India's Direct Tax Code and How it Will Impact Wealth Creation From Next Year

India is soon going to have a new set of rules for direct taxes, which will replace the 50-year-old Income Tax Act.

The so-called Direct Tax Code, which is scheduled to come into force from financial year 2011-12, had prescribed removal of almost all tax rebates in individual investments but also proposed raising the income limits for various tax slabs drastically.

However, the proposals drew sharp reactions and after reviewing some 1,600 public suggestions/comments, the government on Tuesday unveiled a more polished version of the code, which toned down some of the proposals.

As per the revised paper, provident funds and pure life insurance products will continue to enjoy the so-called exempt-exempt-exempt - suggesting tax exemptions in the three stages of investment, accrual of gains and withdrawal of investment - a status they now enjoy.

"It is proposed to provide the EEE (exempt-exempt-exempt) method of taxation for government provident fund, public provident fund and recognised provident funds..." the discussion paper said.

The paper clarified that the EET (exempt-exempt-tax) regime should be restricted to new savings instruments after DTC comes into effect, and the same should not apply to existing saving instruments.

Ulips or unit-linked insurance plans - which have been at the centre of a public debate of late - have been brought under the EET regime after the DTC comes into force.

Similarly, stocks investors will no longer be able to enjoy tax-free gain from long-term investment in equities as the DTS proposes to treat both short-term capital gains as well as long-term capital gains for tax calculation purposes.

Moneyguruindia tax experts analysed the proposals threadbare and came up with a detailed analysis of the tax incidence on various investment instruments as proposed under the new rules.

PAY AND PERKS:- The proposal to bring in perquisites like government accommodation to be part of salary has also been dropped. All perks will continue to be taxed as per existing norms. First draft didn't not find favour with the salaried class

INCOME TAX SLABS:- Revised DTC silent on personal income tax rates and slabs. First draft suggested 10% tax on income from Rs 1.60-10 lakhs and 20% on income between Rs 10-25 lakhs and 30% beyond that. Revenue secretary says these slabs are only illustrative and they will be fixed at the time of notifying the tax code

HOME LOANS:- Government decides to continue with the major tax incentive on housing loans. Revised draft says home buyers will continue to get tax benefit on payment of interest on home loans up to Rs 1.5 lakh annually. Actual rental income will be taxed.

INSURANCE AND ULIPS:- No tax proposed on life insurance products under exempt-exempt-exempt norm. New Ulips issued after DTC becomes operational will be taxed on maturity or withdrawal. Existing Ulips will be exempt from tax either on maturity or withdrawal midway.

EQUITY MUTUAL FUNDS: - The draft DTC proposes long-term capital gains tax on units of equity funds. At present, equity funds that lock in investments for more than three years enjoy tax exemption as there is no long-term capital gains tax. The draft DTC proposes to compute long-term gains on equity and equity funds after allowing a deduction at a specified percentage of capital gains without any indexation.

STOCKS INVESTMENT: - The difference between long-term and short-term capital gains has been eliminated. Capital gains will be treated as income from ordinary sources and taxed at applicable rates. Specific rate of deduction for capital gains is to be finalised. But not tax on capital gains from savings schemes.

PROVIDENT FUND: - The proposal to tax government provident fund (GPF), public provident fund (PPF) and pension funds withdrawals has been dropped. It is proposed to provide the EEE (exempt- exempt-exempt) benefit to GPF, PPF and recognised provident funds. First draft had proposed to tax all savings schemes including PF's at the time of withdrawal.

PENSION PRODUCTS: - Revised draft puts pensions administered by PFRDA, including pension of government employees recruited since January 2004, under EEE treatment, means no tax any stage. "In the absence of adequate social security benefits, taxation of withdrawals from retirement benefits would be harsh," says the revised DTC.

By UDAY SHANKAR

Self Directed Installment Sale Vs 1031 Exchange - When a SDIS Makes Sense (Part I)

Real Estate Investors tend to be hard core. There is nothing like having your money invested in property you can touch, visit, renovate and watch gain in appreciation.

You may have heard the term "Swap till you drop". What this term means is that as an investor,you sell your real property and exchange it for another of equal or greater value, and continue to do this until you die and leave the assets to your heirs. This does (under current tax law) allow you to avoid paying capital gains tax and recaptured depreciation forever. And, your heirs currently inherit it at the value at the date of your death. They do not pay capital gains tax and depreciation, except if they sell it over the value it was at death.

This is a good thing.

However, there is going to be a time to exit the real estate investment phase of your life. Let me give a few examples of when this might be the case.

1. You have accumulated a number of investment properties and reach a point in life you want less hands-on management responsibilities.

2. You want to slow down a bit during retirement and actually want to use some of the equity you have worked so hard to accumulate to improve your income and lifestyle.

3. The market conditions are ripe to sell, but purchasing another property of equal or greater value doesn't make sense.

4. Economic conditions warrant sale. Perhaps need for long term care for you or a member of your family.

5. Personal circumstances, such as need for additional income, debt payoff, tax consequences, property division, etc. warrant the need to sell.

6. You need to do some estate planning and need to remove some of your assets from your estate so your heirs won't have a huge estate tax obligation.

If any of these prevail, a Self Directed Installment Sale may be your best option. A SDIS will allow you to spread out your capital gains tax burden over many years, and trigger what is effectively a 0% interest long term loan from the government. How often do you get this kind of opportunity?

Part II will explain more of how a Self Directed Installment Sale can make a huge difference when any of the above circumstances might arise.

The Changes in Capital Gains Tax and How it Will Impact on UK Landlords

A tax giveaway for landlords?

Landlords are set to be one of the main beneficiaries from the proposed tax changes signaled by the Chancellors Pre-budget Statement last week. This Statement which outlines what changes are to be made for the tax year 08-09 or effectively the tax regime that is to come into force on the 6th April 08. How much is it a give away and are landlords better to sell now under the current capital gains tax regime or should they wait? In this article I set out to investigate what it means to landlords

The current taxation regime

The current system of Capital Gains Tax (CGT) was actually put in place by Gordon Brown in April 1998 when he introduced a system of taper relief to replace the previous system of indexation. The whole idea behind taper relief was that it encouraged businesses and property investors to hold their assets for the long term and discourage short-term investment speculation. The result was a taxation system where the amount of tax paid reduced the longer the landlord held their buy-to-let investment property for up to a maximum relief being given after 10 years of holding their residential property investment.

When does Capital Gains Tax (CGT) apply?

Capital gains tax is a tax that landlord's only pay on disposal of their buy-to-let investment property. It is treated as a top slice of taxable income and therefore the rate that a landlord will pay will depend on what income the landlord has earned in the year of disposal. In calculating a landlord's potential Capital Gains Tax (CGT) tax liability a landlord will have to apply the following concepts to their Capital Gains Tax (CGT) calculation.

1. A landlord should establish the base cost of their buy-to-let investment (effectively cost of acquisition)

2. A landlord should establish the size of the gain by taking base cost from disposal value

3. A landlord should establish if buy-to-let investment held as a non-business or as a business asset (most will be non-business, whilst holiday rentals are classed as a business asset)

4. If the buy-to-let investment property is held as an individual not by a company the landlord can use their annual exemption 2006/2007 £8800 to reduce the amount of the chargeable gain

5. For properties bought before April 6 1998 the gain is subject to indexation

6. Properties bought on or after April 6 1998 the gain is subject to taper relief

Effective rate of Capital Gains Tax (CGT)

For most landlords the effective rate of Capital Gains Tax (CGT) that a landlord will pay depends on their rate of income tax. For a landlord who is a basic rate taxpayer the effective Capital Gains Tax (CGT) rate could reduce to 12% as the percentage of the gain chargeable reduces to 60% after 10 years and this is then charged at 20%. For landlords who are top rate taxpayers the effective rate is double as they pay 40% tax.

The new regime

The new Chancellor Alistair Darling is planning to sweep away the old systems of indexation and taper relief carefully put in place by the previous Chancellor and replace the systems of indexation and taper relief with a single flat rate of 18%.

The verdict for UK landlords

On balance the news for landlords is good. The new flat rate Capital Gains Tax (CGT) will apply to a landlord immediately and means that for a high rate tax payer they will be paying 6% less than they would have done after 10 years under the previous system of taper relief. For basic rate taxpayers things are less clear cut. Under the previous system a basic rate taxpayer would have had to have held their buy-to-let investment property for 4 years before benefiting from a rate as low as 18%. However, this would have eventually reduced to 12% after 10 years or 6% below the rate that will come in on 6th April 2008.
A couple of beneficial points for landlords are that the new system is much simpler to understand and should make property investment disposal decisions and calculations much easier for landlords.

It also makes it far more attractive for landlords to trade their buy-to-let investments buying and potentially renovating a property, holding for a couple of years before then selling their buy-to-let investments on.

However, this may not be so much of a tax gift to landlords as it first appears. For a start, the anticipated slow down in the UK housing market may mean that the opportunities for buying a property and doing it up to rent and then dispose may not be as prevalent as they have been over the last 10 years of the housing boom. Also landlords should be aware that if they are doing this regularly the tax authorities may consider that the landlord is actually engaging in a trade and tax any profit as income anyway.

