognized by the irs however there are other forms of organization an entity can file for and be awarded that are also tax exempt therefore while a 501 c is tax exempt not all tax exempt organizations are 501 c 3 organizations | |
what is the downside of being tax exempt | administratively there may be additional requirements a company must meet such as annual reporting and meeting stipulated criteria to become and maintain its status as tax exempt there is an additional burden to an organization from a time and labor standpoint outside of this reporting and filing requirement there are often little to no downsides to becoming tax exempt | |
why do nonprofit organizations not pay taxes | nonprofit organizations do not pay taxes because they are engaged in public or private interests the purpose of a nonprofit is to further extend the benefit to a community for this reason the irs recognizes and awards these entities tax exempt as any collected taxes would be used for a similar purpose i e would be redistributed to benefit the community can a tax exempt organization make money yes tax exempt organizations such as nonprofits are often encouraged and expected to make money or earn more money than what they spend for the financial health and longevity of the organization these entities must build reserves and have excess cash reside in bank accounts the purpose of being tax exempt is to have this net profit not be taxed by the irs the bottom linea tax exempt organization is a type of entity that is recognized by the irs as being exempt from paying federal income taxes on its earnings to be considered tax exempt an organization must meet certain requirements set forth by the irs and must apply for tax exempt status taxpayers can be exempt from paying certain amounts of ordinary income or capital gains | |
what is tax exempt interest | tax exempt interest is interest income that is not subject to federal income tax in some cases the amount of tax exempt interest a taxpayer earns can limit the taxpayer s qualification for certain other tax breaks the most common sources of tax exempt interest come from municipal bonds or income producing assets inside of roth retirement accounts tax exempt interest explainedtax exempt interest can be somewhat of a misnomer as it may still be taxed at the state or local levels it may also be subject to the alternative minimum tax amt furthermore capital gains on tax exempt investments are still taxable only the interest on these investments is tax exempt the most common way to earn interest that is tax exempt at the state and local levels in addition to the federal level is for an investor to purchase a municipal bond issued in his or her state or locality of residence municipal bonds are one of the most common types of investments that pay tax exempt interest but while interest may be tax exempt at the federal level it may still be taxed at the state level for example a california resident who buys a new york municipal bond would pay california income tax on that interest these tax laws however vary by state for instance some states such as wisconsin and illinois tax interest earned on most muni bonds including their own while states such as california and arizona exempt interest from taxes if the investor resides in their states utah is an example of a state that exempts interest on out of state bonds as long as that state does not impose a tax on bonds issued by utah treasury securities issued by the u s government pay interest that is tax exempt at the state and local levels but not the federal level triple tax exempt is a way of describing an investment usually a municipal bond which features interest payments exempt from taxes at the municipal state and federal levels state and local taxation of interestaccording to the internal revenue service irs interest on a state or local government obligation may be tax exempt even if the obligation is not a bond for example interest on a debt evidenced only by an ordinary written agreement of purchase and sale may be tax exempt also interest paid by an insurer on default by the state or political subdivision may be tax exempt mutual funds that hold a mix of stocks and municipal bonds will have the portion of earnings derived from the bonds tax exempt under federal income tax guidelines and possibly exempt from state taxes depending on the location from which the bonds originated and or the taxpayer s state of residence impact on adjusted gross income agi since tax exempt interest is not subject to income taxes it is not included in the calculation of adjusted gross income agi for taxation purposes issuers or lenders that pay more than 10 in tax exempt interest must report the interest income to both taxpayers and the irs on form 1099 int taxpayers or borrowers in turn must report this tax exempt interest on form 1040 the amount received as tax exempt interest is used by the irs to determine what amount of the taxpayer s social security benefits is taxable | |
what is a tax expense | a tax expense is a liability owed to a federal state or local government within a given time period typically over the course of a year tax expenses are calculated by multiplying the tax rate of the individual or business by the income received or generated before taxes this happens after factoring in variables such as non deductible items tax assets and tax liabilities understanding tax expensesa tax expense is the effective tax rate multiplied by taxable income but calculating tax expense can be complex given that businesses and individuals are subject to various taxes each set at a different rate for instance a business must pay multiple taxes including an individual pays different income tax rates for wages and for their fica federal insurance contributions act contribution which goes to social security medicare medicaid and unemployment insurance in addition to the range of tax rates applicable to various levels of income the different tax rates in different jurisdictions and the multiple layers of tax on income add to the complexity of determining an entity s tax expense in the u s determining the appropriate tax rate and identifying the correct accounting methods for items affecting business tax expense are detailed by the internal revenue service irs and are standardized by generally accepted accounting principles gaap the gaap standards provide for a certain treatment of income and expenses which may at times differ from the provisions allowed under the applicable government tax code this means that the amount of tax expense recognized is unlikely to exactly match the standard income tax percentage that is applied to business income in other words the differences in financial accounting and the tax code may result in a tax expense that differs from the actual tax bill for example many companies use straight line depreciation to calculate depreciation reported in their financial statements but are allowed to employ an accelerated form of depreciation to derive their taxable profit the result is a taxable income figure that is lower than the reported income figure 1tax expense affects a company s net earnings given that it is a liability that must be paid to a federal or state government the expense reduces the profits to be distributed to shareholders in the form of dividends this is even more disadvantageous c corporations who must pay taxes on earned profits and the shareholders are taxed on the dividend received 2a tax expense is only recognized when a company has taxable income in the event that a loss is recognized the business can carry its losses forward to future years to offset or reduce later tax expenses 3tax expense vs tax payablethe tax expense is the amount of money that a business or other entity has determined is owed in taxes based on standard business accounting rules this charge is reported on the business s income statement the tax payable is the actual amount owed in taxes based on the rules of the tax code the payable amount is recognized on the balance sheet as a liability until the company settles the tax bill if the tax expense is higher than the tax liability the difference creates another liability called a deferred tax liability which must be paid at some point in the future on the other hand if the tax payable is higher than the tax expense the difference creates an asset category called the deferred tax asset which can be used to settle any tax expense in the future | |
what is a tax expense for an individual taxpayer | for most individuals a tax expense is the amount of money owed to federal state and local governments in annual income taxes this tax expense is reported annually in a tax return in which the individual resolves the difference between the amount of taxes already paid and the amount that was owed | |
what is a tax expense for a business | arriving at a tax expense is generally more complicated for businesses than for individuals a business is taxed on its net income or the revenue it takes in minus the costs of doing business recording business expenses properly for tax purposes requires following rules set by the irs and standards called generally accepted accounting principles or gaap | |
what do my federal tax expenses include | your annual tax return reports your income for the year and the taxes you owe in a number of categories including the bottom linea tax expense is an amount of money that a business or an individual owes to a government body whether it is federal state or local the term covers all taxes including capital gains taxes payroll taxes and sales taxes as well as income taxes each of these taxes has its own tax rate which is used to calculate the amount owed in most cases this means multiplying the applicable tax rate by the taxable income of the business or individual a notable exception of course is the sales tax the amount of sales tax owed is calculated by multiplying the applicable tax rate by the sales price of the goods or services being purchased | |
what is tax fraud | tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return to limit the amount of tax liability tax fraud essentially entails cheating on a tax return in an attempt to avoid paying the entire tax obligation examples of tax fraud include claiming false deductions claiming personal expenses as business expenses using a false social security number and not reporting income tax evasion or illegally avoiding payment of taxes owed may be construed as an example of tax fraud understanding tax fraudtax fraud involves the deliberate misrepresentation or omission of data on a tax return 1 in the united states taxpayers are bound by a legal duty to file a tax return voluntarily and to pay the correct amount of income employment sales and excise taxes failure to do so by falsifying or withholding information is against the law and constitutes tax fraud tax fraud is investigated by the internal revenue service criminal investigation ci unit tax fraud is said to be evident if the taxpayer is found to have 2a business that engages in tax fraud may tax fraud vs negligence or avoidancefor example claiming an exemption for a nonexistent dependent to reduce tax liability is clearly fraud while applying the long term capital gain rate to a short term earning may be looked into more to determine whether its negligence although mistakes attributed to negligence are non intentional the irs may still fine a negligent taxpayer with a penalty of 20 percent of the underpayment famous people throughout the world have been guilty of tax fraud such as lionel messi given that the tax code in the u s is a complex compilation of tax imposition and laws a lot of tax preparers are bound to make careless errors tax fraud is not the same as tax avoidance which is the legal use of loopholes in the tax laws to reduce one s tax expenses 3 although tax avoidance is not a direct violation of the law it is frowned upon by tax authorities as it may compromise the overall spirit of tax law special considerationstax fraud cheats the government out of millions of dollars every year and is punishable by fines penalties interest or prison time 4 generally an entity is not considered to be guilty of tax evasion unless the failure to pay is deemed intentional tax fraud does not include mistakes or accidental reporting which the irs calls negligent reporting | |
