Tuesday, July 26, 2016

This is What Happens With Taxes When Someone Dies

When someone dies, unfortunately, at some point the heirs of the deceased person's estate or the beneficiaries of the deceased person's trust need to address taxes that will be due as the result of their loved one's death. In short, estates valued at $5.34 million or more must file a federal estate tax return using the United States Estate Tax Return.  Estates of nonresident, alien decedents that owe U.S. federal estate taxes must file the United States Estate Tax Return of nonresident or not a citizen of the United States. An inheritance tax is based on who receives the deceased person's property.  Currently only six states collect a state inheritance tax:  Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

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When someone dies, their estate will normally have to pay any tax due before any money is distributed to their heirs. The deceased could have paid too much or even too little Income Tax. As a result, the deceased’s estate may owe tax to the government, or it could be owed a tax refund. You may need to complete a self-assessment tax return if the deceased normally did one. If you’re not sure if the deceased regularly submitted a tax return, you will need to have the deceased’s National Insurance number to hand when contacting an agency to help you. Any income received after the person’s death, such as rent from a property or income from the person’s business, belongs to their estate. For this type of income, the executor must report this as part of probate, so that appropriate amount of tax is calculated and paid by the estate. If you're the executor of a deceased person's estate, your responsibilities include filing that person's final personal tax return.  Adam Greene CPA suggests three methods on how to file taxes for a deceased person:

One is gathering the complete information. In this one, first you need to gather the income reporting forms that have been mailed to the deceased person, called the decedent. These forms are usually sent after the last day of January for the previous year and should arrive by the end of February. To complete the request to the IRS, you will need the decedent’s complete name, address and social security number, a copy of the death certificate, a notice concerning fiduciary relationship or a copy of Letters Testamentary approved by the court. Then decide whether to file a joint return. If the decedent was married at the time of death, a joint tax return may be filed for that tax year. And finally, for accounts such as mutual funds and bank accounts, change the ownership to your name as the executor as soon as possible.

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Another is to file the final personal Tax Return. First, you need to calculate the person's reportable income. Income earned between the start of the year and the date of the person's death should be reported on the final tax return. Then you must list income, exemptions and deductions just as you would for yourself. If you choose not to itemize, you can take the full standard deduction. If the decedent didn't file taxes in the years preceding his or her death, you may have to file individual incomes for those years as well. If the decedent is due a refund, you can claim it using Statement of a Person Claiming Refund Due a Deceased Taxpayer. And last, write the word "deceased" across the top of form, including the decedent's name and the date of death. Also you must add a specific word in place of the person´s signature at the bottom of the form, depending if you are the spouse or not. If not, add the word “deceased”, and if you are the spouse, add "filing as surviving spouse”.

The third method is filing the Estate Tax Return. For this, you can collect information needed to file estate taxes. If the estate generates more than $600 in annual gross income, a separate tax form must be used to file estate taxes, in addition to personal income taxes. Then, file estate taxes. US Income Tax Return for Estates and Trusts, is the form you need to report income, gains, losses, etc., related to the decedent's estate. A decedent's estate figures its gross income the same way an individual would; however, a decedent's estate is allowed an income distribution deduction for distributions to beneficiaries. And then, you must report a transfer of assets using United States Estate Tax Return. This form is used to report the transfer of assets from the decedent to heirs or beneficiaries. And to conclude using this method, you need to apply for a Certificate of Discharge before selling property. To apply, you will need the inventory and appraisement of the estate assets, copy of the will, and copies of documents related to the sale of property. This releases the property from the automatic federal tax lien that is attached to a person's estate the day he or she dies.

Tuesday, July 19, 2016

How to Reduce Your Personal and Business Taxes

Taxes are special kinds of fees or charges that the government requires people to pay in order to live and work in their state or country. The government needs money to operate, and taxes are a way for it to get this money. They are unavoidable, but you can minimize the impact they have on your bottom line. Every scenario is different, but one thing is universal: Planning is the key to taxes. There are different kinds of taxes.  For example, people that have jobs pay taxes on the money that they earn from working, and states usually have sales tax that you pay when you buy something in a store.

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Here is some brilliant financial advice form Adam Greene CPA: become a scholar of the tax law. If you know the tax law and take every tax deduction to which you are entitled, it is going add up to significant savings over the years. For this reason, the Internal Revenue Service website offers resources to help you understand the following tax deductions and credits. Study the credits well, as those benefits reduce your taxes dollar by dollar. Keeping a tax-reduction mindset in your everyday life will serve your finances well, and so, by spending a few hours each year keeping abreast of the tax law, you can save a lot on taxes over the years. Do not count on a tax preparer to know every deduction for which you are eligible. As a consumer you should know the tax benefits you can claim. Every additional deduction you claim increases your disposable income.

