IRS Tries to Close Tax Gap
Washington, D.C. (Aug. 3, 2007) - The Internal Revenue Service outlined the steps it plans to take to close the approximately $290 billion tax gap by encouraging more people and businesses to voluntarily pay what they owe the government, but it still faces an uphill battle.
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The IRS Oversight Board has set an 86 percent voluntary compliance goal by 2009. Senate Finance Committee Chairman Max Baucus, D-Mont., has an even more ambitious 90 percent goal by 2017. One way the IRS plans to meet the goals is to reduce the opportunities for tax evasion.
To that end, the administration's budget proposal for 2008 contains 16 legislative proposals that target tax evaders. Some of the initiatives would require securities brokers and auctioneers to report more information about sales and consignments, require taxpayer identification numbers from more contractors, increase penalties, and mandate electronic filing for more large organizations.
The IRS also wants to commit more time to researching the success of its compliance efforts. In addition, the agency plans to continue improving its technology, especially in the areas of electronic filing and case selection and management. Related to that, the IRS intends to improve its compliance activities with better document matching and examination. The IRS has been investing heavily in technology to better target these efforts.
The IRS said it is also working on improving taxpayer service and simplifying the tax laws. The agency is stepping up its coordination efforts with state and foreign governments to share information and compliance strategies. But to avoid potentially abusive practices, the IRS is also coordinating with practitioner organizations in the accounting and legal professions to hear about their concerns and those of their taxpayer clients.
— WebCPA staff
from www.webcpa.com
Saturday, August 4, 2007
IRS Report on Improving Voluntary Compliance
Treasury, IRS Release Report on Improving Voluntary Compliance
IR-2007-137, Aug. 2, 2007
WASHINGTON — The Treasury Department and the Internal Revenue Service (IRS) released today an IRS report addressing the agency’s implementation of the 2006 strategy to improve voluntary compliance with federal tax laws. A copy of the report is attached.
The IRS report, Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance, details steps currently being taken by the IRS, as well as those under development, to address key elements of the “tax gap.” The report builds on the seven components of the Comprehensive Strategy for Reducing the Tax Gap, which the Treasury Department released in September 2006. Those components are:
Reducing Opportunities for Evasion
Making a Multi-Year Commitment to Research
Continuing Improvements in Information Technology
Improving Compliance Activities
Enhancing Taxpayer Service
Reforming and Simplifying the Tax Law
Coordinating with Partners and Stakeholders
In each of these areas, the report sets out compliance objectives and initiatives, along with targeted completion dates, that the IRS is implementing to improve tax compliance over the next several years.
Detailed information is provided on each step currently being taken to reduce opportunities for tax evasion, leverage technology and support legislative proposals that, as implemented, will improve compliance. At the same time, the report reaffirms that taxpayer rights must be respected and burdens on compliant taxpayers must be minimized. The report also presents an outreach approach to ensure all taxpayers understand their tax obligations. Additionally, it recognizes the importance of having a multi-year research program that will assist in understanding both the scope of and reasons for noncompliance.
Full implementation of the initiatives outlined in the report will have a positive effect on the rate of voluntary compliance. The report reflects the commitment of the IRS to apply its resources where they are of most value in reducing noncompliance while ensuring fairness, observing taxpayer rights, and minimizing the burden on taxpayers who comply.
The overall compliance rate achieved under the U.S. revenue system is quite high. For the 2001 tax year, the IRS estimates that over 86 percent of tax liabilities were collected, after factoring in late payments and recoveries from IRS enforcement activities. Nevertheless, an unacceptable amount of the tax that should be paid every year is not, short-changing the vast majority of Americans who pay their taxes accurately and giving rise to the tax gap. The gross tax gap was estimated to be $345 billion in 2001. After enforcement effects and late payments, this number was reduced to a net tax gap of approximately $290 billion.
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Friday, August 3, 2007
Summertime Tax Tips from IRS
Summertime Tax Tips Available on IRS.gov and via E-Mail
IR-2007-135, Aug. 1, 2007
WASHINGTON — To help people with tax planning, the Internal Revenue Service is publishing Summertime Tax Tips to provide useful and concise advice on topics that affect millions of taxpayers.
Many taxpayers don’t think about their taxes until the start of the filing season in January. That can be a mistake. Steps such as getting the proper receipts from charities, adjusting your withholding or pursuing a tax strategy to increase your deductions are most effective if they are done well before year’s end.
The IRS is publishing three tax tips per week. Topics range from how parents can get credit for sending their kids to day camp to using an online calculator to fine tune your federal withholdings. Tips published on Fridays focus on the tax concerns of small business owners.
Tips in August will cover a range of topics, including charitable contributions, back-to-school advice, the saver’s credit, selling your home and tax scams.
You can receive new tips via email as they are published by subscribing through the E-News Subscription page on this Web site. When you subscribe, you will receive a confirmation message by e-mail. You must respond to the e-mail in order to verify your subscription.
IR-2007-135, Aug. 1, 2007
WASHINGTON — To help people with tax planning, the Internal Revenue Service is publishing Summertime Tax Tips to provide useful and concise advice on topics that affect millions of taxpayers.
Many taxpayers don’t think about their taxes until the start of the filing season in January. That can be a mistake. Steps such as getting the proper receipts from charities, adjusting your withholding or pursuing a tax strategy to increase your deductions are most effective if they are done well before year’s end.
The IRS is publishing three tax tips per week. Topics range from how parents can get credit for sending their kids to day camp to using an online calculator to fine tune your federal withholdings. Tips published on Fridays focus on the tax concerns of small business owners.
Tips in August will cover a range of topics, including charitable contributions, back-to-school advice, the saver’s credit, selling your home and tax scams.
You can receive new tips via email as they are published by subscribing through the E-News Subscription page on this Web site. When you subscribe, you will receive a confirmation message by e-mail. You must respond to the e-mail in order to verify your subscription.
IRS 2007 Report on Voluntary Compliance
Treasury, IRS Release Report on Improving Voluntary Compliance
IR-2007-137, Aug. 2, 2007
WASHINGTON — The Treasury Department and the Internal Revenue Service (IRS) released today an IRS report addressing the agency’s implementation of the 2006 strategy to improve voluntary compliance with federal tax laws. A copy of the report is attached.
The IRS report, Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance, details steps currently being taken by the IRS, as well as those under development, to address key elements of the “tax gap.” The report builds on the seven components of the Comprehensive Strategy for Reducing the Tax Gap, which the Treasury Department released in September 2006. Those components are:
Reducing Opportunities for Evasion
Making a Multi-Year Commitment to Research
Continuing Improvements in Information Technology
Improving Compliance Activities
Enhancing Taxpayer Service
Reforming and Simplifying the Tax Law
Coordinating with Partners and Stakeholders
In each of these areas, the report sets out compliance objectives and initiatives, along with targeted completion dates, that the IRS is implementing to improve tax compliance over the next several years.