what is tax free | tax free refers to certain types of goods and financial securities such as municipal bonds that are not taxed it also refers to earnings that are not taxed the tax free status of these goods investments and income may incentivize individuals and business entities to increase spending or investing resulting in economic stimulus tax free may also be known as tax exempt understanding tax freetax free purchases and investments do not incur the typical tax consequence of other purchases and investments for instance tax free weekends occur in many states where once or twice a year store purchases are not taxed thereby reducing the overall cost to the consumer frequently these sales tax holidays occur before school starts in the fall to incentivize spending on school supplies clothes computers calculators etc governments will often provide a tax break to investors purchasing government bonds to ensure that enough funding will be available for expenditure projects tax free investments such as tax exempt municipal bonds or munis allow investors to earn interest income tax free 1 interest may only be tax free at the federal level if for example a california resident buys a new york municipal bond these tax laws however vary by state for instance some states such as wisconsin and illinois tax interest earned on all muni bonds including their own subject to a few exceptions 23 meanwhile states such as california and arizona exempt interest from taxes only if the investor resides in the issuing state 4for example assume a local government in california issues a municipal bond to finance a recreational park an investor john smith who resides in the state of issuance purchases the 5 000 par value bond which matures in two years and has a coupon rate of 3 to be paid annually at the end of each of the two years the investor receives interest income of 3 x 5 000 150 this income will not be taxed by both the federal and state government after the bond matures john smith will receive his original principal investment back from the local government alaska florida nevada south dakota tennessee texas washington and wyoming don t have a state level income tax so they naturally exempt interest on all muni bonds 5 treasury securities issued by the u s government namely the u s savings bond and treasury inflation protected securities tipss pay interest that is tax free at the state and local levels but not the federal level 6according to the internal revenue service irs interest on a state or local government obligation may be tax free even if the obligation is not a bond 7 for example interest on a debt evidenced only by an ordinary written agreement of purchase and sale may be tax free also interest paid by an insurer on default by the state or political subdivision may be exempted from tax mutual funds that hold a mix of stocks and municipal bonds will have the portion of earnings derived from the bonds tax exempt under federal income tax guidelines and possibly free from state taxes depending on the location from which the bonds originated and or the taxpayer s state of residence since tax free interest is not subject to income taxes it is not included in the calculation of adjusted gross income agi for taxation purposes issuers or lenders that pay more than 10 in tax free interest must report the interest income to both taxpayers and the irs on form 1099 int 8 taxpayers or borrowers in turn must report this tax exempt interest on form 1040 9 the amount received as tax exempt interest is used by the irs to determine what amount of the taxpayer s social security benefits are taxable 10tax free and the tax equivalent yieldthe higher an investor s marginal tax bracket the more valuable and beneficial tax free securities are for the investor a tax free investment will carry a tax equivalent yield that is often higher than the current yield as determined by the investor s tax bracket the tax equivalent yield is the taxable interest rate that would be required to provide the same after tax interest rate the tax equivalent yield of a tax exempt bond can be calculated as for example if john smith in the example above falls in the 35 tax bracket the 3 muni yield is equivalent to a taxable bond with a yield of | |
what if john smith was in the 22 tax bracket the tax equivalent yield will be | the higher your tax rate the higher the tax equivalent yield this shows how tax free securities are best suited to those in higher tax brackets | |
what is a tax free savings account | a tax free savings account tfsa is a canadian savings account in which contributions interest earned dividends and capital gains grow tax free money withdrawn from it is also tax free the money deposited in tfsas is an after tax contribution meaning it s made with money that s already been taxed therefore it doesn t reduce taxable income while it s called a savings account a tfsa can hold investments that include mutual funds securities and bonds as well as cash this account is available to individuals age 18 and older in canada and can be used for any purpose | |
how tax free savings accounts work | tax free savings accounts were introduced in canada in 2009 they were intended to help canadians save and invest their money throughout their lives the tfsa account lets people save money for any reason not simply for retirement for example you can save for a car for your education to buy a home to set aside extra living expenses and or for retirement what s more you don t need to have earned income to contribute while there are exceptions the money earned by investments in a tfsa is generally not taxed 1 plus savers maintain control over their tfsas they can make contributions decide on investments and withdraw funds whenever they wish without penalty | |
when first introduced they offered canadians age 18 years and older the opportunity to make an after tax contribution of up to c 5 000 for the year in 2013 that annual limit was increased to c 5 500 and remained there through 2018 except for 2015 when the limit was increased to c 10 000 temporarily 2 in 2019 the contribution limit was set at c 6 000 and it remains the same for 2022 3 | the maximum amount that you re allowed to deposit to a tfsa is called your contribution room importantly for every year since 2009 that you were age 18 or older and a resident of canada you accumulate contribution room even if you haven t had an account open 2any unused contribution room can be carried forward for example if you contributed the maximum amount each year until 2019 when you contributed only c 3 000 of c 6 000 available contribution room you could contribute the c 3 000 carryover in 2020 that would have been in addition to the c 6 000 annual contribution limit for 2020 for a total contribution of c 9 000 likewise if you hadn t made any contributions since 2016 your 2020 contribution room for the tfsa account would have been c 23 000 c 5 500 for each of the years 2017 and 2018 c 11 000 and c 6 000 each for the years 2019 and 2020 c 12 000 2the tfsa annual room limit is indexed to inflation and rounded to the nearest 500 also according to the canadian revenue agency qualifying transfers exempt contributions and specified distributions are not considered in the calculation of contribution room 2any contribution made to a tfsa beyond the maximum allowable amount is considered an over contribution the canada revenue agency cra will charge a tax penalty of 1 per month on the excess contribution until it is withdrawn 2account holders should be aware that money withdrawn during the year doesn t reduce the amount already contributed if you contribute additional funds in the mistaken belief that your withdrawal reduced your already contributed amount you may over contribute and as a result owe tax on that amount taxes can also be levied for other reasons including for any contribution made by a non resident and for prohibited or non qualified investments acquired by the account 1withdrawal amounts open up more contribution room for you but not in the year of the withdrawal they are accounted for at the beginning of the following year for example if jane contributed c 5 500 for the tax year 2020 which had a contribution limit of c 6 000 that left c 500 in contribution room for that year if she withdrew c 2 000 she wasn t allowed to replace that entire withdrawal amount in the same year because again her available contribution room was only c 500 in this case jane can contribute an additional c500 the amount allowed by the remaining available contribution room in 2020 then at the beginning of 2021 she can add her withdrawal amount from 2020 to her contribution room for 2021 2tfsa contribution room amountstfsa contribution room adds up for each year even if you haven t opened a tfsa earnings and changes in account value don t affect contribution room the annual limits in canadian dollars since and including 2009 are 2009 2012 5 0002013 2014 5 5002015 10 0002016 2018 5 5002019 2022 6 000types of investments permittedaccording to the canadian government the types of investments that are permitted in a tfsa include the following 4check with a financial advisor or investment specialist to be sure that the investments you d like to purchase align with the options permitted pros and cons of tfsasthe income earned by investments in your tfsa doesn t impact your contribution room for current or future years 2 | |
how to open a tfsa | any person who is a resident of canada is age 18 or older and has a valid social insurance number is eligible to open a tfsa also you can have more than one tfsa at any given time but the total amount you contribute to all your tfsas cannot be more than your available tfsa contribution room for that year to start saving with a tfsa you may open a tfsa if you re not a canadian resident but any contribution made while still a non resident will be taxed at 1 per month until removed from the account tfsas vs rrspswhile a registered retirement savings plan rrsp account is specifically for retirement savings a tfsa can be used to save for anything the tax free savings account differs from a registered retirement account in two other main ways | |
how does the tax advantage of a tfsa compare to a regular investment account | take two savers joe and jane at the beginning of the year joe puts c 6 000 in an investment account earning 7 per year jane contributes the same amount but to a tfsa earning 7 they will each have c 6 420 after a year but jane can withdraw all c 6 420 and owe no taxes on it whereas joe would be taxed on the earnings of c 420 | |
are contributions to a tfsa tax deductible | no you make contributions with money that s already been taxed therefore they aren t deductible up front and can t reduce your taxable income however with few exceptions all withdrawals from a tfsa are completely tax free | |
what is the early withdrawal penalty for tfsas | there is no penalty for any withdrawal from a tfsa that s one of its advantages the canadian government intended for this type of savings account to be used for any purpose whatsoever and not simply for retirement so you can take withdrawals at any time during your life without being penalized for doing so the bottom linetax free savings accounts provide a terrific opportunity to save and invest for any purpose you choose account balances grow tax free withdrawals are tax free as well plus you can take withdrawals any time you wish to tfsas also allow account holders to carry over unused portions of their contribution room to subsequent years plus withdrawal amounts can be added back to the account in the following year this adds to the allowed contribution amount giving a saver even more opportunity to build the value of their account throughout their lives | |
what is a tax haven | a tax haven is a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment they have tax advantages for corporations and for the very wealthy and obvious potential for misuse in illegal tax avoidance schemes 1companies and wealthy individuals may use tax havens legally as a means of stashing money earned abroad while avoiding higher taxes in the u s and other nations tax havens may also be used illegally to hide money from tax authorities at home the tax haven can make this work by being uncooperative with foreign tax authorities in recent times tax havens are under increasing international political pressure to cooperate with foreign tax fraud inquiries understanding tax havensbroadly speaking tax havens are jurisdictions that have low taxes and low residency requirements for foreign entities and individuals willing to park money in their financial institutions a combination of lax regulation and financial privacy laws enables corporations and individuals to screen some of their income from tax authorities in other nations the tax justice network maintains a corporate tax haven index that tracks the jurisdictions that it says are most complicit in helping multinational corporations evade taxes as of 2021 the worst offenders were the british virgin islands the cayman islands and bermuda 2tax havens may be found in another country or merely in a separate jurisdiction some u s states have no income tax that simple fact makes them attractive to corporations looking to pay less overall in taxes although it doesn t help them avoid federal taxes for example in the united states alaska florida nevada south dakota tennessee texas washington and wyoming require no state income tax 3delaware is the state of choice for corporate incorporation it does not impose a corporate tax on corporations that incorporate in delaware but do business elsewhere 4from the viewpoint of an american offshore is anywhere outside u s jurisdiction offshore tax havens benefit from the capital their countries draw into their economies the funds flow in from individuals and businesses with accounts at banks and other financial institutions individuals and corporations benefit from low or no taxes charged on income in foreign countries where loopholes credits or other special tax considerations may be allowed characteristics of tax haven countries generally include no or low taxes minimal reporting of information lack of transparency obligations lack of local presence requirements and marketing of tax haven vehicles worldwide there is not a comprehensively defined standard for the classification of a tax haven country but several regulatory bodies monitor tax haven countries including the organization of economic cooperation and development oced and the u s government accountability office gao u s government response to tax havensthe tax cuts and jobs act tjca which passed in december 2017 set the effective corporate rate of u s taxes at 21 5 it also added provisions intended to discourage foreign investments systematically the tcja is known for being more territorial in nature than previous international tax laws the international tax system under the tcja exempts foreign profits from domestic taxation but has certain provisions for high return foreign profits 67some companies that have historically been known for offshore