The reality is for most landlords buying a residential investment property is seen as a long-term investment. ARLA the Association of Residential Letting Agents latest quarterly survey (Sept 07) of landlords showed that 66% of landlords questioned intended to keep their residential investment properties for more than 10 years. These landlords would therefore have benefited from the maximum taper relief available anyway.

The proposed tax changes appear to be a classic case of smoke and mirrors where tax for some landlords i.e. high rate tax payers looks to have come down whilst those for lower rate tax risers potentially goes up.

Should landlords sell?

This potential change in the tax law has thrown up an interesting conundrum for some landlords over what to do over their buy-to-let investments.

Previously the tax system strongly encouraged them to hold their properties for the long-term to maximise their taper relief. Now, for a lower rate taxpayer who has owned their property for 10 years or more a quick disposal before the new regime would save them potentially a considerable sum.

Equally for high rate taxpayers who were thinking of a sale, holding out until the new tax regime is in place could also save them a sizeable amount of money.

Therefore, all this has to be weighed by a landlord against their wider and long-term financial plans and aspirations. If the housing market does weaken considerably by next year selling at a time of low housing demand may not be the best time to exit the market even where a tax saving.

Capital Gains Tax (CGT)

In addition, from 6 April 2008, to complement these CGT changes, an entrepreneurs' relief is being introduced which will be available when an individual sells their business. This means that the first £1,000,000 will be charged to tax at 10% and gains in excess of the £1,000,000 limit will be charged to CGT at 18%.

The Treasury has announced that it doesn't see the need for a change to the taxation of insurance bonds as a result of the CGT changes. As a result, a policyholder is still subject to income tax at their marginal rate of tax on the event of a chargeable event gain.

Analysis

Even though the 18% flat rate of CGT, which would apply to collectives, looks more attractive than a potential income tax charge at 40% on a chargeable event gain with a bond, there are other factors to consider.

There would also be an annual income tax charge to consider on the dividend/interest distributions from collectives even if this is accumulated which would be 32.5%/40% in the case of a higher rate taxpayer. Investment bonds offer the policyholder tax deferral in that clients can access money through the 5% tax deferred allowance, without incurring an annual income tax charge.

Bonds are self-assessment friendly, as withdrawals within the 5% tax deferred allowance don't need to go on the tax return. Only chargeable event gains need to be put on the tax return.

Withdrawals within the 5% tax deferred allowance don't affect a client's entitlement to age allowance.

Investment bond holdings may be deemed excepted assets for means testing.

IHT planning - bonds are ideal assets for trustees to hold due to the administrative simplicity they offer. If trustees hold collectives, then they will have to consider the completion of annual tax returns and the associated professional costs.

It makes sense for everyone to have all policies and investments reviewed by an independent financial adviser to ensure that the charges are fair and the underlying investment performance is at least as good as the average performing funds. The consequences of not doing this can be extremely costly.

Avoid A Stock Trading Tax Nightmare! The Importance of Cost Basis for Capital Gains

Most people are used to paying income taxes on regular income from their jobs. However, many people get confused when it comes to paying capital gains taxes on stock trades.

There are no taxes due from buying stocks. In fact, if you held your stocks for the rest of your life, you would never have to pay anything to the government. Taxes only enter the picture when you sell.

At that point, it gets a little tricky. Your broker will then send the IRS a statement showing the proceeds of the sale. It is then important for you to determine the cost basis of those shares - i.e, the price and date that you bought the particular shares you just sold. The cost basis is needed to determine whether you have a gain or loss, and whether the gain/loss is long term or short term.

A long term gain or loss occurs when you have held the stock for at least a year and a day. If you held the stock less than a year and a day, it is a short term gain / loss. This is important because long term gains are taxed at a lower rate than short term gains. This is because the government likes to encourage long term investments, because they create jobs.

If you do not provide a cost basis on your tax return, the IRS will assume you bought the stock for $0 and it was a short term gain. This can cost you a lot of money!

For example, suppose that, in one year, you bought 1,000 shares of GE for $34, sold them for $32, and then used some of the money to buy 1,000 shares of HP for $20. Finally, you sold the HP shares for $22. You have broken even - you lost $2,000 on GE and gained $2,000 on HP.

However, the IRS will get a statement from your broker that you sold $32,000 of GE and $22,000 of HP. If you do not provide a cost basis on your tax return, the IRS will think you earned $54,000! They may come after you for back taxes and interest.

Reducing Tax Liability in 2010 and Beyond

Tax planning has always been a very challenging element of the financial planning process. This year it has been especially difficult in light of the uncertainty associated with the pending changes to the tax code. As you may be aware, the tax cuts established by the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (both of these acts are commonly referred to as the Bush tax cuts) are set to expire at the end of the year. There has been considerable debate as to whether or not these tax cuts should be extended. With a lame duck congress now in session, time will tell what the eventual outcome will be.

So how do we properly tax plan in the face of such uncertainty? It is crucial to understand your personal situation and how the pending changes could impact you. One of the primary concerns for many taxpayers is the possibility of higher income tax rates as early as next year. If the tax cuts are not extended the current low and high tax rates will increase from 10% and 35% to 15% and 39.6%. Additionally, the maximum capital gains rate will increase from 15% to 20%. Understanding how each case impacts your personal situation can be very helpful in preparing a strategy. Once you understand this you can begin to assess a probability to the potential outcomes and begin making critical tax planning decisions.

Without offering specific tax advice in this newsletter, the following ideas are typically very important considerations to make at the end of each year:

* As always, consider optimizing contributions to your tax-advantaged investment accounts (i.e. 401K, IRA, Roth IRA, etc.). Investment vehicles such as 401Ks and IRAs enable you to lower your current tax bill and achieve tax-deferred growth. Meanwhile, Roth IRAs and Roth 401Ks allow you to pay taxes at today's low rates and enjoy tax-free growth going forward.

* Consider a Roth IRA conversion. Having taxable, tax-deferred, and tax-free accounts could be part of a broader tax diversification and mitigation strategy.

* Be aware of your realized net capital gains and losses for the year and any net capital loss carry over you may have from prior years. This will help you anticipate factors that will impact your 2010 tax bill.

* If you have a net realized capital gain for 2010 and no carry over loss to offset it, consider harvesting some losses from your taxable portfolio to mitigate your tax bill. Remember, long term losses must first be used to offset long term capital gains. Further, short term losses must first offset short term gains. After this netting out process, any remaining long term loss can be used to offset short term gains.

* If in your probability assessment you have determined that the tax cuts are not likely to be extended, consider proactively selling long-term investments with embedded gains and subject yourself to the maximum 15% capital gains rate as opposed to the 20% rate you may be subject to in the future. In fact, if you are in the 10% or 15% marginal income tax bracket in 2010, you can recognize long term capital gains tax free.

* Mutual funds often distribute capital gains at the end of the year, which can catch people unaware. The owner of a mutual fund can contact the mutual fund company and ask what they anticipate the distribution will be. Once you have this information, you can take the appropriate steps to mitigate the tax liability.

Estate Taxes

Another effect of the Economic Growth and Tax Relief Reconciliation Act of 2001 is that the estate tax was completely phased out in 2010. If there are no modifications to this law change, any estate, regardless of size, can be passed to heirs completely tax free. The estate tax is scheduled to return in 2011. However, while there is no estate tax, inherited property no longer receives a step-up in basis, exposing those assets to potentially large capital gains taxes when sold. Watch for adjustments, as these laws are likely to be altered soon.

Avoid Capital Gains Tax by Using a 1031 Tax Deferred Exchange

When a real estate investor typically sells an investment property, they are taxed on any gain realized from the sale.  However through a 1031 tax deferred exchange a real estate investor can sell an investment property and buy a new property with the gain or profit from the sale and not owe taxes on the sale immediately.

Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment.  A tax deferred exchange is a method by which a real estate investor trades one or more relinquished properties for one or more replacement properties of "like-kind," while deferring the payment of federal income taxes and some state taxes on the transaction.

The IRS states specific guidelines that must be followed to qualify for the benefits of a 1031 tax deferred exchange.  The primary guideline is that the investor is not allowed to receive any material benefit from the sale of the property, must clearly identify potential replacement properties and complete the transfer within certain timeframes.

Qualified Intermediary

If the real estate investor takes control of cash or other proceeds from the sale before the exchange is complete, the exchange can be disqualified and all gain is immediately taxable.  One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary to hold these proceeds until the exchange is complete.

A qualified intermediary is an independent party who facilitates tax deferred exchanges.  The qualified intermediary cannot be the taxpayer or a disqualified person such as your lawyer or accountant or another family member.  Acting under a written agreement with the real estate investor, the qualified intermediary acquires the relinquished property and transfers it to the buyer, then they hold the sales proceeds, and finally they acquire the replacement property and transfer it to the taxpayer to complete the exchange within the appropriate time limits.

Identifying Property

The real estate investor has 45 days from the date of the sale of the relinquished property to identify potential replacement properties.  The identification of the replacement properties must be in writing and signed by the investor and delivered to the qualified intermediary.  The replacement properties must be clearly described in the written identification which usually requires a legal description and street address.

You can identify more than one property as the replacement property.  However the maximum number of replacement properties that you may identify without regard to fair market value is three properties.  You may identify any number of properties provided that the total value of these properties is not more than 200% of the value of the original property you are selling.