Detailed information is provided on each step currently being taken to reduce opportunities for tax evasion, leverage technology and support legislative proposals that, as implemented, will improve compliance. At the same time, the report reaffirms that taxpayer rights must be respected and burdens on compliant taxpayers must be minimized. The report also presents an outreach approach to ensure all taxpayers understand their tax obligations. Additionally, it recognizes the importance of having a multi-year research program that will assist in understanding both the scope of and reasons for noncompliance.
Full implementation of the initiatives outlined in the report will have a positive effect on the rate of voluntary compliance. The report reflects the commitment of the IRS to apply its resources where they are of most value in reducing noncompliance while ensuring fairness, observing taxpayer rights, and minimizing the burden on taxpayers who comply.
The overall compliance rate achieved under the U.S. revenue system is quite high. For the 2001 tax year, the IRS estimates that over 86 percent of tax liabilities were collected, after factoring in late payments and recoveries from IRS enforcement activities. Nevertheless, an unacceptable amount of the tax that should be paid every year is not, short-changing the vast majority of Americans who pay their taxes accurately and giving rise to the tax gap. The gross tax gap was estimated to be $345 billion in 2001. After enforcement effects and late payments, this number
IR-2007-137, Aug. 2, 2007
WASHINGTON — The Treasury Department and the Internal Revenue Service (IRS) released today an IRS report addressing the agency’s implementation of the 2006 strategy to improve voluntary compliance with federal tax laws. A copy of the report is attached.
The IRS report, Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance, details steps currently being taken by the IRS, as well as those under development, to address key elements of the “tax gap.” The report builds on the seven components of the Comprehensive Strategy for Reducing the Tax Gap, which the Treasury Department released in September 2006. Those components are:
Reducing Opportunities for Evasion
Making a Multi-Year Commitment to Research
Continuing Improvements in Information Technology
Improving Compliance Activities
Enhancing Taxpayer Service
Reforming and Simplifying the Tax Law
Coordinating with Partners and Stakeholders
In each of these areas, the report sets out compliance objectives and initiatives, along with targeted completion dates, that the IRS is implementing to improve tax compliance over the next several years.
Detailed information is provided on each step currently being taken to reduce opportunities for tax evasion, leverage technology and support legislative proposals that, as implemented, will improve compliance. At the same time, the report reaffirms that taxpayer rights must be respected and burdens on compliant taxpayers must be minimized. The report also presents an outreach approach to ensure all taxpayers understand their tax obligations. Additionally, it recognizes the importance of having a multi-year research program that will assist in understanding both the scope of and reasons for noncompliance.
Full implementation of the initiatives outlined in the report will have a positive effect on the rate of voluntary compliance. The report reflects the commitment of the IRS to apply its resources where they are of most value in reducing noncompliance while ensuring fairness, observing taxpayer rights, and minimizing the burden on taxpayers who comply.
The overall compliance rate achieved under the U.S. revenue system is quite high. For the 2001 tax year, the IRS estimates that over 86 percent of tax liabilities were collected, after factoring in late payments and recoveries from IRS enforcement activities. Nevertheless, an unacceptable amount of the tax that should be paid every year is not, short-changing the vast majority of Americans who pay their taxes accurately and giving rise to the tax gap. The gross tax gap was estimated to be $345 billion in 2001. After enforcement effects and late payments, this number
Thursday, August 2, 2007
Massachusetts Sales Tax Holiday Weekend
Sales and Use Tax
Technical Information Release 07-12
Massachusetts
Department of
Revenue
The 2007 Massachusetts Sales Tax Holiday Weekend
I. Introduction
A recently enacted statute provides for a Massachusetts "sales tax holiday weekend," i.e., two consecutive days during which most purchases made by individuals for personal use will not be subject to Massachusetts sales or use taxes. St. 2007, c. 81, §§ 1-6 ("the Act"). The Act provides that the sales tax holiday will occur on August 11 and 12, 2007 and on those days, non-business sales at retail of single items of tangible personal property costing $2,500 or less are exempt from sales and use taxes, subject to certain exclusions. The following do not qualify for the sales tax holiday exemption and remain subject to tax: all motor vehicles, motorboats, meals, telecommunications services, gas, steam, electricity, tobacco products and any single item whose price is in excess of $2,500. The Act charges the Commissioner of Revenue with issuing instructions or forms and rules and regulations necessary to carry out the purposes of the Act.
II. Purchases Qualifying for the Exemption
The exemption applies to sales of tangible personal property bought for personal use only. Purchases by corporations or other businesses and purchases by individuals for business use remain taxable. Purchases exempt from the sales tax under G. L. c. 64H are also exempt from use tax under G.L. c. 64I. Therefore, eligible items of tangible personal property purchased on the Massachusetts sales tax holiday from out-of-state retailers for use in Massachusetts are exempt from the Massachusetts use tax.
III. Specific Rules
The following rules are to be applied by retailers in administering the Massachusetts sales tax holiday exemption:
A. Non-Exempt Sales. All sales of motor vehicles, (footnote 1) motorboats, (footnote 2) meals, (footnote 3) telecommunications services, (footnote 4) gas, (footnote 5) steam, electricity, tobacco products (footnote 6) and of any single item whose price is in excess of $2,500, do not qualify for the sales tax holiday exemption and remain subject to tax. Id.
B. Threshold. When the sales price of any single item is greater than $2,500, sales or use tax is due on the entire price charged for the item. The sales price is not reduced by the threshold amount. For example, if an item is sold for $3,000, the entire sales price of the item is taxable, not just the amount that exceeds $2,500.
Exception: Under G.L. c. 64H, § 6(k) there is no sales tax on any article of clothing unless the sales price exceeds $175; in that case, only the increment over $175 is subject to tax. If, on the sales tax holiday, the price of an article of clothing exceeds the threshold, the first $175 may be deducted from the amount subject to tax. The threshold amount is not increased by $175.
Examples:
A customer buys a suit on the sales tax holiday for $600. No tax is due.
A customer buys a wedding dress on the sales tax holiday for $2,550. Tax is due on $2,375 ($2,550 - $175).
C. Multiple Items on One Invoice. Where a customer is purchasing multiple items on the sales tax holiday, separate invoices do not need to be prepared. As long as each individual item is $2500 or less, there is no upper limit on the tax-free amount each customer may purchase.
Example: A customer purchases a television, a stereo receiver, and a computer. The three separate items costing $1,500, $1,200 and $2,000 can be rung up together, all tax free.
D. Bundled Transactions. When several items are offered for sale at a single price, the entire package is exempt if the sales price of the package is $2,500 or less. For example, a computer package including a CPU, keyboard, monitor, mouse, and printer with a single sales price of $3,500 would not qualify for the sales tax holiday exemption because the single sales price of the package ($3,500) is more than the sales tax holiday threshold amount of $2,500.