tax haven holdings include apple microsoft alphabet cisco and oracle overall tax havens may also offer advantages in the area of credit since it may be less expensive for u s based companies to borrow funds internationally this type of lending which can potentially fund acquisitions and other corporate activities is also subject to reporting within the guidelines of u s tax law generally accepted accounting principles gaap and guidelines under international financial reporting standards ifrs the u s has special rules in place for the reporting of foreign income by u s citizens and non u s citizens these rules are generally governed under the foreign account tax compliance act fatca fatca requires the filing of a schedule b and or form 8938 which provides disclosure of foreign account holdings when investments exceed 50 000 separately foreign account holders may also be required to file form 114 report of foreign bank and financial accounts 89in general there can potentially be exemptions and foreign tax credits for investment in all types of overseas vehicles but it is important to consult a tax advisor for individual situations to ensure proper reporting regulatory oversight of tax havenstax havens create opportunities for illegal activities that go well beyond tax evasion they are popular stops in the elaborate process of money laundering which involves transferring illegally obtained cash through a series of shell companies until it can t be traced as such there is some regulatory oversight of tax havens to maximize tax receipts many foreign governments maintain relatively constant pressure on tax havens to release information regarding offshore investment accounts however because of the monetary burdens regulatory oversight may not always be a top national priority worldwide some programs are in place to increase the enforcement of offshore investment reporting the automatic exchange of financial information is one example overseen by the organisation for economic co operation and development oecd 10the program requires participating countries to automatically transmit tax related banking information of non citizen depositors to the countries in which they are citizens sometimes it takes a crisis to force change for example cyprus s financial sector built on the country s tax haven status collapsed in 2013 the european commission european central bank and the international monetary fund predicated an 11 8 billion bailout on the country s agreement to comply with more robust tax participation 1110 | |
what are the top 10 overseas tax havens | the top tax havens currently are the british virgin islands cayman islands bermuda the netherlands switzerland luxembourg hong kong jersey singapore and the united arab emirates 2 | |
how much money do corporations put in tax havens | in 2022 u s companies shifted a collective 800 billion in profits to overseas jurisdictions 369 billion of that to countries considered tax havens worldwide multinational corporations shifted nearly a trillion dollars of profits to tax havens 12 | |
what are the advantages of a tax haven | corporations and wealthy individuals benefit primarily from low or no taxes on their income in foreign countries where loopholes credits or other special tax considerations may be lawful tax havens may also offer advantages in the area of credit since it may be less expensive for u s based companies to borrow funds internationally some tax havens also have strong privacy protections and share limited or no financial information with foreign tax authorities | |
how does a nation benefit from being a tax haven | the tax havens benefit when their financial institutions bring in a vast amount of money that money is then invested for profit plus even the very low fees charged for offshore accounts add up nicely according to a study by the internal revenue service u s households hold about 4 trillion in overseas accounts about half of it in countries normally considered tax havens 13the bottom linetax havens are jurisdictions that attract foreign investors with comparatively low tax burdens or bank reporting requirements these countries and territories have become attractive destinations for foreign capital while they are not inherently illegal a person who banks or invests in a tax haven may be violating the laws of their home country | |
what is a tax holiday | a tax holiday is a temporary tax break in the united states tax holidays often suspend state and local sales taxes paid by consumers governments also use tax holidays as investment incentives that may exempt a new plant from property taxes for a number of years for example | |
when a government wants to encourage consumer spending or business investment it may offer a tax holiday a temporary period during which certain taxes are reduced or lifted altogether | tax holidays may also seek to offset the effect of market based increases in prices this was the case with gas tax holidays instituted by some states and advocated by president joseph biden in 2022 in response to sharply higher prices at the pump 1some tax holidays have become an annual tradition for example some state and local governments in the u s offer a sales tax holiday the weekend before school resumes in the fall to reduce parents outlays for school supplies 2the goal is to increase store traffic which can boost overall spending states declaring a tax holiday may also hope to draw consumers from other nearby states national or local governments may also offer a tax holiday for businesses to foster growth developing countries sometimes use tax holidays to attract foreign investment tax holidays focused on business investment may be defined based on the location of the investment as with the opportunity zones created by the tax cuts and jobs act of 2017 these defer capital gains taxes on funds reinvested in qualifying projects within designated low income areas 3alternatively business investment tax holidays may target particular companies or industries for example the state of wisconsin initially offered 2 85 billion in tax credits to taiwan electronics manufacturer foxconn however it scaled that back to 80 million when foxconn failed to follow through on plans to invest 10 billion in a new plant in the state 4some researchers found that sales tax holidays led households to increase purchases of clothing by more than 49 and shoes by more than 45 5 others have concluded that the regressive nature of sales taxes on lower income families throughout the year overrides the benefits they may obtain from a few annual holidays 6 | |
are tax holidays effective | the net benefit of tax holidays is still up for debate on the one hand even though the government loses out on tax revenues that would have been generated from sales during the tax holiday such tax breaks may increase revenue over the long term because they stimulate spending and investment in addition the lost tax revenue may be offset by consumers increased purchases of items in product categories that are not affected by the tax holiday 7on the other hand increased sales during a tax holiday may be preceded by reduced sales because consumers know they ll save money by waiting thus the tax holiday simply shifts sales that would have happened before or after the holiday to the holiday dates one study found that a weekend long broad sales tax holiday in massachusetts increased spending in the state over the entire month and relative to that in neighboring states 7some retailers may take advantage of tax holidays by raising their prices effectively pocketing some of the subsidy intended for consumers perhaps not coincidentally retailer groups have been among the strongest advocates of sales tax holidays while lawmakers in several of the states that have offered them in the recent past have grown more skeptical of the concept 8 | |
how much can you save during a tax holiday | that depends largely on the customary sales taxes in the state or locality where you re shopping a few states such as delaware and oregon have no state sales tax at all others including california and rhode island charge 7 or more when local sales taxes are added total sales taxes in some areas can top 9 9 | |
what kinds of products can you save on during a tax holiday | the most common items subject to tax holidays in the u s include clothing footwear school supplies and computers some states single out other products such as firearms and ammunition mississippi generators and air conditioners texas or sports equipment west virginia 10 | |
how long do tax holidays last | state tax holidays generally last from two to seven days according to a list compiled by the federation of tax administrators 10the bottom linetax policy can certainly affect consumption and investment the notion that a sales tax break on some or all consumer goods for a few days in a year could permanently increase sales and prosperity has been a harder sell despite its obvious attractions for retailers shoppers and politicians business investment tax breaks invite neighboring jurisdictions to offer incentives of their own in a beggar thy neighbor race to the bottom while risking sweetheart deals for favored businesses from friendly politicians a tax holiday may provide a temporary economic boost but it is not the proverbial free lunch | |
what is a tax identification number tin | a tax identification number tin is a nine digit number used by the internal revenue service irs to identify taxpayers also known as a taxpayer identification number one type of tin includes social security numbers ssns issued by the social security administration ssa investopedia ellen lindnertypes of tax identification numbers tin a child must have an ssn before a parent can claim them as a dependent for income tax purposes so parents voluntarily apply for the number on behalf of their children 6 | |
when is a tin required | a taxpayer identification number identifies individuals corporations and entities such as nonprofit organizations npos the tin is mandatory for anyone filing annual tax returns with the irs and the agency uses it to track taxpayers 7a taxpayer identification number is required the abbreviation tin stands for tax identification number or taxpayer identification number global tinsalmost every country uses tins for various reasons canada uses social insurance numbers sins for employment tax benefits and credit purposes 8 the sin is a nine digit unique identifier that s formatted as xxx xxx xxx countries in the european union also use tins that help government agencies identify taxpayers and allow entities to invest money across the union 9who needs a tax identification number to work in the united states or file taxes with the irs individuals need a tin a taxpayer identification number allows individuals to take advantage of benefits or services offered by the government run their day to day business operations and report their taxes | |
are tins available online | the agency that issues a tin will provide individuals with an official document with their unique identifier tins are not available online because they are considered sensitive information | |
is a taxpayer identification number the same as a social security number | a social security number is an example of a tin it allows individuals to seek employment in the united states to obtain credit with banks and other lenders and file income tax returns the bottom linea taxpayer identification number or tin is necessary to work in the united states and file a tax return individuals can get a social security number through the social security administration or obtain an individual taxpayer identification number or a number for a business directly from the irs | |
what is a tax incidence | tax incidence or incidence of tax is an economic term for understanding the division of a tax burden between stakeholders such as buyers and sellers or producers and consumers tax incidence can also be related to the price elasticity of supply and demand when supply is more elastic than demand the tax burden falls on the buyers if demand is more elastic than supply producers will bear the cost of the tax | |
how a tax incidence works | the tax incidence depicts the distribution of tax obligations which must be covered by the buyer and seller the level at which each party participates in covering the obligation shifts based on the associated price elasticity of the product or service in question as well as how the product or service is currently affected by the principles of supply and demand tax incidence also reveals which group consumers or producers will pay the price of a new tax for example the demand for prescription drugs is relatively inelastic that means that despite changes in cost its market will remain relatively constant levying new taxes on inelastic and elastic goodsanother example the demand for cigarettes is mostly inelastic when governments impose a cigarette tax producers increase the sale price by the full amount of the tax transferring the tax burden to consumers through analysis it s been found that the demand for cigarettes is unaffected by price of course there are limits to this theory if a pack of cigarettes suddenly increased from 5 to 1 000 consumer demand would fall if the levying of new taxes on an elastic good such as fine jewelry occurs most of the burden would likely shift to the producer as an increase in price may have a significant impact on the demand for the associated goods elastic goods are goods that have close substitutes or that are nonessential price elasticity and tax incidenceprice elasticity is a representation of how buyer activity changes in response to movements in the price of a good or service in situations where the buyer is likely to continue purchasing a good or service regardless of a price change the demand is said to be inelastic when the price of the good or service profoundly impacts the level of demand the demand is considered highly elastic 1examples of inelastic goods or services can include gasoline and prescription medicines as noted above the level of consumption across the economy remains steady with price changes elastic products are those whose demand is significantly affected by price this group of products includes luxury goods houses and clothing 1the formula for determining the consumer s tax burden with e representing elasticity is as follows the formula for determining the producer or supplier s tax burden with e representing elasticity is as follows | |