Time Limits

If you have correctly complied with the identification phase of the exchange, you have up to 180 days from the date of the sale of the relinquished property to complete an exchange, but the period may be shorter.  The shorter period is because you have 180 days from the sale of the relinquished property OR the due date of the investor's tax return (including extensions) for the year in which the transfer is made.  There are no extensions for this time limit.

Summary

The 1031 tax deferred exchange is a great way to maximize your wealth.  The taxes you would have paid to the government are now working to earn you money and this provides a financial leverage to greatly increase your net worth. 

This article provides a basic introduction to a 1031 tax deferred exchange and should not be relied upon as legal advice.  If you want to complete a 1031 tax deferred exchange you need to consult a competent professional.

Emergency Budget Changes on Cornwall House Sales

2010 has been a waiting game for the housing market. Pre-election many housing experts and prospective buyers were unsure how the economy was going to be affected by a possible change of government. The scrabble for power and subsequent compromises by our coalition government has continued this uncertainty. Now the Chancellor has delivered his emergency budget we have had time to review and analyse its effects. What are our predictions for the local housing market in Cornwall?

Capital Gains Tax

This has come through lower than expected, a relief for many top rate tax payers who own second homes. For the basic tax rate payer this tax remains the same as it was previously. At first glance this may appear generous but in reality the capital gains made on a property is likely to tip these tax payers into the higher tax paying category.

Overall this should not have a dramatic effect on the property market. The worst to be hit will be long term owners of second homes and rental properties who have gained substantial capital during their ownership.

A more worrying change is the open nature that the Chancellor has left for capital gains tax. Experts are suggesting that further increases could be expected in 2011. Many second home owners will need to analyse their options in detail now bearing this possible change in the future. They may consider it wise to cash in their assets now.

House Price Trends

The latest figures from the Land Registry have noted a small drop in house prices by 0.2% in May, the first drop that has been seen since April 2009. This is not reflected in all areas with Wales being the worst hit and the South East and London continuing to rise. In other regions such as the South West reports have noted that the housing market is continuing to look buoyant. Cornwall's average house price has changed from £175,541 (May 2009) to £190,556 (May 2010).

Cornish House Price Trends

Cornwall's house price trends tend to be distorted as a result of the high number of holiday homes in many of the areas. Historically this has inflated house prices above normal levels, leaving affordability a dream for many locals.

Whilst it is too early to fully see the effect of this recent budget, Cornwall's changes will be accentuated due to the high percentage of second homes. There may well be a healthy number of second homes coming onto the market in the area, helping to balance the housing stock in the region. This will mainly be affected by second home owner's long term interpretation of capital gains tax changes and how this fits in with their personal circumstances. We will have a truer picture towards the end of the summer as to how the trends will continue in 2010.

We hope continued stability will hold on in the South West, fuelling confidence in 'normal' house selling and purchasing. Confidence in this kind of market will help developers, buyers and sellers plan their housing needs and for financial institutions to keep lending for those all too important mortgages.

2011 Capital Gains Tax Increase and the Impact on Business Owners

The last couple of years have been difficult for business owners and financing markets, to say the least. Limited credit, economic uncertainty among businesses and consumers, and poor financial performance across industry sectors contributed to curtailed growth prospects, and have some wondering what their long-term strategy might entail. As we head into 2010, however, there are many reasons for optimism that merger and acquisition activity will increase, including improving economic indicators, cash heavy balance sheets of strategic buyers, better than expected fund raising by private equity groups and Key Take Aways increased confidence in the private and public sectors. For potential sellers, 2010 is also an important time to consider valuation risks now versus future years due to the scheduled increase in the capital gains in 2011.

Originally signed into law in 2001, the capital gains tax rate was reduced as part of President Bush's Economic Growth and Tax Relief Reconciliation Act. Under the reduced rate, long-term capital gains and qualified dividends were taxed at 15% for the lowest two income tax brackets. The lowered rate was set to expire in 2008; however, reduced rate was extended in 2006 under Bush's Tax Reconciliation Act and is scheduled to expire at the end of 2010, at which time the rate will revert to the 2003 rates, which were 20%.

Given the capital gains tax rate increase represents a 33.33% higher effective tax rate, there is significant motivation for owners and shareholders already considering a potential sale in the near-term to consider action in 2010. Beyond avoiding a higher tax rate on long-term capital gains, sellers also need to carefully plan the timing of a potential exit in 2010 in order to secure the most attractive buyer and preserve leverage in the negotiations of the purchase agreement.

While owners and shareholders may be hesitant to pursue an acquisition without greater economic certainty, there are multiple indicators suggesting that 2010 is likely the right time to at least consider a potential a sale, given favorable terms. The capital gains tax increase serves as motivating factor; it is by no means the only one.

The following are key points for understanding the impact of the capital gains tax rate increase on M&A activity in 2010:

Consider the overall economic picture.

There are signs at the corporate level that are encouraging to mid-size firms considering being acquired. Over the last three months through January 2010, deal flow is up 16.8% over the same period a year before. Of course, last year was the one of the worst years in our economic history. However, major deals are being completed, which can cause a "bandwagon effect." In addition to corporate confidence, many private equity groups with a strong track record continue to raise money. In 2009, the average fund size raised by private equity groups was $1.5 billion, the second highest on record. This indicates more private equity groups than expected will have cash in 2010 and will need to put it to work. With a return in confidence to the markets and increasing signs of an economic stabilization, 2010 is likely to see a number of buyers enter the market with cash on hand seeking good deals.

Understand your long-term growth realities.

While the economy is expected to undergo further recovery in 2010, many mid-size firms are simply not going to be able to grow at the same rates experienced in the 2003-2008 period. Given modest growth expectations, overall business growth in the next three to five years will not be significantly higher than its current state in 2010.

It is projected that the economy will grow at an average rate of less than 3.5% for the next 3-5 year, which will mimic the growth of most industries. (There are, of course, exceptions to every rule.) Given this outlook, a company should consider a realistic growth projection as part of their calculations for keeping their business or selling it now or five years from now. This is especially so considering what will most likely be a higher capital gains tax rate in 2011 and beyond.

Think critically about timing.

Early in 2010, the market will be more favorable to sellers, who will have a range of potential buyers to choose from. Moreover, the capital gains tax rate increase puts buyers not paying all cash at a disadvantage, since the increased tax rate will apply to deferred payments at the time the payment is made. Deferred payments are likely to continue into 2011 and beyond for non-cash buyers. Therefore, sellers are more likely to find buyers with cash in hand earlier in the year.

In addition to increased choice of buyers, owners are in a better negotiating position earlier in 2010. As potential buyers know that sellers have a range of options and varying deal structures to minimize tax obligations, they are more likely to agree to terms favorable to the seller. As 2010 progresses, the buyer will be able to use the impending tax increase as leverage in deal negotiations, aware the seller has significant motivation to close before 2011. In fact, if negotiations are still ongoing in 4Q10, buyers are likely to try and discount the purchase price by 1% to 5% or seek tougher terms in the purchase agreement, knowing the seller will try and avoid paying the higher tax rate.

While not appropriate for all owners, those considering a sale in the near-term future are likely to experience favorable conditions 2010 as closing before year end avoids paying higher capital gains taxes. Additionally, early movement will prove advantageous for sellers by yielding a greater range of potential buyers and a strong position in deal negotiations. Overall, 2010 is likely to experience a significant revival in M&A activity, attracting a number of interested buyers to the market.

Special Tax Rules on the Sale of Your Home

If you sell your home the IRS rules permit you to exclude up to $500,000 of the gain ($250,000 if you are single) on the sale. In order to qualify for this exclusion you must have owned and used your home at least two years out of a five-year period ending on the date of the sale (known as ownership & use tests). The best part about this gain exclusion rule is that it is not a one-time exclusion. You can exclude gains on subsequent sales as well, as long as you meet the ownership and use tests.

Special rules regarding the capital gain exclusion:

1. Death of Spouse - As long as the sale of your home occurs within two years of your spouse's death, you are eligible for the gain exclusion.
2. Nursing Homes - If you are admitted to a licensed care facility (e.g. nursing home) the use test is relaxed and the time spent in the nursing home will be considered as time spent in your home.
3. Divorce - In order for the divorced spouse not residing in the home, to be eligible for the gain exclusion, the divorce degree must stipulate that the former spouse living in the home, was granted use of the property pursuant to the divorce agreement. If the divorce agreement does not include this provision, then the former spouse, may fail the use test and become ineligible for the gain exclusion.
4. Job Relocation - The rule permits a reduced gain exclusion when the ownership/use tests are not met due to a job exclusion. The gain excluded is prorated based on the number of days of ownership or use divided by 730 days.
5. Rental of a Portion of Your Home - The entire gain may be excluded, however, a portion of the gain attributable to post May 6, 1997 depreciation is subject to a maximum 25% tax rate. This exclusion rule does not apply to two-family homes. In such case only the unit used as a home qualifies.

