IRS Tax Collection Notice to Collect Back Taxes Tip #1: Don’t Panic, Get the Right Help!

IRS tax help is available if you receive an IRS tax collection notice to collect back taxes, but you need to know whom to ask. Once an IRS tax collection notice to collect back taxes arrives, many people try to work with the IRS themselves to resolve back tax problems, and get themselves into deeper trouble by unintentionally incriminating themselves.

You wouldn’t defend yourself against murder charges without legal counsel. And this IRS tax collection notice to collect back taxesis no different. You’ll need IRS tax help from a tax attorney or Certified Tax Resolution Specialist at your side to ensure that this IRS notice to collect back taxesis dealt with effectively.

The IRS is the most brutal collection agency on the planet. Do not go into battle with them over an IRS tax collection notice to collect back taxeswithout expert IRS tax help in your corner. Unlike that seemingly friendly IRS agent, your tax attorney or Certified Tax Resolution Specialist is there to help you and you alone.

IRS Tax Collection Notice to Collect Back Taxes Tip #2: Delay Collections

Tax liens and IRS levies are the result of poor or no communication between taxpayers and the IRS. Your tax attorney or Certified Tax Resolution Specialist will fix that. He or she is an expert at the ins and outs of the IRS and will handle all communications with them on your behalf.

Once you’ve gotten an IRS tax collection notice to collect back taxes,pick up your phone immediately and call a tax attorney or Certified Tax Resolution Specialist for IRS tax relief before your career, bank accounts and credit rating all disappear. With the tax collection notice to collect back taxes in hand, they can call a temporary halt to the proceedings and allow you to get ready for the battle ahead.

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IRS Tax Collection Notice to Collect Back Taxes Tip #3: File and Appeal

If you’ve ignored the IRS tax collection notice to collect back taxes,there may already be an IRS levy already filed on your bank accounts or your assets. Your tax attorney or Certified Tax Resolution Specialist can give you IRS tax relief by helping you file an IRS collection appeal to remove your back tax lien.

The goal of the IRS Appeal Division is to settle back tax disputes between the IRS and taxpayers. Do you know how to do this? Your tax attorney or Certified Tax Resolution will provide IRS tax help and create an appeal and deliver it to an IRS Appeals Officer who is required to make a decision on your back taxes within five days.

IRS Tax Collection Notice to Collect Back Taxes Tip #4: Be Placed in “Currently Not Collectible“

Even the IRS recognizes their limitations in collecting back taxes from some individuals. If you are indigent, chronically or terminally ill or suffering from other extreme circumstances, you may be placed in the IRS’s Currently Not Collectible file. Your tax attorney or Certified Tax Resolution Specialist can help you determine if you fit the criteria, and arrange for you to receive this designation.

IRS Tax Collection Notice to Collect Back Taxes Tip #5: Negotiate Payment Plan

One of the most common responses to an IRS tax collection notice to collect back taxesis an IRS payment plan.

Once you or your accountant has determined how much money in back taxes you actually owe, which may differ radically from what the IRS thinks you owe, your tax attorney or Certified Tax Resolution Specialist can negotiate a payment plan and bring you some IRS tax relief. It is not an ideal situation because interest and penalties will keep accruing until the debt is discharged in its entirety, but at least you’ll be free from the threats of IRS levies and wage garnishments.

IRS Tax Collection Notice to Collect Back Taxes Tip #6: Offer in Compromise Tax Settlements

Another way to deal with an IRS tax collection notice is with an Offer in Compromise tax settlement where they might accept a discounted lump sum payment and consider the debt cleared.

But it’s not easy. This is where your tax attorney or Certified Tax Resolution Specialist really earns their fee providing IRS tax help. The IRS won’t accept just any Offer in Compromise. They need to be convinced that your Offer in Compromise is their best and only hope of getting the maximum amount of money out of you that they can.

Your tax attorney or Certified Tax Resolution Specialist has done this many times before and is familiar with what Offer in Compromise tax settlements the IRS in general have accepted recently, offering a clue as to what they’ll accept from you.

This is not a negotiation. You only get one shot at it, so listen closely to your tax attorney or Certified Tax Resolution Specialist and take his or her advice to get IRS tax relief.

A tax attorney or Certified Tax Resolution Specialist is your best, and really only, hope of having your federal back tax issue resolved once and for all. Their IRS tax help will allow you to get back to enjoying life without worrying about when the next tax collection notice to collect back taxes may be coming in the mail.

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In some situations, the client, or taxpayer, may not know of the false expenses, deductions, exemptions and/or credits shown on his or her tax return.

However, when the IRS detects a fraudulent return, the taxpayer – not the return preparer must pay the additional taxes and interest and may be subject to penalties.

The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution. The IRS can also assert appropriate civil penalties against unscrupulous return preparers.

While most preparers provide honest service to their clients, the IRS urges taxpayers to be careful when choosing a preparer – as careful as they would be choosing a doctor or lawyer. Even is someone else prepares a tax return, the taxpayer is ultimately responsible for all the information on the return. For that reason, taxpayers should never sign a blank tax form. And they should review the return before signing it and ask questions on entries they don’t understand.

Helpful Hints When Choosing a Return Preparer

Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.

Use a reputable tax professional who signs the tax return and provides a copy.

Avoid preparers who base their fee on a percentage of the refund.

Consider whether the individual or firm will be around to answer questions about the preparation of the tax return months, or even years, after the return has been filed.

Check the person’s credentials. Only attorneys, certified public accountants (CPA’s) and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.

Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

Ask friends and family whether they know anyone who has used the tax professional and whether they were satisfied with the service they received.

Reputable preparers will ask to see receipts and will ask multiple questions to determine whether expenses, deductions and other items qualify. By doing so, they are trying to help their clients avoid penalties, interest or additional taxes that could result from an IRS examination.

Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a 0,000 fine.

Criminal and Civil Legal Actions

Some return preparers have been convicted of or have pleaded guilty to felony charges. Additionally, the courts have issued more than 290 permanent injunctions against abusive tax scheme promoters and abusive return preparers since 2001.

Houston Tax Preparer Sentenced to Prison

On September, 26, 2008, in Houston, Texas, Rosalind Jones was sentenced to 21 months in prison and ordered to pay 5,206 in restitution to the IRS for filing false income tax returns. In January 2008, Jones pleaded guilty by admitting that she prepared false tax returns in order to create or to increase income tax refunds for her clients. On the count to which she pleaded guilty, Jones admitted that the false items she placed on the tax return in question claimed a false income tax refund of ,195. Without the false items, the taxpayer was entitled to a refund of only .

Tax Return Preparer Sentenced to Five Years in Prison for Filing False Claims for Tax Refunds and Identity Theft

On August 25, 2008, in Pensacola, Florida, Deborah R. Adams, operator of Archer Tax and Accounting Services, was sentenced to 60 months in prison, to be followed by three years of supervised release, and ordered to pay ,802 in restitution to the IRS. Adams pleaded guilty in May 2008 to 31 counts of preparing and filing false federal income tax returns and 13 counts of identity theft. According to court documents, she filed 31 false federal income tax returns during tax years 2003 through 2005. Adams also prepared false returns with the personal identity information and Social Security numbers stolen from former clients and had the false refunds also deposited to bank accounts she controlled. Adams filed fraudulent claims for tax refunds totaling 2,000.

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New Jersey Man Who Prepared Hundreds of Fraudulent Tax Returns Sentenced to Six Years

On May 14, 2008, in Newark, New Jersey Romanus Okorie was sentenced to 72 months in prison for filing fraudulent tax returns on behalf of numerous New Jersey residents resulting in a loss to the government in excess of .5 million. He was also ordered to pay 0,000 fine and was prohibited from working as a tax preparer for three years following his release from prison. On January 22, 2008, a jury had convicted Okorie of 10 counts of willfully preparing materially false tax returns. Evidence presented at trial showed that more than 100 clients were audited, and the total tax loss based on the audited returns exceeded million. The government presented further evidence that in 2003 Okorie prepared approximately 250, and in 2004 close to 300, tax returns, all but one generating a refund. The government estimated that the actual tax loss for the returns prepared by Okorie – more than 600 – exceeded million.

North Carolina Professional Tax Return Preparer Sentenced to 70 months

On February 28, 2008, in Charlotte, North Carolina, Lloyd Anthony Bastfield, a professional tax return preparer for approximately 18 years, was sentenced to 70 months in prison and ordered to pay million in restitution. Bastfield pleaded guilty in April 2007 to conspiring to defraud the United States by filing false tax returns claiming nearly million in false claims for refunds for individuals between 2001 and 2005, and evading over 1,000 in personal income taxes owed by him for the years 2000 through 2004. According to a Bill of Information, Bastfield admitted that between 2001 and 2005, he prepared and electronically filed more than 10,000 fraudulent income tax returns for individual clients which claimed false and fictitious education income tax credits.

Phony Tax Return Preparer Posed as CPA and Prepared Fraudulent Returns

On October 2, 2007, in Atlanta, Georgia, Larry Vonzell Black was sentenced to 15 months in prison, to be followed by three years of supervised release. Black pleaded guilty to charges of filing false claims with the IRS on July 16, 2007. According to information presented in court, he falsely told members of the public, friends and acquaintances that he was a certified public accountant trained to prepare tax returns. He advertised his tax preparation services at a booth set up in a check-cashing store in metropolitan Atlanta. Under the guise of preparing legitimate tax returns, he obtained personal information, including Social Security numbers and W-2 forms, from taxpayers. He then submitted false claims small portion of the fraudulent refunds to his victims. In all, Black submitted false claims for over ,000.

Western Tax Service Return Preparers Sentenced for Filing False Tax Returns

On October 15, 2007, in Santa Ana, California, Kelly Agbonmoba David, aka David Kelly, was sentenced to 46 months in prison. David’s co-defendant, Anthony Todd Stefani, was sentenced to 27 months in prison. Both men had been found guilty on charges of conspiracy to defraud the United States and of aiding and assisting in the filing of false tax returns with the IRS. According to the indictment, David was hired in 1999 to assist in the preparation of income tax returns for DeAngelo Tax Service and, later, Western Tax Service. Co-defendant Stefani was employed by Western Tax Service to prepare income tax returns in 2001. The indictment further state that the tax preparers were trained in how to make false, misleading and inaccurate statements on clients’ tax returns, usually without the knowledge of their clients. The preparers at DeAngelo an Western Tax Services prepared and filed over 11,000 income tax returns for years 1998 through 2001. Other individuals sentenced for their role in the conspiracy were Samuel DeAngelo, sentenced on September 24, 2007, to 51 months in prison; Douglas Shields, sentenced on August 6, 2007, to 15 months in prison; Jeffrey Russell Wright, sentenced on September 17, 2007, to six months in prison followed by six months home detention; and Erin Cordes, sentenced on September 24, 2007, to one year of probation which includes six months of home detention.

San Jose Tax Preparer Sentenced for Preparing False Tax Returns, Banned for Life from Working as a Tax Consultant

On November 1, 2007, in San Jose, California, Jonathan Wendy was sentenced to 12 months and one day in prison to be followed by one year of supervised release. In addition, the judge imposed two special supervised release conditions that Wendy agreed to in the plea agreement – a lifetime ban on working as a tax consultant, and filing complete and accurate federal tax returns for tax years 1998 through 2005. Wendy pleaded guilty on November 1, 2006, to one count of aiding or inducing another to file a false tax return. According to his plea agreement, Wendy, who was a tax preparer for over 20 years, admitted that on July 27, 1999, he prepared a federal income tax return for the 1998 tax year which falsely listed taxable income as ,347, when he knew the correct amount was approximately 4,929. Wendy also admitted that he intentionally reduced the tax liability by creating numerous false or grossly inflated deductions on the return. In addition to the specific count to which he pleaded guilty, Wendy admitted preparing 17 other individual tax returns and falsely listing the taxable amount claimed one each return. As a result of his conduct, the amount of tax owing to the government by those taxpayers was more than ,000.

U.S. Court Permanently Bars Washington State Woman’s Bogus “Decoding” Tax Scheme

On August 11, 2008, an Oregon federal court permanently barred John Fitzgerald of Portland and his three daughters – Marilyn Dial, Martha Farr Sharp and Karen Gray – from marketing a tax fraud scheme involving sham nonprofit corporations that customers used to evade federal taxes. The civil injunction order also barred Noreen MsCausland, a family associate, from promoting the scheme. Judge Michael W. Mosman of the U.S. District Court for the District of Oregon found that the defendants, through their business American Family Enterprise, Inc., operated “a one stop shop” for setting up sham nonprofit corporations in Oregon. The defendants falsely told customers they could put their income, assets and businesses into the sham corporations and would not have to file income tax returns or pay taxes.

Texas Man Barred from Promoting Home-Based Business Tax Scheme

On February 8, 2008, a federal court barred Thell G. Prueitt of Kingsland, Texas, from promoting a home-based business tax scheme, falsely advising customers they could claim tax deductions for non-deductible personal expenses, and other fraudulent deductions. The court also found that he promoted on ATM and pay phone tax scam, falsely advising customers that they could claim tax credits and deductions based on artificially inflated purchase prices.

California Preparer Promised Customers She Would Represent Them at IRS Audits

On October 2, 2008, a federal court permanently barred Bonnie Arnel, of Newman, California, from preparing federal income tax returns. According to the complaint, Arnel told customer she could “find the deductions to the IRS did not want her customers to know about. “Arnel also allegedly promised customers that, as part of her tax preparation services, she would represent them at IRS audits, when she had no intention of doing so and in fact never did.

Imprisoned Tax Defiers Barred from Preparing Tax Returns and Selling Tax Fraud Materials

On October 17, 2008, a federal court in Las Vegas permanently barred notorious tax defiers Irwin Schiff and his former associate, Cynthia Neun, from promoting Schiff’s fraudulent “zero tax” plan. The pair was convicted on tax charges in October 2005 and is currently incarcerated. The permanent injunction ensures that Schiff and Neun cannot promote tax-fraud schemes from within prison or when they are released from prison.

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Planning is the key to beating the IRS, legally.

Mistake #1

The first mistake is the biggest mistake of all. It’s failing to plan.

I don’t care how good you and your tax preparer are with a stack of receipts on

April 15.

If you didn’t know about the perfectly, legal techniques you could use to write off your kid’s braces as a business expense, there’s nothing we can do.

Tax coaching is about giving you a plan for minimizing your taxes. What should you do? When should you do it? How should you do it? And tax coaching offers two more powerful advantages.

First, it’s the key to your financial defenses. As a business owner, you have two ways to put cash in your pocket. Financial offense is making more. Financial defense is spending less. For most of us, taxes are our single, biggest expense.

So, doesn’t it just makes good sense to focus your financial defense where you spend the most. Sure, you can save 15% on car insurance by switching to GEICO. But how much will that really save in the long run.

Second, tax coaching guarantees results. You can spend all sorts of time, effort, and money promoting your business. But that does not guarantee results. Or, you can set up a medical expense reimbursement plan, deduct your daughter’s braces, and guarantee savings.

Let’s start by taking a quick look at how the tax system works. This will “lay a foundation” for understanding the specific strategies that I’ll be revealing shortly.

The process starts with income. And this includes most of what you’d think the

IRS is interested in:

• Earned income from wages, salaries, bonuses, and commissions.

• Profits and losses from your own business.

• Interest and dividends from bank accounts, stocks, bonds, and mutual funds.

• Capital gains from property sales.

• Pensions, IRAs, and annuity income.

• Alimony and gambling winning.

• Even illegal income is taxable.

The IRS doesn’t care how you make it; they just want their cut! (The good news is, if you’re operating an illegal business, you can deduct the same expenses as if you were running a legitimate business. If you’re a bookie, you can deduct the cost of a cell phone you use to take bets.

Once you’ve added up your total income, it’s time to start subtracting “adjustments to income.” These are a group of special deductions, listed on the first page of

Form 1040, that you can take whether you itemize deductions or not. Total

income minus adjustments to income equals “adjusted gross income” or “AGI.”

Adjustments to income are also called “above the line” deductions, because

you take them “above” AGI.

Adjustments include IRA contributions, moving expenses, half of your self employment tax, self-employed health insurance, Keogh and SEP contributions, alimony you pay, and student loan interest.

Once you’ve determined adjusted gross income, you can take a standard deduction or itemized deductions, whichever is greater. The standard deduction for 2009 is ,700 for single taxpayers, ,350 for heads of households, ,400 for joint filers, and ,700 each for married couples filing separately.

Tax deductions reduce your taxable income. If you’re in the 15% bracket, an extra dollar of deductions cuts your tax by 15 cents. If you’re in the 35% bracket, that same extra dollar of deductions cuts your tax by 35 cents. You can also deduct a personal exemption of ,650 for yourself, your spouse and any dependents.

Once you’ve subtracted deductions and personal exemptions, you’ll have taxable income. At that point, the table of tax brackets tells you how much to pay.

You may also owe self-employment tax, which replaces Social Security and Medicare for sole proprietors, partnerships, and LLCs. You’ll also owe state and local income and earnings taxes.

Finally, you’ll subtract any tax credits. These are dollar-for-dollar tax reductions, regardless of your tax bracket. So if you’re in the 15% bracket, a dollar’s worth of tax credit cuts your tax by a full dollar. If you’re in the 35% bracket, an extra dollar’s worth of tax credit cuts your tax by the same dollar. There’s no secret to tax credits, other than knowing what’s out there.