Items that are priced separately and are to be sold as separate articles will qualify for the sales tax holiday exemption if the price of each article is $2,500 or less. For example, a customer purchases a personal computer for $3,000, and a computer printer for $200, each of which is priced separately. The purchase of the personal computer will not qualify for the exemption because the sales price ($3,000) is in excess of the sales tax holiday threshold amount of $2,500. However, since the sales price of the computer printer ($200) is less than $2,500, the printer would be exempt from tax.
E. Coupons and Discounts. If a store coupon or discount provided by a retailer or manufacturer reduces the sales price of the property, the discounted sales price determines whether the sales price is within the sales tax holiday price threshold of $2,500 or less. If a store coupon or discount applies to the total amount paid by a purchaser rather than to the sales price of a particular item and the purchaser has purchased both eligible property and taxable property, the seller should allocate the discount on a pro rata basis to each article sold.
Example: A furniture store customer has a coupon for 20% off her entire bill. She purchases a dining room table for $1,800, and a sofa for $3,500. The total discount available is $1,060 ($5,300 x .20), of which $360 is attributable to the table ($1,800 x .20), and $700 is attributable to the sofa ($3,500 x .20). No tax is due on the sale of the table. Tax of $140 is due on the sales price of the sofa, $2,800 ($3,500 - $700), as even its discounted price exceeds the $2,500 threshold.
F. Exchanges. Consistent with the Department’s usual practice, if a customer purchases an item of eligible property during the sales tax holiday, but later exchanges the item for an identical or similar eligible item, for the same price ("an even exchange"), no tax is due even if the exchange is made after the sales tax holiday, see LR 03-8.
G. Layaway Sales. A layaway sale is a transaction in which property is set aside for future delivery to a customer who makes a deposit, agrees to pay the balance of the purchase price over a period of time and receives the property when the last payment is made. Layaway sales do not qualify for the sales tax holiday, even if the last required payment (or payments necessary to complete the transaction) are made on August 11 or 12, 2007.
H. Special Order Items; Transfer of Possession after Sales Tax Holiday. Special order items such as furniture are eligible for the sales tax holiday so long as they are ordered and paid in full on the sales tax holiday weekend, and the cost of each item is $2,500 or less, even if delivery is made at a later date. Generally, a customer pays for an item when the seller receives cash, a credit card number, a debit authorization, a check, or a money order or the buyer and seller enter into financing arrangements with a third party, including an affiliated entity (but excluding seller financing where the seller extends credit to the customer). A prior special order purchase with a deposit paid before August 11, 2007 will not qualify for the holiday, even if the retail customer pays the entire remaining balance due on August 11 or 12, 2007.
I. Rain checks. When a customer receives a rain check because an item on sale was not available, property bought with the use of the rain check will qualify for the exemption regardless of when the rain check was issued if the rain check is used on the sales tax holiday weekend. Issuance of a rain check during the sales tax holiday weekend will not qualify otherwise eligible property for the sales tax holiday exemption if the property is actually purchased after the sales tax holiday.
J. Rentals. Generally, rentals of tangible personal property except motor vehicles and motorboats are eligible for the sales tax holiday, even if the rental period covers days before or after the holiday, providing payment in full is made during the sales tax holiday weekend.
K. Rebates. A rebate is a refund of an amount of money by the manufacturer of a product to the retail purchaser of the product. If a vendor sells tangible personal property to a customer who applies a manufacturer's rebate to reduce the sales price at the time of the sale, the rebate is generally treated as a cash discount and is excluded from the sales price. The discounted sales price determines whether the sales price is within the sales tax holiday price threshold of $2,500 or less.
If a vendor sells tangible personal property to a customer who will receive a rebate after the sale (e.g., by mailing a coupon to the manufacturer), the full purchase price of the property determines whether the sales price is within the sales tax holiday price threshold of $2,500 or less, and tax must be charged on the full purchase price if it is over $2,500.
If a vendor offers a customer a cash discount upon the purchase of tangible personal property and the customer also receives a rebate from the manufacturer of the property after the sale, only the cash discount given by the retailer is excluded from the sales price for purposes of the sales tax holiday exemption. The amount of the manufacturer's rebate is not deducted from the sales price.
L. Internet Sales. If a customer orders an item of eligible property over the Internet, the item is exempt if it is ordered and paid for on August 11 or 12, 2007, Eastern Daylight Time. Generally, a customer pays for an item when the seller receives a credit card number, a debit authorization, a check, or a money order. The actual delivery can occur after the holiday period. For example: a customer orders a computer over the Internet with a sales price of $2,000 and charges the sale to his credit card at 1:00 p.m. (EDT) on August 12, 2007; the computer has a delivery date of September 1, 2007. The sale is exempt since the computer was ordered and paid for during the sales tax holiday.
M. Splitting of Items Normally Sold Together. Articles normally sold as a single unit must continue to be sold in that manner. Such articles cannot be priced separately and sold as individual items in order to obtain the sales tax holiday exemption.
N. Returns. Generally, sales tax may only be refunded to a retail customer on returns within 90 days of the sale. G.L. c. 64H, § 1. For the 90 day period following August 12, 2007, when a customer returns an item that could have qualified for the sales tax holiday exemption, the vendor may not credit or refund sales tax to the retail customer unless (1) the customer provides a receipt or invoice that shows the tax was paid or (2) the seller’s records show that tax was paid. Sellers may set their own return policies. This requirement is not intended to change or extend a seller’s return policy.
O. Erroneously Collected Taxes. Customers who were erroneously charged sales tax by a vendor for an exempt purchase should take their tax paid receipt to the vendor to obtain the refund. If the vendor has previously remitted the erroneously collected tax to the Department, the vendor may file an application for abatement of the erroneously collected tax within 3 years upon satisfactory evidence that the vendor has credited or refunded the tax to the purchaser.
IV. Responsibilities of Retailers
A. Participation. All Massachusetts businesses normally making taxable sales of tangible personal property that are open on August 11 and 12, 2007 must participate in this sales tax holiday.
B. Erroneous Collection. Any sales or use tax erroneously or improperly collected by a retailer on August 11 and 12, 2007 must be remitted to the Department of Revenue.