Capital Gains Tax and You

The current tax system imposed on corporations by the U.S. government is at best, a biased system; for corporations that have a net profit, taxes on those profits amount to a full one-third. So, if you're doing business as a standard "C" corporation, and you do manage to make a profit, you're going to owe Uncle Sam about 30%. Now, you add to that tax a capital gains tax that is levied on the investment capital of that corporation, and you have the makings for a tremendous tax liability, or do you? The actual income tax paid by corporations and the tax paid as a capital gains tax has diminished tremendously over the last thirty or forty years, and apparently not many of the citizenry of this country, nor the media are asking any questions. The general public doesn't ask because for the vast majority and understanding of corporate taxation is non-existent; why isn't the media asking? That's another issue altogether.

The first thing you must understand when dealing with the corporate tax structure, is that for the most part, many large corporations do not pay the complete 30% tax that would typically be levied against an individual if they were in the same situation; corporate accountants and the sheer process by which corporations must report their income, expenses, deductions, depreciation, dividends, and any other financial transactions allows for huge deductions that typically offset any tax due. This concept is a major topic of discussion today, as we attempt to better control and regulate corporate accountability for their finances.

As for the capital gains tax, it is at an all time low, and President Bush has given corporate America and even greater gift of capital gains exemption on foreign income. Could you imagine how excited the average citizen would be to find their income had been exempted for a couple of years from tax? Don't look for that to happen any time soon, as the average guy doesn't have expensive lobbyists in Washington working for them.

When you have large corporations that are obviously reporting earnings and paying dividends, yet they pay no tax, you should be tipped off to the fact that there is a problem. How to fix that problem, may be another subject altogether.

The latest proposals have been to eliminate the corporate tax altogether. This would leave only the capital gains tax, and would shift the tax burden to the individuals of this country; that is a tremendous shift from the post-war era of the Second World War, when corporations and individuals shared the responsibility almost equally. Thanks to the lobbying done by corporate lobbyists over the last thirty years, we've finally reached the point of no return. The latest proposals have come from within the halls of Congress to eliminate corporate tax, and let the average taxpayer assume all the responsibility. Of course, these are the same individuals who voted themselves a pay raise in the face of a huge national deficit and a sluggish economy.

In case some of you have noticed, we as individual citizens are losing more and more of our take home pay each year, to taxes of some kind. Medicare, social security, and income taxes take a larger portion of our dispensable income each year. This would take a step closer to making even more of our income the property of the tax man.

What about this seems unfair? As pointed out by the individuals who are in favor of eliminating corporate tax, it would encourage capital investment and job growth in this country and that is absolutely true, it theoretically would do just that. But since when does theory actually work in practice? Communism works in theory. Many individuals believe it is simply another way to provide tax-free income to CEOs, and Board Members. The latest scandals such as Enron and HealthSouth have shown this country real hard evidence of the corporate abuses that are rampant in this country, and so far uncontrolled. The Sarbanes-Oxley Act has taken great steps toward greater accountability on the part of the corporate environment, but elimination of corporate tax is simply a legal way to avoid paying the tax.

When you factor in the ability of the wealthy and the corporate entities of this country to hire brilliant accountants that find loopholes in the tax system, and relieve their clients entirely of their tax liability, you cannot believe that the current system operates for the people, by the people, can you?

When Selling Rental Property, How Do You Stretch Your Profits?

Before you get all excited about selling rental property for juicy profits, it's crucial for you to learn how to slash your capital gains tax first so that you can maximise your hard earned profits. Find out how smart property investors cut down or even eliminate their taxes right now.

What are Taxes You Will Have to Pay When Selling Rental Property?

Capital gains tax is a type of tax that is imposed on the profits that you earn from selling investments such as your shares or rental property. As the name suggests, you won't have to pay a single cent if your rental property was actually sold for a loss.

So how much can you expect to pay? Depending on which country you live in, you can expect to pay anything between 10 to 30%. The good news for some is that there are actually no such taxes for them to worry about. This includes rental property owners who are lucky enough to be in Hong Kong, New Zealand or Singapore.

If you are from the U.S. and hold on to your property for at least 1 year before selling it, your tax rate will range from 10% to 25% depending on your income tax bracket.

However if you sell your rental property after holding it for less than 1 year, your profits are considered as short term capital gains and you will be taxed more heavily at the same rate of your ordinary income tax. This will mean you can expect tax rates of 10% to 35% depending again on what is your taxable income.

How to Cut Down or Even Totally Eliminate Your Capital Gains Tax

Before selling rental property take a closer look at your country's tax laws first to see if you can spot any loopholes that you can exploit.

For example do you know that foreign property investors in the U.K. do not have to pay these taxes and in Russia you can avoid it completely by owning the rental property for at least 3 years before selling.

If you live in the U.S., it's vital to know how the legendary 1031 exchange works so that you can milk it to legally avoid paying any money for your capital gains.

What makes the 1031 exchange so popular with rental property owners is that it allows your to defer paying taxes on your capital gains tax as long as you reinvest the money from the property sale to buy another similar type of property.

In some countries such as the U.S., home owners enjoy lower tax rates than property investors when selling off their homes. If you can find a way to qualify as a home owner instead of a rental property investor, you can enjoy these tax savings as well.

For example in the U.S. you can be considered as a home owner if you lived at least 2 of 5 years before selling off the property. You are also allowed to rent out your property for 14 days or less every year without being taxed.

Stock Option Plans, Statutory & Non-Statutory Explained

Statutory Stock Option Plans.

Generally, property transferred to an employee in connection with services performed by the employee, results in ordinary income to the employee and a deduction to the employer. The Code does provide for special tax treatment for statutory stock options. The transfer of a statutory stock option to an employee has no tax consequence until the employee sells the stock. At that time, the employee pays capital gains tax (generally 15%) on the difference between the option price and the amount received. However, if the option price was less than the fair market value at the time the option was granted, the employee must recognize ordinary income (taxed up to 35%) on the difference between the option price and the fair market value at the time the option was granted.

As this is extremely confusing, an example is appropriate:

In year one, Employer (GM) gives Employee a five year statutory stock option to purchase one share of GM for $100. At the time, shares of GM have a fair market value of $100. In year 3, when shares of GM have a fair market value of $150, Employee exercises the option by paying GM $100 for the share of stock. In year five, Employee sells stock to a 3rd party for $200.

There is no tax consequence to any party in year one. In year three, Employee does not recognize any income. GM may have capital gain income equal to the $100 received minus GM's basis in the share. In year five, employee will have a $100 capital gain. GM does not receive a deduction.

Numerous requirements must be met to qualify as a statutory stock option. They provide a tax advantage for the employee in that tax on the appreciation is deferred until sale and the appreciation is taxed at a capital gains rate. There is no tax advantage for the employer, however, because no deduction is allowed.

If the employer's marginal tax rate is as high as the employees' marginal tax rate, there may be no overall advantage in utilizing a statutory stock option.

Non-statutory Stock Option Plans.

A non-statutory stock option plan is simply one that does not meet the requirements of a statutory plan. Generally, the employee will realize ordinary income at the time that the option is granted. Income recognition is deferred, however, if the employees' rights to the stock are not vested or if the stock does not have a readily ascertainable fair market value. Although income recognition deferral is a general goal of tax planning, in this case, the advantage of deferral must be weighed against the disadvantage that the appreciation in the stock is taxed as ordinary income (up to 35% rate) rather than capital gain (usually a 15% rate).

In some circumstances, the employee may elect to recognize income at the time that the option is granted. By doing so, appreciation in the stock is taxed at capital gains rate when the stock is sold.

Employers are entitled to a deduction equal to the ordinary income recognized by the employee. The employer may not claim this deduction until the year the employee includes the income in his/her return. The employer may also have capital gain or loss when the option is exercised equal to the option price minus the employer's basis in the stock.

It is more difficult to value a stock option than the underlying stock. The stock option value is based on the value of the underlying stock and the option privilege. Accordingly, it is more likely that a stock option will not have a "readily ascertainable value." This means that the stock option is less likely to be immediately taxable to the employee (and deductible to the employer). This also means that an employee is less likely to be eligible to make an election to immediately recognize income (to avoid ordinary income taxation on stock appreciation).

For this reason, it is sometime preferable to issue stock bonuses rather than stock options.

Making More Money from Capital Gain Taxes

As we may know, keeping a diversified portfolio can be beneficial to the overall health of our financial stability and growth. Taking a closer look at each investment, they fall into two categories of taxes: capital gains tax and ordinary tax. Many people have both types of taxes within their portfolio but are not sure which tax applies to the investments.

Which Tax is Which: Capital Gains and Ordinary

Capital gains tax is applied on profits realized from the sale of capital assets such as a home, certain investments and dividends and business interests. The best way to determine how an investment is taxes is to simply ask, "What occurred with the investment this year?" If the investment generated income such as interest, the income will probably be considered ordinary. But if you sold the investment for a profit then it will be determined a capital gain.

Capital gain is generated when the sale price for a capital asset exceeds your adjusted tax basis in that asset. Generally, your adjusted tax basis in an asset equals the price you paid for the asset with some adjustments. However, different basis rules may apply to assets acquired through gift or inheritance.

Retaining Income Through Capital Gain

Capital gain income is generally preferable to ordinary income. Currently, the highest marginal income tax rate is 35 percent, while long-term capital gains tax rates vary from 5 percent to 28 percent, depending on the asset and your marginal tax rate.