Ultimately, there are two kinds of dollars in this world: pre-tax dollars, and after-tax dollars. Pre-tax dollars are great. And after-tax dollars aren’t bad. But they’re not as good as pre-tax dollars.

So here’s the bottom line:

You lose . . . every time you spend after-tax dollars . . . That could have been pre-tax dollars.

Let me repeat that. You lose . . . every time you spend after-tax dollars . . . That could have been pre-tax dollars.

I’m going to spend the rest of this report talking about how to turn after-tax dollars into pre-tax dollars.

We’re going to use three primary strategies.

First, earn as much nontaxable income as possible. Second, make the most of adjustments to income, deductions, and credits. There’s really no magic to it, other than knowing what’s available. Finally, shift income to later tax years and lower-bracket taxpayers. This includes making the most of tax-deferred retirement plans and shifting income to lower-bracket children, grandchildren and other family members.

The second big mistake is nearly as important as the first, and that’s fearing, rather than respecting the IRS.

What does the kind of tax planning we’re talking about do to your odds of being audited? The truth is, most experts say it pays to be aggressive. That’s because overall audit odds are so low, that most legitimate deductions aren’t likely to wave “red flags.”

Audit rates are actually as low as they’ve ever been for 2004, the overall audit rate was just one in every 137 returns. Over half of those audits targeted the Earned Income Tax Credit for low-income working families. The IRS primarily targets small businesses, especially sole proprietorship’s, and cash industries like pizza parlors and coin-operated laundromats with opportunities to hide income and skim profits. In fact, they publish a series of audit guides that you can download from their web site that tell you exactly what they’re looking for when they audit you!

Take a look at the bottom of the chart. You’ll see that the IRS audits just about one-third of one percent of s corporations and partnerships. If you’re really worried about being audited, you might consider reorganizing your business to help fly “under the radar.”

If you’re like most business owners, you pay as much in self-employment tax as you do in income tax. If that’s the case, you might consider setting up an “S” corporation or limited liability company to reduce that tax.

If you run your business as a sole proprietor, you’ll report your net income on Schedule C. You’ll pay tax at whatever your personal rate is. But you’ll also pay self-employment tax, of 15.3% on your first ,200 of “net self employment income” and 2.9% of anything above that.

Let’s say your profit at the end of the year is ,000. You’ll pay regular tax at

your regular rate, whatever that is. You’ll also pay about ,000 in self employment tax.

The self-employment tax replaces the Social Security and Medicare tax that your employer would pay and withhold if you weren’t self-employed. How many of you plan to retire on Social Security?

An “S” corporation is a special corporation that’s taxed like a partnership. The

corporation pays the owners a reasonable wage for the work they do. If there’s

any profit left over, it passes through to the shareholders, and the shareholders pay the tax on their own returns. So the S corporation splits the owners income into two parts, wages and pass-through distributions.

Here’s why the S corporation is so attractive. You’ll pay the same 15.3% tax on your wages as you would on your self employment income.

BUT – there’s no Social Security or self-employment tax due on the dividend pass-through. Let’s say your S corporation earns the same ,000 as your proprietorship. If you pay yourself ,000 in wages, you’ll pay about ,500 in Social Security. But you’ll avoid ,500 in self-employment tax on the pass-through distribution.

You can also use an S corporation to shift income to a lower-bracket family member. Let’s say your son is attending college out of state. You can earn money in your business, pay tax on it, and use after-tax dollars to pay his tuition. Or you can give him part of the corporation, pass that income through to him directly, let him pay tax at his lower rate, and pay less tax on those tuition dollars.

The S corporation takes a little more paperwork to operate than the proprietorship. You’ll have to file articles of incorporation with the (Secretary of State/Department of Corporations, etc.), get an employer ID number from the IRS, observe the usual corporate formalities, and manage a payroll for yourself.

And you have to pay yourself a reasonable wage for your service. That means

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something like you’d pay for an outside employee to do the same work. The IRS is on the lookout for business owners who take all their income as passthrough. They’re not likely to believe you’ll find a brain surgeon willing to work a year for ,000. That reasonable wage varies from industry to industry. But the S corporation can still be an effective tool for cutting your overall tax.

Now let’s talk about the fourth mistake:

Choosing the wrong retirement plan.

If you’re looking to save more than the ,000 limit for IRAs, you have three main choices: Simplified Employee Pensions, or “SEPs,” SIMPLE IRAs, or 401ks.

I’m not here to make you an expert on retirement plans. But I can help you decide pretty quickly if the plan you have is right for you – or if you should be looking for something more suited for your specific needs.

The next step up the retirement plan ladder is the SIMPLE IRA. This is another “turbocharged IRA that lets you contribute more than the usual ,000 limit:

You and your employees can contribute up to ,500. If you’re 50 or older you can make an extra ,000 “catch up” contribution. If your income is under ,000, that may be more than you could sock away with a SEP.

But – you have to match everyone’s deferral or make profit-sharing contributions. You can match everyone’s contribution dollar-for-dollar up to 3% of their pay, or contribute 2% of everyone’s pay whether they defer or not. If you choose the match, you can reduce it as low as 1% for two years out of five.

The money goes straight into employee IRAs. You can designate a single financial institution to hold the money, or let your employees choose. Like the SEP, there’s no set-up charge or annual administration fee.

The SIMPLE IRA may be best for part-time or sideline businesses earning less than ,000. You can also hire your spouse or children, and they can make SIMPLE contributions. We’ll be talking more about those strategies in a few minutes.

The final step up the ladder is the 401k. Most people think of 401ks as retirement plans for bigger businesses. But you can set up what’s called a “solo” or “individual” 401k just for yourself.

The 401k is a true “qualified” plan. This means you’ll set up a trust, adopt a written plan agreement, and choose a trustee. But the 401k lets you contribute far more money, far more flexibly, than either the SEP or the SIMPLE.

You and your employees can “defer” 100% of your income up to ,000. If you’re 50 or older, you can make an extra ,000 “catch up” contribution. You can choose to match your employees contributions, or make profit sharing contributions up to 25% of their pay. That’s the same percentage you can save in your SEP – on top of the ,000 or ,000 deferral.

The maximum annual contribution is ,000 per person, plus any “catch up” contributions.

You can offer yourself and your employees loans, hardship withdrawals, and all the bells and whistles “the big boys” offer their employees. 401ks are generally more difficult to administer. There are anti discrimination

rules to keep you from stuffing your own account while you stiff your employees. If you operate your business by yourself, you can establish an “individual” 401k with less red tape. And again, you can hire your spouse and contribute to their account.

If you’re older, and you want to contribute more than the ,000 limit for SEPs or 401ks, consider a traditional defined benefit pension plan:

Defined benefit plans let you guarantee up to 5,000 in annual income.

You can contribute – and deduct – as much as you need to finance that benefit. You’ll calculate those contributions according to your age, your desired retirement age, your current income, and various actuarial factors.

A 412(i) plan, which is funded entirely with life insurance or annuities, lets you

contribute even more. Defined benefit plans have required annual contributions. But you can combine a defined benefit plan with a 401k or SEP to give yourself a little more flexibility.

Now let’s talk about the fifth mistake: Missing family employment.

Hiring your children and grandchildren can be a great way to cut taxes on your income by shifting it to someone who pays less.

Yes, there’s a minimum age. They have to be at least seven years old. Their first ,700 of earned income is taxed at zero. That’s because it’s the standard deduction for a single taxpayer – even if you claim them as your dependent. Their next ,825 is taxed at just 10%. So you can shift a lot of income downstream.

You have to pay them a “reasonable” wage for the service they perform. The Tax Court says a “reasonable wage” is what you’d pay a commercial vendor for the same service, with an adjustment made for the child’s age and experience. So, if your 12-year-old son cuts grass for your rental properties, pay him what a landscaping service might charge. If your 15-year-old helps keep your books, pay him a bit less than a bookkeeping service might charge. Does anyone have a teenager who helps with your web site? What would you pay a commercial designer for that service?

To audit-proof your return, write out a job description and keep a time sheet. Pay by check, so you can document the payment.

You have to deposit the check into an account in the child’s name. But it doesn’t have to be his pizza-and-Nintendo fund. It can be a Roth IRA for decades of tax-free growth. It can be a Section 529 college savings plan. Or it can be a custodial account that you control until they turn 21. Now, you can’t use money in a custodial account for your obligations of parental support. But private and parochial school aren’t obligations of parental support. Sleep away summer camp isn’t an obligation of parental support.

Let’s say your teenage daughter wants to spend two weeks at horse camp.

You can earn the fee yourself, pay tax on it, and pay for camp with after-tax dollars. Or you can pay her to work in your business, deposit the check in her custodial account, and then, as custodian write the check to the camp. Hiring your daughter effectively lets you deduct her camp as a business expense.

If you hire your child to work in an unincorporated business, you don’t have to withhold for Social Security until they turn 18. So this really is tax-free money. You’ll have to issue them a W-2 at the end of the year. But this is painless compared to the tax you’ll waste if you don’t take advantage of this strategy.

Now let’s talk about health-care costs. Surveys used to show that taxes used to be small business owners’ biggest concern. Now it’s rising health care costs.

If you pay for your own health insurance, you can deduct it as an adjustment to income on Page 1 of Form 1040. If you itemize deductions, you can deduct unreimbursed medical and dental expenses on Schedule A, if they total more than 7.5% of your adjusted gross income. But most of us don’t spend that much.

What if there were a way to write off medical bills as business expenses?

There is, and it’s called a Medical Expense Reimbursement Plan, or Section 105 Plan.

This is an employee benefit plan, which means it requires an employee. If you operate your business as a sole proprietorship, partnership, LLC, or S corporation, you’re considered self-employed. So, if you’re married, hire your spouse. If you’re not married, you can do this with a C corporation. But you don’t have to be incorporated. You can do it as a sole proprietor or LLC by hiring your spouse.

The one exception is the S corporation. If you own more than 2% of the stock, you and your spouse are both considered self-employed for purposes of this rule. You’ll need to use another source of income, not taxed as an S corporation, as the basis for this plan.

Let’s assume you’re a sole proprietor and you’ve hired your husband. The plan lets you reimburse your employee for all medical and dental expenses he incurs for himself – his spouse (which covers you) – and his dependents.

This includes all the expenses you see listed here. Major medical insurance, long-term care coverage, Medicare, and Medigap insurance. Co-pays, deductibles, and prescriptions. Dental, vision, and chiropractic care. Braces for your kids’ teeth, fertility treatments, and special schools for learning-disabled children. It even covers nonprescription medications, vitamins and herbal supplements, and medical supplies. The best part is, this is money you’d spend anyway, whether you get a deduction or not. You’re just moving it from a nondeductible place on your return, to a deductible place.

There’s no pre-funding required. You don’t have to open a special account, like with Medical Savings Accounts of flex-spending plans. You don’t have to decide how much to contribute, and there’s no “use it or lose it” rule. It’s just an accounting device that lets you characterize your family medical bills as business expenses.

You can reimburse your employee or pay health-care providers directly. Let’s say your husband needs to pick up a prescription. He can use his own money, and you can reimburse him. Or he can use a business credit card and charge it to the business directly.

You’ll need a written plan document, which we can provide you. You’ll need to track your expenses under the plan, which we can also help with. But there’s no special reporting required. You’ll report reimbursements as “employee benefits” on Schedule C, Form 1065, or Form 1120. You’ll save income tax and self-employment tax.

If you have non-family employees, you have to include them too. You can exclude employees under age 25, who work less than 35 hours per week, less than nine months per year, or who have worked for you less than three years.

Non-family employees may make it too expensive to reimburse everyone as generously as you’d cover your own family. But, if you’re offering health insurance, you can still use a Section 105 plan to cut your employee benefit cost. You can do it by switching to a high-deductible health plan, and using a Section 105 plan to replace those lost benefits.

If a medical expense reimbursement plan isn’t appropriate, consider the new Health Savings Accounts. These arrangements combine a high-deductible health plan with a tax-free savings account to cover unreimbursed costs.

To qualify, you’ll need a “high deductible health plan” with a deductible of at least ,000 for singles or ,000 for employees and an out-of-pocket limit of ,100 for singles or ,200 for families. Neither you nor your spouse can be covered by a “non-high deductible health plan” or Medicare. The plan can’t provide any benefit, other than certain preventive care benefits, until the deductible for that year is satisfied. You’re not eligible if you’re covered by a separate plan or rider offering prescription drug benefits before the minimum annual deductible is satisfied.

Once you’ve established your eligibility, you can open a deductible savings account. You can contribute 100% of your deductible up to ,000 for singles or ,950 for families. You can use it for most kinds of health insurance, including COBRA continuation and long-term care premiums. You can also use it for the same sort of expenses as a Section 105 plan.

The Health Savings Account isn’t as valuable as the Section 105 Plan. You’ve got specific dollar contribution limits, and there’s no self-employment tax advantage. But Health Savings Accounts can still cut your overall healthcare costs.

Let’s look at a specific example to see just how much the Section 105 Plan saves. Our “guinea pig” here is a self-employed consultant, married, with two children. He pays 25% in federal income tax and 15.3% in self-employment tax.

We replaced a traditional “first dollar” insurance policy with a high-deductible plan from the same company. In this case, it meant a ,000 deductible before benefits kick in. But it cut his premium by ,620. So even if he hits that ,000 deductible, he saves ,620 in premiums. And now, since he deducts his medical costs from his business income, his self-employment tax savings add another ,156 to his bottom line. He’ll save at least ,121 – and possibly much more.

The home office deduction is probably the most misunderstood deduction in the entire tax code. For years, taxpayers feared it raised an automatic audit flag. But Congress has relaxed the rules, so now it’s far less likely to attract attention.

Your home office qualifies as your principal place of business if: 1) you use it “exclusively and regularly for administrative or management activities of your trade or business”; and 2) “you have no other fixed location where you conduct substantial administrative or management activities of your trade or business.” This is true even if you have another office, so long as you don’t use it more than occasionally for administrative or management activities.

You have to use your office regularly and exclusively for business. “Regularly” generally means 10-12 hours per week. To prove your deduction, keep a log and take photos to record your business use.

You can claim a workshop, studio, or “separately identifiable” space you use to store products or samples. The space doesn’t have to be an entire room. If you use it for more than one business, both have to qualify to take the deduction.

Once you’ve qualified, you can start deducting expenses. If you’re taxed as a proprietor, you’ll use Form 8829. If you’re taxed as a partnership or corporation, there’s no separate form, which helps you “fly under the radar.”.

First, you’ll need to determine business use percentage of your home. You can divide by the number of rooms if they’re roughly equal, or calculate the exact percentage of square footage. You can exclude common areas like halls and stairs to boost that business use percentage

Next, you’ll deduct your business use percentage of rent, mortgage interest, and property taxes.

You’ll depreciate the business use percentage of your home’s basis (excluding land) over 39 years as nonresidential property.

Finally, you’ll deduct your business use percentage of utilities, repairs, insurance, garbage pickup, and security. If business use percentage for specific expenses differs from business use percentage for the overall home – such as high electric bills for home office equipment – you can claim the difference as “direct” expenses.”

Claiming a home office can also boost your car and truck deductions. That’s because it eliminates nondeductible commuting miles for that business.

You can use home office expenses to shelter profits, but not below zero. If your home office expenses exceed your net business income, you can carry forward those excess losses to future years.

When you sell your home, you’ll have to recapture any depreciation you claimed or could have claimed after May 6, 1997. You can still claim the 0,000 tax-free exclusion for home office space unless it’s a “separate dwelling unit.”

Now let’s talk about car and truck expenses. I don’t want to take too much time here, but I do want to point out the most common mistake clients make with these expenses.

Are you detecting a pattern here? That deduction is the same for everyone, no matter what we drive. Do you think we all spend the same to operate our cars?It might surprise you to see how much it really costs to operate your car. And it’s probably more than 55 cents per mile!

Every year, AAA publishes a vehicle operating cost survey. Costs vary according to how much you drive – but if you’re taking the standard deduction for a car that costs more than 55 cents/mile, you’re losing money every time you turn the key.

If you’re taking the standard deduction now, you can switch to the “actual expense” method if you own your car, but not if you lease. You can’t switch from actual expenses to the mileage allowance if you’ve taken accelerated depreciation.

Let’s finish up with some fun deductions for meals and entertainment. The basic rule is that you can deduct cost for meals with a bona fide business purpose. This means clients, prospects, referral sources, and business colleagues. And let me ask you – when do you ever eat with someone who’s not a client, prospect, referral source, or business colleague? If you’re in a business like real estate, insurance, or investments, where you’re marketing yourself, the answer might be “never.” Be as aggressive as you can with what you define as bona fide business discussion!

The general rule is, you can deduct 50% of your meals and entertainment, so long as it isn’t “lavish or extraordinary.” The IRS knows you have to eat, so you can’t deduct it all. But they’ll meet you halfway.

You don’t need receipts for expenses under . But you do need to record the five pieces of information listed on the right side of the slide in your business diary or records. And you should do it as close to daily as possible.

The IRS wants to know how the cost of the meal, the date of the meal, the place where it takes place, the business purpose of your discussion, and your business relationship with your guest.