what does tax incidence determine | tax incidence shows who or what ultimately bears the burden of a tax as opposed to just who directly pays the tax | |
are consumers or retailers impacted more by tax incidence | a number of different parties can be impacted by tax incidence such as when consumers have to pay higher sales taxes and therefore spend less at a retailer ultimately hurting the retailer s sales and leading to job cuts or store closings | |
what is elastic vs inelastic demand | elastic demand is demand that rises or falls based on the price of the service or product state of the economy or financial health of individuals inelastic demand is demand that is to an extent impervious to price fluctuations the state of the economy tax incidence or any other financial consideration it is the difference between something like entertainment or self care purchases versus food and medicine the bottom linetax incidence is a measure of the tax burden between producers and consumers or between different groups in an economy elasticity which measure the relationship between prices and the demand for goods is an element that helps determine tax incidence inelastic goods are those that consumers will continue to buy even as the price goes up for example gasoline and prescription drugs by contrast with elastic goods like a new home car or fashion consumer demand will drop as prices rise the tax burden shifts with inelastic vs elastic goods tax incidence also can be used to determine the fairness of a taxation system by contrasting the tax burden across a population for example using tax data from 2019 connecticut issued a report in 2022 finding that its state and local tax system is unfair and regressive since working and middle class families pay a higher percentage of their income in taxes than upper class families and the wealthy connecticut had come to the same conclusion in 2014 using tax data from 2011 2 | |
what is tax liability | tax liability is the payment owed by an individual business or other entity to a federal state or local tax authority generally you have a tax liability when you earn income or generate profits by selling an investment or other asset it is possible to have no income tax liability if you don t meet the income requirements to file taxes investopedia nono floresunderstanding tax liabilityvarious authorities including federal state and local governments impose taxes and use the funds to pay for services such as repairing roads funding social programs and maintaining a military companies withhold income social security and medicare taxes from employees wages and send them to the federal government it s important to note that your tax liability doesn t just include the current year instead it factors in any years for which taxes are owed that means that if back taxes any unpaid taxes from previous years are due those are also added to your tax liability | |
how to calculate your tax liability | the most common tax liability for americans is the tax on earned income for federal taxes you use the tax brackets and standard deductions issued by the internal revenue service standard deductions for 2022 are 1standard deductions for 2023 are 2imagine you re a single filer in 2022 earning 72 950 per year after applying your standard deduction of 12 950 your reportable income is 60 000 you also have no other deductions or income because your adjusted gross income is between 41 775 and 89 075 you fall into the 22 tax bracket your tax liability is computed for each tax bracket up to the one you re in here s how it works now assume that your w 4 resulted in your employer withholding 7 500 in federal taxes when you file your individual tax return form 1040 you haven t met your tax liability so you owe taxes in this case you d owe 8 818 7 500 1 318 if your w 4 resulted in your employer withholding 9 200 in federal taxes the irs would refund you 9 200 8 818 382 to calculate your state tax liability locate your state s standard deductions and tax information and use the instructions provided by the state some states have a single tax rate and others have graduated brackets 3 | |
when you sell an investment real estate or any other asset for a gain you owe taxes on the gain if you sell it for a loss you can report it as a capital loss capital gains are taxed in two different ways long term capital gain and short term capital gain if you ve held an asset for one year or less and sold it for a gain it is a short term capital gain included in your income | if you hold an asset for more than one year and sell it for a gain it is considered a long term capital gain and is subject to the capital gains tax there are capital gains thresholds similar to income tax brackets here is how it works assume you purchase 100 shares of xyz common stock for 10 000 in 2022 and sell them five years later for 18 000 the 8 000 gain is a taxable event because you held the stock for more than one year the gain is a long term capital gain 4using the previous example if your adjusted gross income was 60 000 your capital gains bracket is 15 so you d need to pay 15 of 8 000 in taxes or 1 200 if you had held the stocks for less than one year you d include the 8 000 in your gross income before subtracting your standard deduction so if you earned 72 950 and had 8 000 in short term capital gains your total income is 80 950 if your filing status and other deductions were the same as in the previous example you d still be in the 22 tax bracket and would work through the calculations the same way with the new income amount | |
how to reduce your tax liability | taxes can take a significant bite out of your take home pay but it s something everyone has to live with to fund the government programs we rely on however there are a few ways to reduce the amount of taxes you pay you might qualify for other deductions or credits deductions reduce your taxable income and credits reduce the amount of tax you owe some deductions you might be able to take are 5some credits are contributing to a retirement fund does more than help you save for and grow your retirement nest egg if carefully planned you can reduce your tax liability for years to come you can contribute a specific amount per year to your ira which is tax deferred you contribute to a roth ira after you ve paid taxes to lower your tax liability by contributing you ll only need to determine how much you plan to be taxed in retirement by projecting your income and withdrawals if you re in a higher tax bracket now than you will be in retirement a traditional ira can lower your total tax payments because if you re sure you ll be in a higher tax bracket after you retire and begin taking withdrawals a roth ira can lower your total tax payments because withdrawals are tax free 6 | |
how is tax liability determined | you determine your tax liability by subtracting your standard deduction from your taxable income and referring to the appropriate irs tax brackets 7 | |
how do i know if i have no tax liability | you have no tax liability if you aren t required to file income taxes or have no taxable income for the tax year 8 | |
how do i reduce my tax liability | some ways to reduce your tax liability include contributing to a retirement or health savings account you can also use credits or other deductions to reduce your taxable income 5the bottom linetax liability is the amount of taxes you owe on your taxable income for the year if you earn income you ll have a tax liability to determine your tax liability you add all your income and subtract your standard deduction to figure out your taxable income then refer to the irs tax brackets to find your tax liability 9 | |
what is a tax lien | a tax lien is a legal claim against the assets of an individual or business that fails to pay taxes owed to the government in general a lien serves to guarantee payment of a debt such as a loan or in this case taxes if the obligation is not satisfied the creditor may proceed to seize the assets understanding a tax lienthe federal or state government can place a tax lien on a property if the owner is in arrears on income taxes local governments may place a lien on a property for nonpayment of property or local income taxes the lien does not mean that the property will be sold rather it ensures that the tax authority gets the first claim over any other creditors vying for the creditor s assets the process of a tax lienthe process begins when a taxpayer gets a letter that details how much is owed this is known as a notice and demand for payment if the taxpayer fails to pay the debt or attempt to resolve it with the internal revenue service irs the agency can place a lien on the person s assets this lien attaches to all of a taxpayer s assets including securities property and vehicles any assets the taxpayer acquires while the lien is in effect also apply it also attaches to any business property and the accounts receivable for the business if the taxpayer chooses to file for bankruptcy the lien and the tax debt could continue even after the bankruptcy most debts are wiped out by bankruptcy proceedings but not federal tax debt 1 | |
what the irs can do | in the u s the irs may place a lien against a taxpayer s home vehicle and bank accounts if federal tax payments are delinquent and there has been no demonstrated effort to pay the taxes owed a federal tax lien has precedence over all other creditors claims it also makes it difficult for the taxpayer to sell the assets or to obtain credit the only way to release a federal tax lien is to fully pay the tax owed or reach a settlement with the irs once a lien has been filed it used to show up on the taxpayer s credit report damaging the person s credit score this could also prevent the taxpayer from selling or refinancing any assets to which liens have been attached note that since 2018 the three major credit reporting agencies have stopped including tax liens on credit reports 2if the taxes remain unpaid the tax authority can use a tax levy to legally seize the taxpayer s assets in order to collect the money it is owed while a lien secures the government s interest or claim in the property a levy permits the government to seize and sell the property in order to pay the tax debt 1the lien will remain in place until the tax bill is resolved or the statute of limitations on the debt expires getting out of a tax lienthe simplest way to get out of a federal tax lien is to pay the taxes owed tax liens are publicly recorded after a tax debtor pays off the debt the county records will be updated to reflect the fact that the lien has been released however if this is not possible there are other ways to deal with a lien with the cooperation of the irs if repaying the taxes is simply impossible the taxpayer must pay as much of the debt as possible and seek dismissal of the balance in bankruptcy court can tax liens be purchased in many localities and states public tax debt can be sold through auctions known as tax lien sales at auctions third parties can bid on liens and buy them from munipalities and states after such a transfer occurs the property owner will owe unpaid taxes and interest to the third party purchaser of their lien going forward a good understanding of tax lien investing and the local real estate market is important | |
how long can property taxes go unpaid | the length of time that one can be delinquent on their property taxes varies from state to state in general property owners have around two years before their homes are foreclosed on | |
how an individual can determine whether they have a tax lien against their property depends on where they live and which agency imposed that lien in most places a search via the state record office or the attorney general s office will reveal the existence of a lien against property the automated lien system of the irs can locate liens against businesses there are private third party lien searching services that can also do lien research | the bottom linea tax lien is a claim against the assets of an individual or business who fails to pay their tax debt to the government this is related to but different from a tax levy which is the act of taking the property if the subject of a lien neglects to make arrangements to settle their debt individuals affected by tax liens can resolve them by paying off their tax debt or coming to a negotiated settlement with the agency pursuing it such as the irs | |
