Given the fact that most seniors are interested in a secure income, reducing risk and lowering taxes, here is a planning technique to consider if you are trying to increase your income.
Maybe you have a CD that is coming up for renewal and you discover the rate is going to be lower. You could have some stocks or mutual funds that were invested for growth and are thinking about selling some off and re-investing in something that would pay you an income. The only reason you haven't sold them is that you don't want to pay the capital gain.
I would suggest including a charitable gift annuity in your list of options.
A charitable gift annuity is a combination of a gift to charity and an annuity. For older people, annuity rates may be 8%, 9% or even higher. Since part of the annuity payment is a tax free return of principal, the gift annuity may provide you with a substantial income. The combination of partially tax free income and the initial charitable deduction makes this planning device attractive.
While this arrangement has its own unique benefits, the rate of return is less than if you had bought a commercial immediate annuity. Therefore, your decision to use a gift annuity should include a desire to eventually leave money to a qualified charitable organization that you have an interest in, such as a church, school, hospital, etc.
Gift annuities are easy to set up. You simply transfer property to the charity and the charity promises to pay a given amount monthly, quarterly, semi-annually or annually to you for as long as you live. Alternatively, you could elect to have the payments paid to you and another person for as long as you both live. Or you could elect to have the payments made to you for the rest of your life and then to the second person for the rest of their life. But the maximum number of people per gift annuity is two.
Gift annuity rates are set by the American Council on Gift Annuities. Charities don't have to use these rates, but most do. So you don't have to out shopping for the best rate. Make your choice based on the charity that you would like to support.
There are two tax issues that you should take into consideration when comparing a gift annuity to your other alternatives.
The first is that if you fund the gift annuity with cash, part of the payment you receive is taxed (as ordinary income) and part of it is not taxed as it is treated as a return of principal. If you fund it with appreciated property, and are the recipient of the income, part will be taxed as capital gain, part as ordinary income and part could be treated as a return of principal and not taxed. However, if you live past your life expectancy, all later annuity payments will be ordinary income.
The second tax issue is that when you give the charity your asset in exchange for a life income, you get a large income tax deduction. For most people, this income tax deduction is so big it cannot be taken in one year. So there are provisions to spread the deduction out over the year of your donation and five more. Your accountant can tell you if this will eliminate income taxes for the next 6 years or not. Chances are good that it will.
Please note that I am only giving general guidelines about taxation. Before you set up a gift annuity, you should sit down with your tax advisor to determine the exact tax ramifications for your situation.
There are a number of charitable gift annuity options and applications. This brief overview has given you some of the basics. If this seems like it may fit, contact the charitable organization of your choice and get a proposal. Then sit down with your accountant and financial planner and have them help you compare a gift annuity with your other options.
By : Robert D. Cavanaugh
Robert D. Cavanaugh, CLU is a 36 year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". To subscribe and get a free video of one little known planning concept, go to http://theestatepreservationadvisor.com/freevideo.htm
Wednesday, October 28, 2009
Tuesday, October 20, 2009
Decoding the IRS Dependent Rules! How Do I Know When to Claim a Dependent?
Everyone who earns any type of income knows how confusing federal taxes and dealings with the Internal Revenue Service can be. When the April 15th deadline begins to sneak up every year, the entire nation begins to feel the frustration of sorting out their income taxes. With the thousands of areas in which people can find deductions, one of the most confusing areas to consider is the handling of dependents.
Having a dependent may seem straight forward; however, there are many situations which bring up questions. For example, claiming a child as a dependent typically requires providing that child's social security number. However, what if you've just adopted the child and have no access to that number yet? In this situation, there are two solutions. If the child was adopted domestically, the parents must request an Adoption Taxpayer Identification Number (ATIN). This will allow the parents to claim the child as a dependent AND file for the child care credit. If the adoption is of a child that is not a U.S. citizen or resident, the application should be for an Individual Taxpayer Identification Number (ITIN).
Perhaps you've allowed a relative to live with you free of charge during the last year, and that person did not have a job. Can you claim this person as a dependent? The IRS has provided specific guidelines for this type of situation. As of December 31, 2004, the following must apply in order for you to claim the individual as a dependent:
1. The relative should be a child or grandchild of your brother or sister;
2. The relative is under 19 (or 24 in the instance of a full time student);
3. The relative has lived with you for more than half of the tax year in question; and
4. The relative has not provided at least half of his or her own support during the tax year in question.
In this day and age, many people are choosing to file separately, even if they are married. If you have both provided the same amount of care and support for a child, can you both claim that child as a dependent? Unfortunately, a child can only be claimed as a dependent on one tax return. Therefore, you should discuss between the two of you which will claim him. If you cannot come to an agreement, Publication 501 from the IRS has a "Tie-Breaker Rule", which will aid you in the determination.
What about separated couples? For instance, the child has lived with his or her mother for the majority of the tax year in question. However, the father has provided all financial support for the care of the child. Who would claim the child as a dependent? In this situation, the party with which the child resides maintains the right to claim him or her as a dependent. This, however, can be waived to allow the financially supportive parent to claim the dependent by filling out Form 8332, entitled "Release of Claim to Exemption for Child of Divorced or Separated Parents".