C. Certification of Nonbusiness Use by Purchaser. Normal business records showing the date of sale, item(s) purchased and selling price must be kept by the retailer/vendor. However, when a retailer sells an item(s) exempt by virtue of the sales tax holiday, and the total transaction is $1,000 or more, a retailer must also document the transaction by obtaining and keeping a Massachusetts Sales Tax Holiday Purchaser’s Certification of Nonbusiness Use, signed by the purchaser of the exempt item(s). On-line or telephone retailers should similarly allow a purchaser to make a selection to confirm that items being purchased are for personal use rather than for business use. Retailers should keep this Certification for three years. The Certification is intended to protect retailers from any question as to whether the purchaser was actually buying the items for business use, subject to the retailer’s good faith acceptance of the Certification as explained below. Retailers may use the Massachusetts Sales Tax Holiday Purchaser’s Certification of Nonbusiness Use, which is available on the Department’s website, at http://www.blogger.com/www.mass.gov/dor, or retailers may provide their own, which must include the following information: a statement by the purchaser affirming that the purchases are for personal use rather than for business use, the purchaser’s address, the purchaser’s signature or comparable confirmation for online or telephone transactions, and the purchaser’s telephone number. The following is model language for the Certification:
"I, _________________________, certify that the item(s) listed on the attached receipt are being purchased for personal use and not for any business use."
_______________________________________________
Purchaser’s Address
_______________________ _______________________
Purchaser’s Signature Purchaser’s Telephone Number
Example: A customer buys twenty-five items, each costing $40. Since the transaction totals $1,000, the retailer must document the transaction by obtaining and keeping a Massachusetts Sales Tax Holiday Purchaser’s Certification of Nonbusiness Use, signed by the purchaser of the items.
D. Acceptance of the Certification. It is presumed that all gross receipts of a vendor from the sale of tangible personal property are from sales subject to tax. G.L. c. 64H, § 8; G.L. c. 64I, § 8. The burden of proving that a particular sale made on the sales tax holiday is not a taxable sale is on the vendor. Acceptance of a Purchaser’s Certification will relieve the vendor from the burden of proof only if taken in good faith from the person purchasing the property. A vendor would not be deemed to have accepted such a certification in good faith if the purchaser uses a business name or d/b/a/, or if other circumstances make it clear that the purchase is not for personal use. Purchasers paying for tangible personal property with business credit cards or checks must be charged tax on the items purchased.
E. Out-of-State Retailers. Out-of-state retailers registered to collect Massachusetts sales and use taxes must participate in this sales tax holiday. Such retailers should not collect sales/use tax for items ordered and paid for on August 11 and 12, 2007 in accordance with the rules of this technical information release. The retailers must keep records sufficient to verify the date of sale, item(s) purchased, and selling price. In addition, out-of-state retailers must document sales by obtaining and keeping Purchaser’s Certifications (see above).
/s/Henry Dormitzer
Henry Dormitzer
Commissioner of Revenue
HD:MTF:jet
240332
August 2, 2007
TIR 07-12
---
Technical Information Release 07-12
Massachusetts
Department of
Revenue
The 2007 Massachusetts Sales Tax Holiday Weekend
I. Introduction
A recently enacted statute provides for a Massachusetts "sales tax holiday weekend," i.e., two consecutive days during which most purchases made by individuals for personal use will not be subject to Massachusetts sales or use taxes. St. 2007, c. 81, §§ 1-6 ("the Act"). The Act provides that the sales tax holiday will occur on August 11 and 12, 2007 and on those days, non-business sales at retail of single items of tangible personal property costing $2,500 or less are exempt from sales and use taxes, subject to certain exclusions. The following do not qualify for the sales tax holiday exemption and remain subject to tax: all motor vehicles, motorboats, meals, telecommunications services, gas, steam, electricity, tobacco products and any single item whose price is in excess of $2,500. The Act charges the Commissioner of Revenue with issuing instructions or forms and rules and regulations necessary to carry out the purposes of the Act.
II. Purchases Qualifying for the Exemption
The exemption applies to sales of tangible personal property bought for personal use only. Purchases by corporations or other businesses and purchases by individuals for business use remain taxable. Purchases exempt from the sales tax under G. L. c. 64H are also exempt from use tax under G.L. c. 64I. Therefore, eligible items of tangible personal property purchased on the Massachusetts sales tax holiday from out-of-state retailers for use in Massachusetts are exempt from the Massachusetts use tax.
III. Specific Rules
The following rules are to be applied by retailers in administering the Massachusetts sales tax holiday exemption:
A. Non-Exempt Sales. All sales of motor vehicles, (footnote 1) motorboats, (footnote 2) meals, (footnote 3) telecommunications services, (footnote 4) gas, (footnote 5) steam, electricity, tobacco products (footnote 6) and of any single item whose price is in excess of $2,500, do not qualify for the sales tax holiday exemption and remain subject to tax. Id.
B. Threshold. When the sales price of any single item is greater than $2,500, sales or use tax is due on the entire price charged for the item. The sales price is not reduced by the threshold amount. For example, if an item is sold for $3,000, the entire sales price of the item is taxable, not just the amount that exceeds $2,500.
Exception: Under G.L. c. 64H, § 6(k) there is no sales tax on any article of clothing unless the sales price exceeds $175; in that case, only the increment over $175 is subject to tax. If, on the sales tax holiday, the price of an article of clothing exceeds the threshold, the first $175 may be deducted from the amount subject to tax. The threshold amount is not increased by $175.
Examples:
A customer buys a suit on the sales tax holiday for $600. No tax is due.
A customer buys a wedding dress on the sales tax holiday for $2,550. Tax is due on $2,375 ($2,550 - $175).
C. Multiple Items on One Invoice. Where a customer is purchasing multiple items on the sales tax holiday, separate invoices do not need to be prepared. As long as each individual item is $2500 or less, there is no upper limit on the tax-free amount each customer may purchase.
Example: A customer purchases a television, a stereo receiver, and a computer. The three separate items costing $1,500, $1,200 and $2,000 can be rung up together, all tax free.
D. Bundled Transactions. When several items are offered for sale at a single price, the entire package is exempt if the sales price of the package is $2,500 or less. For example, a computer package including a CPU, keyboard, monitor, mouse, and printer with a single sales price of $3,500 would not qualify for the sales tax holiday exemption because the single sales price of the package ($3,500) is more than the sales tax holiday threshold amount of $2,500.
Items that are priced separately and are to be sold as separate articles will qualify for the sales tax holiday exemption if the price of each article is $2,500 or less. For example, a customer purchases a personal computer for $3,000, and a computer printer for $200, each of which is priced separately. The purchase of the personal computer will not qualify for the exemption because the sales price ($3,000) is in excess of the sales tax holiday threshold amount of $2,500. However, since the sales price of the computer printer ($200) is less than $2,500, the printer would be exempt from tax.
E. Coupons and Discounts. If a store coupon or discount provided by a retailer or manufacturer reduces the sales price of the property, the discounted sales price determines whether the sales price is within the sales tax holiday price threshold of $2,500 or less. If a store coupon or discount applies to the total amount paid by a purchaser rather than to the sales price of a particular item and the purchaser has purchased both eligible property and taxable property, the seller should allocate the discount on a pro rata basis to each article sold.