Here's how capital gain is taxed. Taxation of capital gains depends on how long you owned or held your investments before selling. Assets that are held for less than one year generate short-term gains and are taxed at the ordinary income tax rates. If you hold the asset for more than one year, it is considered a long-term capital gain. The applicable long-term capital gains tax rate is determined by the type of asset and your marginal tax bracket. For taxpayers in tax brackets higher than 15 percent, the rate is generally 15 percent. For taxpayers in the 15 percent and 10 percent brackets, the rate is 5 percent. This applies to sales and exchanges made after May 5, 2003 and before January 1, 2009.

Too Much Income

If selling an asset that you've held on to for more than a year puts you into the higher tax bracket, you may not be taxed at 5 percent. You can use a preferred capital gains tax rate of 5 percent on a portion of the capital gain only. The remainder of your capital gain will be taxed at the higher 15 percent rate.

Net it Out with the Netting Rules

In order to properly compute your capital gains tax, you should be aware of the manner in which capital gains and losses may offset one another. These rules are known as the "netting rules." Generally speaking, the tax code prescribes that short-term capital gains and losses must be netted against each other first. Next, long-term capital gains and losses are netted against one another according to a set of ordering rules. Finally, net short-term gains or losses must be netted against net long-term gains or losses in a prescribed manner.

Capital losses are netted against capital gains. Up to $3,000 of excess capital losses is deductible against ordinary income each year. Unused net capital losses are carried forward indefinitely and may offset capital gains, plus up to $3,000 of ordinary income during each subsequent year.

Knowing is the Key

The key to making the most of your money is deciding when to keep or sell your investments. But when you do, you now know how it can be taxed. Be sure to consult your financial planner or accountant to verify the tax rate so your decision is the best one.

Capital Gains Tax and Divorce

As a general principle transfers of assets between spouses living together, including Civil Partners, are deemed to take place on a 'no gain, no loss' basis and no charge to tax will arise. The acquiring individual is treated as if the asset was acquired for a consideration of such an amount as would ensure that on the disposal neither a gain nor a loss would accrue to the individual making the disposal (section 58 TCGA 1992).

This can produce significant opportunities for mitigating Capital Gains Tax (CGT) liabilities otherwise arising by arranging assets so as to:-

- Make use of individual CGT exemptions available (currently £9,200);

- Utilise lower and basic rate tax bands.

This can often involve the transfer of ownership of assets prior to disposal, often at the "last minute". As the liability for CGT follows 'beneficial ownership' principles, rather than legal ownership, this can often be achieved by way of 'declaration' rather than the physical transfer and vesting of assets in the name of the recipient. A useful tool when timescales are tight!

The general principles outlined above only apply to transfers in a tax year when the couple are married, or civil partners, and living together at sometime during the tax year. The principles will therefore apply to transfers which take place in the year a couple permanently separate.

Thereafter however, such transfers, even if part of a financial settlement arising on divorce or dissolution, may give rise to a charge to CGT.

The reason is that, assuming the transfer of assets takes place in the year following separation, but when the parties are still married, or civil partners, then the disposal will be to a "connected person" as defined in the Taxation of Chargeable Gains Act 1992. Such disposals are deemed to take place at market value, irrespective of the consideration changing hands, if any.

So, take for example a husband transferring an investment property to his wife as part of an agreed financial settlement. The market value of the property at the time of transfer is £200,000 and had an original acquisition cost of £100,000. The gain arising after taper relief and annual exemption is £50,800 giving rise to a potential liability to CGT of £20,320.

In such cases it is imperative that the question of CGT is considered at an early stage in the divorce process.

Australian Federal Budget - Tax and Superannuation Changes

The Australian Treasurer, Wayne Swan, delivered the 2010-2011 Australian Federal Budget on 11 May 2010. In this article I will concentrate only on the taxation and superannuation matters that will be of more general interest. I will not cover all of the changes. Also, I will not repeat announcements that were part of the Government's response to the Henry review.

The key announcements I will discuss are: (1) An increase in the Low Income Tax Offset (2) An increase in the level of net medical expenditure necessary to obtain a tax rebate (3) An optional standard deduction for work related expenses and cost of managing tax affairs (4) A 50% discount in relation to the earning of certain interest income (5) A change in the way that Capital Gains Tax applies to earn-out arrangements (6) A permanent reduction to the superannuation co-contribution rate. (7) GST changes to the margin scheme and the financial supplies threshold. Here are the details:

Low Income Tax Offset

From the 1st of July 2010 there will be an increase from $1,350 to $1,500 of the Low Income Tax Offset. Due to this, a person that earns up to $16,000 will not have to pay income tax.

Net Medical Expenditure Threshold

Currently, if a taxpayer has net medical expenditure of $1,500 or more, a tax offset can be claimed for 20% of the expenditure above the threshold. From 1 July 2010 the threshold will be raised to $2,000, thus making it more difficult to make a claim. Also, in following years, the threshold will be indexed in line with the Consumer Price Index.

Optional Standard Deduction

In a big win for millions of taxpayers, from 1 July 2012, there will be an optional standard deduction in lieu of claiming work-related expenses and the cost of managing a person's tax affairs. This will only apply to individual taxpayers. The optional standard deduction amount will be $500 in the year ending 30 June 2013. In the year ending 30 June 2014, this amount will be $1,000. The standard deduction is optional as taxpayers will still have the ability to claim actual expenditure.

50% Discount for Interest

To encourage savings, from the 1st of July 2011, there will be a tax discount of 50% on up to $1,000 of interest earned. So if a person has $20,000 in the bank that is earning 5% interest, the whole amount of this interest will be eligible for the discount. This will also mean that some individuals and families will become eligible for Government assistance or be able to obtain larger Government assistance with such things as the Family Tax Benefit, Child Care Benefit and so forth.

Capital Gains Tax and Earn-Out Arrangements

There is going to be a change to an annoying part of the Capital Gains Tax law that relates to the sale of a business where there is an earn-out arrangement. An earn-out arrangement is used to adjust the sale price of a business depending on how it trades after the business changes hands. Typically there will be a set amount paid for the business plus a contingent amount based on trading over, say, the next 12 months. So, for example, a purchaser of a business may agree to pay a certain percentage of the gross margin of a business as further consideration for the purchase of the business.

Under the current interpretation of the law, the earn-out component is a separate asset from the underlying business. This causes a number of problems, including the inability to apply the small business CGT concessions to the earn-out component of the purchase price of the business. The Government will change the capital gains tax law so that the earn-out component of the sale price will be treated as consideration for the underlying business and not consideration for a separate right created by the contract of sale.

This change will apply from the date the law receives Royal Assent. There will be transitional provisions in certain cases from 17 October 2007.

Matching Rate for the Superannuation Co-Contribution System

The Government has announced that it will permanently keep the matching rate for the superannuation co-contribution system at 100%. Further, the maximum co-contribution will be set at $1,000.

Goods and Services Tax Changes

Turning to GST, the Government has announced that there will changes in the way the margin scheme operates. These changes will apply from 1 July 2012. There is not much detail as to how these changes will operate but the changes will be designed to address a number of problems with the current law.

Finally, the threshold below which businesses need not be concerned with making financial supplies will be increased by 3 times from $50,000 to $150,000 of input tax credits. This change will have effect from 1 July 2012.

Wishing you easier business

John M. Jeffreys

Capital Gains Tax on Levied Property

One of the most key things that have to be done is to hide true accounts of the business. The people who do nine to five jobs are the ones that tax is usually collected from; Things such as these have left certain governments in a sticky situation. Their approach to this problem was by the Federal government which took things into their own hands and told the provincial governments that they should levy their taxes on capital gains from real estate.

Two particular governments which are Punjab and Sindh would support this gesture but the only way that will happen is if the federal government drops the current capital gain tax value on real estate. Certain governments like the one's of WWFP and Baluchistan are very much against the motion to drop the prevailing tax on real estate, that feel that this particular tax should never be withdrawn neither replaced. The Government in control of this tax called a meeting with the various provinces and there was a point raised by Sindh that the power of the tax from levying should not be collected by the tax collectors but instead it should be levied determining the market price for any particular property.

These market prices should be reviewed and updated every year, the representative also raised the issue of making inheritance transfers have none of this tax. The representatives from NWMP whom also spoke stressed on their point that the tax should remain as they don't see anything wrong with it at this present time.

Could Capital Gains Tax Break Encourage Business Incorporation?

There is some interesting legislation surfacing that could fuel business incorporation. President Obama is backing a proposal that eliminates capital gains tax on investments made in 2010 and 2011 on qualifying small businesses. "We should eliminate all capital gains taxes on small business investment so these folks can get the capital they need to grow and create jobs " said Obama at a February Town Hall meeting in Nashau, N.H. "That's particularly critical right now, because bank lending standards are tightened since the financial crisis and many small businesses are still struggling to get loans". The president believes in the proposal and so do the majority of small business owners according to a recent poll. PNC Financial Services Group polled 500 small business owners and 60% believe the proposal would benefit small business.

The tax break does not support all business incorporation or benefit all investors. The tax break applies only to individual "angel" investors who invest in the early stages of small privately held corporations.