How many of you entertain at home? Do you ever discuss business? Are you deducting those meals, too? There’s no requirement that you eat out. Don’t forget to deduct home entertainment expenses too! You can deduct entertainment expenses if they take place directly before or after substantial, bona fide discussion directly related to the active conduct of your business. You can deduct the face value of tickets to sporting and theatrical events, food and beverages, parking, taxes, and tips.

Now that you see how business owners miss out on tax breaks, let’s talk about the biggest mistake of all. What mistake is that?

The biggest mistake of all is failing to plan.

Have you all heard the saying “if you fail to plan, you plan to fail”? It’s a cliché because it’s true. Fortunately, our tax coaching service avoids the problem.

We offer true tax planning. We’ll tell you what to do, when to do it, and how to do it. We start with a three-page “check the box” questionnaire that takes 5 minutes to fill out.

Then we prepare a written tax plan that addresses you family, home, and job, your business, and your investments. We’ll even review your last three years’ tax returns to see if we can find savings that were overlooked.

Tax Filing Help: How Do You Choose?

You should always choose a Tax Filing Advice Corporation that employs the best Tax Accountants, Licensed Enrolled Agents, Tax Attorneys, and Certified Public Accountants. Most of these professional people provide the best Tax Filing Assistance and should be able to help you avoid tax levy difficulties like a Bank Levy or a Wage Garnishment and also assistance you Avoid tax Liens from the Internal Revenue Service.

Tax Filing Assistancefrom Tax Attorneys: Another really good source of Tax Filing Advice is often a Tax Attorney. You can Stop Tax Levy Troubles and Avoid Tax Liens when you work with a Tax Attorney for Tax Filing Help. A Tax Attorney has gone to school for a long time to understand the tax code and tax laws. They know all of the loopholes feasible to support you Stop Tax Levy Situations and Stop Tax Liens.

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Tax Accountants for Tax Filing Assistance: Whenever you you need guidance crunching your numbers, use Tax Accountants for Tax Filing Advice. Tax Accountants know precisely exactly what information are necessary and how to put it all together to provide you with the Tax Filing Advice you need. They will guidance you Avoid Tax Levy troubles and Prevent Tax Liens.

Tax Filing Helpfrom Licensed Enrolled Agents: Registered Enrolled Agents are the best for Tax Filing Help. A Registered Enrolled Agent is a Tax Accountant that’s been screened extensively on tax techniques and codes. An IRS Enrolled Agent has the ability to offer superior Tax Filing Guidance given that they understand all of the pieces of information you will need to Avoid Tax Liens or Stop Tax Levy Troubles.

Strategies to Stop Tax Levy Situations and Prevent Tax Liens

Tax Filing Assistance is one of the best approaches to stop tax liens from happening. You possess a Tax Lien by default should you owe the Internal Revenue Service so filing your taxes on time and getting Tax Filing Advice are the most effective ways to Avoid Tax Levy Issues and Prevent Tax Liens that may manifest. Below are a few more tips on how to Stop Tax Liens and Avoid Tax Levy Situations.

If you wish to prevent Tax Levy problems like a Wage Levy or Bank Levy, you have to get Tax Filing Assistance. It’s hard to prevent Tax Levy challenges at the time you are in debt to the Internal Revenue Service. With Internal Revenue Service Levies within their toolbox, the Internal Revenue Service will try to collect in any manner they’re able to. They are able to make use of an IRS Bank Levy to take all the funds from your very own bank-account. An Internal Revenue Service Wage Garnishment can be utilized to seize money directly from your payroll check. Any time you make use of Tax Filing Supportand pay your taxes on time, you Avoid tax levy troubles.
You possibly can Stop Tax Liens by hiring Tax Filing Advice if you feel overwhelmed by your tax responsibilities. Should you feel like you defintely won’t be capable of filling by the time to submit you information mainly because you have too much on your plate, it’s essential to look for Tax Filing Guidance. It is always more favorable to pay for Tax Filing Guidance than to end up owing the Internal Revenue Service . Whenever you owe the IRS, there isn’t any method to Minimize Tax Liens and Minimize Tax Levy Complications that will occur if you do not paf off your tax liability.

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Best Strategy to Pass the IRS RTRP Exam

Maitland, FL (PRWEB) September 27, 2011

Fast Forward Academy has announced that they have entered into an agreement with the National Society of Tax Professionals (NSTP) for the purposes of training and preparing tax preparers for the soon to be released Registered Tax Return Preparer (RTRP) Competency Examination.

NSTP and Fast Forward Academy are joining forces to provide the most efficient RTRP exam training and preparation program available on the market. The strength of both organizations blends solid Federal Income Tax knowledge and analysis with mastered exam preparation materials and skills for the first time.

“This relationship is a natural evolution for us, as it brings our industry leading content and technology platform to a network of world class instructors.”—Rain Hughes, CEO, Fast Forward Academy, LLC

NSTP will offer Fast Forward Academy’s “IRS Tax Preparer Course & RTRP Exam Study Guide,” a comprehensive guide to passing the IRS RTRP Examination. NSTP will host “live seminars” with its experienced team of Class A instructors. In addition to using the most efficient study guide available, students can access an online test bank of questions and complete simulated practice exams before they schedule the real exam. Detailed reports provide performance results, explanations, correct answers and all the important metrics needed to Learn Fast and Pass.

About The National Society of Tax Professionals

The National Society of Tax Professionals – NSTP – is a non-profit organization founded in 1985, dedicated to “Serving the Tax Professional”. With the goal of organizing the tax professional community and assisting individuals in the business of tax to achieve a standard of recognition long overdue, the National Society of Tax Professionals has reached out to Certified Public Accountants, Attorneys, Enrolled Agents, Financial Planners and tax professionals/accountants. Our organization is a unique federation of tax professionals at every level.

About Fast Forward Academy

Fast Forward Academy, LLC provides companies and individuals around the world with the tools to help them efficiently manage their professional education needs. The name Fast Forward Academy reflects the scope of our mission – helping students and professionals accomplish more in less time. To realize this goal we make every effort to provide the most useful and efficient exam prep material in the market place, all designed to help our students Learn Fast and Pass. Our principal focus is to supply rapid training and streamlined continuing education to professionals in the fields of taxation, securities, and insurance.

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How Would a Wealth Tax Work?

Given the excessive degree of wealth inequality in the Pakistan, its phenomenal increase in recent years, and the importance of wealth as a source of social and political power, it seems incumbent upon us to consider the possibility of extending the tax base to include personal wealth holdings. Such an extension may not only promote greater equity in our society — particularly, by taxing those more able to pay taxes — but may also benefit the economy by providing households with an incentive for switching from less productive to more productive forms of assets.

Few Arguments

There are four lines of argument in favor of a tax based on household wealth. The claims are that such a wealth tax improves the fairness of most tax systems, effectively raises government revenue, can further economic growth, and could have desirable secondary, social effects by reducing economic inequality.  

Fairness: It is generally held that taxes should be commensurate with ability to pay, and the tax laws of nearly all nations reflect this to a greater or lesser extent. A household’s wealth, its net worth, along with its income, are usually considered the best measures of socioeconomic status and so ability to pay. Net worth is also a good measure of the extent to which a household has profited from the economic infrastructure provided by governments, that is all taxpayers. For instance, it can be claimed that a wealthy investor or business owner has profited more than average citizen from the public education (of the work force), roadways (for carrying on commerce), financial security for the elderly (consumers), a judiciary to enforce commercial agreements, financial regulation, government subsidies to and rescues of corporations, and so on.  

It is argued that a wealth tax would improve the fairness of a tax system particularly to the extent that it replaces taxes that are less commensurate with ability to pay and profits from government-provided financial infrastructure. Sales and value added taxes are generally regressive as to income or wealth, since the wealthy spend a smaller fraction of their income and wealth than the middle class and poor. Real estate property taxes are generally regressive on overall wealth since the tax is a fixed percentage of the full value of the home. For young, middle-class families especially, this full value is often many times their net worth, while for the very wealthy it is generally a small fraction of their net worth.  

Income taxes are often a progressive tax on “taxable income,” but they generally do not tax unrealized capital gains from investments. Unrealized capital gains are likely the largest source of investment gains, but they are generally not defined as income for purposes of taxation. Therefore, for instance, an individual with a million Rupees in an equity mutual fund may have the value of that holding increase Rs.100,000 in a year, but can pay little or no taxes on that gain (in some cases even if he redeems shares from the fund).  

Taxing unrealized capital gains directly is impractical since it would result in massive yearly swings in tax revenue for governments and even large payouts from the government in years that equity markets are down. However, a 1-2% tax on household wealth above an exempt amount of several hundred thousand Rupees, (coupled with elimination of taxes on dividends, realized capital gains and estates) would amount to a roughly 25% tax on typical investment income/gains of 4-6% (including unrealized capital gains). This tax rate would be similar to typical tax rates on income from work or interest on savings accounts. For example: The Netherlands imposes a 1.2% tax on net worth, which is justified as a 30% tax on an assumed (“deemed”) investment return (income) of 4%. This justification could be used to answer criticisms that wealth taxes represent “double taxation” or “confiscation of property.” In the United States the same construction could be used to defend a federal wealth tax as a form of income tax, which is authorized by their Constitution.  

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We have to formulate a long term policy and should propose a rate of wealth tax on the net worth of individuals, that should this be used to eliminate the national debt. 

The reduction of wealth condensation in the investing class and bringing tax rates for investment returns closer to tax rates for work could reduce excessive investment and risky investment, which create investment bubbles, which in turn often contribute to the formations of some recessions. The reduction in regressive taxes, like property and sales taxes, would reduce the tax burden on newly unemployed workers, who owe these taxes despite having no income. This would help maintain their spending power and could prevent a recession from spiraling deeper. It has also been argued that a wealth tax could encourage the investment in assets that are more productive.  

It is argued that more financial resources in the hands of the poor and middle class would improve the educational opportunities for their children. This would promote social mobility, mean more citizens reach their full potential of productivity, and so improve the economy. More economic equality has been correlated with higher levels of innovation. Increased government revenue from a wealth tax could be used to promote public investment in services like education, basic science research, and transportation infrastructure, which in turn improve economic efficiency. Increased government revenue from a wealth tax coupled with restrained government spending would reduce government borrowing and so free more credit for the private sector to promote business. A strong, steadily growing economy could in turn increase tax revenues further, allowing for more deficit reduction, and so on in a virtuous cycle.

Details

Some governments require declaration of the tax payer’s balance sheet (assets and liabilities), and from that ask for a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax is in place for both “natural” and in some cases legal “persons”.  

In France, the net worth tax on “natural persons” is called the “solidarity tax on wealth”. In other places, the tax may be called, or be known as, a “Capital Tax”, an “Equity Tax”, a “Net Worth Tax”, a “Net Wealth Tax”, or just a “Wealth Tax”.   Most of the governments levying this net worth tax are welfare states with a relatively high government spending to GDP rate.  

Some European countries have abandoned this kind of tax in the recent years: Austria, Denmark, Germany (1997), Sweden (2007), and Spain (2008). On January 2006, wealth tax was abolished in Finland, Iceland and Luxembourg. In other countries, like Belgium or Great Britain, no tax of this type has ever existed, although the Window Tax of 1696 was based on a similar concept.  

Existing net wealth/worth taxes

 France: A progressive rate from 0 to 1.8% of net assets. In 2006 out of €287 billion “general government” receipts, €3.68 billion was collected as wealth tax. See Solidarity tax on wealth.
 Switzerland: A progressive wealth tax with a maximum of around 1.5% may be levied on net assets. The exact amount varies between cantons.
  Netherlands: Interest income is taxed like a wealth tax, i.e. a fixed 30% out of an assumed yield of 4% is a rate of 1.2%. 
 Norway: Up to 0.7% (municipal) and 0.4% (national) a total of 1,1% levied on net assets exceeding NOK. 700,000.
 India: Wealth tax is 1% on wealth exceeding Rs 30,00,000. However, non-residents returning to India are given exemption for seven years.

Wealth tax causes far less market distortion, and hence, much fairer than income tax. Wealth tax hurt productivity less. If you live in a capitalistic country, then your income is yours fairly. However, wealth might not be traceable to productivity. Wealth through inheritance gained through slavery, or genocide. The link between wealth to productivity is less than the link between incomes and productivity. Hence, wealth tax discourages productivity less than income tax.  

Wealth tax also has meritocratic justification that can actually increase productivity. Property rights are effectively contracts between a person and the society. Part of the contract is that the society will protect the person’s property.  

Well, if you protect land, you should get paid right? Wealth tax is then effectively protection fee we pay to our local gangs we call governments. How much a society should get paid for protecting wealth? Natural pricing schemes will be of course something proportional to the amount of wealth protected.  

Let’s examine this issue. Wealth Tax as Protection Fee

The year is somewhere in 13th century. Kublai Khan attacked China. The peasants don’t bother fighting. Why? Because all they have, their life, they can take with them in refugee. The lands belong to landlords anyway. So just let the landlord fight.  

The Sung emperor realized this. So, the Sung court provided land sharing to peasants. Now the peasants have something worth dying for, land. However, it’s kind of late. Also, that enraged the land owning landlords who switched side to the Mongol. There goes Sung dynasty, the most prosperous country in the world at that time.  

Say a foreign investor puts 1 million dollars in 2 countries each. The first 1 million go to, hmmm… Let’s see…, No I would not say Pakistan!! Let say Somalia, where the money just goes away through local warlords. The next 1 million goes to Singapore with its strong laws and commitment to meritocracy. In which country the $ 1 million produce higher return? In Singapore of course.  

Now, say Singapore taxes wealth by 1% but gives 16% return. Say Somalia has no wealth tax but provide 0% return. Where do you want to invest your money? In Singapore…

At the end, any country that can provide return on to investors will motivate investors to invest money on that country.  

Countries will compete with other countries in trying to give better protection for investors. Countries that do it well can get away with more wealth tax and still be very attractive for investors. Investors will still put money in that country even though the country taxes a small percentage of wealth tax.  

If governments’ spending can be slashed, the rest can be given as dividend to all citizens in equal share for everyone manner. Karl Marx would love this, am I a commie or what? That’ll provide incentives for citizens all over the world to vote in favor of free market, privatization, or anything that gets money in. The more investor-friendly the countries are, the more money gets in, the more dividend those citizens will get.  

Some special arrangements should be around to prevent citizens from abusing the system by just making more kids to collect more dividends, but that’s easy to solve.  

Less Market Distortion

Say you’re equally poor. However, you’re more diligent than your peers. Then you wouldn’t pay much higher tax than your peers because you’re equally poor. Hence, wealth tax do not punish the diligent as much as income tax.  

When you’re richer, you can build factories rather than mansions. You don’t pay extra penalty for gaining income. So, you will pay the same amount of tax whether you build factories or mansions.  

It takes the same amount of military power to protect a mansion and a factory. So why in the earth factories pay more tax?  

Less Repulsive Than Income Tax

Will you invest money in a country with 30% income tax or in a country with 2% wealth tax? Well it depends. If you have a good business plan, then wealth tax is preferable than income tax. Good business plan means good returns on your investments, which means high productivity, income or profit. However, if your business plan is lousy or you just want to put your money for mansions that produce no return then income tax is preferable.  

Exchanging income tax into wealth tax will hurt incentives for good business plan much less. You’re not going to be penalized for having better business plan and earning more profit.

Higher return of investments are better not only for investors but for everybody. When businesses collapse, the ones that collapse first are usually the ones with lower returns that’s just above the margin. Things go a little wrong and those bad business plans will collapse. Income tax encourages all businesses to be like that. Wealth taxes do not penalize profit and hence will increase profit.  

If wealth tax is done in exchange of income tax, good investors would love it more and invest more money. Bad investors that governments will end up bailing out with IMF’s help can invest somewhere else.  

Doesn’t Go Berserk

No people in any country, in their right minds, would demand too much wealth tax. Why? Because too much wealth tax will simply drive investors away. Some countries can demand bigger wealth tax but only if they do their homework well, such as maintaining security and explicit consistent rules.  

At the end, there will be a nice supply and demand relationship where all countries try to provide the best capital protection and efficient economic and capital growth at the least possible cost or tax. The citizens in such countries can simply pocket the difference, which will be called profit. When citizens think like stock holders, then politicians will think like CEOs.

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Last Minutes Tax Advice with Tax Expert, Steve Kohman, CPA, CSEP Veteran Lange team member, Steve Kohman, CPA, CSEP talks last minute tax advice covering everything from making retirement contributions to filing a tax extension.

Welcome to The Lange Money Hour: Where Smart Money Talks. Hosted by Beth Bershok, with expert advice from Jim Lange Pittsburgh based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice Lange Financial Group, and how to secure Jim as a speaker for your next event visit his website at www.retiresecure.com. Now get ready to talk smart money.

Beth Bershok: Thank you for joining us, I am Beth Bershok and we are talking smart money. We are actually tonight talking smart tax money, and there is a lot to talk about because we are 1 week away from the tax deadline. First of all of course we have Jim Lange, CPA Attorney, bestselling author of the book, Retire Secure! and we drug him out of the office tonight. We have Steve Kohman; Steve you have been with Jim for what, 15 years?

Steve Kohman: Yeah, about 15 years; thanks for dragging me out of his office!

Beth Bershok: Well Steve has been busy. Steve is a CPA, he’s a specialist in estate planning, he’s a Certified Valuation Analyst and hey it’s a lot of work right now during taxes and we are 7 days away. Before we get to everything else tonight I have a quick question for the both of you: Are your taxes done?