what is a tax lien certificate | a tax lien certificate is a claim against a property that s had a lien placed upon it as a result of unpaid property taxes tax lien certificates are generally sold to investors through an auction process understanding tax lien certificatesa tax lien can be placed on a property because the owner hasn t paid property taxes the county or municipality will issue a property tax bill each time property tax comes due and it will eventually issue a tax lien if the bill isn t paid the lien is removed when the owner pays the taxes but the municipal or county authority will eventually auction the lien off to an investor if they continue to go unpaid a certificate is issued to the investor detailing the outstanding taxes and penalties on the property after they ve placed a winning bid the investor will then pay the taxes on behalf of the property tax owner but now they have the lien rather than the government 1not all states counties or municipalities offer tax liens 1 some states such as california only hold tax sales on defaulted properties resulting in the winning bidder becoming the legal owner of the property in question 2the term of tax lien certificates typically ranges from one to three years the certificate enables the investor to collect the unpaid taxes plus the applicable prevailing rate of interest during this time the rate can range from 6 up to 24 depending on the jurisdiction 3tax lien certificates can be bid on and won based on the highest cash amount the lowest interest rate or another method | |
how tax lien certificates are sold | the sale of a tax lien certificate starts when the local government sends out tax bills to property owners for the amount owed on their property taxes the local government places a tax lien on the property if the property owner fails to pay the taxes on time this lien is then entered in an auction that s typically held online or in person bidders usually have to register and provide a deposit before participating investors bid on the tax lien certificates at the auction by offering to pay the unpaid taxes plus any interest and fees the winning bidder receives a certificate that represents a lien on the property for the amount they paid the property owner then has a period of time to redeem the lien certificate from the investor by paying the amount owed plus interest and fees the investor is typically able to foreclose on the property and take ownership if the owner fails to redeem the certificate a property must be considered tax defaulted for a minimum period that depends on local law before it s subject to the lien and auction process rate of return on tax lien certificatestax lien certificates can offer rates of return that are substantially higher than those offered by other types of investments because they re spurred by high state mandated rates of interest tax liens generally have precedence over other liens such as mortgages 4an investor could potentially acquire the property for pennies on the dollar if the property owner fails to pay the back taxes acquiring a property in this manner is a rare occurrence however because most tax liens are redeemed well before the property goes to foreclosure the rate of return on tax lien certificates isn t guaranteed and can vary depending on whether the property owner redeems the certificate and whether the investor can foreclose on the property 1benefits and risks of tax lien certificatesbuying a tax lien certificate can be an attractive investment some certificates have a low entry point so you can buy them for a few hundred dollars compare that to a traditional investment like a mutual fund that often comes with a minimum investment requirement you also have the option to spread your money around so that you can buy multiple certificates for a low dollar value the rate of return is usually pretty consistent so you re not going to have to worry about the ups and downs of the market negative aspects of tax lien certificates include the requirement that the investor pay the tax lien certificate amount in full within a very short period usually one to three days these certificates are also highly illiquid because there s no secondary trading market for them those who invest in tax lien certificates must also undertake significant due diligence and research to ensure that the underlying properties have an appropriate assessed value tax implications of tax lien certificatesthe tax implications of tax lien certificates depend on several factors there may be taxes imposed at the federal state or local levels depending on the circumstances of the certificate the income earned may be subject to taxes if an investor gains interest on a tax lien certificate interest income is typically reported on the investor s tax return in the year it s earned the taxpayer must report the interest income as taxable income even if they didn t receive any cash distributions 5the investor will receive the amount paid for the certificate plus the interest earned if the property owner redeems the tax lien certificate by paying the unpaid taxes and any interest or fees owed this amount is considered a return of principal and it isn t taxable income 6the investor can take possession of the property through foreclosure if the property owner is unable to redeem the tax lien certificate the investor will then become responsible for paying taxes on the property going forward any income or gains earned from the sale or rental of the property will also be taxed just as with any other property some states and localities may also impose taxes or fees on tax lien certificate investments 7tax liens vs mortgage liensa tax lien and a mortgage lien are both legal claims against a property but they re significantly different in a few ways a tax lien is placed on a property by the government to collect unpaid property taxes a mortgage lien is placed on a property by a lender to secure the loan used to purchase the property tax liens generally have priority over mortgage liens in the event of default the government s tax lien will typically be satisfied before any mortgage liens are paid if a property is foreclosed upon due to unpaid taxes 4 the individual or lender who owns a mortgage lien is more at risk of losing their principal investment and not receiving any funds property owners have the right to redeem a tax lien by paying the unpaid taxes plus any interest or fees owed mortgage liens can typically only be satisfied by paying off the entire underlying loan both liens are similar in that they represent debt that may be repaid but the underlying nature of that debt is different tax liens are typically placed on a property for a specific time a local government entity may wish to sell the lien to an investor through a tax lien certificate sale after that time has passed mortgage liens can last for the duration of the mortgage loan which may be significantly longer | |
is tax lien investing a good idea | property tax lien investing may be a plausible investment for those who want to hold alternative investments and want exposure to real estate it s a reasonable way for investors to own real estate without the necessity of holding tangible property it s usually advised that you understand tax lien investing know the local real estate market and do research on properties before investing | |
what is the risk of tax lien investing | there are several downsides to tax lien investing it can be easy to overbid on tax lien properties or not fully understand the redemption periods you may hold a lesser claim to other more strongly perfected liens on the property the major risk is that the property owner files for bankruptcy so they ll never have to repay the delinquent tax and the home may escape foreclosure 1 | |
does a tax lien hurt your credit | having a tax lien against you doesn t necessarily hurt your credit because the three major credit bureaus don t include tax liens on their consumer credit reports 8 but property tax liens may be a matter of public record and the information that you owe an outstanding tax bill would be widely available to the general public 1the bottom linea tax lien certificate is a representation of ownership resulting from defaulted taxes owed on a property a local government creates a lien against the property and can auction off the rights to that lien in the form of a certificate if the taxes continue to go unpaid an investor who purchases the tax lien certificate may be able to recoup their principal while also earning some interest via penalty fees should the original property owner be able to pay off the tax lien in the future but returns are often a function of risk just like other forms of investment | |
what is a tax loss carryforward | a tax loss carryforward or carryover is an internal revenue service irs provision that allows businesses or individuals to carry a tax loss from one year into future years to offset a portion of their taxable income net operating loss nol carryforwardsthe amount of a company s net operating loss nol can offset a portion of the company s taxable income in future tax years through an irs provision called a carryforward carryforwards are limited to 80 of each subsequent year s net income 1 if a company has negative net operating income noi in year one but positive noi in years two and three it can use its nol carryforward to reduce its taxable income in the latter years the provision provides tax relief when a company loses money in a particular tax period a tourism business is subject to weather conditions and may have profits and a large tax obligation in one year incur an nol in the next and then follow that with another profitable year to smooth the tax burden the loss carryforward provision allows the nol in the second year to offset taxes due in the third year suppose a company lost 5 million in 2023 and earned 6 million in 2024 according to the irs provision its carryforward limit in 2024 would be 80 of 6 million or 4 8 million 2 that 4 8 million carryforward would lower the company s taxable income for 2024 to 1 2 million 6 million minus 4 8 million the remaining 200 000 nol carryforward the company s 5 million 2023 nol minus the 4 8 million nol carryforward it used in 2024 could be a carryforward in 2025 or later depending on when it next turns a profit the tax cuts and jobs act tcja of 2018 revised the rule that businesses carry nols forward 20 years to net against future profits or backward two years for an immediate refund of previous taxes paid 2the law removed the two year carryback provision except for certain farming losses and instituted an indefinite carryforward period however carryforwards are limited to 80 of each subsequent year s net income 3capital loss carryforwardsthe sale of capital assets such as stocks bonds industrial equipment and real estate results in capital gains and losses the gain or loss is the difference between its selling price and its tax or cost basis commonly the purchase price of the asset plus the cost of any improvements minus depreciation if the selling price is higher the result is a capital gain if the selling price is less the result is a capital loss companies and individuals can have capital loss carryforwards capital losses can be used only to offset a corporation s capital gains the company can carry its capital losses forward and backward and must do so starting with the year three years prior followed by two years prior and then one year prior if any loss remains the company can carry it forward for the next five years 4net capital losses can offset an individual s ordinary income up to a maximum of 3 000 in a tax year or 1 500 for married individuals filing separately losses exceeding the 3 000 threshold may be carried over to future tax years 56 assume a taxpayer sold 1 000 shares of xyz stock for 10 000 less than their cost basis incurring a 10 000 capital loss if they also had a 2 000 capital gain from selling other stock their net capital loss for the year is 8 000 they can use 3 000 of the loss as a deduction on their current year s tax return the remaining loss of 5 000 can be carried forward to the next tax year to offset 3 000 in income leaving 2 000 for the year after 6 | |
how is the cost basis of a stock determined | the cost basis of a stock is generally the amount paid for shares plus any dividends reinvested in addition individuals can add in any commissions or fees paid for those transactions 7 if an individual inherited the stock its basis is whatever it was worth when the first owner died 8 | |
what is tax loss harvesting | tax loss harvesting is a strategy in which an investor sells an investment at a loss replaces it in their portfolio with a similar investment and uses the capital loss to offset their gains or other income tax loss harvesting is legal but investors cannot run afoul of wash sale rules which prohibit buying a substantially similar security within 30 days of selling can a business claim an nol carryforward on its state taxes state laws on nol carryforwards vary some follow the federal rules while others set different dollar caps or time limits for carryforwards 9 similarly state laws on capital loss carryforwards can differ from federal ones the bottom linebusinesses and individuals typically prefer profits to losses however losses have one upside the ability to use them to offset gains sometimes years into the future through a carryforward the irs provision provides tax relief when a company or individual loses money in a particular tax period | |
what is tax loss harvesting | tax loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling profitable assets this strategy is commonly used to limit short term capital gains commonly taxed at a higher rate than long term capital gains to preserve the value of the investor s portfolio while reducing taxes | |