Example: A furniture store customer has a coupon for 20% off her entire bill. She purchases a dining room table for $1,800, and a sofa for $3,500. The total discount available is $1,060 ($5,300 x .20), of which $360 is attributable to the table ($1,800 x .20), and $700 is attributable to the sofa ($3,500 x .20). No tax is due on the sale of the table. Tax of $140 is due on the sales price of the sofa, $2,800 ($3,500 - $700), as even its discounted price exceeds the $2,500 threshold.
F. Exchanges. Consistent with the Department’s usual practice, if a customer purchases an item of eligible property during the sales tax holiday, but later exchanges the item for an identical or similar eligible item, for the same price ("an even exchange"), no tax is due even if the exchange is made after the sales tax holiday, see LR 03-8.
G. Layaway Sales. A layaway sale is a transaction in which property is set aside for future delivery to a customer who makes a deposit, agrees to pay the balance of the purchase price over a period of time and receives the property when the last payment is made. Layaway sales do not qualify for the sales tax holiday, even if the last required payment (or payments necessary to complete the transaction) are made on August 11 or 12, 2007.
H. Special Order Items; Transfer of Possession after Sales Tax Holiday. Special order items such as furniture are eligible for the sales tax holiday so long as they are ordered and paid in full on the sales tax holiday weekend, and the cost of each item is $2,500 or less, even if delivery is made at a later date. Generally, a customer pays for an item when the seller receives cash, a credit card number, a debit authorization, a check, or a money order or the buyer and seller enter into financing arrangements with a third party, including an affiliated entity (but excluding seller financing where the seller extends credit to the customer). A prior special order purchase with a deposit paid before August 11, 2007 will not qualify for the holiday, even if the retail customer pays the entire remaining balance due on August 11 or 12, 2007.
I. Rain checks. When a customer receives a rain check because an item on sale was not available, property bought with the use of the rain check will qualify for the exemption regardless of when the rain check was issued if the rain check is used on the sales tax holiday weekend. Issuance of a rain check during the sales tax holiday weekend will not qualify otherwise eligible property for the sales tax holiday exemption if the property is actually purchased after the sales tax holiday.
J. Rentals. Generally, rentals of tangible personal property except motor vehicles and motorboats are eligible for the sales tax holiday, even if the rental period covers days before or after the holiday, providing payment in full is made during the sales tax holiday weekend.
K. Rebates. A rebate is a refund of an amount of money by the manufacturer of a product to the retail purchaser of the product. If a vendor sells tangible personal property to a customer who applies a manufacturer's rebate to reduce the sales price at the time of the sale, the rebate is generally treated as a cash discount and is excluded from the sales price. The discounted sales price determines whether the sales price is within the sales tax holiday price threshold of $2,500 or less.
If a vendor sells tangible personal property to a customer who will receive a rebate after the sale (e.g., by mailing a coupon to the manufacturer), the full purchase price of the property determines whether the sales price is within the sales tax holiday price threshold of $2,500 or less, and tax must be charged on the full purchase price if it is over $2,500.
If a vendor offers a customer a cash discount upon the purchase of tangible personal property and the customer also receives a rebate from the manufacturer of the property after the sale, only the cash discount given by the retailer is excluded from the sales price for purposes of the sales tax holiday exemption. The amount of the manufacturer's rebate is not deducted from the sales price.
L. Internet Sales. If a customer orders an item of eligible property over the Internet, the item is exempt if it is ordered and paid for on August 11 or 12, 2007, Eastern Daylight Time. Generally, a customer pays for an item when the seller receives a credit card number, a debit authorization, a check, or a money order. The actual delivery can occur after the holiday period. For example: a customer orders a computer over the Internet with a sales price of $2,000 and charges the sale to his credit card at 1:00 p.m. (EDT) on August 12, 2007; the computer has a delivery date of September 1, 2007. The sale is exempt since the computer was ordered and paid for during the sales tax holiday.
M. Splitting of Items Normally Sold Together. Articles normally sold as a single unit must continue to be sold in that manner. Such articles cannot be priced separately and sold as individual items in order to obtain the sales tax holiday exemption.
N. Returns. Generally, sales tax may only be refunded to a retail customer on returns within 90 days of the sale. G.L. c. 64H, § 1. For the 90 day period following August 12, 2007, when a customer returns an item that could have qualified for the sales tax holiday exemption, the vendor may not credit or refund sales tax to the retail customer unless (1) the customer provides a receipt or invoice that shows the tax was paid or (2) the seller’s records show that tax was paid. Sellers may set their own return policies. This requirement is not intended to change or extend a seller’s return policy.
O. Erroneously Collected Taxes. Customers who were erroneously charged sales tax by a vendor for an exempt purchase should take their tax paid receipt to the vendor to obtain the refund. If the vendor has previously remitted the erroneously collected tax to the Department, the vendor may file an application for abatement of the erroneously collected tax within 3 years upon satisfactory evidence that the vendor has credited or refunded the tax to the purchaser.
IV. Responsibilities of Retailers
A. Participation. All Massachusetts businesses normally making taxable sales of tangible personal property that are open on August 11 and 12, 2007 must participate in this sales tax holiday.
B. Erroneous Collection. Any sales or use tax erroneously or improperly collected by a retailer on August 11 and 12, 2007 must be remitted to the Department of Revenue.
C. Certification of Nonbusiness Use by Purchaser. Normal business records showing the date of sale, item(s) purchased and selling price must be kept by the retailer/vendor. However, when a retailer sells an item(s) exempt by virtue of the sales tax holiday, and the total transaction is $1,000 or more, a retailer must also document the transaction by obtaining and keeping a Massachusetts Sales Tax Holiday Purchaser’s Certification of Nonbusiness Use, signed by the purchaser of the exempt item(s). On-line or telephone retailers should similarly allow a purchaser to make a selection to confirm that items being purchased are for personal use rather than for business use. Retailers should keep this Certification for three years. The Certification is intended to protect retailers from any question as to whether the purchaser was actually buying the items for business use, subject to the retailer’s good faith acceptance of the Certification as explained below. Retailers may use the Massachusetts Sales Tax Holiday Purchaser’s Certification of Nonbusiness Use, which is available on the Department’s website, at http://www.blogger.com/www.mass.gov/dor, or retailers may provide their own, which must include the following information: a statement by the purchaser affirming that the purchases are for personal use rather than for business use, the purchaser’s address, the purchaser’s signature or comparable confirmation for online or telephone transactions, and the purchaser’s telephone number. The following is model language for the Certification:
"I, _________________________, certify that the item(s) listed on the attached receipt are being purchased for personal use and not for any business use."
_______________________________________________
Purchaser’s Address
_______________________ _______________________
Purchaser’s Signature Purchaser’s Telephone Number
Example: A customer buys twenty-five items, each costing $40. Since the transaction totals $1,000, the retailer must document the transaction by obtaining and keeping a Massachusetts Sales Tax Holiday Purchaser’s Certification of Nonbusiness Use, signed by the purchaser of the items.
