Jan/120
Tax Shelters the IRS Doesn’t Like
Tax shelters can be good–reducing your taxable income. But tax shelters can be bad–illegal and causing participants to commit tax fraud. How to know what shelters to avoid? The key is education, read the IRS forms, and pay attention. The old caveat, if it sounds too good, it’s most likely bad, is very often true. The best tax shelter for the business owner is to use sound tax planning strategies and think of your business as a legal way to avoid and rightfully reduce taxes. It is all in the deductions and keeping good records (receipts, checks, daily journals).
A tax shelter is a type of investment that allows people to reduce their tax liability. Pension plans and real estate investments are good examples. Persons can reduce taxable income if you have losses on investments. These are all legal strategies. But fraudulent or “abusive tax shelters” are considered by the IRS to use many schemes to filter or hide transactions: trusts, off-shore credit/debit cards, hedges, circular cash flows, defeasances, insurance schemes, and other activities are all attempts to hide. If investments insulate the client from significant economic risk, the courts have decided they are not appropriate.
The IRS considers tax shelters “abusive” when they are designed solely for avoiding taxes. They have no other significant business purpose. There are various means to do the abusive practices–helping clients falsify tax losses or report phony tax losses. In 2005, KPMG, a Big Four accounting firm, cost the U.S. $2.5 billion, according to the Department of Justice, by helping clients to develop tax losses. The following scenario (from Grace Wong, a reporter from CNN’s website “Money”) is a simplified explanation of one method such firms used to help clients develop tax losses.
Here’s an example:
* Joe is a new millionaire and has capital gains of $20 million. He wants to create an “artificial” loss.
* Joe places an option in identical amounts and prices on the euro /U.S. dollar for exchange rates. He buys a call option with the right to buy Euros at a certain price on or before a certain date for a premium of $20 million. He writes an option with the same strike price and expiration date for $20 million. The premiums offset each other.
* Joe then transfers the option to a partner in a friendly “accommodation” partnership, someone who paid big fees to enter into a partnership with no real business purpose.
* When he sells for zero profit, Joe claims a tax loss of $20 million, even though he’s incurred no real economic loss.
Hard to follow the details? The concepts of many bad tax shelters lack definable business purpose. An “abusive tax shelter” is a marketing scheme that offers tax transactions with little or no economic value. In the real world people invest money to make money. The bad kind of tax shelters offer inflated tax savings based on large tax write offs and tax credits out of proportion to your investment. There is no real economic investment. An abusive tax shelter often involves little risk and its tax write off ratio is frequently much greater than one-to-one. If you use a tax shelter, be sure to file Form 8271 from the IRS. Read the experts. Read the known tax shelter abusers listed on the government’s IRS site. And below are some of the worst schemes for abusive tax shelters.
Tax Shelters the IRS Dislikes
Lease In Lease Out(LILO) Sale In Lease Out (SILO) Partnership Straddle Corporation Owned Life Insurance Sham Transactions (COLI) Overseas Shelters
Dec/110
Tax Deductible Massage
You may very well have been getting a tax-deductible massage and did not know it. Yes, that’s correct! Your massage therapy may very well be tax deductible.
Many deductions, such as medical expenses, require you to overcome a minimum. For example, only medical expenses that exceed 7.5% of your adjusted gross income are allowed. This means an individual with an adjusted gross income of $40,000 can only deduct medical expenses above and beyond $3,000.
Your medical care expenses typically include medical insurance, some Medicare costs, and miscellaneous costs of health care. These could include costs for making alterations to your home prescribed for your medical condition, removing toxic substances from your home, enrolling in weight-loss programs, dental work, and travel-related expenses to get to your medical care, including mileage expense. Even that massage you got to relieve stress MAY be deductible. Other potentially deductible expenses include prostheses, and ointments or lotions for wound and skin care.
Deductible medical services can be performed by someone other than your doctor. If you have a condition like a bad back and your doctor says you need regular massage, this treatment is deductible. Make sure you get a prescription for massage from your doctor saying you need these services.
Remember that the cost of the massage therapy is TAX DEDUCTIBLE as long as a physician prescribes it.
If you routinely get massage to help manage stress, blood circulation, chronic pain, or other medical conditions ask your doctor for a prescription and get a receipt for each massage from your massage therapist.
Dec/110
Tax Form 941 – Employer’s Quarterly Federal Tax Return
This article is (hopefully!) a simplified version of the “Instructions for Form 941″. Form 941 is what most employers use to record and pay income tax, social security, and Medicare withholdings. Its not the step by step, line by line version, but will teach “show you the ropes” of Form 941.
Purpose And Filing of Form 941:
If Joe is an employer, Federal law requires that he takes out of his employees’ paychecks (withholds) sums for federal income tax, social security tax, and Medicare tax. Under this withholding system, taxes withheld from Joe’s employees are credited to them when they pay their “tax liabilities”. Of course, Joe has to withhold from himself, to help pay his social security and Medicare taxes.