Sorry LLCs and S-corps, you can only qualify for the tax break if you invest in a C-corporation with assets of less than $50 million. Other restrictions prevent newly incorporated businesses in fields like farming, accounting and law, restaurants and hotels, or banking and finance from benefiting. The tax break is geared towards corporations in fields that are believed to have high-job growth potential such as manufacturing and technology.

Also, the investor has to purchase "original issue" stock. Original issue is stock purchased directly from the company. Additionally, the stock must be held for at least five years.

What about AMT? The alternative minimum tax (AMT) is a tax structure that is aimed at eliminating deductions from high income filers. Those investors that would have the cash flow to support business incorporation are generally subject to AMT exposure. In this proposal the impact of AMT is eliminated 100%.

Before you form an opinion on the new proposal, let's look at the current law. Under current law, the exclusion for purposes of the regular income tax system of 50% of the recognized gain on the disposition of qualified small business stock (which was increased recently under the American Recovery and Reinvestment Act to 75% for issuances after February 17, 2009) is substantially undercut by the combination of the high 28% rate of tax applicable to the non-excluded portion of the gain under the regular income tax and the AMT rules.

Of course with any legislation there are going to be supporters and skeptics. But small business owners are hopeful that investors will have an incentive to give business incorporation a shot in the arm.

To learn more about how Capital Gains Tax Break Encourage Business Incorporation click here: http://www.ezonlinefiling.com/incorporate-1.php

Is Ordinary Income Different From Capital Gains?

Earned income (typically from employment) is considered ordinary income. In 2009, ordinary income tax rates range from 10 to 35 percent. An individual's marginal tax rate is the percent of the last dollar made during the year that must go towards taxes. It's important to note that a taxpayer's marginal tax rate is not applied to every dollar earned during the year. Examine the following chart, which illustrates the federal tax schedule for married individuals filing jointly in 2009.

o 10% on the income between $0 and $16,700
o 15% on the income between $16,700 and $67,900; plus $1,670
o 25% on the income between $67,900 and $137,050; plus $9,350
o 28% on income between $137,050 and $208,850; plus $26,637.50
o 33% on income between $208,850 and $372,950; plus $46,741.50
o 35% on the income over $372,950; plus $100,894.50

As the chart indicates, all income up to $16,700 will be taxed at 10 percent, and only income between $16,700 and $67,900 will be taxed at 15%. This layering of tax rates creates a distinction between a taxpayer's marginal and effective tax rates. If a couple earned $75,000 in a year, they would be in the 25 percent marginal tax bracket, but their actual federal tax bill would be $11,125 (calculated by subtracting $67,900 from $75,000 and multiplying the result by 25 percent, then adding $9,350). Thus, the couple's effective federal tax rate would be 14.83 percent ($11,125 divided by $75,000).

Marginal rates are used to calculate how much tax can be saved by increasing deductions. A taxpayer in the 25 percent marginal tax bracket will save 25 cents in federal tax for every dollar spent on a tax-deductible expense, such as mortgage interest.

Capital gains tax is applied to most items purchased and sold for investment purposes. For the purposes of this writing, the items most applicable to capital gains taxes are stocks, bonds, money market accounts, and property. When a capital asset is sold, the difference between the selling price and the basis (usually what was paid for the asset plus the costs of any improvements made) is subject to capital gains tax.

Capital gains or losses are further classified as short-term and long-term. An asset that was owned for 12 months or less is considered to be a short-term asset, and any gains from the sale of short-term assets are taxed at ordinary income rates. Long-term assets are owned for more than 12 months, and qualify for taxation at favorable capital gains tax rates.

Capital gains tax rates are lower than ordinary income rates in order to give investors an incentive to invest in the economy. In 2009, taxpayers in the 10 or 15 percent marginal tax brackets qualify for the generous capital gains tax rate of 0 percent, while taxpayers who are in the 25 percent or higher marginal tax brackets pay a capital gains tax of 15 percent.

Your financial planning efforts should always consider tax implications. Recruit an independent fee only financial planner who prefers to work closely with your tax preparer.

Preparing Income Taxes - 2 Ways Capital Assets Save You Money

What is a capital asset? Tax authorities like the Internal Revenue Service and state taxing authorities expect you to report any capital gains or losses on your annual income tax return. This information is reported on IRS Form 1040, Schedule D, Capital Gains and Losses and then transferred as a "cumulative" net amount to Line 13 in the income section on the top page of your IRS Form 1040. You can't file an income tax return that has capital gains or losses using IRS Form 1040A if you are required to file Schedule D to report the income.

Why should you care what is or is not a capital asset? It is important because it could save you money! Tax rates applied to capital gains income are often significantly lower than a person's marginal income tax rates. In other words, you often owe less tax if you sell a capital asset! For 2009 and 2010, a taxpayer in the 15% marginal income tax bracket will pay 0% on any net capital gains! But there is yet another way it can save you money.

The second way you can save money is if your capital loss is greater than your capital gains for the tax year. If gains are less than your losses, you have a cumulative or net loss. This means you can deduct up to $3000 ($1,500 if you are married but filing separately) from your income tax. If the loss is greater than this annual limit, you can "carry forward" the unused loss into future years until it is all used up. There is a catch, though. You can deduct a capital loss only on investment property; you can't deduct a capital loss on personal use property. This distinction is important; you typically don't own investment property, according to IRS code, for personal enjoyment! It is also important to remember that if you anticipate a significantly large taxable capital gain during the year, you are required to make estimate tax payments (even though it will be taxed at a preferentially lower rate).

Your understanding of the definition of a capital asset and how you dispose of it is an important part of managing your personal finances. More information is available in IRS Publication 544, Sales and Other Dispositions of Assets or on the IRS website, IRS.gov. Knowing the "rules" about capital assets could save you lots of cash AND grief.

Capital Gains and Flipping Properties

Flipping and taxes are a frequent issue for property investors, since for a long while people have been looking at the real estate market in the exact same way they look at the stock market. The instance of flipping in the real estate market became a great way to get quick funds.

But one of the things that people usually don't check on is the way to avoid the high tax bills on their profits. One of the first ways to avoid high taxes on your profit is treating the particular investment as a capital gain. The usual thing that occurs is that the if you sell a certain property in less than one year you will end up paying less tax, as this amount will be the same as the ordinary income tax rates which is in the 35% bracket. If you have owned the property for more than a year then you will have to pay the long term capital gains tax of 15%.

The way that you will get this property treated as a capital gain is if you can show that you had not tried to flip it. But in order to do this you would have to hold the property for a period of time which would go against the whole notion of flipping the property to make a quick earning. And another key fact of the matter is how often you flip, because if you flip properties too often the IRS will check your records and see if you are doing this for a living and then tax you in all the necessary area's.

The 1031 Exchange Alternative - How to Sell Commercial Real Estate Without Paying Capital Gains Tax

When it comes to tax planning, eliminating the capital gains and depreciation recapture taxes on the sale of appreciated commercial real estate is a hot topic. In fact, there are countless numbers of would be sellers who don't because of this. Many would be sellers simply want out of the real estate - they're tired of landlording, fixing toilets, and never ending maintenance and management. They would like to sell, reinvest elsewhere and simply receive a check, spending their time doing what they like. Unfortunately, the only way to get out of real estate without losing control of the "asset" is to sell it outright-and pay the tax. You could implement a property exchange (1031) directed by a Qualified Intermediary, but the key word here is "exchange"- you've simply traded one for the other. You're still in real estate.

Other sellers may want to buy more real estate, but don't want the restrictions and rigid timeframes of a 1031 Exchange. What can you do? Is there any other way to get out without paying these taxes? The answer may lie in the use of a specialized trust, designed in accordance with strict IRS guidelines and a private letter ruling. It can be used as a tax deferral tool and as a 1031 Exchange alternative.

This tax deferral tool could, if implemented, save you tens of thousands of dollars in taxes that you would have otherwise voluntarily paid to Uncle Sam. These are dollars that you can use to generate a higher income and to potentially profit from. It's as if Uncle Sam let you keep the tax dollars, invest them somewhere, and use the income they generate for you. It really is like "free" money. As a result, it comes as no surprise that this strategy is gaining popularity among owners of highly appreciated commercial real estate who have properties marked for sale. With a better understanding of the process, you too can take advantage of this program.

The process begins when an owner of commercial property sells it to a special trust owned by a third party company. Then, the trust sells the property to a buyer. There are no taxes to the trust because the trust "purchased" the property from you for what it sold it for. At the completion of the sale, the money from the buyer is now in the trust. At this point, the trust begins to "pay" you. This payment isn't is a lump sum, but a payment contract, referred to as an "installment contract". This contract is similar to that of an Installment Sale, but without the restrictions and with many added benefits. This contract promises to make payments to you over a pre-specified period of time.

You can choose when and how payments are to be made. You may not need the income right away-or ever. It's up to you. The tax code requires the payment of tax to the IRS only when you begin to take installment payments. Therefore, tax is paid incrementally. It is paid in proportion to the number of years in your "installment plan". In the case of a 1031 exchange, money for a new purchase can be acquired anytime from the sale of the old property and use of this trust without paying taxes, thereby eliminating the restrictions and rigid timeframes of the 1031 Exchange. Either way, your equity is no longer "tax trapped".