D. Acceptance of the Certification. It is presumed that all gross receipts of a vendor from the sale of tangible personal property are from sales subject to tax. G.L. c. 64H, § 8; G.L. c. 64I, § 8. The burden of proving that a particular sale made on the sales tax holiday is not a taxable sale is on the vendor. Acceptance of a Purchaser’s Certification will relieve the vendor from the burden of proof only if taken in good faith from the person purchasing the property. A vendor would not be deemed to have accepted such a certification in good faith if the purchaser uses a business name or d/b/a/, or if other circumstances make it clear that the purchase is not for personal use. Purchasers paying for tangible personal property with business credit cards or checks must be charged tax on the items purchased.
E. Out-of-State Retailers. Out-of-state retailers registered to collect Massachusetts sales and use taxes must participate in this sales tax holiday. Such retailers should not collect sales/use tax for items ordered and paid for on August 11 and 12, 2007 in accordance with the rules of this technical information release. The retailers must keep records sufficient to verify the date of sale, item(s) purchased, and selling price. In addition, out-of-state retailers must document sales by obtaining and keeping Purchaser’s Certifications (see above).
/s/Henry Dormitzer
Henry Dormitzer
Commissioner of Revenue
HD:MTF:jet
240332
August 2, 2007
TIR 07-12
---
Lower your Estate Tax/Gifting
Although Republicans have tried to do away with the estate tax and it will disappear for one year in 2010, the next year (2011) our unified transfer tax system will be back completely.
This year and next, the estate tax credit covers assets of $2 million per person and $4 million per married couple. In 2009 this amount is $3.5 million per person; and in 2010 there is no estate tax. 2011 returns us to the $1 million per person credit equivalent, with the estate and gift tax system integrated as it was prior to 2003.
In order to reduce their estate tax burden, a few taxpayers become involved in exotic schemes developed by aggressive law and accounting firms and a few slick life insurance outfits. Some of these methods are legitimate, but they can also be disguised tax-avoidance scams that leave taxpayers vulnerable to Internal Revenue Service scrutiny that can lead to substantial penalties. A sure and safe method for reducing transfer taxes is gifting.
Gifting should be done only if estate owners have sufficient income and assets after gifting to provide for their desired lifestyle and financial security. However, when income and asset values allow for gifting, four methods can be considered:
Annual Exclusion Gifts--Gifts of $12,000 per spouse can be made annually to children (or anyone else for that matter) without any gift taxes or reductions in the estate and gift tax credits. Therefore, if a couple has two children they could gift $48,000 annually, double that amount if the spouses of their children also receive gifts, and $12,000 per grandchild. Annual exclusion gifts can be given directly to children, or commonly they are made to irrevocable trusts (using so-called Crummey powers) for the payment of life insurance premiums. Annual exclusion gifts remove both the amount gifted and any earnings from the estate value.
Gift Tax Credits--Estate and gift credits become equal in 2011 when married couples' credits are equivalent to $2 million of asset value (or $1 million individually). What is often not very well understood about credit gifting is that the actual value of the gift isn't removed from the estate value because it is integrated with the estate tax in a unified system. What is removed from estate value is the growth of the asset gifted. A credit gift of $2 million incurs no gift taxes. Upon death the $2 million gift is brought back into the estate, and the unified tax credits are applied.
It is the growth on this $2 million that provides the savings, compared with having retained this asset in the estate. That is, a $2 million credit gift that has a value of $6 million when the estate owners die has effectively removed $4 million from estate value with corresponding estate tax savings, compared with not making this credit gift. Because of this, gifts equal to the credit should be made as soon as possible so the maximum amount of growth potential is realized outside of the estate. However, many clients I work with who should have used their gift tax credits long ago are holding on to them because their advisers are either unaware or ignorant.
Paying Gift Taxes--Gifts that exceed annual exclusion amounts and exceed estate and gift tax credits on a cumulative basis are subject to the payment of gift taxes. Making gifts and paying current gift taxes, instead of retaining the same amount within the estate and paying the estate tax at death, is great planning (as long as death doesn't occur at a time when the estate tax isn't levied). Paying current gift taxes is valuable because the gift tax isn't included in the amount of the gift, whereas the estate tax is included.
For example, Mr. and Mrs. Rich, with assets valued at $12 million, including $10 million of marketable securities and cash equivalents, have used their estate and gift tax credits ($2 million) in previous years. They have also made annual exclusion gifts each year. In 2011, they make a $2 million gift and pay a gift tax of $1 million (rounded off), for a total cash outlay of $3 million. In 2021 Mrs. Rich dies, having survived Mr. Rich. The $2 million gifted to their children in 2011 has been invested in tax-exempt bonds and is worth $2.89 million in 2021, which represents their net value.
Alternatively, the $3 million is retained in the estate, also invested in tax-exempt bonds and has a gross value of $4.34 million in 2021 when the estate tax is paid. This $4.34 million generates a $2.17 million tax, leaving the children with $2.17 million, which is $720,000 less than if the taxable gift is made in 2011. This is a robust difference of 33%. Most estate planning attorneys avoid even discussing this approach with clients.
Generation Skipping Transfers (GST) --These are asset transfers that skip the next generation. Since estate and gift taxes are imposed every time assets are transferred, the ability to transfer assets to grandchildren and beyond saves a great deal of estate taxes. Indeed, transferring asset principal beyond the next generation is such a good deal that the amount is limited under complex GST rules. The current GST amount is $2 million per spouse but returns to $1 million in 2011. This is planning the very wealthy use, usually with the guidance of some of the finest estate planning attorneys, so there is no need for this column to go into further explanation.
Types Of Assets Gifted
Selecting the type of asset to be gifted is very important. It is imperative that assets gifted go up in value; otherwise transfer taxes will be higher than need be because it is the value at the time of the gift that is brought back into the estate for calculating the estate tax. If closely held business stock has a gift value of $2 million but declines in value to $500,000 by the second death, taxes will be based on its $2 million value at the time of the gift, not the current $500,000 value.
For this reason, the prudent course is to gift cash that can either be used immediately by heirs or, if gifted to an irrevocable trust, should be invested conservatively so there is no chance that it will decline in value. Investing in participating whole life insurance with increasing death benefits from stellar companies like Northwestern Mutual and Guardian is a very good choice, because the death benefits are not subject to income taxes and the yields are very likely to be higher than tax-exempt bonds.
A gift's cost basis needs to be taken into account. When securities or real estate are gifted, the persons receiving the gift (donee) retain the cost basis of the person who makes the gift (donor). Possible capital gain tax exposure is relevant because assets retained by the donor receive a step-up in basis at death. If real estate with a fair market value of $1 million and a cost basis of $100,000 is gifted and the donee sells the gifted real estate for $2 million, there is a capital gain of $1.9 million.
However, if the donor had retained the real estate and died with a fair market value of $2 million, the real estate has a new cost basis of $2 million, and there are no capital gain taxes due. Balancing potential estate and gift tax savings with possible capital gain tax exposure should be considered when selecting assets to be gifted.