The IRS warns Joe not to use form 941 to report withholdings on nonpayroll payments including but not limited to pensions, annuities, and gambling winnings. The IRS also says that Joe must file an initial 941, then one each quarter, even if he has no taxes to report, unless he fits one of the exceptions listed below.
Exceptions
Seasonal employers have no need to file form 941 in quarters they have paid no wages. Employers of solely Household employees don’t usually file form 941. Employers of farm employees don’t usually file form 941 either. Agricultural employers file form 943.
Unless Joe fits on of these exceptions, he has to file form 941.
Joe must use form 941 to report these amounts to the IRS:
Wages he has paid. Tips his employees were given. Federal income tax he withheld. All the social security and Medicare taxes he withheld (including his own). The current quarter’s adjustments to Medicare and social security taxes. These adjustments are for fractions of cents, sick pay, group-term life insurance, and tips. Advanced EIC payments. Credit for COBRA premium assistance payments.
Business/Name/Address Changes
If Joe sells or transfers his business, both he and the new owner must file form 941 (two forms, one by Joe, and one by the new owner) for the quarter in which the transfer happened. If two businesses merge, the continuing one must file a return for the quarter in which the change took place, and the other should file a final return. See the *”Instructions for form 941″ to learn about changing forms of business.
If Joe changes his business name or address, he must notify the IRS ASAP. In this event, he must write to the IRS office where his returns are filed, and complete and mail form 8822 (Change of Address) for address changes.
In the event that Joe–or the government–closes his business he must file a final return. There will be other forms Joe has to file is he goes out of business.
When must Joe File Form 941?
Joe must file his first form 941 for the quarter in which he first paid wages that were subjected to social security and medicare taxes; or subject to federal income tax whithholding. He must then file every quarter thereafter (each quarter is three months) even if he has no taxes to report, unless he is filing/has filed his final return, or one of the exceptions apply to him. Joe must file form 941 only ONCE for each quarter, even if he chooses to file it electronically.
Quarterly form 941 is due the last day of the month following the end of the quarter it is to be filed for. Quarters are:
January, February, March.
Nov/110
Tax Return Online in Canada – File an Online Tax Return and Get Fast Tax Refund
The Canada Revenue Agency is starting the process of the Canadian income tax returns at the middle of February. No matter how early you file, you’ll not be able to get information on the status of an income tax refund until the middle of March. You should also wait until at least four weeks after you file your return before checking on the status of an income tax refund.
Processing Times for Tax Refunds.
The length of time it takes the CRA to process your tax return and refund depends on how and when you file your return.
For income tax returns filed before April 15
Paper returns – four weeks
TELEFILE, NETFILE or EFILE returns – two weeks
For income tax returns filed after April 15
Paper returns – six weeks
TELEFILE, NETFILE or EFILE returns – two weeks
Who Has to File a Canadian Income Tax Return?
Most Canadian residents have to file a Canadian Income Tax Return for the previous year.
-To pay the accurate amount of income tax owed.
-To pay back overpayment of benefits such as Employment Insurance.
-To claim certain benefits, such as the GST/HST Credit or the Guaranteed Income Supplement under the Old Age Security Program.
Some international and non-resident individuals must also file a Canadian income tax return.
Deadline for Filing Your Income Tax Return:
The deadline for filing your tax return is midnight April 30. Normally, Canadian Individual returns for any particular year must be filed by April 30 of the following year. There is no provost for generally covering this deadline, but there are a some exceptions.
The Canada Revenue Agency will charge a penalty and interest on the unpaid amount if you file your income tax return after the deadline.
Sep/110
Federal Income Tax Rebates – Get Your Tax Money Here!
Everyone knows you never get something for nothing.
Right? Well, that is usually true. But hold on to your hats, people. Not only are you going to get some MONEY for nothing, it’s coming from the least likely place of all – the federal government!
What, you say? How can this be?
Here’s how: the U.S. government, in all its generosity, has decided that in order to try and help what appears to be a looming recession, they will issue rebate checks to somewhere around 117 million people. Even if you earned money last year but not enough to pay taxes on.
Here’s how it will work:
-Most people will get somewhere between $600 and $1,200, although there will be exceptions to this. For example, some individuals may only get $300, but that would be true only if they made at least $3,000 in 2007 but didn’t pay any federal income taxes on it.
-To get the maximum $600 per individual, or $1,200 per couple rebate, you must have paid federal income taxes in 2007 and made at least $3,000.
-If you have children, you will get an additional $300 per dependent child.
-The rebates start phasing out if you are an individual with an adjusted gross income of over $75,000, or a couple with adjusted gross income of over $150,000. Note that these income thresholds are slightly higher if you have children, but the exact threshold numbers have not yet been released.
-The government will issue checks based on the returns filed in the spring of 2008 for tax year 2007.
It was announced that the checks are tentatively set to start being mailed in May of 2008. It would, therefore, be in your best interests to prepare and file your federal income tax return as soon as possible. The longer you wait to file, the longer you will wait for your rebate check.
If this isn’t a good reason to prepare and file your federal income tax return early this year, what else is? Look in your mailbox in a few months for that nice freebie, and don’t spend it all in one place!