So, what can you do to reduce your personal and corporate taxation? Here are some additional financial advice in order to reduce what you pay in taxes:

Starting a savings plan will encourage good habits. Consider setting up a regular transfer into an investment that automatically takes place when you receive your pay, before you spend any of your income. This “investment” could be a high interest savings account, for example, which allows you to take advantage of the power of compound interest. When calculating the cost basis after selling a financial asset, make sure to add in all of the reinvested dividends. That increases the cost basis and reduces your capital gain when you sell the investment. Alternatively, if you have a mortgage then this could mean putting additional money in an offset account, which then reduces the interest payable on your loan.

Take a retirement account. This contributions are a top tax-reduction tool and allow you to deduct from your taxable income the amount paid into the retirement account. Also these funds, grow tax-free until retirement. If you start early, this strategy alone can secure your retirement.

Combine a vacation with a business trip, and reduce vacation costs by deducting the percent of the unreimbursed expenses spent on business from the total costs. If you work for yourself or have a side business, take the home office deduction. This allows you to deduct the percent of your home that is used for your business, for example, if the guest bedroom is used exclusively as a home office, and it constitutes one-fifth of your apartment’s living space, you can deduct one-fifth of rent and utility fees for your home office. Have in mind that the Lifetime Learning Credit is great for boosting education and training. This credit is worth a maximum of $2,000 per year (up to 20 percent of up to $10,000 spent on post-high school education) and helps pay for college and educational expenses that improve your job skills.

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By being charitable, every donation over $2 you make to a registered charity is tax deductible. Your donations don’t come straight back onto your tax refund.  They are subtracted from your taxable income, which means you get a percentage back (depending on your income and taxation rate).

It's also important to understand that taxes are not based on your gross income, but on a taxable income, that can be reduced by deductions. While people with many deductions will itemize them on their tax returns to maximize their refund or lower the amount of taxes they must pay, those without them will use the standard deduction provided by the government to calculate the tax. Simple commitments such as paying down debt or saving more can have a dramatic impact on both your financial and emotional wellbeing. Creating a plan and sticking to it is the first step.

Finally, claiming deductions is one of the best tools in reducing your overall tax payable. If you have to spend money during the year and it relates to earning your income, then keep the receipt and make sure you claim a deduction in your Corporate Taxation for what you are entitled to. Even if you use the item for part work and part personal, you can still to claim an apportioned deduction. If you are not sure whether you can claim a particular item, keep the receipt and ask later, when you prepare your next tax return.

Tuesday, July 12, 2016

A Brief Look at Tax Changes Throughout US History

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Benjamin franklin said it “In this world, nothing can be said to be certain, except death and taxes”. And he was totally right. Taxes have been in our lives forever, since we can remember our grandparents paid taxes, our parents paid taxes and we ended up paying taxes as well. We also know that these taxes tend to change, not to be cheaper or softer, and tend to regulate almost any activity in our day to day lives.
But how has taxation changed in the United States? More importantly, what are those changes that have marked the history of the tax system in the Unites States? Surprisingly, at the beginning, America was tax-free for much of its early history. At least, it was free of direct taxation like income tax. We have to remember that it was taxation that led to the revolution against the British in 1773 and after that, one of the first challenges the new system faced was the Whiskey Rebellion. This rebellion was all about groups of Pennsylvanian farmers angry about the tax on whiskey burning down tax collectors' houses and tarring and feathering any collectors too slow to get away. It is well remembered because the congress handled the situation using military force because they had the right to collect indirect taxes for the nation.
Since this date, taxation has had many changes, some good and necessary, others not so favourable for some people and at times unfair. Let’s take a look at those moments in taxation history that are worthy to remember and that gave an amazing boost to the North American economy.
Near the previous date, in 1790, taxation had a big addition to its variety. A war with France led the government to impose a property tax and a further modification to it in 1812 with the first income tax approach after a civil war. Of course the consequences of the war, specially a war against oneself as a civil war is, are totally negative. The American Civil War was very expensive for the nation because there was an amazing rate of debt that had to be acquired in order to carry out such war. In order to help pay for the war, the Congress passed the Revenue Act of 1861 which taxed incomes exceeding $800, and was not rescinded until 1872. Many scholars consider that it was this act that created most of what it is considered as the modern tax system. That same year the U.S. Internal Revenue Service (IRS) was founded as a consequence of arranging such taxes and making the government machinery work perfectly.
In 1895 there was a big game changer.  Although the Constitution forbade any direct taxes that were not levied in proportion to each state's population, the Supreme Court declared a flat tax contained in the 1894 Wilson-Gorman Tariff Act unconstitutional. This was a huge victory for all the taxpayers because now it was a bit fairer the way they were going to be charged for their taxes. This started a feeling in people´s hearts that taxes could also bring negative consequences to world trade and for underprivileged people. After this, the 16th Amendment was introduced in 1913 and that gave way to one type of income tax for the population and a further income tax for people with an annual income of over $3,000. This tax touched less than 1% of Americans and gave the government the possibility to control high incomes that came from anonymous societies or big partnerships and that were free from being charged as a group. (This was one of the mechanisms used to get to Al Capone´s finances and money movements)  
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For the Second World War and for his new approach to the country called The New Deal, Roosevelt introduced many taxes and increased many others. For Roosevelt´s New Deal there was a huge deficit that had to be covered by imposing and collecting more taxes. By the end of 1936 there was a top tax rate 76% and the economy couldn’t take it. Taxes were then raised several more times and only the corporate tax changed for good lowering its tariff. The war came and America needed money to support their allies so a more aggressive taxation was imposed. By 1945, 43 million Americans paid tax and the amount of taxes collected went from $9 billion in 1941 to $45 billion in 1945.
All these changes in taxation in the United States came after big issues in the government or society or after wars in and outside of the country. We all know that taxes are totally necessary, but we also known that those same taxes make our lives a little bit more difficult. Learn more about taxation in this article