how tax loss harvesting works | tax loss harvesting is also known as tax loss selling most investors use this strategy at the end of the year when they assess the annual performance of their portfolios and its impact on their taxes an investment that shows a loss in value can be sold to claim a credit against the profits that were realized in other assets tax loss harvesting is a tool for reducing overall taxes a loss in the value of security a could be sold to offset the increase in the price of security b thus eliminating the capital gains tax liability of security b using the tax loss harvesting strategy investors can realize significant tax savings if your capital losses for the year exceed your capital gains you can deduct up to 3 000 in net losses from your total annual income if your net losses exceed 3 000 internal revenue service irs rules allow the additional losses to be carried forward into the following tax years 1maintaining your portfolioselling an asset at a loss disrupts the balance of the portfolio after tax loss harvesting investors with carefully constructed portfolios replace the asset sold with a similar asset to maintain the portfolio s asset mix and expected risk and return levels you should avoid buying the same asset that you just sold at a loss which may violate the irs wash sale rule 2losses on your investments are first used to offset capital gains of the same type therefore short term losses are first used to offset short term capital gains tax and long term losses are first used to offset long term capital gains tax but net losses of either type can then be deducted against the other kind of gain 3the wash sale rulethe wash sale rule requires that investors avoid buying the same stock sold at a loss for tax purposes a wash sale involves the sale of one security and within 30 days purchasing a substantially identical stock or security if a transaction is considered a wash sale it cannot be used to offset capital gains and if wash sale rules are abused regulators can impose fines or restrict the individual s trading 2using etfs that track the same or similar indexes can be used to replace one another while avoiding violating the wash sale rule in a tax loss harvesting strategy if you sell one s p 500 index etf at a loss you can buy a different s p 500 index etf to harvest the capital loss example of tax loss harvestingassume a single investor earns an income of 580 000 in 2023 the investor s marginal income tax rate is 37 and is subject to the highest long term capital gains tax category where gains are taxed at 20 short term capital gains are taxed at the investor s marginal rate 41below are the investor s portfolio gains and losses and trading activity for the year portfolio trading activity the tax owed from these sales is if the investor harvested losses by selling mutual funds b and c the sales would help to offset the gains and the tax owed would be | |
how does tax loss harvesting work | tax loss harvesting takes advantage of the fact that capital losses can be used to offset capital gains an investor can bank capital losses from unprofitable investments to pay fewer capital gains tax on profitable investments sold during the year this strategy includes using the proceeds of selling unprofitable investments to buy similar investments that preserve the portfolio s overall balance | |
what is a substantially identical security and how does it affect tax loss harvesting | the investor cannot violate the irs wash sale rule by selling an asset at a loss and buying a substantially identical asset within 30 days before or after that sale doing so will invalidate the tax loss write off a substantially identical security is defined as a security issued by the same company or a derivative contract issued on the same security 2 | |
how much tax loss harvesting can i use in a year | if your capital losses exceeds your capital gains you can claim excess loss of the lesser of 3 000 1 500 if married filing separately or your total net loss shown on line 16 of schedule d form 1040 according to the irs if have a greater net capital loss that that you can carry the loss forward to later years 1the bottom linetax loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling profitable assets an individual taxpayer can write off up to 3 000 in net losses annually for more advice on how to maximize your tax breaks consider consulting a professional tax advisor | |
what is tax planning | tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible a plan that minimizes how much you pay in taxes is referred to as tax efficient tax planning should be an essential part of an individual investor s financial plan reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success understanding tax planningtax planning covers several considerations considerations include timing of income size and timing of purchases and planning for other expenditures also the selection of investments and types of retirement plans must complement the tax filing status and deductions to create the best possible outcome retirement saving strategiessaving via a retirement plan is a popular way to efficiently reduce taxes contributing money to a traditional ira can minimize gross income by the amount contributed for 2023 if meeting all qualifications a filer under age 50 can contribute a maximum of 6 500 to their ira with an additional catch up contribution of 1 000 if age 50 or older that number rises to 7 000 in 2024 with the catch up contribution holding steady at 1 000 if an individual who made 75 000 a year contributed a total of 7 000 to a traditional ira in 2024 they would have an adjusted gross income of 68 000 75 000 7 000 on which they would be taxed the 7 000 would then grow tax deferred until withdrawn there are several other retirement plans that an individual may use to help reduce tax liability 401 k plans are popular with larger companies that have many employees participants in the plan can defer income from their paycheck directly into the company s 401 k plan the greatest difference is that the contribution limit dollar amount is much higher than that of an ira in 2023 the contribution limit for a 401 k is 22 500 increasing to 23 000 in 2024 for both years if you are 50 and over you can contribute an additional 7 500 if we take the example above if an individual contributed 23 000 in 2024 their adjusted gross income would be 52 000 75 000 23 000 on which they would be taxed the 23 000 would grow tax deferred until withdrawn tax planning vs tax gain loss harvestingtax gain loss harvesting is another form of tax planning or management relating to investments it is helpful because it can use a portfolio s losses to offset overall capital gains according to the irs short and long term capital losses must first be used to offset capital gains of the same type in other words long term losses offset long term gains before offsetting short term gains short term capital gains or earnings from assets owned for less than one year are taxed at ordinary income rates in 2023 long term capital gain limits are the following in 2024 long term capital gain limits will be increasing to the following for example if a single investor whose income was 100 000 had 10 000 in long term capital gains there would be a tax liability of 1 500 if the same investor sold underperforming investments carrying 10 000 in long term capital losses the losses would offset the gains resulting in a tax liability of 0 if the same losing investment were brought back then a minimum of 30 days would have to pass to avoid incurring a wash sale according to the internal revenue service if your capital losses exceed your capital gains the amount of the excess loss that you can claim to lower your income is the lesser of 3 000 1 500 if married filing separately or your total net loss shown on line 16 of schedule d form 1040 for example if an individual earned 75 000 a year and had 5 000 in net capital losses for the year the 75 000 income will be adjusted to 72 000 72 000 3 000 the remaining 2 000 in capital losses can be carried over with no expiration to offset future capital gains | |
what are basic tax planning strategies | some of the most basic tax planning strategies include reducing your overall income such as by contributing to retirement plans making tax deductions and taking advantage of tax credits | |
how do high income earners reduce taxes | there are many ways to reduce taxes that are not only available to high income earners but to all earners these include contributing to retirement accounts contributing to health savings accounts hsas investing in stocks with qualified dividends buying muni bonds and planning where you live based on favorable tax treatments of a specific state can i contribute to a 401 k a traditional ira and a roth ira yes you can contribute to a 401 k a traditional ira and a roth ira you must ensure that you only contribute the legally allowed amount per year if you invest in both a traditional ira and a roth ira you cannot contribute more than the overall maximum allowed for an ira the bottom linetax planning involves utilizing strategies that lower the taxes that you need to pay there are many legal ways in which to do this such as utilizing retirement plans holding on to investments for more than a year and offsetting capital gains with capital losses | |
what is a tax rate | a tax rate is a percentage at which the income of an individual or corporation is taxed the united states uses a progressive tax rate system imposed by the federal government and many states with such a system the tax rate charged increases as the amount of the person s or entity s taxable income increases an ability to pay or progressive tax collects more money from taxpayers with higher incomes understanding tax ratesto help build and maintain a nation s infrastructure as well as to support social services a government taxes its residents the tax collected is used for the betterment of the nation society and all living in it in the u s and other countries a tax rate is applied to taxpayer income whether earned from wages or salary investment income such as dividends and interest capital gains from investments or profits made from selling goods or services a percentage of earned and unearned income is remitted to the government for income tax the tax rate is the percentage of an individual s taxable income or a corporation s earnings owed to state federal and in some cases municipal governments the tax rate applied to an individual s income depends on the marginal tax bracket the marginal tax rate used by the u s government is indicative of its progressive tax system current tax ratesfor individuals the dollar threshold for each tax rate is dependent upon the status of the filer whether they are single the head of a household married filing separately or married filing jointly the marginal tax brackets for 2023 and 2024 are 12a single individual who earns 62 000 in 2023 will be taxed as follows 10 on the first 11 000 12 on the next 33 725 the amount over 11 000 up to 44 725 then 22 on the remaining 17 275 the amount over 44 725 up to 95 375 all of which equals 8 947 50 another individual who earns 160 000 will be taxed 10 on the first 11 000 12 on the next 33 725 22 on the next 50 650 the amount over 44 725 up to 95 375 then 24 on the remaining 64 625 the amount of income that falls between 95 375 and 182 100 all of which equals 31 800 following this example the single taxpayer who falls in the third marginal tax bracket will pay less tax than the single taxpayer who falls in the fourth and higher bracket a marginal tax rate means that different portions of income are taxed at progressively higher rates although these taxpayers fall in the third and fourth marginal brackets they do not pay flat rates of 22 and 24 respectively on all of their income due to the nature of the marginal tax calculation if they did the first individual would pay 22 x 62 000 13 640 the second would pay 24 x 160 000 38 400 in total individual a pays an effective rate of 14 4 8 947 50 62 000 and the individual with the higher income pays a rate of 19 9 31 800 160 000 these rates are called effective tax rates and represent the actual percentage at which the tax is levied for a tax year sales and capital gains tax ratestax rates also apply as sales tax on goods and services real property tax short term capital gains tax and long term capital gains tax | |
when a consumer purchases certain goods and services from a retailer a sales tax is applied to the sales price of the commodity at the point of sale since sales tax is governed by individual state governments the sales tax rate will vary from state to state in georgia the rate is 4 while the tax rate in california is 7 25 34 | income gained from investments is categorized as earnings and tax rates on capital gains and dividends apply when the value of an investment rises and the security is sold for a profit the tax rate that the investor pays depends on how long they held the asset the tax rate of a short term investment held for one year or less is equal to the investor s ordinary income tax 5 individuals in the 22 marginal tax bracket will pay 22 on short term capital gains the tax rate on profits from investments held longer than a year ranges from 0 to 20 5for tax year 2023 individuals with such taxable income at or below 44 625 pay 0 if they have income above 44 625 to 492 300 they pay 15 those individual investors with such income over 492 300 pay a 20 tax rate on capital gains 6married individuals filing jointly and surviving spouses with such taxable income at or below 89 250 pay 0 if they have income over 89 250 to 553 850 they pay 15 those married filing jointly investors with such income over 553 850 pay a 20 tax rate on capital gains 6heads of households hoh with such taxable income at or below 59 750 pay 0 if they have income over 59 750 to 523 050 they pay 15 those hoh investors with such income over 523 050 pay a 20 tax rate on capital gains 6married individuals filing separately with such taxable income at or below 44 625 pay 0 if they have income over 44 625 to 276 900 they pay 15 those married individuals filing separately with such income over 276 900 pay a 20 tax rate on capital gains 6for tax year 2024 individuals with such taxable income at or below 47 025 pay 0 if they have income over 47 025 to 518 900 they pay 15 those individual investors with such income over 518 900 pay a 20 tax rate on capital gains 7married individuals filing jointly and surviving spouses with such taxable income at or below 94 050 pay 0 if they have income over 94 050 to 583 750 they pay 15 those married filing jointly investors with such income over 583 750 pay a 20 tax rate on capital gains 7heads of households hoh with such taxable income at or below 63 000 pay 0 if they have income over 63 000 to 551 350 they pay 15 those hoh investors with such income over 551 350 pay a 20 tax rate on capital gains 7married individuals filing separately with such taxable income at or below 47 025 pay 0 if they have income over 47 025 to 291 850 they pay 15 those married individuals filing separately with such income over 291 850 pay a 20 tax rate on capital gains 7qualified dividends are subject to the same tax rate schedule for long term capital gains non qualified dividends have the same tax rates as short term capital gains 89tax rates abroadtax rates vary from country to country some countries implement a progressive tax system while others use regressive or proportional tax rates a regressive tax schedule is one in which the tax rate increases as the taxable amount decreases the proportional or flat tax rate system applies the same tax rates to all taxable amounts regardless of income level bolivia and greenland are examples of countries that have this system of taxes in place | |