This special type of trust gives you the potential to generate much more money over the long run than you would with the taxes lost in a direct sale.

This may be the most suitable or appropriate tax strategy depending on your circumstances. Contact the author for a complimentary tax analysis and to discuss your specific circumstances and goals.

Private Annuity Trust

Private annuity trust is actually a 'capital gain program' that aids with both depreciation re-capture costs and high-capital gains. This program is advantageous to owners of residential or commercial real estate properties who do not need money immediately from the sale. With several individuals paying high tax amounts on highly valued properties, private annuity trust proffers a choice to save a fair amount of money.

How does a Private Annuity Trust Work?

The owner sells his property to a 'trust' by moving ownership before the actual sale of property. The payment of trustee is in the firm of private annuity agreement, which is actually setup to make pre-determined number of 'payments' for a pre-calculated, specific amount for rest of the owner's life.

The payment for annuity is determined using a method which employs age of the owner, amount of proceeds of sale, and interest rates set by the 'IRS'. The proceeds from properly sales are then seized in 'private annuity trust' and can be put in by trustees. The payments are made to owners for an agreed upon and predetermined amount. Also, any income that the trust makes should be kept for the beneficiaries of the trust.

The owners are taxed on payments from annuity only, instead of the entire amount at the time of sale. Payments don't have to start on immediately, making 'private annuity trust' a smart option for retirement. The owners can have tax benefits, as long as payments start by the age of 70.

Key Advantages of Private Annuities Trust

Private annuity trust is in fact a tactical yet simple tax planning approach that saves thousands of dollars in tax-liabilities, while adding to the worth of your assets due to tax deference and combination of gains and principal. Some most common trust advantages include:

• Pays no depreciation re-capture taxes at the time of sale
• Defers capital-gain taxes unpaid upon time of sale
• Creates a lifetime income 'stream' for mutual lives
• Eradicates estate taxes unpaid upon the death of taxpayer
• Maximizes Medicaid planning advantages for utmost asset protection
• Does away with property management needs
• Keeps away from expenses and holdups of probate Moreover, private annuity trust also offers asset safety against lawful disputes.

As of October 2006 the IRS ruled that the PAT is no longer a valid capital gains tax deferral vehicle. Those who utilized the PAT prior to the IRS ruling are grandfathered in and will continue to recognize its tax deferral benefits. Prior to October 2006, PAT's were in high demand and very attractive to sellers of highly appreciated real estate in the United States. A PAT would allow the owner of an investment property to defer up to 100% of the taxes that were due without having to buy another property. This is important to understand because all of the gains or appreciation on a primary residence over $250,000 for a single person, and $500,000 for a married couple will be taxed if a PAT is not used.

Who should Consider Buying Private Annuity Trust

A business owner, who wishes to retire and give control to a family member or key employee devoid of facing large income tax-liability, can think about purchasing private annuity trust. Furthermore, if you are an investor who wishes to eliminate sized asset from estate, or you're a grandparent who wishes to give some assets to his/her grandchild, then you can opt to buy annuity trust. Those who wish to change non-income creating real-estate into the assets that give regular income devoid of having to pay immense capital gain tax can also consider buying 'private annuity trust. Above all, a private annuity trust can aid you to cut down on taxes (gift, estate and income), get a fixed income and expand your portfolio. I would recommend consulting with your CPA and financial advisor/agent prior to purchasing a PAT to consider if a PAT is right for you and your taxes.

Congress Set a Tax Bomb For 2009 and 2011

You may question why I call the coming federal tax increases a Tax Bomb? The reason is that he tax increases that are coming are going to impact individual households and the economy as whole in the same manner that the atom bomb impacted Japan at the end of World War 2.

Most Americans are so caught up with the current problems that are hitting us they don't have time to look ahead at what is coming.

The first tax bomb will impact us in 2009 when the reduction of capital gains taxes expires. Thousands of people that rely on stock dividends for their income will pay two to three times as much in taxes. Then in two years 2011 the tax bill will increase by half to double once again.

Why?

Currently dividends are taxed at a favorable capital gains rate but starting in 2009 dividends will be taxed as ordinary income.

If you have stock or real estate to sell the capital gains rate will double in 2009.

The reason for this is the economic stimulus package that was passed by congress to overcome the effects of the World Trade Center bombing of 2001 will start to expire at the end of 2008 and expire in 2010. In 2009 dividends will be taxed as ordinary income and capital gains and ordinary income rates will go back to 2000 level.

What does this mean to you as a taxpayer?

It means that unless you and I can convince congress to extend the favorable tax rates many of us are going to be paying a lot more tax than we ever imagined.

An example of the impact: say you are married two children 15 and 16 and you are making $50,000 at your job and have $5000 in dividends in 2008. Your federal tax bill in 2008 would be about $1,250 or less. In 2009 it will jump to $3,000 in 2011 the taxes will jump to about $6,000. Those that make more will see more dramatic tax increases.

Another example of the coming tax increases is a single person making minimum wage in 2008 will pay about $600 in federal tax. In 2011 his federal tax will increase to $1500.

A retired couple living on dividends of $50,000 will pay no federal tax in 2008 but in 2009 they will be taxed $4500 on the same dividends.

Are you ready for these tax increases?

There are a number of things that you can do to offset these taxes but you need to act pro actively now.

Things that you may want to ask your tax advisor about are:

A home based business such as an MLM.

A Self Directed Roth IRA.

Roth IRA's.

The best thing we can do is write our congressmen and convince them to make the tax cuts permanent or better yet just replace the people in congress with people that will not hide tax bombs in the tax code.

Watch for coming articles on MLM's and Self Directed IRA's.

Down Size With Reverse Mortgage, Move Your Tax Base & Take A Capital Gains Exemption? It's Possible

A future trend for Southern California Boomers? For Boomers and Seniors living in other areas, two out of three isn't bad either.

The house is big, the kids are gone, you're tired of maintaining the yard and you and your spouse only use half of the house. Could it be time to move and at the same time increase your retirement nest egg and cash flow?

The passing of HR. 3221 and the modernization of FHA and reverse mortgages is a step in the right direction in helping boomers and seniors plan for their retirement. The improvement is yet to be measured but here are some interesting thoughts.

Within the last couple of weeks the president signed into law HR 3221. Amongst many things, this law will do is dramatically change reverse mortgages. It will:

o Increase the loan limits for reverse mortgages (limits have yet to be defined publicly by HUD) - which means more liquid cash for reverse mortgage recipients.
o Capped origination fees - 2% of the first $200k of the maximum claim amount, plus 1% of the balance above $200k to a maximum origination fee of $6000. On average this will reduce origination fees by over $1200 for Southern California reverse mortgage borrowers.
o Enable to use the FHA HECM reverse mortgage for HOME PURCHASE
o Enable the FHA HECM reverse mortgage to used on co-ops, amongst other improvements

In 1986, California voted to provide tax relief (Proposition 60) to homeowners older than 55 by allowing (with some restrictions) to transfer their existing property tax base to replacement homes of the same or a lesser value within the same county or a participating reciprocal county (Proposition 90). As the boomers begin to retire and look to trade into smaller, age friendly single story homes, or consider 55+ communities, using this proposition may become more popular. You can use this benefit one time. There are numerous restrictions including a single person or spouse must be 55 years old when selling your original property. Your new property must be a principal residence with the current market value equal or less than your original residence. Proposition 60 covers property transfers within the same county. Proposition 90 allows property tax base transfers with participating counties of Alameda, Los Angeles, Orange, Santa Clara, San Diego, San Mateo and Ventura counties. Be sure to contact your tax assessor's office for current information.

Taxpayer Relief Act of 1997 changed the way real estate capital gains taxes are calculated. The IRS issued updates in 2003. This rule offers up to $250,000 tax free sales home profits for a single person and up to $500,000 profits for a couple. To qualify the seller must have owned and occupied their principal residence a total of two of the five years before the home sale. (Consult your tax expert for updated advice)

Even with today's softened housing market, many home owners have substantial equity in their homes. There is an opportunity to take advantage of these gains and improve your retirement plan with multible opportunities.

Here is an example:
Mr. & Mrs. Jones both age 70, sell their current home for 1 million in Los Angeles County; Original cost of home: $250,000; Mr. & Mrs. Jones decide to buy a home for $500,000 in Ventura County. Gain on the sale: $500,000; Exclusion for couple filing jointly: $500,000; Taxable gain: $0. Mr. and Mrs. Jones transfer their original property tax base with them, keeping their original property tax base. They take their $500,000 exemption and buy their home in Ventura County with a FHA HECM reverse mortgage. The FHA HECM reverse mortgage allows them to either pay $300,000-$320,000 for their $500,000 home, they have no mortgage payment and they pocket the difference tax free. Mr. and Mrs. Jones may also purchase their new $500,000 home with a reverse mortgage and further increase their monthly cash flow by $6-700 a month buy opting for the tenure payment option for life.

All three of these opportunities will soon be available to many Southern California retirees. The capital gains exemption is available to everyone. As soon as HUD issues the green light, FHA reverse mortgages will be available for use in home purchases for borrowers 62+ years old, throughout the USA.