Individuals who have accumulated considerable wealth can use various gifting techniques to substantially reduce their estate taxes without necessarily resorting to other exotic methods that may have misunderstood and nasty surprises.
Making annual exclusion gifts is a common technique. Using gift tax credits as soon as possible to enhance their growth, resulting in the actual estate tax savings, is often overlooked. And gifts that require the payment of gift taxes are almost always avoided even though they provide a sure method for reducing estate taxes associated with the gifts by 33% (as long as the estate tax isn't repealed). Care needs to be taken to limit the possibility that gifted assets don't go down in value. Finally, gifts of assets with a low cost basis should be avoided.
Written by Peter Katt, principal at Katt & Co., a fee-only life insurance advising firm in Mattawan, Mich.
This year and next, the estate tax credit covers assets of $2 million per person and $4 million per married couple. In 2009 this amount is $3.5 million per person; and in 2010 there is no estate tax. 2011 returns us to the $1 million per person credit equivalent, with the estate and gift tax system integrated as it was prior to 2003.
In order to reduce their estate tax burden, a few taxpayers become involved in exotic schemes developed by aggressive law and accounting firms and a few slick life insurance outfits. Some of these methods are legitimate, but they can also be disguised tax-avoidance scams that leave taxpayers vulnerable to Internal Revenue Service scrutiny that can lead to substantial penalties. A sure and safe method for reducing transfer taxes is gifting.
Gifting should be done only if estate owners have sufficient income and assets after gifting to provide for their desired lifestyle and financial security. However, when income and asset values allow for gifting, four methods can be considered:
Annual Exclusion Gifts--Gifts of $12,000 per spouse can be made annually to children (or anyone else for that matter) without any gift taxes or reductions in the estate and gift tax credits. Therefore, if a couple has two children they could gift $48,000 annually, double that amount if the spouses of their children also receive gifts, and $12,000 per grandchild. Annual exclusion gifts can be given directly to children, or commonly they are made to irrevocable trusts (using so-called Crummey powers) for the payment of life insurance premiums. Annual exclusion gifts remove both the amount gifted and any earnings from the estate value.
Gift Tax Credits--Estate and gift credits become equal in 2011 when married couples' credits are equivalent to $2 million of asset value (or $1 million individually). What is often not very well understood about credit gifting is that the actual value of the gift isn't removed from the estate value because it is integrated with the estate tax in a unified system. What is removed from estate value is the growth of the asset gifted. A credit gift of $2 million incurs no gift taxes. Upon death the $2 million gift is brought back into the estate, and the unified tax credits are applied.
It is the growth on this $2 million that provides the savings, compared with having retained this asset in the estate. That is, a $2 million credit gift that has a value of $6 million when the estate owners die has effectively removed $4 million from estate value with corresponding estate tax savings, compared with not making this credit gift. Because of this, gifts equal to the credit should be made as soon as possible so the maximum amount of growth potential is realized outside of the estate. However, many clients I work with who should have used their gift tax credits long ago are holding on to them because their advisers are either unaware or ignorant.
Paying Gift Taxes--Gifts that exceed annual exclusion amounts and exceed estate and gift tax credits on a cumulative basis are subject to the payment of gift taxes. Making gifts and paying current gift taxes, instead of retaining the same amount within the estate and paying the estate tax at death, is great planning (as long as death doesn't occur at a time when the estate tax isn't levied). Paying current gift taxes is valuable because the gift tax isn't included in the amount of the gift, whereas the estate tax is included.
For example, Mr. and Mrs. Rich, with assets valued at $12 million, including $10 million of marketable securities and cash equivalents, have used their estate and gift tax credits ($2 million) in previous years. They have also made annual exclusion gifts each year. In 2011, they make a $2 million gift and pay a gift tax of $1 million (rounded off), for a total cash outlay of $3 million. In 2021 Mrs. Rich dies, having survived Mr. Rich. The $2 million gifted to their children in 2011 has been invested in tax-exempt bonds and is worth $2.89 million in 2021, which represents their net value.
Alternatively, the $3 million is retained in the estate, also invested in tax-exempt bonds and has a gross value of $4.34 million in 2021 when the estate tax is paid. This $4.34 million generates a $2.17 million tax, leaving the children with $2.17 million, which is $720,000 less than if the taxable gift is made in 2011. This is a robust difference of 33%. Most estate planning attorneys avoid even discussing this approach with clients.
Generation Skipping Transfers (GST) --These are asset transfers that skip the next generation. Since estate and gift taxes are imposed every time assets are transferred, the ability to transfer assets to grandchildren and beyond saves a great deal of estate taxes. Indeed, transferring asset principal beyond the next generation is such a good deal that the amount is limited under complex GST rules. The current GST amount is $2 million per spouse but returns to $1 million in 2011. This is planning the very wealthy use, usually with the guidance of some of the finest estate planning attorneys, so there is no need for this column to go into further explanation.
Types Of Assets Gifted
Selecting the type of asset to be gifted is very important. It is imperative that assets gifted go up in value; otherwise transfer taxes will be higher than need be because it is the value at the time of the gift that is brought back into the estate for calculating the estate tax. If closely held business stock has a gift value of $2 million but declines in value to $500,000 by the second death, taxes will be based on its $2 million value at the time of the gift, not the current $500,000 value.
For this reason, the prudent course is to gift cash that can either be used immediately by heirs or, if gifted to an irrevocable trust, should be invested conservatively so there is no chance that it will decline in value. Investing in participating whole life insurance with increasing death benefits from stellar companies like Northwestern Mutual and Guardian is a very good choice, because the death benefits are not subject to income taxes and the yields are very likely to be higher than tax-exempt bonds.
A gift's cost basis needs to be taken into account. When securities or real estate are gifted, the persons receiving the gift (donee) retain the cost basis of the person who makes the gift (donor). Possible capital gain tax exposure is relevant because assets retained by the donor receive a step-up in basis at death. If real estate with a fair market value of $1 million and a cost basis of $100,000 is gifted and the donee sells the gifted real estate for $2 million, there is a capital gain of $1.9 million.
However, if the donor had retained the real estate and died with a fair market value of $2 million, the real estate has a new cost basis of $2 million, and there are no capital gain taxes due. Balancing potential estate and gift tax savings with possible capital gain tax exposure should be considered when selecting assets to be gifted.
Individuals who have accumulated considerable wealth can use various gifting techniques to substantially reduce their estate taxes without necessarily resorting to other exotic methods that may have misunderstood and nasty surprises.
Making annual exclusion gifts is a common technique. Using gift tax credits as soon as possible to enhance their growth, resulting in the actual estate tax savings, is often overlooked. And gifts that require the payment of gift taxes are almost always avoided even though they provide a sure method for reducing estate taxes associated with the gifts by 33% (as long as the estate tax isn't repealed). Care needs to be taken to limit the possibility that gifted assets don't go down in value. Finally, gifts of assets with a low cost basis should be avoided.