how are tax rates imposed | a tax rate can apply to goods and services or income and is defined by a government the rate is commonly expressed as a percentage of the value of what is being taxed | |
what is a tax bracket | a tax bracket defines a range of incomes subject to an income tax rate tax brackets are part of a progressive tax in which the level of tax rates progressively increases as an individual s income grows low incomes fall into tax brackets with lower tax rates while higher earners fall into brackets with higher rates | |
what is the difference between a marginal tax rate and an effective tax rate | a marginal tax rate is the amount of tax that applies to each additional income level as defined by the tax brackets in the u s taxpayers pay more in taxes as their income rises a taxpayer s effective tax rate is the single rate obtained by totaling the amounts owed as determined by the various applicable tax brackets and then dividing that by total income the bottom linea tax rate is a percentage at which the income of an individual or corporation is taxed the u s imposes a progressive tax where the higher the individual s income the greater percentage of tax is paid tax rates are also applied as sales tax on goods and services or as capital gains tax on investments some nations may impose a progressive tax while others may charge a flat tax rate or a regressive tax rate | |
what is the tax reform act of 1986 | the tax reform act of 1986 is a law passed by the united states congress to simplify the income tax code to increase fairness and provide an incentive for growth in the economy the passage of the act reduced the maximum rate on ordinary income and raised the tax rate on long term capital gains 1it was followed by the tax reform act of 1993 2understanding the tax reform act of 1986signed into law by republican president ronald reagan on october 22 1986 the tax reform act of 1986 was sponsored in congress by richard gephardt d mo in the house of representatives and bill bradley d nj in the senate the act is commonly known to be the second of two reagan tax cuts the first being the economic recovery tax act of 1981 3the tax reform act of 1986 lowered the top tax rate for ordinary income from 50 to 28 and raised the bottom tax rate from 11 to 15 this was the first time in u s income tax history that the top tax rate was lowered and the bottom rate was increased at the same time the tax reform act of 1986 also provided for the elimination of the distinction between long term capital gains and ordinary income the act mandated that capital gains be taxed at the same rate as ordinary income raising the maximum tax rate on long term capital gains to 28 from 20 1prior to the passing of the act capital gains were either taxed at lower rates than ordinary income under an alternative tax or received a partial exclusion from tax under the regular rate schedule sixty percent of capital gains on assets held for at least six months were excluded from taxable income thus the marginal tax rate on net long term capital gains was only 40 of the marginal tax rate on other forms of income under the previous tax laws 4in addition to altering the tax brackets the tax reform act of 1986 eliminated certain tax shelters it required people claiming children as dependents to provide social security numbers for each child on their tax returns it expanded the alternative minimum tax amt the least tax that an individual or corporation must pay after all eligible exclusions credits and deductions have been taken and increased the home mortgage interest deduction to incentivize homeownership while the act ended tax code provisions that allowed individuals to deduct interest on consumer loans it increased personal exemptions and standard deduction amounts indexed to inflation for businesses the corporate tax rate was reduced from 50 to 35 the tax reform act of 1986 also reduced the allowances for certain business expenses such as business meals travel and entertainment and restricted deductions for certain other expenses 51tax reform act of 1993the clinton administration subsequently created the tax reform act in 1993 to contain several major provisions for individuals such as the addition of the 36 tax bracket an increase in gasoline taxes and an additional tax of 10 on married couples with income above 250 000 it also raised taxes on social security benefits and eliminated the tax cap on medicare the tax reform act was one of president clinton s first tax packages and it led to a lot of significant changes in tax law for both individuals and businesses the tax reform act of 1993 was a piece of legislation also known as the revenue reconciliation act of 1993 individuals were not the only ones affected by this legislation for instance the corporate tax rate was raised as well along with a lengthening of the goodwill depreciation period and the elimination of deductibility for congressional lobbying expenses many other taxes were raised and deductions reduced or eliminated as well 6 the act was also one of the first bills to retroactively raise the tax rate effectively making the increased tax rates law for taxpayers for the beginning of the year despite the fact that the act was signed into law on august 10 7 | |
what is a tax refund | the term tax refund refers to a reimbursement made to a taxpayer for any excess amount paid in taxes to the federal or state government while taxpayers tend to look at a refund as a bonus or a stroke of luck it often represents what is essentially an interest free loan that the taxpayer made to the government it s often possible to avoid overpaying your taxes so you can keep more money in your pocket each paycheck and avoid a refund when you file your tax return understanding tax refundsit can be exciting to get a large tax refund you can expect to get a refund if you overpaid your taxes during the year this generally happens when taxes are deducted from your paycheck every time you get paid by your employer here are some reasons why a taxpayer might get a refund tax refunds are the opposite of a tax bill which refers to taxes owed by a taxpayer in the case of a tax bill you owe more taxes to the government than you paid during the year you normally have a tax bill if your employer doesn t withhold enough taxes from your paycheck to avoid overpaying you must fill out your w 4 correctly and update it if you experience a significant life change such as marriage divorce adoption a new freelance job or gig the birth of a child or a financial windfall 3special considerationstaxpayers are generally better off not overpaying their taxes in the first place because that money could be put to better use for example you could adjust your withholding or estimated quarterly taxes if you re self employed and invest that extra money in your individual retirement account ira 401 k or even an interest yielding savings account that way the money is working for you instead of for the federal government refundable tax creditsmost tax credits are nonrefundable meaning that the tax credit can only reduce a taxpayer s liability to 0 any remaining amount from a nonrefundable tax credit is automatically forfeited by the taxpayer for this reason this type of tax credit is sometimes called a wastable tax credit 56in contrast a refundable tax credit pays out in full meaning that a taxpayer is entitled to the entire amount of the credit regardless of their income or tax liability if the tax credit reduces the tax liability to below 0 then the taxpayer gets a refund 5refundable tax credits include the child tax credit is 2 000 maximum for eligible taxpayers the fully refundable portion is 1 600 for 2023 and 1 700 for 2024 789the earned income tax credit eitc gives low and moderate income workers and families a tax break the credit is 7 430 in 2023 and 7 830 in 2024 the amount of credit that a taxpayer receives depends on their income filing status and the number of children they have for example eligible taxpayers who have no children will receive 600 for tax year 2023 that figure increases to 632 for tax year 2024 1011the american opportunity tax credit aotc is a partially refundable tax credit that is available to taxpayers to offset qualified higher education expenses qhees if a taxpayer reduces their tax liability to 0 before using the entire portion of the 2 500 tax deduction then the remainder may be taken as a refundable credit up to the lesser of 40 of the remaining credit or 1 000 12low and moderate income households may qualify for the premium tax credit ptc which lowers the monthly premiums for health plans offered through the federal and state health benefit exchanges taxpayers can use all some or none of their ptc in advance i e upfront if taxpayers use less ptc than they qualify for they will get the difference as a refundable credit at tax time 13 | |
how tax refund are issued | tax refunds usually are issued either as checks and sent by u s mail or as direct deposits to the taxpayer s bank account alternatively taxpayers can use the refund to buy u s series i savings bonds or have it loaded on a prepaid debit card the fastest way to get a refund is to e file your tax return and choose direct deposit most refunds are issued within a few weeks of when the taxpayer files their tax return however there may be some instances where a refund takes longer 14for example taxpayers who claim the eitc will receive their refunds by february 27 that s because the law requires the irs to hold on to these refunds until march due to years of fraudulent filings for the credit 15refunds are always pleasant but it would be better to avoid overpaying in the first place by correctly filling out your w 4 or precisely calculating your estimated taxes the closer you get your refund to zero the more money you will have throughout the prior year of course not everyone agrees some people consider tax refunds an alternative savings plan and look forward to the lump sum repayment | |
when can i expect my tax refund | the internal revenue service irs claims that it issues most refunds in less than 21 calendar days if you claim the earned income tax credit or the additional child tax credit then your refund will arrive no sooner than early march 1415 | |
why do people get tax refunds | you get a refund if you overpaid your taxes the year before this can happen if your employer withholds too much from your paychecks based on the information you provided on your w 4 if you re self employed you may get a refund if you overpaid your estimated quarterly taxes refundable tax credits such as the eitc can also lead to refunds | |
how do i check on the status of my tax refund | you can use the irs s where s my refund tool to check the status of your most recently filed tax return within the past two tax years you can start checking where s my refund 24 hours after the irs receives your electronically filed tax return or four weeks after you mail a paper tax return 16the bottom linea tax refund is an amount of money that the government reimburses taxpayers who pay more than they owe in taxes in general it s a good idea to calculate the taxes that you ll owe as precisely as possible so that you don t overpay throughout the year that way you can keep more of your money and put it to work for your best interests whether that s earning a return and building your savings or paying off debt | |