The Boomer generation turned 62 this year. With the increasing popularity and practical application of reverse mortgages into the main stream, it is not unreasonable to expect to see the incorporation of these and other cash flow tools in retirement planning on an increasing basis.

Home Appreciation and Capital Gains

The last seven years has seen tremendous appreciation in home prices. This brings up the issue of home capital gains tax issues for people when they sell.

Home Appreciation and Capital Gains

Owning home is considered part of the American Dream. Unless you are extremely unlucky, homeownership leads to tremendous wealth building. You simply sit in your home, make the monthly payment and reap the benefits of appreciation and increased equity. A bit of the luster, however, can be lost when it comes time to sell.

Capital gains taxes are the problem. The federal government encourages homeownership, but also wants a chunk of a change when you sell. The capital gains tax is a percentage of the profit you have realized from the home, to wit, the difference between the price you purchased it at and the price it is sold. You can deduct mortgage costs, improvements and so on, but there is still the tax.

Fortunately, there are some large safe harbor exemptions to the home capital gains tax. If you are single, you can exclude the first $250,000 in profit from being taxed. If you are married and filing jointly, you can merge your individual exemptions and protect the first $500,000 from being taxed. In most parts of the country, these exemptions will completely protect you from home capital gains tax. Even if they don't, the tax savings should be substantial.

To claim the exemptions, you must meet a few requirements. Obviously, you have to actually own the home. You must also have lived in the home two out of the previous five years. It must have been two years since you tried to claim the exemption on any other home. Put another way, you cannot claim the exemptions for investment property or second homes. Still, these healthy exemptions are a windfall for most homeowners.

Americans are notorious for being horrific savers when it comes to financial planning. Homeownership provides a relatively straightforward savings method and the government promotes it as such by providing these large home capital gains tax exemptions. If you can pull it off, buying a home is one of the smartest moves you will ever make.

How To Escape Capital Gains Tax

Taxpayers are usually terrified of the word "capital gains." You can define capital gains as the profits you gain from the sale of an asset. As per capital gains tax law, you have to pay taxes on the profits you make when you sell an asset. You can make a capital gain on assets such as land, stocks, or bonds. On the other hand, if you made a loss on a piece of property, it is considered to be a capital loss for which you get a tax deduction.

A clause in the capital gains tax law permits you to avoid paying capital gains tax even if you make a huge profit while selling an asset. Real estate in one area in which you can dodge capital gains tax. Real estate is known to be a very profitable venture; its price never goes down as long as you own it. The good news is that IRS has enabled tax payers, who invest in real estate, to avoid paying taxes on the profits they make on it.

As per capital gains tax law, if you are single and make a profit of less than $250,000 or if you are married and make a profit of less than $500,000 on the sale of your primary residence, you don't have to pay any capital gains tax. So, unless you make a really big profit while selling your residence, capital gains tax is not something you have to worry about. Even if you make a profit exceeding $250,000 or $500,000, you have to pay taxes only on the amount which exceeds that.

If you would like to sell a house that you have been renting, you will be interested to know that you can consider it to be your primary residence, provided you live in it at least two years during a span of five years before you sell it. Several people who invest in real estate use this convenient clause to escape capital gains tax. All they have to do is to live in the property they have been renting for two years just before selling it.

Capital gains tax law has yet another clause that can help you avoid paying taxes on profits made on a place you have been renting even if you don't live in it for two years. You simply have to invest your profits in more real estate property, and you can escape paying capital gains taxes.

You have to pay taxes on profits made out of selling bonds. If you have held the stock for five or more years, you have to pay a 15 percent capital gains tax . However, if you have held it for less than five years, you have to pay almost double, that is 30 percent.

Your tax professional is the best person to answer any queries you might have on capital gains tax law.

Investing In The UK Through An Offshore Company To Avoid UK Tax

Capital Gains Tax Holding UK investment via an offshore company would look at first glance to be a good way of avoiding UK capital gains tax. As the company is non UK resident,and provided the assets aren't used for the purpose of a UK trade they will be exempt from UK capital gains tax (or more correctly corporation tax on the capital gain).

Note though that this tax exemption only applies if the company retains the cash until the shareholder is non UK resident or if the cash is retained overseas. Any extraction of the proceeds would be taxed to the extent that they were remitted to the UK. So whether a simple dividend is paid or if the company is liquidated and a capital distribution is paid the cash would need to be retained offshore. If you wanted to enjoy the proceeds in the UK you'd need to think about methods of remitting the proceeds with minimal UK tax implications.

A big problem with using an offshore company is in ensuring it's controlled from overseas. If it was controlled from the UK it would be UK resident and as such taxed in full on any capital gains realised. If the company owns UK assets it makes it more difficult to avoid the company being classed as UK resident.

Inheritance taxUsing an offshore company is a big advantage for inheritance tax purposes, as it converts a UK asset into an overseas asset. As non UK domiciliaries are not subject to Inheritance tax on overseas assets they can then avoid tax on the UK property owned by the offshore company. One point to note here is that it's important that the company shares pass on registration. They will then be classed as located where the share register is - which if this is outside the UK will ensure that the shares are excluded property.

Income taxA directly owned foreign holding company can at the most only achieve only a a partial avoidance of UK tax. Income tax, unlike capital gains tax is still taxed on UK source income. Therefore even if an offshore company is used, UK tax will still be charged on UK income.

However there are benefits to be obtained from using an offshore company. For example there can be a saving of higher rate tax as non resident companies are subject to the lower or basic rate of tax in respect of UK source income. Note though that you can obtain some income (eg UK bank interest) free of UK tax. This is because tax on this income is restricted to tax deducted at source if the recipient is a non resident.

SummaryAn offshore company investing in the UK can look to achieve the following tax benefits:

Avoidance of capital gains tax
Avoidance of inheritance tax
Partial avoidance of income tax
Anti avoidance rulesAside from the company residence position - which is always an issue where you have an offshore company with UK shareholders there are also the anti avoidance provisions to consider.

Note that there is also the related issue that if an individual exercises control over the company and makes it UK resident there is a risk that he may be a shadow director and any benefits provided to him (or his family) from the company would be charged to income tax.

The main anti avoidance provision that applies to income is S739. Although there is an exemption for non UK domiciliaries this does not apply to the company's UK income.

Therefore if the offshore company had UK investment income this provision would deem the income of the company to be that of the person establishing/transferring to the company originally.

Another useful point to note is that S739 applies to any foreign registered company.

When can the anti avoidance rules be avoidedOne is where the UK individual buys a company that already has the UK investments in it. Provided he doesn't inject any further assets to the company he shouldn't be within the scope of the legislation (as he's not made a transfer of assets resulting in income accruing to the company).

Secondly there is the motive defence which applies where the transfer was not for the purposes of avoiding UK tax, and was for a wholly commercial purpose. One case where this is more easily satisfied is where a non domiciliary established the company before coming to the UK.

When can the offshore non resident company be used as a tax shelter for UK investments?It can be used to avoid UK Inheritance tax It can be used to avoid UK tax on any capital gain It can be used as a partial shelter for UK income if S739 is avoided in one of the above ways.

However any extraction of the income or proceeds from the company to the UK would be subject to UK tax. Therefore ideally income/proceeds should be retained overseas.

Tax When You Inherit Money, Assets Or Property

Usually, you don't have to pay any sort of inheritance tax when some assets, money or property are left for you by the deceased one. In most cases, you get the inheritance after paying out the inheritance tax over it, but some situations may need to pay some sort of taxes.

You may need to pay three sorts of taxes regarding some inheritance, and these taxes can be in the form of income tax, capital gains tax, and inheritance tax. Let us find out in which conditions, you might have to pay these taxes.

If the items that you are going to inherit can generate taxable income for you, it is possible that you will have to pay on this inheritance. Usually, shares dividends, interest, and rental income are the incomes on which you might have to pay some tax over.

Similarly, when it comes to capital gains tax, this tax might be payable when you give away, sell or exchange some inherited asset. Often it goes up in value from the time of death. 'Dispose of' is what we call it in legal terminology that can be ceased to have an asset. If the inherited asset gains some value between the time of death, and disposing of date, this increase is known as capital gain, and you might have to pay some tax over it.

When it comes to inheritance tax, usually, this type of tax is not paid on property, assets, or money that you inherit, as this tax is taken out from the estate of the dead one. However, you need to pay this tax in certain situations for instance, you might need to pay this tax if the estate of the deceased cannot pay it, or if it is said in the will that the inheritance tax will be paid by you.

If you inherit some property from your spouse, you are considered an exempted beneficiary, and you will not owe inheritance tax, if you have been domiciled in the UK. However, if some property is owned jointly with the dead one who was not your spouse, the personal representative, or executor of the deceased need to pay debts, or inheritance tax before the distribution of the estate in its beneficiaries.

More often, it is paid by making the most of some other funds that come from different parts of some estate. If the debt or outstanding tax cannot be paid from the rest of the estate, you might have to sell the property.

You may need to pay Capital Gains Tax if your inherited asset is a property in which, you live in from its inheriting time to the time of its disposal, you may not need to pay Capital Gains Tax. If a second property is inherited disposed of, it is possible that you have to pay inheritance tax on this second property. Besides these situations, there is no other well known situation in which, you may need to pay any tax on your inherit money, property or asset.