Steve Kohman: Yeah, I did mine earlier.

Beth Bershok: Did you? Look at you go!

Steve Kohman: February 1st.

Beth Bershok: Ok Jim, just a little poll.

Jim Lange: I have been extending my own tax return for the last 30 years and will extend my return again this year.

Beth Bershok: I bring this up because my husband is also a CPA and he told me I should consider October 15th the deadline for the rest of my life. We are taking questions tonight so I want to give the studio line. It’s 412-333-9385 so if you have a question we have another hour here for you to call us at 412-333-9385 if you have a question for Jim or Steve. We also have a very special deal that we’re going to be telling you about a little later in the show, and also a couple of workshops coming up so we’ll get to that. But I do want to start with, you know a lot of people are in a frenzy, it’s the last week here, taxes are due next Wednesday and some people may be thinking that there’s nothing I can do now with the numbers. But apparently that’s not true, you can still effect 2008.

Jim Lange: Well one of the most important things that you can do for your both short-term and even more so long-term future, is, it is not too late to make a retirement claim contribution. As many listeners know in general, but not always, I tend to favor Roth IRAs for people who are still working in Roth 403(b)s. Now it is too late for 2008 to put money into a Roth 401(k) or even a traditional 401(k) or 403(b). But it is not too late to put money into a Roth IRA whether you have done your return or not. If you are married and you’re filing a joint return and your adjusted gross income is less than 9,000, you do qualify for a Roth IRA and if you’re single, 6,000 and you can do that for yourself. You can also put money in for your spouse. We’re talking ,000 if you are 49 or younger, or ,000 if you are 50 or older for yourself and the same amount for your spouse. If your kids are working or have any earned income it is not too late for them, and I think a lot of people know about Roth IRAs. But can I tell you something that people don’t know about and they’re not doing and they’re not thinking about?

Beth Bershok: Jump in there, tell me what it is.

Jim Lange: This is going to be for people who make too much money to put into a Roth IRA and they think Oh I can’t do anything else. But they can actually put money into a non-deductible IRA.

Beth Bershok: Ok, explain how that works.

Jim Lange: The non-deductible IRA: they don’t get an income tax deduction today so in effect it’s after-tax money but the money grows tax-deferred. That is, they won’t have to pay taxes on an annual basis. A lot of people have non-deductible IRAs even back when they were ,000 but now they are ,000 or ,000 and what’s really cool about non-deductible IRAs particularly with 2010 coming up , it’s not going to be very long where we’re going to be able to convert those non-deductible IRAs to Roth IRAs. We’re going to have the opportunity to take what is otherwise grown tax deferred and getting a tax-free growth, and that’s something that not many people know about that they should probably be taking advantage of and it’s not too late.

Beth Bershok: I have to jump in here one second and mention your Roth Seminars which are coming up. You have a couple of workshops where you touch on a lot of these strategies and the past couple of ones have, we’ve gone to capacity so I want to mention the dates. There’s one next Saturday it’s at the Comfort Inn on Rodi Road and that’s 9:30 to 11:30 in the morning, and also 1 to 3 in the afternoon. We just booked one for May 16th which is a Saturday, same times. We’re in Cranberry this time and it’s at the Four Points Sheridan and I’m going to give you coming later in the hour, the toll free number to call to register. They’ve really been booking up so you should book as soon as you can. But you cover a lot of those strategies in these workshops. Now getting back to the non-deductible IRAs for a second, are the limits the same that you mentioned for the Roth and the IRAs?

Jim Lange: Yeah it’s still ,000 and ,000. The income change, it’s for people who are making more than 9,000 but it’s something that people don’t know and it is a way that people who are wealthy can get into the tax-free world of Roth IRA conversions. Again, it’s not too late.

Beth Bershok: Now something a lot of people are going to have to deal with on their return this year is re-characterizing their Roth IRA from 2008 because we all know what happened to the market, and you can undo your IRA. I actually have a question on this, can I toss this out to you guys?

Jim Lange: Yeah go for it.

Beth Bershok: This comes from’“ Oh I do want to thank, we have listeners who are listening at KQV.com. They are listening all over the country and I know this because they email us. We’ve had emails from Ohio, New Jersey, Texas, Florida and Maryland, and we just got one this morning from San Francisco. This is his question, Raj from San Francisco said that he re-characterized about K. His question is, he’s turning it back over to traditional, he wants to know if that means the conversion never took place in the first place and will his AGI come down by that amount?

Jim Lange: Well, how about I give you the conceptual answer.

Beth Bershok: Ok

Jim Lange: Steve will do the tough part which is to tell you how to report it. Conceptually, I would consider that an undo. So let’s say that you have done a Roth IRA conversion sometime in calendar year 2008, and lets just say that he did it for ,000 and now it’s worth ,000 or ,000 and he’s not so happy about it. If he doesn’t do anything pro-actively he is going to have to pay income tax on ,000 and the Roth IRA is only worth ,000 or ,000. So undoing or technically re-characterizing is the appropriate strategic thing to do and he has until October 15th of 2009 to re-characterize his 2008 Roth IRA conversion. If he has not yet filed his tax return and he re-characterizes, Steve is going to explain the mechanics of that.

Beth Bershok: I think that’s the deal Steve.

Steve Kohman: Ok

Jim Lange: If he has already filed his tax return he can file an amended return, but it is very important to know that you can re-characterize. So even people who should be making Roth IRA conversions now in 2009, if it doesn’t work out, if you make a Roth IRA conversion and the market goes down, you will still have the opportunity either in 2009 or up until October 2010 to re-characterize. Now maybe Steve can help us with some of the mechanics on how to handle that on the 1040.

Steve Kohman: Yeah it’s really not as hard as it sounds and the thing that throws people off is when they do a re-characterization, the amount of money that goes back into your traditional IRA is less than what you converted. And also people get confused when they get a 1099 for the re-characterization. They don’t really know what to do with it and they see it has a distribution code and they get confused. But that’s really simple to handle on your tax return. Ordinarily, if you did a conversion you’d put the gross amount on 15 (a) for gross distributions from IRA and the taxable amount, the same amount, maybe ,000. But if you have to amend the return or re-characterize it, then the taxable amount on 15 (b) is just 0. So it’s very simple, just put a 0 on 15 (b) which is 0 taxable income and your pretty much done. I would make sure you keep paperwork and understand the dollar amounts that flow in and out of the Roth IRA in case there are any questions on it later.

Beth Bershok: So what basically happens if you have already filed your return? Let’s say for instance Raj already filed his return then he decided to re-characterize, he can still file an amended return?

Steve Kohman: Yes, he can file an amended return and claim a refund of the full ,000 he converted.

Beth Bershok: Okay and if you have a question for Jim or Steve we are taking them tonight at 412-333-9385, we’ll be here until 8 o’clock, it’s The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking more smart money on The Lange Money Hour: Where Smart Money Talks. I’m Beth Bershok. Jim Lange with us today and of course also joining us Steve Kohman who has been part of Jim’s office for the past 15 years. Steve is a CPA, he’s a specialist in estate planning and a Certified Valuation Analyst. And we’re going to be taking your questions too, so call 412-333-9385 if you have a question. Steve, there are a lot of things that are new for this year, that I think are causing some confusion for people, and can we touch for a second on the Housing and Economic Recovery Act of 2008.

Steve Kohman: Yes.

Beth Bershok: And one thing that is causing some confusion is the first time home buyer refundable tax credit. Can you explain first of all exactly how this is working?

Steve Kohman: Well actually it was a very good deal when it first came out in 2008. It allowed first time home buyers to get ,500 back on their tax return, even if they didn’t owe that much in taxes so it’s a refundable item. People who bought a home in 2008 that qualified got that much money back and are eligible for that, and if you don’t know about that it’s a really good deal for 2008.

Beth Bershok: So if you bought a home in 2008 you should be considering this on your return?

Steve Kohman: Yeah, so think about that if you bought a home in 2008. But the bad news is that it would have been better to buy the home in 2009 because in 2009 they changed the law again and made the credit not refundable. The original one from 2008 you had to pay back over 15 years, 0 per year on your next 15 year tax returns but in 2009 if you keep the home for 3 years you don’t have to pay it back at all. And that qualifies for homes purchased between January 1st 2009 and December 1st 2009.

Beth Bershok: So you actually get quite a break if you buy your house in 2009.

Steve Kohman: Yeah between now and November 30th, I don’t know why it has to stop December 1st.

Beth Bershok: Yeah why does it have to stop? It’s just one of those things. We do have a call coming in from North Park and this is a question on Roth IRAs. Hi good evening and what is your question..

Caller #1: The question is, I contributed some money to a Roth IRA and I think I have to take it back because of certain reasons. I have to take it out or it will be an excess distribution because I’m not eligible for the Roth IRA. So what happens now, do I have to take out all the money that I put in? I put in ,000. Or because the market value has gone down on my portfolio then do I take out ,000 then what? How does it work?

Steve Kohman: Well you have to call your broker and tell them you would like to re-characterize the Roth conversion, perhaps it’s because you never qualified for it in the first place.

Caller #1: Ok

Steve Kohman: Or it could be because it went down in value, it doesn’t really matter why. Anyone can re-characterize their contribution. So, yes it would be going back to either the traditional IRA or you can..

Caller #1: No, I don’t think I can contribute to any one of them because my income is social security and pension income. It’s not earned income.

Steve Kohman: Right, you didn’t have earned income. So yes, it was a failed contribution so you’d have to contact them and explain that to them. Then you’d have to take that money back out of the Roth IRA, that’s correct.

Caller #1: Yeah, the question is, if for example, I put in ,000 and there’s nothing else in that portfolio except for that ,000 stocks, whatever I bought. Now they’re worth ,000 so I can’t withdraw more than ,000.

Steve Kohman: Right yes, it would be ,000 that goes back in there. There may be some tax benefits to the amount of loss you suffered during that period of time.

Caller #1: I see

Steve Kohman: You’ll have to look into that, yeah, but that’s correct.

Beth Bershok: Ok was that helpful?

Caller #1: Yeah it was, thank you so much.

Jim Lange: And I’m going to do what people hate and tell you what you should have done.

Jim Lange: Rather than making a Roth IRA contribution, what could have been done was a Roth IRA conversion. I am a big believer that retirees should come up with, probably with the help of an adviser, but should come up with a long-term Roth IRA conversion strategy. Perhaps, and without knowing more about your situation, but I might take the liberty of guessing, it might be appropriate for you to make a series of Roth IRA conversions, even if a relatively small amount over a number of years, that might have been a more appropriate strategy for retirees.

Beth Bershok: Hey thank you so much for your call , does that answer your question?

Caller #1: Yes it does thank you.

Beth Bershok: Thank you so much, he was checking in from the North Park and if you have a question its 412-333-9385, Jim Lange and Steve Kohman. I want to jump to the Worker Retiree and Employer Recovery Act of 2008 because I think this effects a lot of people. This has to do with the RMD suspension of 2009 where seniors do not have to take their RMD. But its caused a lot of confusion on exactly how it works, and some confusion also on what to do with your taxes there. So, let’s start first with how it works for 2009 in terms of you don’t have to take your distribution, can you take a partial distribution?

Jim Lange: Yeah you could take a partial distribution and technically you really don’t even have to do anything. You can just sit there and say guess what? I don’t have to take a minimum required distribution this year and my taxes are going to lower. I’m likely to be in a lower tax bracket and thank you very much Congress. You could take that passive role and you would be fine with it, assuming you do not need the money from your minimum required distribution for your ordinary expenses. But that’s step 1. What ‘d like to do is go a step deeper and say let’s think about this for a minute. You’re retired, you don’t have any income from work or even if you do that’s not your major source. You have minimum required distributions that normally, not for 2009, but normally would push you into a higher tax bracket. Now since you don’t have to take a minimum required distribution because of this one year rule, you’re into a lower tax bracket. Rather than just saying thank you very much, I’ll be in a lower tax bracket this year, I would proactively say Hey, this is a great opportunity to make a Roth IRA conversion at what is likely the lowest income tax rate that you will ever be in for the rest of your life, even forgetting tax raises in the future which I believe are almost inevitable. Your personal rate will be lower because you don’t have your minimum required distribution. I used to tell people the best years to convert was after you retire but before minimum required distribution. Now people over 70 are going to get this one year reprieve of having no minimum required distribution and likely be in the lowest rate they will ever be in.

Beth Bershok: It’s sort of an accidental bonus, really.

Jim Lange: It is an accidental bonus; I do not think it was intended for people who have a reasonable amount of money to be able to exploit and proactively take advantage of. In fact, other than the sources that I have come up with, and you know we’ve done press releases that were recognized all over the country in many major newspapers, nobody else was saying be proactive about this, do a Roth IRA conversion this year and depending upon the numbers you can be ,000s, 0,000s down the road for your family – even a ,000,000 better off.

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Beth Bershok: Steve wants to jump in with something.

Steve Kohman: That’s a great plan for people who have a good income and maybe a lot of money but there is a trap there though for some people who don’t, and who have social security income. That is the strange part of the tax law that makes more and more of your social security income taxable, the more income you have. Without their MRD’s for 2009 they could end up owing very little or no tax at all on their income. If they had the MRD they can calculate their tax with and without what would have been their MRD, and they might be paying 25%, 35% tax on what would have been their MRD or Roth conversion perhaps, unless it’s a large conversion amount. It makes it seem like a high tax on the next incremental bit of income that they have, like from a Roth conversion. There is a trap there; I would run the numbers to make sure it makes sense for you.

Beth Bershok: Actually tha’s one of Steve’s niches – doing the projections on situations like that.

Steve Kohman: Yeah and it’s just a strange part of the tax code that makes people with less income in extremely high tax brackets. There’s many other things that do that, there’s tax credits that phase out, itemized deductions, retirement savers, credits – all kinds of things that just go away the more money you make so you’re taxed higher than anyone else when you don’t have much money.

Beth Bershok: All kind of unusual things in the tax code aren’t there Steve?

Beth Bershok: We are talking smart money, The Lange Money Hour: Where Smart Money Talks. When we come back here in just a second we do have a very special deal that I am going to tell you about and if you want to call in it is 412-333-9385 The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: The Lange Money Hour: Where Smart Money Talks. I’m Beth Bershok, with Jim Lange and Steve Kohman tonight. We’re talking taxes because we are 1 week away from the tax deadline and before we continue we have a very special deal. It has to do with extensions because at this point you’re thinking ooh it’ s 1 week from the tax deadline, there is no way ‘m going be able to wrap this up. So at our office which is in Squirrel Hill and I’m going to give a toll-free number because this is good if you are a resident of Pennsylvania. The professional staff is offering to do free extensions. This is what you’ll have to do, give us a call, the number is 1-800-387-1129, give us your name, your phone number and relevant information. What they are offering to do is take care of the extension in terms of – you guys will do the paperwork, right? Now, you’re not going to do the estimate at this time so they have to have some kind of idea of what they owe. And then they’ll make sure it’s delivered and then one of the accountants will meet with you later, to make sure that everything is filed by October 15th. So, that’s the offer of a free extension if you’re listening tonight, this is good for PA residents and you can call the office at 1-800-387-1129. You can call the office tomorrow morning in fact and we’ll take care of that. We’ll just need your name, phone number and then we’ll get that going for you. Now you guys want to talk about capital gains, am I reading this right? There’s a new 0% tax rate on long-term capital gains and qualified dividends.

Steve Kohman: Yes there is and this is another part of the tax code that is very strange.

Beth Bershok: Steve loves the tax code

Steve Kohman: There’s a 0% tax rate on qualified dividends and capital gains up to what would have been your 15% tax rate. For example, if you’re married filing a joint return you can have ,100 of taxable income which is the top of the 15% bracket and not pay any income tax. Let’s say your itemized deductions and personal exemptions are ,000, say you have ,000 of taxable income. Let’s say you have ,500,000 worth of good blue-chip stocks that paid dividends and you make ,000 of dividends. Well guess what, you don’t pay any tax – another strange quirk of the tax code – people with ,500,000 don’t pay any tax!

Beth Bershok: It is a strange quirk, that’s very interesting. How do you keep up on all these changes in the tax code, seriously how do you keep up?

Steve Kohman: Well you see them when you do a lot of tax return work and different situations people have. One of the things that’s important on your tax return is taking the capital-loss carry over. People have a lot of capital losses this year with the stock market and had some last year and it’s important if you have a situation where you have lost money in the stock market, to do a little tax loss selling to create your capital loss. Because if you don’t sell stocks you won’t have the capital loss, and some mutual funds still kicked out capital gains distributions, and you certainly don’t want to pay tax on capital gains this year, or next year when you’ve been losing money.

Beth Bershok: Do you think a lot of people miss these? Do you think a lot of people are doing their returns and their missing the 0% tax rate because they’re trying to do it themselves and they’re unaware of these parts of the tax code?

Jim Lange: Well that’s possible. That’s Schedule D where you calculate the capital gains and qualified dividends tax worksheets, one of the most complicated parts of the tax return and virtually everybody has that as part of their tax return. I recommend doing it with a tax preparer or a computer, doing it by hand is very difficult these days.

Beth Bershok: 412-333-9385 if you have a question for Jim or Steve. Something else that is possible – reduce your college tuition cost. How is that possible?