what is tax relief | tax relief refers to any government program or policy designed to help individuals and businesses reduce their tax burdens or resolve their tax related debts tax relief may be in the form of universal tax cuts targeted programs that benefit specific groups of taxpayers or initiatives that bolster particular goals of the government for example the child tax credit gives a tax break to parents of minor children while the tax credit for green improvements e g energy efficient windows furthers the goal of u s energy independence and cleaner air 12tax relief basicstax relief programs and initiatives help taxpayers reduce their tax bills through tax deductions credits and exclusions other programs help taxpayers who are behind on their taxes settle their tax related debts potentially avoiding liens in the process government policy goals are often the catalyst for amending the federal tax code for example in response to concerns about the general lack of retirement savings in the u s congress created incentives to encourage people to save for retirement in tax advantaged savings accounts such as iras and 401 k s tax relief is also available for people affected by natural disasters for example the irs has historically made tax relief announcements to help individuals and businesses affected by severe storms tornados flooding hurricanes straight line winds wildfires and drought the relief typically comes in the form of filing and payment extensions penalty and interest waivers and deductions for casualty and theft losses sustained due to federally declared disasters 4you can t deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement and reduce the loss by your anticipated reimbursement 5tax deductionsa tax deduction reduces your taxable income for the year thereby lowering your tax bill taxpayers can take the standard deduction or itemize their deductions on schedule a of form 1040 or 1040 sr you can t do both 36 in addition there are a number of tax deductions a taxpayer can take independent of the standard deduction or itemized deduction each type is discussed more below the standard deduction amount is based on your filing status age and whether you are disabled or claimed as a dependent on someone else s income tax return here are the standard deduction amounts for the 2023 and 2024 tax years 7you can take an extra deduction if you are at least age 65 or legally blind by the end of the tax year for tax year 2023 this additional standard deduction is 1 500 1 850 if filing as single or head of household if you are 65 or older or blind the amount doubles if you are 65 or older and blind the additional standard deduction for 2024 is 1 550 1 950 if single or head of household 89if another taxpayer can claim you as a dependent your standard deduction for tax year 2023 is limited to the greater of 1 250 or your earned income plus 400 the total can t be more than the basic standard deduction for your filing status for 2024 the standard deduction for a dependent increases to 1 300 or the individual s earned income plus 450 10itemized deductions are expenses that can be subtracted from your adjusted gross income to lower your taxable income and tax bill you can itemize your deductions only if you don t claim the standard deduction it makes financial sense to itemize if the total amount you can deduct is greater than the standard deduction for your filing status common itemized deductions include 11beyond the standard deduction and itemized deductions there are other deductions taxpayers can take for example taxpayers who have paid interest on qualifying student loans may be able to deduct up to 2 500 from their taxable income this deduction can be taken whether the taxpayer takes the standard deduction or itemized deduction 13another deduction is the educator expense deduction designed to support teachers and eligible educators this deduction allows educators to deduct up to 250 of unreimbursed expenses incurred for classroom supplies 14last the health savings account hsa deduction offers a tax advantage for individuals with a high deductible health plan contributions made to an hsa are tax deductible reducing taxable income and providing a way for individuals to save for qualified medical expenses 15tax relief often targets specific taxpayers such as those facing unexpected costs due to a hurricane or a wildfire tax creditsa tax credit is another form of tax relief unlike tax deductions which lower your taxable income tax credits directly reduce the amount of tax you owe 3here s an example say a taxpayer takes the standard deduction and their tax bill amounts to 3 000 if the person is also eligible for a 1 000 tax credit their final tax bill would be 2 000 by comparison with a 1 000 tax deduction someone in the 22 tax bracket would save just 220 tax credits are more favorable than tax deductions because they reduce the amount of tax you owe not just your taxable income this type of tax relief is often described as a tax incentive because it reimburses taxpayers for expenditures the government deems worthwhile for example the american opportunity tax credit aotc and the lifetime learning credit llc programs give tax credits to people who enroll in post secondary education programs 1617other popular tax credits include tax exclusionswhile tax deductions are amounts you deduct from your income tax exclusions set aside certain types of income as non taxable as such tax exclusions reduce your taxable income and your tax bill for example you can generally exclude from your income any child support payments life insurance death benefits and municipal bond income you receive 1819a common tax exclusion is the one for employer sponsored health insurance health insurance premiums your employer pays are exempt from federal income and payroll taxes and the portion of premiums you pay is generally excluded from your taxable income the exclusion of premiums lowers your tax bill effectively reducing your after tax cost of health insurance coverage 2021if you earned income overseas you might be eligible for the foreign earned income exclusion and the foreign housing exclusion to qualify you must be a u s citizen or resident alien who is a resident of a foreign country for an uninterrupted period that includes the entire tax year 22another popular tax exclusion pertains to selling a house if you have a capital gain from the sale of your main home you can exclude up to 250 000 500 000 if married filing jointly of that gain from your income to qualify you must have owned and lived in the home for at least two out of the previous five years and you must not have excluded the gain from the sale of another home within the last two years 23in some cases income excluded for tax purposes is not recorded on the return in other cases it is recorded in one section of the return and then deducted in another area tax debt reliefthe irs fresh start program helps taxpayers catch up on back taxes and avoid tax liens levies wage garnishments and jail time launched in 2011 the program is a group of changes to the u s tax code that streamlines the collection process and makes it possible to settle your tax debt for less than the total amount you owe individuals and businesses are eligible for the program 24here are four fresh start options for taxpayers behind on their tax payments keep in mind that while helpful the fresh start program isn t necessarily easy to navigate and deciding which avenue to pursue can be tricky if you have significant tax debt consider working with a tax professional who can make sure you apply to the appropriate program and guide you through the process | |
what is the difference between a tax credit and a tax deduction | tax credits lower the amount of tax you owe while tax deductions reduce your taxable income both save you money on your tax bill but credits provide the most substantial savings 3for example a 1 000 tax credit lowers your tax bill by that same 1 000 meanwhile a 1 000 tax deduction lowers your taxable income by that amount so if you fall into the 24 tax bracket a 1 000 deduction would shave 240 off of your tax bill | |
what is the standard deduction for 2023 and 2024 | for 2023 the standard deduction is 13 850 for single and married filing separately taxpayers 20 800 for heads of household and 27 700 for married filing jointly filers and surviving spouses 29 each of these amounts increase for 2024 in 2024 the standard deduction for single and married filing separate taxpayers is 14 600 while the standard deduction for heads of household is 21 900 in 2024 the standard deduction for married filing joint filers or surviving spouses is 29 200 7 | |
what is the annual gift exclusion for 2023 and 2024 | the annual exclusion for gifts is 17 000 for 2023 and 18 000 for 2024 that means you can give up to 17 000 or 18 000 tax free to as many people as you wish without using any of your lifetime gift and estate tax exemption 7the bottom linetax relief constitutes government programs or policies that help lessen the burden of taxes for individuals these are usually done through tax deductions credits and exclusions when filing your taxes make sure you take advantage of all of these options so that you don t end up paying more taxes than you need to when in doubt consult with a tax professional or financial advisor | |
what is a tax return | a tax return is a form or forms filed with a tax authority that reports income expenses and other pertinent tax information tax returns allow taxpayers to calculate their tax liability schedule tax payments or request refunds for the overpayment of taxes in most countries tax returns must be filed annually for an individual or business with reportable income including wages interest dividends capital gains or other profits understanding tax returnsin the united states tax returns are filed with the internal revenue service irs or with the state or local tax collection agency massachusetts department of revenue for example containing information used to calculate taxes tax returns are generally prepared using forms prescribed by the irs or other relevant authorities in the u s individuals use variations of the internal revenue system s form 1040 to file federal income taxes corporations will use form 1120 and partnerships will use form 1065 to file their annual returns 123a variety of 1099 forms are used to report income from non employment related sources application for automatic extension of time to file u s individual income tax return is through form 4868 45typically a tax return begins with the taxpayer providing personal information which includes their filing status and dependent information consider other needs for your tax returns before you discard old copies for example your insurance company or a creditor may require you to hang onto copies longer than the irs may suggest the sections of a tax returnin general tax returns have three major sections where you can report your income and determine deductions and tax credits for which you are eligible the income section of a tax return lists all sources of income the most common method of reporting is a w 2 form wages dividends self employment income royalties and in many countries capital gains must also be reported 678deductions decrease tax liability tax deductions vary considerably among jurisdictions but typical examples include contributions to retirement savings plans alimony paid and interest deductions on some loans for businesses most expenses directly related to business operations are deductible 91011taxpayers may itemize deductions or use the standard deduction for their filing status once the subtraction of all deductions is complete the taxpayer can determine their tax rate on their adjusted gross income agi 12tax credits are amounts that offset tax liabilities or the taxes owed like deductions these vary widely among jurisdictions however there are often credits attributed to the care of dependent children individuals aged 65 or older or those with permanent and total disability note that there may be income limitations or restrictions to these credits 1314after reporting income deductions and credits the end of the return identifies the amount the taxpayer owes in taxes or the amount of tax overpayment overpaid taxes may be refunded or rolled into the next tax year taxpayers may remit payment as a single sum or schedule tax payments periodically similarly most self employed individuals may make advance payments every quarter to reduce their tax burden 1516you can file a tax return by filling it out yourself using a tax software program or hiring a tax preparer or accountant who will gather the required information from you and file it on your behalf in 2024 the irs announced it has a direct file pilot that allows taxpayers to file their 2023 taxes online directly with the irs for free the service is being rolled out in phases and is not available to the public it is expected that by mid march it will be more widely available 17irs and record retentiongenerally speaking the irs recommends that filers keep tax returns for at least three years however other factors may require more prolonged retention some situations may require indefinite retention of filed returns if a tax return contains errors an amended return should be submitted to correct the discrepancy 1819you should keep documents related to income deductions or credits on your tax return until the period of limitations for that specific tax return expires the period of limitations is the time during which you can amend your tax return or the irs can assess additional tax the years mentioned generally refer to the period after the return was filed treating returns filed before the due date as filed on the due date the irs has outlined many different periods that will pertain to different taxpayers the language below from the irs outlines these record retention suggestions other tax return uses and retentionaside from an irs audit you may find yourself needing to provide a copy of your federal tax return to an external party for a variety of reasons below are some of those reasons along with general guidance on retention note that the periods listed may vary based on your situation and there may not be direct specific guidelines on the time frame when you may be asked for your return |
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