Wednesday, July 6, 2016

What is Brexit and How Will it Affect Taxes?

One of the most important events that have happened these days is the so called Brexit (or British Exit), a term used to refer to the United Kingdom leaving the European Union. This Event has had a lot of consequences in both national and international aspects and has affected greatly the finances of the country. These consequences can be seen in the drop in both the price of the Pound and British shares, this has led to different reactions in international finances, for example the rise of the American dollar just days after the decision.

Most think that this was a bad decision and will have bad consequences for the United Kingdom, and these problems have started to appear through the country. One of the biggest consequences people think the United Kingdom will face is the fact that the intervention of the European Union helped keeping the United Kingdom, well, united. Brexit has made the tension between the countries that make part the United Kingdom clearer, especially from the side of Scotland as most of them didn’t want Brexit to happen. Scotland has also been historically against British control and Brexit seems like it will strengthen the Scottish separatist groups even more and this might just push Scotland enough to leave the United Kingdom. Ireland on the other hand, depended a lot of the European Union help reduce tension in the borders, also most of Ireland supported to Remain in the European Union.

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As we said before, most consequences of the decision will be economical and one of the things that will be affected both directly and indirectly is taxes. Taxes will face changes from both Brexit directly and from other economic aspects that are also affected by it. Before we go into taxes directly, we have to take into account that many things may vary depending on how the government of the UK decides to manage their relationship with the European Union and what models they choose to follow. The three models that are the most likely to be chosen, are the Norwegian model, the Swiss model and the Canadian model. The Norwegian model means the UK will make part of the European Free Trade Association and will be a party of the European Economic Area Agreement, meaning its economic relationship would be regulated by the European Union. In the Swiss Model, the UK would make part of the European Free Trade Association but it would not be a party of the European Economic Area Agreement, this would make trade between both to be regulated via an agreement between both sides, though this seems to be the less viable model. The final model is the Canadian model, this model makes use of the World Trade Organization to regulate and supervise the relationship between the countries and the European Union, and would depend on other groups and alliances to help regulate the commerce. Some of these alliances include the OECD, G20 and the one mentioned before, the WTO. After they choose one of these models, the consequences will be easier to predict as more information will be available.

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First we will analyze what taxes will be affected indirectly be Brexit. The first one will be VAT, VAT is chargeable in most products and services provided within the European Union but each member chooses how it works for them, including methods of collection and rates. This will mean the UK will have to analyze and modify it so it can be viable for them when they are not part of the EU. The UK leaving the EU means the UK will have total power over their taxes and might even overhaul the whole system, but this will also mean they would have to pay additional taxes when making commerce with the EU. The UK will not be able to make use of some of the economic advantages of the EU, like the proposed US-EU Transatlantic Trade and Investment Partnership that will remove some custom duties and other trade barriers.

Finally the taxes that will be affected directly are mostly those related with company profits and capital gains, as the UK will have no obligation to follow the EU laws designed to reduce the burden of direct taxation for companies. These laws are designed to avoid double taxation when working within the single market. Even before the Brexit, the UK was not really fond of the models of corporate taxation proposed be the EU, so this will represent a benefit for the UK as they will have control of it.

So we will have to wait a little before we see the full consequences of the British Exit and according to how the issue develops we will have varied results. If you like related topics and are interested in the world of taxes and finances you should check more content in this blog by Adam Greene, the recommended post is What you need to know about corporate taxation as it is about a related topic.