Steve Kohman: Well it’s always been for the last few years, a very good tax credit available for people, the Hope Credit and Lifetime Learning Credit. It’s potentially giving you up to ,000 dollars per student for the Hope Credit. There is good news on the horizon for 2009, a lot of people may have been phased out with this credit because their income was too high and in 2009 the phase out range has jumped quite a bit, for a married couple from 6,000 of AGI up to 0,000. So it’s going to be much more relevant to a lot of people – a lot more people in 2009 and the amount is jumping from ,800 up to ,500 for the Hope Credit. Also another bonus is the Hope Credit is valid on spending money for books as well of just tuition for 2009 so it’s improved quite a bit, and people should be aware of that.

Beth Bershok: Something that I think a lot of people miss, you know if you sit down trying to do your taxes yourself you miss, you overlook some deductions and something that Steve pointed out earlier was review frequently overlooked medical expenses. Steve, take us through some of those.

Steve Kohman: Well there’s basic things, one of the things people miss is the medical care insurance premiums that are withheld from your social security income. That’s part of a medical expense, there’s also your basic things like prescription costs, co-payments and also long-term care insurance. One of the things that’s frequently missed for self-employed people is that the deductible long-term care insurance premiums and the Medicare insurance premiums also qualify as self-employed health insurance deductions where you can get it on the front page of your tax return, even if you don’t have enough medical expense to use it as an itemized deduction. So that’s some things to be aware of. Some other things that you might not know is if you have an elderly parent who’s in an assisted care facility and needs help with daily living and chores, you can get them certified as chronically ill and deduct the entire cost of living in the facility, like a nursing home; that would be deductible also as a medical expense. It would be a long-term care expense in that case, if they’re certified as chronically ill.

Beth Bershok: You know a lot of changes for this year. Jim, there’s a difference in the Estate and Gift Tax law this year as well, no, ok? What did you want to cover? More medical expenses?

Jim Lange: I actually wanted to point out something, you asked Steve a very interesting question, you said How do you keep up on this? And Steve said well you know, I prepare a lot of tax returns which is even more valuable than reading all the advanced sheets that tax preparers get. I think a lot of times what people miss isn’t necessarily missing deductions on the return when they do the return themselves, but they miss planning opportunities. I’ll give you an example, tax-loss harvesting when you offset capital gains and losses. That should be done before year end and if you prepare your own taxes and you don’t think about this stuff and you don’t get a letter from a CPA firm saying hey, it’s time to do tax-loss harvesting and here’s how you get it, you might not think about it. Lets even say that somehow somebody tells you about it. Steve just mentioned the deduction if you can get an elderly person certified as chronically ill. Well let’s say you have a ,000 or ,000 or even a 0,000 medical expense that now becomes deductible and you only had say ,000 or ,000 of income. To me that is an opportunity to make a very significant Roth IRA conversion that could have an enormous impact for the family later on. So, it’s both tax preparation but it’s also the planning that goes into it that I think people have to be aware of.

Beth Bershok: And speaking of Roth IRA conversions we have a question, we have Bob on the line from Penn Hills who has a question about Roth IRA conversions. Hi Bob, what is your question?

Bob: Hi, if you make a Roth conversion do you also have to file an 8606 form along with that when you are returning your tax return?

Beth Bershok: 8606, that sounds like something Steve would know off the top of his head.

Steve Kohman: Well, they did change the 8606 a little bit from last year. I think you have to complete it when you take money out of a Roth IRA but you should keep track of your basis of Roth IRAs and the conversion would be part of that. I’m not sure that it’s really required on the 8606 this year.

Beth Bershok: Bob, you have a Roth IRA?

Bob: I made a conversion and my computer program spat out an 8606, but it didn’t completely fill it out and I was curious to whether that was a requirement or just supplementary information?

Steve Kohman: Yeah I just looked at that 8606 and it says complete this part of you took money out of a Roth IRA, so I guess you don’t have to at this point.

Bob: Ok, thank you very much

Beth Bershok: Thank you Bob.

Jim Lange: Steve you’re going to have to help me out on this. Isn’t the 8606, when I think of 8606, maybe I have the form wrong, I’m thinking of the basis that you have to keep track of for your non-deductible IRAs because if you make a non-deductible IRA contribution then you should be keeping track of what is deductible and what is not, and I thought that that was the purpose of form 8606.

Steve Kohman: They expanded the purpose of 8606 to cover Roth IRAs to keep track of the basis of them because you can only take out so much from your Roth IRA before you’re 59 ½ before you pay tax on the earnings. Now that rarely happens but it does have to be kept track of.

Jim: And what I would say, what’s really valuable about the 8606 is keeping track of the after-tax dollars because one of the things that we will be talking about at the two seminars, that Beth Bershok is going to give you the times and dates on, is how to make a Roth IRA conversion from money that you’ve already paid tax on in the form of a non-deductible IRA.

Beth Bershok: That’s one of Jim’s favorite strategies.

Jim Lange: That actually is! It’s so cool particularly for people who have after-tax dollars in their retirement plan. We show how if you have even just say ,000 of non-deductible IRAs or after-tax dollars and a retirement plan, that you can be 0,000 better off in the future and you know how much it cost you in taxes now to be 0,000 better off in the future?

Beth Bershok: How much?

Jim Lange: Nothing, Nothing.

Jim Lange: Doesn’t work for everybody but it is one of my favorite strategies and we’ve done it multiple times in practice.

Beth Bershok: We have graphs in fact in the workshops, and if I’m not mistaken, Steve you’re the one who did the graphs for that workshop. Am I right?

Steve Kohman: Yeah sure.

Beth Bershok: Well here’ the deal, I’m going to take this second to tell you when the workshops are because we really do go through all of this and it’s coming up next weekend. It’s at the Comfort Inn on Rodi Road and we’re doing one from 9:30 to 11:30 in the morning and then 1 to 3 in the afternoon.

Jim Lange: When you say next weekend you mean April..?

Beth Bershok: 18th

Jim Lange: 18th , Right not this coming Saturday.

Beth Bershok: Right, exactly. Not this coming Saturday, it’s going to be April 18th and you do need to tell us when you call to make your reservation which session you want to go to, 9:30 to 11:30 or 1 to 3. And by the way the phone number for that to register is 1-800-748-1571. The next one we already have on the calendar because we’re reaching capacity every time we do one of these seminars. The next one is set for Cranberry at the Four Points Sheridan on Saturday May 16th same times, its 9:30 to 11:30 and then 1 to 3 in the afternoon 1-800-748-1571, you need to tell us what session you want to go to. I don’t think I’ve ever mentioned this but one of the cool things about going to these, not only do you get these great strategies but you get a copy of Jim’s book, Retire Secure! Pay Taxes Later, all of the graphs are in there, all of these strategies and it was a number 1 best seller on Amazon.com so you get to go and get all these great strategies and you also get a free copy of the book. Also if you want to find out more about the seminars, we always have them posted. They’re on our website all the time, the ones that are coming up, so you can always check in at www.retiresecure.com for the latest on that. And we’ll be back in just a minute with more tax strategies as we get close to the tax deadline. It’s The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: The Lange Money Hour: Where Smart Money Talks. I’m Beth Bershok, with Jim Lange and Steve Kohman today. We’re one week away from the tax deadline, going through some great strategies because it’s still not too late for 2008. If you have a question, its 412-333-9385. We’ve had people checking in from North Park and Penn Hills and we only have about 20 minutes left so if you have a question 412-333-9385. One quick second, Jim you mentioned just a few minutes ago about how important it is not just when you’re doing your returns but we really need to plan in advance some strategies, and it really helps to see a financial professional. When should you start doing that for next year? Looking ahead to 2009, is it too early now?

Jim Lange: If you go to particularly a firm that prepares tax-returns now and you say I want to do some planning for 2009, they’re going to have your head! On the other hand, one of the best times is actually after April 15th. After typically a return has been filed or extended and you are in a mind frame that you are thinking about taxes. Personally, I think one of the best times to talk to a financial advisor is actually after you have done something proactive. To learn a little bit before you go to the adviser such as going to a workshop or actually reading something and being motivated. Right now, there is such a fear of what’s going on with the economy that people are sometimes forgetting the big picture, and that is taxes can make an enormous difference and I would say particularly today, it’s even more important to get tax strategies right as well as investment strategies.

Beth Bershok: That’s why you should check with a financial professional?

Steve Kohman: I would say that yes, it’s important to go see your tax advisor for planning. Although part of that planning moves to occur early in the year. For example if you planned in the fall to do Roth conversions in January of 09 because you knew you weren’t taking your minimum distribution, you could of jumped on a really good opportunity when the stock market was at 65,000 and done a conversion when the taxes would have been very low on your conversion. So, the plans should be set up in advance, maybe fall is the best time for the CPA to see you.

Beth Bershok: Well because the CPAs are frequently golfing in April, May, June, July and August. Am I right?

Steve Kohman: Well late April maybe, yeah, ok

Steve Kohman: But yeah, the planning process will involve actions to be done throughout the year.

Beth Bershok: It makes it easier for you, I’m guessing? If clients come in and they’re doing some planning with you, it makes it much easier for you when you’re doing their return. Back to estate and gift tax laws; there have been changes..

Jim Lange: I’m going to throw in one more.

Beth Bershok: Ok, sure.

Jim Lange: Steve made a great point, if you had done it early you would have taken advantage of the benefit. Let’s say for example though, it went the other way. Then you would still have time to re-characterize then do another Roth IRA conversion. So sometimes earlier in the year is more appropriate than later in the year. People often come in for year-end planning, but sometimes early year or mid-year is even more effective.

Beth Bershok: Well sometimes year end planning, when you guys say year-end planning you mean 4th quarter but some people mean December 29th. So ..

Jim Lange: Sometimes it’s tough to get things done that late in the year, so it makes sense to get in there before Thanksgiving.

Beth Bershok: Ok, can we talk about real quick, I just want to get in that the gift tax went from ,000 to ,000 am I right?

Jim Lange: ,000 to ,000 is the amount of money you are allowed to give to an individual without eating into your once in a lifetime exclusion.

Beth Bershok: Oh it’s up to 13?

Jim Lange: Right so if you were in the habit, or if you are interested in making gifts to your kids, now you can give them, typically kids it could be anybody, but if you are in the habit of making gifts to your children and you want to give them the maximum amount that you are allowed to give without eating into your once in a lifetime exclusion, it would be ,000 per beneficiary if you are married and your spouse joins in the gift that would be ,000. And I am a big fan of gifting, assuming you can afford it and I happen to like 3 types of gifts. I like just straight forward gifts to children, say Happy Birthday or Merry Christmas or whatever it might be, here’s some money. I also like section 529 plans which are typically educational forms of gifts usually done for grandchildren, sometimes for children. And I also like Life Insurance, and in particular if you are married, second to die life insurance policies and I actually like a mix of all 3 of those types of gifts.

Beth Bershok: Well the Second to Die Life Insurance, that’s something else that we cover in our workshops too, and there’s a lot of great information on that in the book, Retire Secure!. 412-333-9385 about 15 minutes left if you have a question for Jim or Steve. Something else that Steve recommends is check to see if your children are subject to the Kiddy Tax. Steve, can you first of all explain what that even is.

Steve Kohman: Well the Kiddy Tax is almost a young adult tax now because they’ve raised the age for kiddies from 17 up to 24.

Beth Bershok: Oh that’s not a kiddy, that’s not a kiddy at all!

Steve Kohman: So basically the rule is if they have a lot of investment income, that i’s taxed at their parents marginal tax rate which ends up resulting in more tax. It’s something to be aware of, they’ve changed the rules in that regard. It’s a long held tax planning strategy to shift money to your kids so they pay income tax at their lower rates and it’s still a valid planning technique. The thing now is that even kids in college can have the Kiddy Tax applied to them so it’s a little complicated to go over in this show. It’s something tha’s changed and maybe not for the better but the planning opportunity is still there to transfer money to your kids. Transferring money to your kids is something that happens when you do the ,000 a year gift like Jim was talking about. The gift is also a good strategy for estate planning because it reduces estate tax, but even people that aren’t subject to federal estate tax or subject to the PA inheritance tax, some planners never mention that it’s 4.5% tax for money going to your kids and it could be over 10% for money going to other people, other relatives. So it saves a lot of money doing gifting if you’re a person who has a lot of wealth and wants to transfer to other people sooner or later.

Beth Bershok: What’s the deadline for that from year to year, is it the end of the year?

Steve Kohman: Yeah that sort of thing is done every year on a calendar year basis, it can be done every year.

Beth Bershok: So it’s that amount every year, so now it’s ,000 you could literally between you and your spouse do ,000 every year to each beneficiary.

Steve Kohman: To each person without filing a gift tax return. But even if you go over those amounts, if the child or person needs a lot of money and you want to help them out, you can file a gift tax return it’s not always that complicated of a thing to do and we’d be happy to do it. Usually you don’t pay any tax when you file a gift-tax return unless your gifts total more than a ,000,000 in your life.

Beth Bershok: I have a question just in general, because you know we’ve been mentioning that you should see a financial professional and do some planning. When you guys see new clients or you see tax clients at this time of year, what kind of information do you need them to bring? Because I know that some people, and this sounds like it’s really a joke but people do this, they bring like a big old shoebox and they have all kinds of receipts, and all kinds of documents just scattered around in the box. Makes it a little difficult, first of all I’m sure you’d like to see it organized but really what do you need to see so you can start making some plans for a client?

Steve Kohman: Well not only do you want to see all the 1099’s and deductions that the person has, the 1099 forms are critical of course and the W2s. They pretty much are sent to you in January, maybe February of every year, automatically. They come in a little envelope that says Important Tax Document here, so you just put it in the file and give it to your CPA. I prefer clients who take it out of the envelope so then I don’t get paper cuts when I open the envelope.

Beth Bershok: Well that’s getting a bit picky, Steve.

Steve Kohman: But other than that i’s lists of charitable contributions, business deductions and if you have other sources of income. You sort of make a list of that, it can be a handwritten list; it’s not that big of a deal.

Jim Lange: And that’s assuming you want to get your tax return prepared professionally. If you are in for a strategy meeting which is done with one of our sister firms, The Lange Financial Group as opposed to The Lange Accounting Group and typically those meetings would be with me. I’m actually more interested in a list of assets and a tax-return. We actually have a sample list of assets that have blank forms or blank spaces that you can fill in. So for me when I see a client I like to have in front of me a list of assets and a tax return.

Beth Bershok: But this is helping you do general financial planning, that is why you need to see that.

Jim Lange: Right, I’m much more interested in the big picture and in order to give somebody advice on the big picture, I have to know if they have 0,000 or ,000,000 ..

Beth Bershok: Well it makes a big difference, it makes your strategy completely different. 412-521-2732 is the office number. So say for instance one of these things interests you and you want to some financial planning done that would be the number to call, 412-521-2732. I do have, we talked about earlier a special offer that we’re just tossing out tonight tha’s good for the next week and I’m going to tell you about that in just a minute. It’s the Lange Money Hour: Where Smart Money Talks.

Beth Bershok: We are talking smart tax money tonight, the Lange Money Hour: Where Smart Money Talks. I’m Beth Bershok, with Jim Lange and Steve Kohman. One week away from the tax deadline and we’re just minutes away from wrapping this show up, so if you have a question for Jim or Steve the studio line is 412-333-9385 get your question in here in the last few minutes. Now we have a special offer and that is an offer of a free extension and this is what me mean by that. First of all I should point out that this is for PA residents only. But here’s the deal. If you call the office and this office is in Squirrel Hill, and you say I want to take advantage of this free extension and I will give you the number here in just a second, the professional staff will actually do the paperwork for you. Now, at this point in time they’re really busy, they’re not going to have time to do your estimate which you still have to pay. So you’re going to have to take care of that but they will do the paperwork. They will make sure it’s delivered; they will make sure the check is delivered; and they will make sure it’s hand-stamped. They’ll take care of all of that and then they will meet with you after April 15th and make sure they can get your extension rolling. It’s 1-800-387-1129 and Jim and Steve, you guys are making that offer for any PA resident?

Jim Lange: Yes we are. Keep in mind though that the extension is an extension to file, it is not an extension to pay. So, if you owe money you have to take it in. One of the nice things about doing it with our firm, or for that matter most any CPA firm, is that we physically hand deliver the extension to the IRS. We get it stamped so there is proof positive that that extension went through as opposed to waiting until midnight on April 15th and you don’t know when the IRS actually gets it.

Beth Bershok: So you guys are willing to do that in the next week. You do have to call the office at 1-800-387-1129 and just give us your name and phone number and they will get that all worked out for you. Real quickly, you mentioned that it’s not an extension, it’s an extension to file its not an extension to pay. What if you miscalculate?

Jim Lange: You might owe a bit of penalty and interest. On the other hand, a lot of times you don’t owe anything. The most prudent thing to do, if you think you might owe something to probably put some money in when you file for an extension, just in case.

Beth Bershok: Just in case so you don’t end up with penalty and interest.

Steve Kohman: The typical procedure is that you would add your estimated tax for the first quarter into the extension payment so if your off by a little bit you’re going to be covered for 2008 and it will adjust the estimated taxes for the next year. So that’s the typical strategy, you add the first quarter estimated payment to the extension payment.