Written by Peter Katt, principal at Katt & Co., a fee-only life insurance advising firm in Mattawan, Mich.
Income Tax Basics: Calculating Taxable Income
Income Tax Basics:Calculating Taxable Income
Taxes: Basics
Anyone seeking help with taxes should start with the fundamentals. Here are the basics of taxes.
When you prepare a federal income tax return such as IRS Form 1040, you calculate three levels of income: total income, adjusted gross income and taxable income.Taxable income is used to calculate your tax liability, the amount of federal income taxes you owe for the tax year.Calculating taxable income is straightforward: Add up all sources of income to determine total income. Next, take any allowed "above-the-line" adjustments to calculate adjusted gross income. Finally, take any allowed deductions and exemptions to arrive at taxable income.Total income is shown on line 22 of the 2005 Form 1040. It includes all sources of income, such as:Wages, salaries and tips. Income from these sources is reported on a W-2. Your employer is required to send you a W-2 by Jan. 31, 2006. If you earn any additional income not shown on a W-2, the IRS expects you to voluntarily report it.Interest and dividends. Banks, brokerages and other financial institutions that pay you interest or dividends mail a 1099-INT, 1099-OID or 1099-DIV at the end of every tax year. If you earn more than $400 in either taxable interest or ordinary dividends, you are required to submit Schedule B with your 1040.Capital gains. If you earn capital gains, you may have to submit Schedule D of Form 1040. See the instructions of your 1040 to see whether you have to complete the schedule.Income earned outside of the U.S. The IRS allows you to exclude up to $80,000 of foreign-earned income on your tax return. For more information, see IRS Pub. 54Social Security benefits. The IRS requires that you report some or all of your Social Security benefits as taxable income. To calculate how much to report, use the Social Security Benefits worksheet found in the instructions of your 1040.Adjusted gross income is shown on line 37 of the 2005 Form 1040. Adjusted gross income is total income minus certain allowable deductions, including:Contributions to IRAs. Some or all of your contributions to an IRA may be tax-deductible. For more information, see IRS Pub. 590.Interest on student loans. Interest on student loans used to pay for qualified educational expenses is tax-deductible. For taxpayers filing a single return, the deduction begins to phase out when modified adjusted gross income reaches $50,000. It phases out completely when income reaches $65,000. For married persons filing a joint return, the respective amounts are $105,000 and $135,000. For more information, see IRS Pub. 970.Alimony payments. Alimony payments may be deducted from total income. For more information, see IRS Pub. 504.Retirement and health insurance-related expenses. If you are self-employed, you may deduct from total income all of your health insurance premiums. You may also deduct contributions you make to a SEP, SIMPLE or other small-business retirement plan. For more information, see IRS Pub. 560.Moving expenses. You may be able to deduct your moving expenses if moving to take a new job. See IRS Pub. 521.Because tax deductions lower your taxable income, they create tax savings. The amount of tax savings is equal to the amount of the deduction times your marginal income tax rate. For example, if you're in the 25% tax bracket, every $1,000 of allowable deductions lowers your tax liability by $250.Taxable income is the narrowest measure of income on Form 1040, which is shown on line 43 on the 2005 form. To calculate taxable income, subtract from your adjusted gross income the larger of your itemized deductions or standard deduction.Subtract the value of your exemptions from this amount and you have taxable income. That's all there is to it. For 2006, each exemption is worth $3,300.
from www.aol.com/money/finance
for aditional information go to http://www.taxadvocacyllc.com/
Taxes: Basics
Anyone seeking help with taxes should start with the fundamentals. Here are the basics of taxes.
When you prepare a federal income tax return such as IRS Form 1040, you calculate three levels of income: total income, adjusted gross income and taxable income.Taxable income is used to calculate your tax liability, the amount of federal income taxes you owe for the tax year.Calculating taxable income is straightforward: Add up all sources of income to determine total income. Next, take any allowed "above-the-line" adjustments to calculate adjusted gross income. Finally, take any allowed deductions and exemptions to arrive at taxable income.Total income is shown on line 22 of the 2005 Form 1040. It includes all sources of income, such as:Wages, salaries and tips. Income from these sources is reported on a W-2. Your employer is required to send you a W-2 by Jan. 31, 2006. If you earn any additional income not shown on a W-2, the IRS expects you to voluntarily report it.Interest and dividends. Banks, brokerages and other financial institutions that pay you interest or dividends mail a 1099-INT, 1099-OID or 1099-DIV at the end of every tax year. If you earn more than $400 in either taxable interest or ordinary dividends, you are required to submit Schedule B with your 1040.Capital gains. If you earn capital gains, you may have to submit Schedule D of Form 1040. See the instructions of your 1040 to see whether you have to complete the schedule.Income earned outside of the U.S. The IRS allows you to exclude up to $80,000 of foreign-earned income on your tax return. For more information, see IRS Pub. 54Social Security benefits. The IRS requires that you report some or all of your Social Security benefits as taxable income. To calculate how much to report, use the Social Security Benefits worksheet found in the instructions of your 1040.Adjusted gross income is shown on line 37 of the 2005 Form 1040. Adjusted gross income is total income minus certain allowable deductions, including:Contributions to IRAs. Some or all of your contributions to an IRA may be tax-deductible. For more information, see IRS Pub. 590.Interest on student loans. Interest on student loans used to pay for qualified educational expenses is tax-deductible. For taxpayers filing a single return, the deduction begins to phase out when modified adjusted gross income reaches $50,000. It phases out completely when income reaches $65,000. For married persons filing a joint return, the respective amounts are $105,000 and $135,000. For more information, see IRS Pub. 970.Alimony payments. Alimony payments may be deducted from total income. For more information, see IRS Pub. 504.Retirement and health insurance-related expenses. If you are self-employed, you may deduct from total income all of your health insurance premiums. You may also deduct contributions you make to a SEP, SIMPLE or other small-business retirement plan. For more information, see IRS Pub. 560.Moving expenses. You may be able to deduct your moving expenses if moving to take a new job. See IRS Pub. 521.Because tax deductions lower your taxable income, they create tax savings. The amount of tax savings is equal to the amount of the deduction times your marginal income tax rate. For example, if you're in the 25% tax bracket, every $1,000 of allowable deductions lowers your tax liability by $250.Taxable income is the narrowest measure of income on Form 1040, which is shown on line 43 on the 2005 form. To calculate taxable income, subtract from your adjusted gross income the larger of your itemized deductions or standard deduction.Subtract the value of your exemptions from this amount and you have taxable income. That's all there is to it. For 2006, each exemption is worth $3,300.
from www.aol.com/money/finance
for aditional information go to http://www.taxadvocacyllc.com/
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