Beth Bershok: Now it takes out the confusion though if you take advantage of this free extension offer because you guys will do all of the leg work on it. So, 1-800-387-1129. OK looking ahead to 2009 and i’s not really too early to start planning. Steve has some ideas for you.

Steve Kohman: Here’s a planning technique not only for 2009 but also for your tax return for 2008 if you haven’t filed it yet. And if you did file it incorrectly you can amend it. But for people who take the standard deduction and own a home, there’s an additional deduction for real estate taxes that you didn’t have last year and in 2007 it didn’t exist. But for 2008 you get to add up to ,000 on a joint return to your standard deduction amount for real estate taxes. Even a simple tax return can get this extra deduction and save you a couple of hundred dollars in taxes. That will again occur next year in 2009, and another good thing for 2009 people may not be aware of and now I’ll point it out. If you buy a new car between now and the end of the year, actually if you bought a car from February 16th, 2009 through the end of the year, you can deduct the sales tax on the purchase of the new car.

Beth Bershok: That’s new?

Jim Lange: That’s new.

Beth Bershok: I was going to say When did that one crop up?

Jim Lange: It adds on to your standard deduction so you don’t need to itemize deductions to do that. It’s good on sales tax paid on the first ,500 of a new car.

Beth Bershok: I have to back up when you mention these kinds of things because it just seems like there are so many new things. Because I’m married to a CPA, I don’t do my own taxes so I don’t look at the return, so I don’t really know. Is this information in front of you when you are doing your tax return? Do you know to do this?

Jim Lange: Not always, people may get the forms and just fill them out the way they did last year. They may not be aware of that.

Beth Bershok: How would you be aware of that?

Beth Bershok: Umm, well let’s see, how would I not know? It’s hard for me to answer because I know!

Jim Lange: By the way that is an interesting point because one of the nice things about Steve is that he’s not only, and we really haven’t talked about this facet of his career. Where he does all the charts and he does all the number-running for Roth IRA conversions and after-tax dollars and Roth IRAs and the different strategies, which is already unusual. But what’s very rare is the combination of somebody who understands the strategies and understands the mechanics of doing the tax returns. I remember an old law professor of mine used to say If you don’t know where it is on the 1040, then you don’t really understand it! And I think there’s something to that and one of the advantages of working with Steve is that he has both.

Steve Kohman: One of the things about these tax laws that if you don’t pay attention you are not really aware of what is going on, you might make mistakes. One of the things people did in 2008 was they went out and bought an energy efficient improvement for their home, insulation, maybe new doors or new windows and thought they were getting a tax credit, and then they took it into their CPA and they had to be told They didn’t pass that law, it doesn’t apply for 2008.

Beth Bershok: Why would they though?

Steve Kohman: It applied to 2007 purchases everybody knew about it and said look at this tax credit, we’re going to get it for 2008 and then they went and spent the money and didn’t get it for 2008. They didn’t extend that part of the law which was expected to be extended. But the good news is for 2009 and 2010 the energy efficient home improvement credit has tripled to 30% with a new ceiling of $ 1,500, so it’s a much better credit and it will apply for 2009 and 2010.

Beth Bershok: How long do you have to file an amended return if you realized you made a mistake, or you missed one of these things. Let’s say somebody is listening right now, they already filed their return and they just found out about the car – the real estate tax. What if they just found out about that?

Steve Kohman: Well actually they have actually 3 years to file an amended return from the due date of their original return which will be 3 years from the April 15th of this year, so its quite a good bit of time. You have plenty of time to correct a return.

Beth Bershok: I want to real quick, because we are running out of time, this is always a question, married filing jointly or married filing separately. How do you know which one to do?

Steve Kohman: Well it’s typically better to do married filing jointly. Married filing separately is worse than single filing which you aren’t allowed to do once you’re married. So your status of marriage at the end of the year dictates how you have to file. You can’t file single if you’re married on December 31st and there are situations where it could be a tax benefit to file separate returns. It takes some considerable calculation to come up with that result. Our office handles that, we use computer programs to calculate the advantage that that might be.

Beth Bershok: Jim, any last minute thoughts on your 2008 taxes before we wrap up?

Jim Lange: I think the important thing is think long-term in addition to short-term. Get in the Roth IRA contributions for yourself, for your spouse, maybe even your kids. Do the non-deductible if your income is high enough and move forward and plan for the future.

Beth Bershok: And I want to recommend strongly, one of our workshops because they are coming up. I want to mention the dates again. Next Saturday which is April 18th, Comfort Inn Rodi Road 9:30 to 11:30 in the morning, 1to 3 in the afternoon. Same times for May 16th which is also a Saturday. That’s at the Sheridan Four Points in Cranberry and you can register by calling 1800-748-1571. You can also check out our website which is www.retiresecure.com. And I want to mention that by next week the audio to this show, if you missed it and you want some more ideas will be posted on that website so check it out at www.retiresecure.com. Thank you so much Steve for joining us. Are you going to get back to the office and do more returns tonight or.

Steve Kohman: I’ll be up till midnight. The end is coming soon.

Beth Bershok: Jim Lange, Steve Kohman, thank you guys so much. We have a very special guest, two weeks from today, Paul Merriman, and we’ll be telling you more about that on our website, www.retiresecure.com. It’s the Lange Money Hour: Where Smart Money Talks.

Prepare yourself for the best in Roth IRA conversion information available today! Jim Lange, JD/CPA, is now available to train your team anywhere in the country – training financial advisors and insurance professionals. For more information on Jim’s availability and fee, contact Nicole DeMartino, CLTC, Marketing Director at 412.521.2732/1.800.387.1129, nicole@paytaxeslater.com or visit http://www.retiresecure.com/speakertour.php.

A tax code is issued by the HMRC and used by your employer or pension provider to calculate the amount of tax to deduct from your pay or pension. This is a simple guide to helping people understand tax codes a little bit more, to help you check what to look for, where to find it and what to do if you are paying too much, this is really important if you have one or more jobs to check your code is right.

Before establishing the various codes, there are two terms to distinguish and to help understand what they mean to your tax code; Personal Allowance is the amount of taxable income that you can receive tax free in the current tax year. Another is ‘PAYE’, this means pay as you earn, and is the level of earning at which tax becomes payable.

The structure of a tax code

A tax code is usually made up of several numbers and a letter for example 147L or K587. If you multiply the number in your tax code by 10, you’ll get the total amount of income you can earn in a year before paying tax.

Where do you find your tax code?

There are a number of places where you can locate your tax code, one being on your P45 form when you leave a job. This is very important to give this to your new employer when your change jobs. If you do not have a P45 your employer will provide you with a P46 to fill in and sign, then a tax code will be allocated to you by your employer. HMRC will then process your P46 and were necessary revise your tax code. More importantly, if you have paid too much tax you will be entitled to a refund, alternatively if you have not paid enough tax, your tax code will be amended to collect the underpaid tax. In addition your tax code can be found on your ‘PAYE Coding Notice’ sent to you by your Tax Office. This is usually sent by post before the start of each tax year, on the other hand it may also be sent to you at another time if something has changed, for instance if you start receiving a new source of income, or a new company benefit.  

There are several Common tax codes to be aware of;

L – Tax code ‘L’ is for those eligible for the basic Personal

    Allowance, an example would be seen as 647L for the 2010-2011 tax

    year. Also can be used for emergency tax codes

P – Tax code ‘P’ is for persons aged 65 to 75 who are eligible for

    the full Personal Allowance.

V – Tax code ‘V’ is for persons aged 65 to 75 who are eligible for

    the full Personal Allowance and the full married couple’s

    allowance, and estimated to be liable at the basic rate of tax.

Y – Tax code ‘Y’ is for persons aged 75 or over who are eligible for

    the full Personal Allowance.

T – Tax code ‘T’ highlights if there is any items in your tax codes

    that need to be reviewed, for example the income related

    reduction to the Personal Allowance.

K – Tax code ‘K’ is for persons whose total allowances are less than

    their total deductions.

How does the K code work?

The untaxed income on which tax is still due is known as ‘deductions’, and when your deductions are more than your allowances you’ll be given a K code to ensure you pay tax on the excess. Whereas with other tax codes the number indicates the amount of income you can have tax free, the number in a K code multiplied by ten broadly indicates how much must be added to your taxable income to take account of the excess untaxed income you receive.  For example, K497 means your untaxed income was approximately £4970 greater than your taxable income, as a result approximately £4,970 must be added to your total taxable income to ensure the right amount of tax is collected.

What is an Emergency tax code?

In some instances your employer or pension provider will have to use an ‘emergency’ or ‘special basis’ code until HRMC has worked out what your tax should be. This usually happen if you start a new job and you do not have a P45 for example. While you are on emergency code you will receive a basic Personal Allowance which may or may not be right for you. However once HMRC identifies more about your previous pay and tax, your tax code will be reviewed and changed if necessary. In addition, if you have paid too much tax under this code you will receive a refund. 

Other tax codes to be aware of;

If your tax code has two letters but no number, or has the letter ‘D’ followed by a ‘0′, it is normally used when you have two or more sources of income and all of your allowances have been applied to the tax code and income from your main job or pension.

BR – Tax code ‘BR’ is used when all your income is taxed at the basic

     rate which is currently 20 per cent (this tax code is most

]]>

     commonly used for a second job or pension).

D0 – Tax code ‘D0′ is used when all your income is taxed at the

     higher rate of tax which is currently 40 per cent (this tax code

     is most commonly used when for a second job or pension).

NT – Tax code ‘NT’ is used when no tax is to be taken from your

     income or pension.

How to work out your tax code?

There are four simple steps to identify your personal tax code;

Step one; Add up your tax allowances (in many cases, personal allowance and any blind personals allowance, some cases may include certain job expenses)

Step two; Income you have not paid tax on (for example: untaxed interest or part time earnings) and any taxable employment benefits are added up.

Step three; the total amount of income you have not paid any tax on, is called ‘deductions’, subtract your deductions away from your total amount of tax allowances. The amount that you are left with is the total of tax free income you are allowed in a tax year.

Step 4; now for the creation of your tax code, divide the amount of tax free income you are left with by 10 and add the figure you are left with to the letter which fits your circumstances, as a result you are left with your tax code.

Example – 217L

You are entitled to the basic personal allowance, £2,170, therefore this cash amount is to be taken away from your total taxable income and you pay tax on what is left.

Changes that might affect your tax code;

You must keep the HRMC informed of any change in your circumstances, for example, if you get married, form a civil partnership, separate, start or receive a second income or more. In the case of a change in circumstances, the amount of untaxed income you get will either increase or reduce. Always keep a note of all coding letters for reference, as if you have to question or check if you are paying the right amount of tax, you have all the necessary information at hand. If you have the wrong tax code you could end up paying too much or too little tax, hence why is so imperative to understand tax codes.

When we receive our weekly or monthly income, many of us are bewildered about what our personal tax code means. The numbers and letters throw us into a state of confusion, and all we can fathom out, is that a fraction of our income has been deducted and collected by HM Revenue and Customs to pay for public services. Tax codes can be confusing at the best of times, and a number of questions surround their anatomy.

A tax code is issued by the HMRC and used by your employer or pension provider to calculate the amount of tax to deduct from your pay or pension. This is a simple guide to helping people understand tax codes a little bit more, to help you check what to look for, where to find it and what to do if you are paying too much, this is really important if you have one or more jobs to check your code is right.

Before establishing the various codes, there are two terms to distinguish and to help understand what they mean to your tax code; Personal Allowance is the amount of taxable income that you can receive tax free in the current tax year. Another is ‘PAYE’, this means pay as you earn, and is the level of earning at which tax becomes payable.

The structure of a tax code

A tax code is usually made up of several numbers and a letter for example 147L or K587. If you multiply the number in your tax code by 10, you’ll get the total amount of income you can earn in a year before paying tax.

Where do you find your tax code?

There are a number of places where you can locate your tax code, one being on your P45 form when you leave a job. This is very important to give this to your new employer when your change jobs. If you do not have a P45 your employer will provide you with a P46 to fill in and sign, then a tax code will be allocated to you by your employer. HMRC will then process your P46 and were necessary revise your tax code. More importantly, if you have paid too much tax you will be entitled to a refund, alternatively if you have not paid enough tax, your tax code will be amended to collect the underpaid tax. In addition your tax code can be found on your ‘PAYE Coding Notice’ sent to you by your Tax Office. This is usually sent by post before the start of each tax year, on the other hand it may also be sent to you at another time if something has changed, for instance if you start receiving a new source of income, or a new company benefit. A Payroll Management company can assist with tax codes.

There are several Common tax codes to be aware of;

L – Tax code ‘L’ is for those eligible for the basic Personal

    Allowance, an example would be seen as 647L for the 2010-2011 tax

    year. Also can be used for emergency tax codes

P – Tax code ‘P’ is for persons aged 65 to 75 who are eligible for

    the full Personal Allowance.

V – Tax code ‘V’ is for persons aged 65 to 75 who are eligible for

    the full Personal Allowance and the full married couple’s

    allowance, and estimated to be liable at the basic rate of tax.

Y – Tax code ‘Y’ is for persons aged 75 or over who are eligible for

    the full Personal Allowance.

T – Tax code ‘T’ highlights if there is any items in your tax codes

    that need to be reviewed, for example the income related

    reduction to the Personal Allowance.

K – Tax code ‘K’ is for persons whose total allowances are less than

    their total deductions.

How does the K code work?

The untaxed income on which tax is still due is known as ‘deductions’, and when your deductions are more than your allowances you’ll be given a K code to ensure you pay tax on the excess. Whereas with other tax codes the number indicates the amount of income you can have tax free, the number in a K code multiplied by ten broadly indicates how much must be added to your taxable income to take account of the excess untaxed income you receive.  For example, K497 means your untaxed income was approximately £4970 greater than your taxable income, as a result approximately £4,970 must be added to your total taxable income to ensure the right amount of tax is collected.

What is an Emergency tax code?

In some instances your employer or pension provider will have to use an ‘emergency’ or ‘special basis’ code until HRMC has worked out what your tax should be. This usually happen if you start a new job and you do not have a P45 for example. While you are on emergency code you will receive a basic Personal Allowance which may or may not be right for you. However once HMRC identifies more about your previous pay and tax, your tax code will be reviewed and changed if necessary. In addition, if you have paid too much tax under this code you will receive a refund. Payroll outsourcing takes care of tax codes for you.

Other tax codes to be aware of;

If your tax code has two letters but no number, or has the letter ‘D’ followed by a ‘0′, it is normally used when you have two or more sources of income and all of your allowances have been applied to the tax code and income from your main job or pension.

BR – Tax code ‘BR’ is used when all your income is taxed at the basic

     rate which is currently 20 per cent (this tax code is most

     commonly used for a second job or pension).

D0 – Tax code ‘D0′ is used when all your income is taxed at the

     higher rate of tax which is currently 40 per cent (this tax code

     is most commonly used when for a second job or pension).

NT – Tax code ‘NT’ is used when no tax is to be taken from your

     income or pension.

How to work out your tax code?

There are four simple steps to identify your personal tax code;

Step one; Add up your tax allowances (in many cases, personal allowance and any blind personals allowance, some cases may include certain job expenses)

Step two; Income you have not paid tax on (for example: untaxed interest or part time earnings) and any taxable employment benefits are added up.

Step three; the total amount of income you have not paid any tax on, is called ‘deductions’, subtract your deductions away from your total amount of tax allowances. The amount that you are left with is the total of tax free income you are allowed in a tax year.

Step 4; now for the creation of your tax code, divide the amount of tax free income you are left with by 10 and add the figure you are left with to the letter which fits your circumstances, as a result you are left with your tax code.

Example – 217L

You are entitled to the basic personal allowance, £2,170, therefore this cash amount is to be taken away from your total taxable income and you pay tax on what is left.

Changes that might affect your tax code;

You must keep the HRMC informed of any change in your circumstances, for example, if you get married, form a civil partnership, separate, start or receive a second income or more. In the case of a change in circumstances, the amount of untaxed income you get will either increase or reduce. Always keep a note of all coding letters for reference, as if you have to question or check if you are paying the right amount of tax, you have all the necessary information at hand. If you have the wrong tax code you could end up paying too much or too little tax, hence why is so imperative to understand tax codes. A UK payroll bureau could help eliminate these complexities

Countries in Commonwealth Market for Eastern and Southern Africa (COMESA), like many other developing nations face difficulty in raising tax revenue for public purposes. This study uses panel data analysis for nineteen countries during 2000-2009 to analyze empirically the determinants of tax buoyancy. Among the variables identified as affecting annual tax buoyancy is monetization, with empirical results confirming its importance. The results have shown that the way monetization is handled in the developing nations affects annual tax buoyancy negatively. Other variables that have been found to be affecting tax buoyancy include the growth in the agricultural and industrial sector contribution to national income, external aid growth, growth of fiscal deficit and growth of total expenditure. The determinants of tax buoyancy have been suggested following tax handle theory advice. The study yielded such results because quality dimension of tax performance have been considered, which has been neglected by many previous authors.

Introduction

The traditional function of the tax system is to bring in sufficient revenue to meet the growing public sector requirements. Common measures of the ability of the tax system to mobilize revenues are buoyancy and elasticity (Asher 1989). A desirable property of a tax system is that income elasticity and buoyancy should be equal or greater than unity. Such property ensures that revenue growth keeps pace with that of Gross Domestic Product (GDP) without frequent discretionary changes. More important, it imparts build-in stability to the tax system, hence ensuring mitigation of cyclical variations in GDP over the course of the business cycle.

Concentration of the study will be on tax buoyancy, which indicates whether the tax “keeps up” with growth in the economy. Tax buoyancy measures the total response of tax revenue to changes in national income (Begum, 2007). Year to year buoyancy measures the volatility of the tax and the ability of government to meet the demands of their constituents. As an economy grows, income of taxpayers grows and the demand for public services tends to increase. If tax revenues grow less quickly than the economy, then the public sector will not be able to meet increased demand for better social amenities.

The Commonwealth Market for Eastern and Southern Africa (COMESA), in line with the above indicator (buoyancy), comprises of low tax performance countries with average regional buoyancy that is less than unity (Matshediso, 2004) implying that the tax system is not responsive to the income changes in the region. An effort to improve tax performance has been done over the years mainly noted by various reforms in the taxing system but no significant permanent solutions have been reaped so far. On the other hand, policies relating the monetization to tax performance have not yet received attention in the region.

The study attempts to examine the determinants of tax buoyancy, paying particular attention on the effect of monetization on tax buoyancy. The tax performance analysis aims at finding out whether there is a possibility of increasing tax revenue in developing nations through the monetary policy. Taxation is an important instrument for attaining a proper pattern of resource allocation, income distribution, and economic stability, in order that the benefits of economic development are evenly distributed.

Tax systems should be adequately stable and buoyant in order to enable a country to meet its increasing financial commitments as its gross domestic product (GDP) grows. If the tax revenue of a country is stable and buoyant, there is a high probability that its public expenditure needs will be adequately met over time. If GDP is growing more than tax revenues then it could be one policy indicator that the tax structure needs reform. The study of tax buoyancy is of much importance because it is both a quality and quantity measure of tax performance. Tax buoyancy can also be used to summarize revenue growth over time, (Zolt, 2003:8). Finally, it shows the strength of the tax system in the country when they are subjected to certain environments for example when a certain sector is declining.

The manner in which different countries raise taxes differs as widely as do the amounts they raise. The pattern of taxes found in any country depends upon many factors such as its economic structure, its history, and the tax structures found in neighbouring countries (Bird and Zolt, 2003: 7). According to Zolt (2003:1), developing countries are no different: ideas, interests, and institutions play a central role in shaping tax policy. Basing on this argument the study will be focusing on COMESA countries since they are close to each other and belong to a community. Countries no longer have the luxury to design their tax systems in isolation.

The research problem is derived from the fact that public services in the past years in developing nations have been deteriorating. The level of revenue being raised from taxation is very low in these nations as compared to the tax base which shows their tax potential. Rapid expansions in expenditure and declining or low revenue levels have been the main cause of fiscal imbalances in COMESA countries over the years (Ghura, 1998).

Tax revenues appear to be highly volatile relative to GDP, the tax base (Ghura, 2004; Greenaway, 2005). According to Ghura(2004), the changes include the effects of changes in tax rates, deductions and compliance. Developing countries are characterized by high tax rates (exorbitant tax rates, Matshediso 2004) as compared to developed nations, the obvious effect being decreasing tax revenues collection due to the increased informal sector activities and hence the governments are not able to meet public demand of public goods. The existing persistent budget deficits in developing nations suggest that the tax system is not revenue productive, and in such situations increasing revenue should be the main objective of tax policy.

On the other hand money supply in the COMESA economies has been growing at high levels but has been named inflationary. There are high levels of tax erosion, due to high growth of money supply (RED, 2006). Given the continuous reforms (leading to uncertainty and loss of credibility) that have been happening in the taxing system of developing nations, it still remains a wonder why tax performance is still low and even declining in some countries. The monetary sector has not received attention as far as taxing policies are done in these nations and hence its emphasis should be brought about, since some studies have proposed its importance.

The objective of the study is to establish the main determinants of tax buoyancy in developing countries with special attention to the effect of monetization on the tax buoyancy. The General and Specific research questions of the study can be stated consecutively as follows: What are the main determinants of tax buoyancy in developing nations? How does monetization affect tax buoyancy? The main hypotheses to be tested in this study are that: Monetization have a positive relationship with tax buoyancy. Growth of the industrial sector and agricultural sector, fiscal deficit, external debt, level of economic development, total expenditure and trade openness increases tax buoyancy. Growth in external aid and the concentration of population reduces tax buoyancy.These hypotheses are tested by determining the significance of the regression coefficients of relevant regression equation that will be estimated.

Countries no longer have the luxury to design their tax systems in isolation due to current wave of globalization and regionalization (Bird and Zolt, 2003).  With dramatic reduction in trade barriers over the last two decades, taxes have become a more important factor in location decisions. There is increased tax competition for portfolio investment, qualified labor, financial services, business headquarters and foreign direct investment. This means that taxes do matter, and any country with a tax system that differs substantially from other countries, particularly its neighboring countries, may suffer. From this idea, analysis of determinants of tax buoyancy in the SADC region can be undertaken, since the countries trade with each other, share labor services and share national borders.

The previous studies (Harley(1965), Lotz and Morss(1967), Raja(1971), Raja et al.(1975) and Roy(1979)) of tax performance have been dwelling much on quantitative measures of tax performance such as the tax ratio. There is a need to incorporate both a quality and a quantity measure of tax performance, in this case tax buoyancy. There are few studies (for example Teera, 2002 and, Bird and Zolt, 2003) carried out in this area especially for African countries. It is a new area which needs further investigation around the regions of the world. Also the study involves the determination of yearly buoyancy, of which several studies (Quazi(1994), Begum(2007) and Teera(2002)) have been involved in the use of single averages over a period. The main base of this study’s approach is that tax buoyancy changes over time even annually because of many factors (discretionary changes) which may include the political environment among others.

The effect of monetization on tax buoyancy is a crucial issue to consider when making tax performance decisions. This is because policy makers have to critically administer the optimal level of money supply in the economy that will not have adverse effects on economic agents. If money supply grows faster than the growth of the economy, inflation arises and the problem of tax erosion occurs since there is a gap between the time tax are to be paid and when they are actually paid. Increased documentation of the economy can also arise as monetization increases and hence this facilitates the collection of both direct and indirect taxes. From this idea the impact of monetization on tax buoyancy has to be analysed. The results will be used to give necessary policy advice on the link between monetization and tax performance. The incorporation of money supply in taxing decisions of governments is also a contribution, the variable have been left by many authors without any justification.

The study will contribute to existing literature on tax buoyancy for developing nations, this helps in the continuous debate of the effects of various determinants.  Analyzing the determinants offers a guide to policy makers on which areas to put more emphasis. According to Teera (2002), a poor tax performance, in terms of raising revenues can mean either deficiencies in tax structure policy or an inadequate effort to collect, on the part of government, both of which are influenced by various factors. Hence the study concentrates on finding factors that affect tax performance.

 Therefore there is need for more empirical input and guidance to carry out rational economic decisions. To formulate strategies for achieving sustained increase in tax buoyancy relevant information is necessary. Therefore examining determinants of tax buoyancy is an appropriate way of finding where policies can rightly respond to those issues and as such we would gain better understanding about the determinants. Knowledge of the determinants of tax buoyancy in SADC will help preclude policy makers from (over) emphasizing only few variables to neglect of other important ones in promoting tax performance.

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Theoretical and Empirical Literature Review

Theoretically and empirically tax buoyancy can be calculated using the Constant Structure rate, Dummy variable method, Divisia Index and the proportional method. However this study due to its nature will use annual tax buoyancy, as the above methods refers to periodical buoyancy.

The normative bent of the literature on tax policy deals with the questions of why a country develops a particular tax structure and why this tax structure differs among countries and changes during the process of economic growth. This strand of tax literature not only recognizes the importance of administrative constraints on tax policy, but in contrast to the normative literature places administrative factors at the forefront.

The “tax handle” theory offers a sweeping historical explanation of tax structure change. It argues that low-income economies are forced to collect revenue from easy-to-administer taxes (or tax handles), but that this administrative constraint lessens as countries develop and become able to choose “better” taxes as defined by the normative objectives discussed above. Measures of tax handles typically include per capita income, trade taxes and the proportion of people living in urban areas (Liebaman, 2003).

The optimal tax theory, the reigning normative approach to taxation combines information on a country’s economic structure, the set of available taxes to the government and the objectives of tax policy to make recommendations on tax mix, structure and incidence (see Slemrod, 1990; Burgess and Stern, 1993). Optimal taxes are those that raise a desired amount of revenue with the lowest marginal efficient cost, with few distortions and that promote the desired amount of wealth. While optimal tax theory tackles the trade off of different taxes, it does not explain the structure of government revenues.

The Ricardian equivalence theory is based on the opinion that when the government borrows instead of levying taxes to finance budget deficit the current generation is under taxed, they are rational and will realize that the loan will have to be repaid from income tax at some time in the future; debt finance is therefore a postponement of the tax burden which will fall on the future generation. The importance of this theory to tax performance is now questionable given the continuous borrowing done in developing nations and continuous budget deficit in the economies. The theory suggests discipline in the monetary sector and also effective borrowing which does not affect generations to come.

Quazi (1994) carried out a study of the determinants of tax buoyancy in developing nations using 35 countries for a period of ten years. The countries were chosen at random all over the world but based on the level of national income. Zambia and Zimbabwe are the only COMESA countries that managed to be selected. He used the ordinary least squares method in the regression of tax buoyancy and its suggested explanatory variables. The model includes average growth of money supply (monetization- M2), import sector output, industrial sector output, service sector output, agricultural sector output, deficit, grant and Gross Domestic Product (GDP). He found monetization to be positively related to tax buoyancy, he commented that an increase in monetisation increases the documentation of the economy which increases tax collection. His conclusion was that increase in the level of monetization through increase in documentation also facilitates the growth of taxes. Other variables found to affect buoyancy include growth of industrial sector, growth of imports and growth of grants.

A study by Begum(2007) of the determinants of tax share and revenue performance (buoyancy) is worth noting. The study of Bangladesh along with ten other developing countries through a panel data analysis span for fifteen years. The results obtained suggest international trade, broad money, external debt and population growth to be significant determinants, with expected signs of the estimated coefficients. The study identifies Bangladesh as the lowest tax effort country in the sample, with an average tax effort index of 0.493. This has important policy implications that Bangladesh and other countries having low tax effort (less than unity) are not utilizing their full capacity of tax revenue, and therefore, have the potential for financing budgetary imbalance through raising tax revenue.

A study carried out by Teera (2000) found that the results of the dynamic measure of tax performance (tax buoyancy) indicate that the high-income OECD group has the least percentage number of countries with a buoyancy ratio below unity, followed by the lower middle-income group. This implies that the lower income groups have made less effort to increase tax revenues over the period as compared to the higher income groups. He mainly hammered on the tax evasion variable. In his regression he included variables like total expenditure and also time trend.

Methodology and Data Analysis

In the hope to improve tax performance COMESA countries have been undertaking several reforms either individually or collectively. The shift from Sales tax to Value added tax (VAT) has seen many countries improving their tax collections and reducing tax burdens of the tax payers. During the period under study VAT has dominated Sales tax and is in use. Furthermore nations have launched Autonomous and semi-Autonomous Revenue authorities (SARAs) to have the duty to collect revenue on behalf of the government. This was done to separate political influence and revenue collection. However the efficiency of these SARAs is debatable, revenue have been seen rising in the few years of introduction of SARAs then they decline.

Panel data methodology is used in the analysis since cross-sectional and time series are combined. The methodology is more common for the comparison of different countries. Nineteen countries in the COMESA region are considered over a sufficient period. Data for analysis is obtained from the African Development Indicators various publications and World Bank/IMF publications. The advantage of these sources is that they allow international comparisons to be made.

Using various theoretical literature and empirical literature many variables have been identified as affecting tax buoyancy. The main variables to be used in the study include monetization, level of economic development, structure of the economy (contribution of agriculture and industrial sectors to GDP), external aid growth, debt, population size, expenditure growth and trade openness.

The following results have been found after regressing tax buoyancy against its determinants using STATA econometric software. Multicollinearity and homoskedasticity have been checked. Panel tests have been done and the best model was the pooled Ordinary least Squares (OLS) and time effects have been taken into account.

Specific Pooled OLS Model [Dependent Variable BUOY]

        BUOY                    Coef.                      Std. Err.                        P>|t|    

        ECON                   .0055117                .0040867                         0.179   

         AGR                     .0188142                .0071365                         0.009***   

         IND                       .0219473                .0067639                         0.001***

          MS                      -.0043354                .001639                          0.009***

         AID                      -.7558855                 .1211132                        0.000***  

          DF                       -.0165895                .0064552                         0.011**  

          XM                       .0056362                 .0044746                         0.210   

         EXP                      .8653563                  .3776645                         0.023**    

        Trend                   -.074938                    .035562                          0.037**

       _cons                    150.7422                 71.12115                          0.036**

R-squared     =  0.4063         Adj R-squared =  0.3725

F =   12.01          Prob > F      =  0.0000***         

* denotes statistical significance at 10%, ** at 5% and ***at the 1% level

Discussion of Results

The F statistic 12.01 (0.0000***) shows that the model is correctly specified and that the null hypothesis of variable inclusion is rejected at the 1% level of significance and we therefore conclude that at least one of the variables in the model explain the magnitude of annual tax buoyancy in COMESA economies.

The coefficient of monetization (MS) has a negative value and significant at the 1% level indicating that growth of money supply (M2) seems to negatively affect the tax buoyancy of COMESA states. The results are not in line with the tax handle theory which poses for a positive sign. This means that the growth of money supply does not facilitate the documentation of the economy so as to improve tax administration. The reasons why monetization has a negative influence on tax buoyancy in the COMESA region might be due to the lack of capacity within the tax administrators to take advantage of the growing supply of money to facilitate the tax collection of each tax, over relying on printing money to finance government activities rather than generating revenue elsewhere, the presence of distortions such as trade barriers, weak legal and financial systems. Some COMESA financial markets are not well developed. The region has a narrow range of intermediaries and offers a limited number of financial instruments. This finding is not in line with the result obtained by Quazi (1994) who found a positive and significant effect of monetization and tax buoyancy for a sample of 35 developing countries in a period of 10 years. Begum (2007) obtained a positive significant coefficient for Bangladesh which is a developing nation, the reason being that there is utilization of growing money supply to facilitate the documentation of the economy.

The coefficient of growth of the agricultural sector (AGR) is .0188142, with a p-value of 0.009 showing that the coefficient of domestic investment was positive and significant at 1% level. Thus countries that are able to maintain and improve their agricultural sector will experience an increase in their tax performance. 

Growth of the industrial sector (IND) has a positive and significant impact on tax buoyancy at all levels of significance. This shows that it is one of the major variables that explain how the tax system is performing in developing nations. This is in line with the tax handle theory which predicts a positive impact. The possible reason for such results is that the sector is easy to tax, companies keep records of transactions and many are located in urban areas which reduces costs of tax collection. Industry includes mining companies which are very large and also few and hence easy to monitor and audit for tax payment.

External aid (AID) has a negative and significant impact on tax buoyancy at all levels, indicating a major variable. Economic theory (tax handle) predicts a negative impact, which is in line with the results. The findings in this study suggest that high levels of external aid growth in COMESA have influenced the tax performance of developing nations negatively. The reason may come because an increase in foreign resources makes governments in the developing nations relaxed and due to fear of any political unpopularity the governments rely less on domestic resource mobilization. The results are in line with those of Quazi (1994), who found also that it was a major variable significant at all levels with the appropriate sign.

Fiscal deficit (DF) variable is significant at 5% with a negative coefficient of -.0165895 and a p-value of 0.011. The sign is not the expected, and this shows that as the deficit grows big it demotivates the respective authorities from improving their taxing strategies to raise revenue from taxes. The time trend coefficient (Trend) is significant at 5% with a negative sign. Implication is that tax performance is changing over time due to the presence of shocks. The variable explains the presence of time effects and hence economic shocks during the period under study. The possible reasons for such results can be explained by the presence of droughts, civil wars and political instability during the period.

Total expenditure (EXP) is significant at 5% significant level and reports a correct positive sign. This is in line with economic theory. The results for this variable are in line with what Teera (2000) obtained.  The results indicate that as the total spending increases, this causes the tax system to be more buoyant, this is due to an extra effort to collect more revenue through taxation to finance the increasing spending.

Trade openness (XM) variable is not significant but has the correct sign, it has a probability value of 0.210. A positive sign was also obtained by Teera (2000) but significant at 5 % and 10% for low income group and SSA countries respectively. The possible reasons for such results include the undervaluation of imported goods which applies to most own-funds imports (Fjelstad, 1995). This is due to the fact that the importer has access to foreign exchange without going through central bank records. Administrative constraints and corruption at entry points increase the problem of undervaluation of imported goods (Basu and Morrissey, 1993: 22)

The overall model reported Adjusted R-squared of 0.3725. This tells us that approximately 37.25% variation in the annual tax buoyancy is explained by the explanatory variables included in the model. The obtained Adjusted R-squared by Begum (2007) reports a value 0.51 for total tax buoyancy regression and 0.46 for indirect tax buoyancy regression using pooled OLS, no justification was given for such results. It automatically reports to us that there are some variables that explain buoyancy that have been omitted. Some variables have been omitted such as the shadow variable (tax evasion) due to the problem of measuring it.

Conclusion and Policy Recommendation

Introduction

This chapter contains a detailed conclusion to the study and also some policy lessons drawn from the empirical results of the previous chapter. In addition, the chapter also gives possible areas of future research.

Conclusion

The study has attempted to examine empirically the determinants of tax buoyancy in the developing nations using COMESA countries information for the period 2000-2009. The motivation of the study sort to address the neglected quality dimension of tax performance leading to biased policies, low tax revenue collection against potential revenue that can be raised from national income, deterioration and shortage of public goods, continuous changes in tax rates that are also high as compared to developed nations leading to the rapid expansion of the hidden economy, persistent fiscal deficits and high growing rates of money supply.

Using a panel data, pooled OLS methodology we found out that monetization negatively affects tax buoyancy. This result suggests that monetization seem not to increase tax performance, instead it retards buoyancy levels. Possible reasons of this result may be due to the inability to utilize the growth of money supply to increase the documentation of the economies to increase the collection of each tax. The abuse of the printing of discretionary paper money to finance government activities in developing nations is a possible reason for such results. This reduces effort to raise adequate revenue from collecting taxes. Poor tax administration and also underdeveloped infrastructure may be possible reasons.

Apart from monetization, the study found that growth of agricultural sector, growth of industrial sector, external aid growth, fiscal deficit growth and total expenditure growth to be the determinants. The agricultural sector is still contributing positively to revenue generation processes despite the industrialization going on in developing nations. The industrial sector is worth to be noted, it contributes significantly to tax performance. Respective countries can increase their tax buoyancy by actively encouraging growth in the agricultural and industrial sectors; they should not undermine one sector since both have positive impacts. Fiscal deficit growth and external aid growth have indicated a negative impact on tax performance.

Impact (negative) of economic shocks to tax performance has been found in the study. Economic shocks have been shown by the presence of time effects and their significance in the regressions undertaken. The main causes have been severe droughts due to inadequate rainfall, civil wars and political instability.

Policy Recommendation

Since our findings suggest a negative relationship between monetization and tax buoyancy, maybe for COMESA countries to reap benefits from monetization they need to have strong link between fiscal and monetary sectors, improve tax administration through appropriate reforms, invest in the improvement of infrastructure to facilitate the collection of taxes and stable macroeconomic environment. A strong link between fiscal and monetary sectors facilitates the utilization of the growth in money supply to improve tax performance through increased documentation of the economy. Improvement in tax administration will produce efficient taxing systems which discourages tax evasion and the growth of the hidden economy. Most of all there should be central bank independence from political authorities, the government activities should be financed not from discretionary paper money printing rather they should use other noninflationary ways such as tax collection until the potential level of the economy has been reached.

Policies aimed at developing the domestic taxing systems are beneficial. The policies should be aiming at taking special considerations of the findings in the study. Factors aimed at taking appropriate decisions on variables like fiscal deficits and external deficits since they have been found to have a negative impact on tax buoyancy. In some COMESA countries there are a few numbers of financial intermediaries and stock markets are not well developed, an effort to improve their significance will be an appropriate measure to be undertaken.

Development policies should not be biased towards the growth of one sector rather it has to be across all sectors. Both the agricultural sector and the industrial sectors have proved to be of significance in defining the level of tax performance, and hence they have to be treated without disparity.

Developing nations should however consider maintaining their taxing systems or improve them positively over time. The time trend variable have shown us that over time there is negative effect on tax buoyancy, there is actually a decline and this is to be prevented. Policies aimed at avoiding declining tax performance over time should be developed. Economic shocks like drought should be avoided through forecasting and mitigation strategies developed.

References

Begum Lutfunnahar (2007), “A Panel Study on Tax Effort and Tax Buoyancy  with Special Reference to Bangladesh. Policy Analysis Unit(PAU). Working Paper Series: WP 0715. Research Department, Bangladesh Bank. Bangladesh.

Fjeldstad, O.-H. (2003). “Fighting fiscal corruption. Lessons from the Tanzania Revenue Authority.” Public Administration and Development, Vol. 23, No. 2, pp. 165-175 (May).

Ghura, D. (1998), “Tax revenue in Sub-Saharan Africa: Effects of economic policies and corruption.” IMF Working Paper 98/135, Washington, DC: International Monetary Fund.

Hsiao, Cheng, (1986), “Analysis of Panel Data,” (Cambridge University Press).

International Monetary Fund, Government Financial Statistics, 2001.

Osoro N. E. (1993). “Tax reform in Tanzania.” Paper presented at the CREDIT-CSAE Workshop on trade and fiscal reforms in sub-Saharan Africa, Oxford, 6-8 January.

Quazi Masood Ahmed (1994), “The Determinants of Tax Buoyancy: An Experience from the Developing Countries.” The Pakistan Development Review. 33:4 Part II (Winter 1994) pp. 1089- 1098.

RED, (2006), “Integrated Paper on Recent Economic Development,” Bank of Namibia. December 1.

Stotsky, J.G. and WoldeMariam, A. (1997), “Tax Effort in Sub-Saharan Africa,” IMF Working Paper, WP/97/107, September.

Teera J. M (2000), “Tax Performance: A Comparative Study.” University of Bath, Department of Economics, BATH BA2 7AY. Bath

Wawire Nelson Were H. (2000), “The Determinants of Tax Revenue in Kenya.” Kenyatta University, Nairobi.

World Bank. (2006). World Development Indicators. Washington

Ans: SOURCES OF PUBLIC REVENUE:

*INTRODUCTION:

~ Public finance is the study of the financial operations of the state and is concerned with the income and expenditure of public authorities and the adjustment of one with the other.

~ Public finance includes public revenue, public expenditure and public debt.

~ Public revenue is the income of the Government raised from all sources in order to meet the public expenditure.

*MEANING:

~ Public revenue refers to government revenue. The important sources of public revenue are taxes, sale of public goods and services, fees, fines, donations, etc.

~ The source of public revenue can be : TAX REVENUE, NON-TAX REVENUE.

*SOURCES:

A) TAX REVENUE:

~ Taxes are the most vital sources of public revenue.

~ ‘A tax is a compulsory levy imposed by a public authority on persons and organizations to meet public expenditures’

~ Thus, the above definition highlights the following points:

i) A tax is the compulsory payment made to the government. Refusal to pay the tax is a punishable offence.

ii) Every tax involves some sacrifice on part of the tax payer.

iii) A tax is not a fine or penalty.

~ The major share of revenue receipts of the Central Government comes from taxes.

~ Taxes can be broadly divided into: DIRECT TAXES, INDIRECT TAXES

*DIRECT TAXES:-

~ Direct taxes are imposed on the income and wealth of individuals or organizations.

~ They are personal income tax, wealth tax, corporate tax, gift tax, etc.

~ The impact and incidence of direct taxes are on the same person.

~ Direct taxes are progressive in nature and the rate of tax increases along with the tax base.

~ Progressive direct taxes are instrumental in reducing income inequalities especially in developing countries.

~ The following are the major direct taxes:

a)PERSONAL INCOME TAX:

~ Personal income tax is levied on the total income tax of the individual after some permissible deductions. At present, the personal income tax rates are as follows:

INCOME (IN RS)

RATE

0-1,60,000

0%

1,60,000 – 5,00,000

10%

5,00,000 – 8,00,000

20%

8,00,000 and above

30%

~ Senior citizens are exempted from tax on income up to Rs: 2,40,000.

~ Females are exempted from tax on income upto Rs: 1,90,000

~ In the year 2009-2010, Personal Income Tax contributed 17.6% of the Total Tax Revenue. (Rs:1,12,850 crores)

b) CORPORATE TAX:

~ Corporate tax is levied on the profits registered corporate firms.

~ Since a company is given a legal status, corporate tax is a direct tax.

~ At present (2010), the corporate tax rates are:

^ INDIAN FIRMS – 30% + 7.5% surcharge.

^ FOREIGN FIRMS – 40% + 2.5% surcharge.

~ In the year 2009-2010, Corporate Tax contributed to 40% of the Total Tax Revenue

(Rs: 256725 crores).

c) OTHER DIRECT TAXES:

~ The other direct taxes include expenditure tax, interest tax, wealth tax, gift tax, etc.

~ The share of these taxes is negligible.

*INDIRECT TAXES:

~ Indirect taxes are imposed on commodities.

~ They are sales tax, service tax, excise duty, customs duty, VAT, etc.

~ The impact and incidence of indirect taxes may be on different persons. The person on whom the tax is imposed bears the impact, while the person who ultimately pays it bears the incidence.

~ In direct taxes are regressive in nature because the burden of tax is ultimately shifted to the consumers who pay the same amount of tax irrespective of their income level.

~ Indirect taxes play an important role in developing countries due to low income levels.

~ The following are the major indirect taxes:

a) EXCISE DUTY:

~ It is levied on goods manufactured and consumed in India.

~ Excise duty is the single largest source of government revenue.

~ There has been a declining trend in the rates of excise duty.

~ In 2009-2010, excise duty contributed to 16.6% of the Total tax revenue                            (Rs: 1,06,477 crores)

b) CUSTOMS DUTY:

~ It is levied on imports and on selective exports.

~ From revenue point of view, customs duty has limited importance.

~ The peak rate of customs duty is 10%.

~ In 2009-2010, customs duty contributed to 15.3% of total Tax Revenue. (Rs:98,000 crores)

c) SERVICE TAX:

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~ It is levied on services provided by certain categories of firms / persons / agencies.

~ Service tax collections have steadily increased.

~ In 2009-2010, it contributes to 10.1% of total tax revenue. (Rs:65,000 crores)

d) GOODS AND SERVICES TAX: (GST)

~ This includes a combination of all taxes like service tax, excise tax and VAT. (proposed to be incepted in 2011).

~ It will cover goods and services in almost all sectors and industries.

~ It will simplify the complexities of the system of levies on goods and services.

*NON-TAX REVENUE:

~ Non Tax Revenue includes all revenues other than taxes, accruing to the Government.

~ These are internally generated funds.

~ These sources of revenues are:

^ Administrative revenues.

^ Commercial revenues.

^ Grants and gifts.

~ The following are the main sources of non-tax revenue.

a)SPECIAL ASSESSMENT:

~ It is also known as betterment levy.

~ It is levied on certain members of the community who get the benefits of certain government activities or public projects like roads / railways projects, construction of park, etc.

~ Thus, due to public expenditure, the value of land / property appreciates and they experience ‘unearned increments’ in their asset holdings.

~ So, the government charges special assessment levy on such properties.

b) SURPLUSES OF PUBLIC ENTERPRISES:

~ The government has set up public sector enterprises that are involved in commercial activities.

~ The surpluses of these enterprises are an important source of non-tax revenue.

~ These revenues are in the form of profits and interests and are termed as commercial revenues.

~ The government also gets dividend from PSUs.

c) FEES:

~ Fees are an important source of administrative non-tax revenue charged by Government authorities for rendering services to the members of the public.

~ There is no compulsion involved in case of fees. All those who make use of these services pay the fees.

~ Fees are charged for obtaining licences, passports or registrations, filing of court cases, etc.

d) FINE AND PENALTIES:

~ These are an other sources of administrative non-tax revenues.

~ They are imposed on public as a form of punishment for not observing certain rules and regulations.

~ They are not expected to be a major source of revenue to the Government.

e) GRANTS AND GIFTS:

# Grants are financial aids.

~ They are given so that a public authority is able to perform certain activities for social development.

~ They are made by a higher public authority to a lower one.

~ For eg: World Bank gives grants to Central Government, Central Government gives grants to State Government, etc.

~ There is no repayment obligation in case of grants.

# Gifts and donations are voluntarily made by individuals, organizations or foreign governments to the Central Government.

~ Such gifts are made out of patriotic feelings or at the time of crisis or national calamities.

~ Gift cannot be considered as a regular source of revenue.

*CONCLUSION:

~ Thus, the tax system plays an important role in generating Public Revenue. Also, the non-tax income is important in raising revenue.

~ The Public Revenue so generated is used to meet Public Expenditure.

Q2: Discuss the changing trends in tax and non-tax revenue in India.

Ans: CHANGING TRENDS IN TAX AND NON-TAX REVENUE.

*INTRODUCTION:

~ The Government raises finance to meet its expenditures from tax and non-tax revenue sources.

~ In fact, Government expenditure exceeds government revenue, resulting in Government deficit.

*CHANGES:-

~ The important trends in tax and non-tax revenue are discussed below:-

A) TAX REVENUE:

~ The tax-structure in India is well developed and the power to levy taxes and duties is distributed as follows:

^ CENTRAL GOVERNMENT: It levies taxes on income (except agricultural income), customs duty, central excise duty and service tax.

^ STATE GOVERNMENT: It levies taxes on agricultural income, Value Added Tax (VAT), Stamp Duty, state excise duty, land revenue tax and professional tax.

^ LOCAL GOVERNMENT BODIES: They levy property tax, Octroi and tax for utilities like water supply, Sanitation etc.

~ Since liberalization Indian tax structure and system have undergone certain reforms.

~ These reforms included reduction in rates of all major taxes, broadening the base of all taxes, simplifying laws and procedures and modernization of administrative and enforcement machinery.

~ Some of the important trends in tax revenue are:

# TRENDS IN GROSS TAX-REVENUE AND TAX-GDP RATIO:

~ The collection of taxes has increased due to reduction of tax rates, simplification of procedures and a high growth rate of GDP.

~ The share of Gross tax revenue of the Central Government as a % of GDP has remained constant between 9% to 10%.

~ This is very low in comparison to the developed nation as well as many developing nations.

YEAR

TAX REVENUE

PERCENTAGE OF GDP

1990-1991

57,576

10%

2002-2003

216266

8.8%

2009-2010

641979

10.4%

# TRENDS IN DIRECT AND INDIRECT TAXES:

~ Before liberalization, the indirect taxes contributed more than 70% to the total tax revenue.

~ However, since 1990-91 (post-liberalization), this trend got reversed due to economic development.

~ The direct taxes contributed significantly due to increase in corporate tax and personal income tax.

YEAR

DIRECT TAXES (%)

INDIRECT TAXES (%)

1990-1991

19.1

80.9

2004-2005

43.3

56.1

2009-2010

57.7

42.0

# TRENDS IN DIRECT TAXES:

~ The share of direct taxes in the tax revenue of the Government has increased over the years.

~ The Direct Tax Code will replace the Income and Wealth Tax Laws and will be affective from April 1, 2011.

~ Major Direct taxes are:-

i)CORPORATE INCOME TAX:-

~ It is the most significant direct tax in terms of revenue collection and contribution to total tax revenue.

~ The contribution of corporate tax has increased greatly after liberalization:

YEAR

% OF TOTAL TAX REVENUE

Rs.CRORES

1990-1991

9.3

5335

2004-2005

27.1

82680

2009-2010

40.0

256725

ii)PERSONAL INCOME TAX:

~ The collection of personal income tax has also increased greatly since 1990-1991.

~ The contribution of personal income tax as a percentage of total tax revenue has also increased.

YEAR

% OF TOTAL TAX REVENUE

Rs.CRORES

1990-1991

9.3

5371

2004-2005

16.2

49268

2009-2010

17.6

112850

# TRENDS IN INDIRECT TAXES:

~ The share of indirect taxes in the tax revenue of the Central Government has gradually declined.

~ The trends in the share of three main indirect Taxes are stated as follows:-

# EXCISE DUTY:

YEAR

Rs CRORE

% OF TOTAL TAX REVENUE

1990-1991

24,514

42.6

2004-2005

99,125

32.5

2009-2010

1,06,477

16.6

Increased Significantly

Declined

#CUSTOMS DUTY:

YEAR

Rs CRORE

% OF TOTAL TAX REVENUE

1990-1991

20,644

35.9

2004-2005

57,611

18.9

2009-2010

98,000

15.3

Increased

Declined

# SERVICE TAX (INTRODUCED IN 1994-95)

YEAR

Rs CRORE

% OF TOTAL TAX REVENUE

1990-1991

862

0.8

2004-2005

14,200

4.7

2009-2010

65,000

10.1

~ INCREASED SIGNIFICANTLY due to rapidly growing service sector.

B) NON-TAX REVENUE:

~ Non-tax revenue includes internally generated funds.

~ Greater attention has to be paid to raise funds through non-tax revenues because of the limitations of raising revenue through taxes.

~ In 2002, the government set up the Non-Tax Revenue unit to advise the government to increase the collection of Non-Tax Revenue.

~ Since non-tax revenues broaden the sources of revenue, they are vital in meeting the growing fiscal deficit and funding infrastructure investments.

YEAR

NON-TAX REVENUE(Rs Crore)

% of GDP

1990-1991

11,976

2.1

2002-2003

72,290

3.0

2009-2010

1,40,279

2.3

INCREASED

~ SHARE OF TAX REVENUE AND NON-TAX REVENUE (%):

YEAR

TAX REVENUE

NON-TAX REVENUE(%)

1990-1991

78.2

21.8

2004-2005

73.5

26.5

2009-2010

77.2

22.8

* CONCLUSION:

~ Thus, there are various changes in the trends of tax and non-tax revenue.

~ These changes are brought about for meeting the ever-increasing public expenditure and public deficit.