As you can see, there are many situations in which the dependency of a child is not straight forward. However, with the right sources, you can find the answers to most or all of your tax questions regarding the filing of dependent credits.
About the Author
Confused about your taxes and the functions of the IRS? Not sure what deductions you can take this year? Find your answers to these questions and more at http://www.irsdnld.com!
Having a dependent may seem straight forward; however, there are many situations which bring up questions. For example, claiming a child as a dependent typically requires providing that child's social security number. However, what if you've just adopted the child and have no access to that number yet? In this situation, there are two solutions. If the child was adopted domestically, the parents must request an Adoption Taxpayer Identification Number (ATIN). This will allow the parents to claim the child as a dependent AND file for the child care credit. If the adoption is of a child that is not a U.S. citizen or resident, the application should be for an Individual Taxpayer Identification Number (ITIN).
Perhaps you've allowed a relative to live with you free of charge during the last year, and that person did not have a job. Can you claim this person as a dependent? The IRS has provided specific guidelines for this type of situation. As of December 31, 2004, the following must apply in order for you to claim the individual as a dependent:
1. The relative should be a child or grandchild of your brother or sister;
2. The relative is under 19 (or 24 in the instance of a full time student);
3. The relative has lived with you for more than half of the tax year in question; and
4. The relative has not provided at least half of his or her own support during the tax year in question.
In this day and age, many people are choosing to file separately, even if they are married. If you have both provided the same amount of care and support for a child, can you both claim that child as a dependent? Unfortunately, a child can only be claimed as a dependent on one tax return. Therefore, you should discuss between the two of you which will claim him. If you cannot come to an agreement, Publication 501 from the IRS has a "Tie-Breaker Rule", which will aid you in the determination.
What about separated couples? For instance, the child has lived with his or her mother for the majority of the tax year in question. However, the father has provided all financial support for the care of the child. Who would claim the child as a dependent? In this situation, the party with which the child resides maintains the right to claim him or her as a dependent. This, however, can be waived to allow the financially supportive parent to claim the dependent by filling out Form 8332, entitled "Release of Claim to Exemption for Child of Divorced or Separated Parents".
As you can see, there are many situations in which the dependency of a child is not straight forward. However, with the right sources, you can find the answers to most or all of your tax questions regarding the filing of dependent credits.
About the Author
Confused about your taxes and the functions of the IRS? Not sure what deductions you can take this year? Find your answers to these questions and more at http://www.irsdnld.com!
Tuesday, October 13, 2009
Will You Pay Tax on Your Retirement Accounts ?
There are several retirement accounts with tax implications. 401K accounts, Keogh accounts, Roth IRAs and standard IRAs are some of the most important and widely know retirement accounts.
What is an Individual Retirement Account (IRA)?
An Individual Retirement Account (IRA) is a retirement investment into which you put contributions on which you do not pay taxes until you withdraw the money from the account after you retire. Usually, your tax bracket will be lower after retirement and so you won't have to pay as high a percentage of the money in taxes as you would have if the money had been taxed at the time it was originally earned. When you put money into an IRA, you get a tax deduction. When you take a "distribution" from that IRA later, it counts as taxable income. There are penalties for early withdrawal up to age 59 1/2.
You are required to start taking money out of your IRA no later than at age 70 1/2.
You should check with your accountant or the IRS to see how much you can contribute in the current tax year. How much of this money is tax deductible depends on your Adjusted Gross Income (AGI) and whether you are covered under an employer retirement plan.
There are other variations of the standard IRA, such as the "Simple IRA," a relatively new but popular employer based plan allowing employer contributions and a higher contribution by the taxpayer.
What is a 401K Retirement Account?
A 401K plan is named after a section of the 1978 U.S. Tax code. It is a plan offered by employers which allows you to automatically save a portion of your income for retirement without paying taxes now on the money you are saving. As with the IRA, the idea behind it is you'll be in a lower tax bracket after retirement and therefore will have less tax to pay on the saved money than you would pay now at your higher salaried income rate. You only pay taxes on the money when you withdraw it from the 401K account after retirement.
Usually, the 401K money is automatically deducted from your paycheck by the company's payroll system in much the same way your taxes are withheld.
In its basic configuration, a 401K account is similar to a standard IRA, but in many employers' plans, there is a matching contribution from the employer which provides the real power to the plan. Beware. Many companies invest the 401K plan money heavily in their own company stock. If the company has an unusually bad financial problem, you might find this money in jeopardy as well as your job. The best 401K plans allow you to control the investment vehicles for your money.
Typically, at the time of retirement, a 401K plan is "rolled over" into a standard IRA, from which the retiree then makes withdrawals over time to provide retirement income.
What is a Keogh Retirement Account?
A Keogh retirement account is a tax deferred retirement plan for self employed people. If you are self employed, with a sole proprietorship or a partnership, then this is the plan you may want to consider setting up. Any type of qualified retirement account can be set up to cover self employed individuals. You should also look into 401K plans, and standard and Roth IRAs.
There are advantages and disadvantages to each. One advantage to the Keogh plan is that contributions are deducted from the gross income. Contribution limits are more liberal than those allowed with some other retirement accounts. As with other retirement accounts, tax is deferred until money is withdrawn, usually after retirement. In some cases, lump sum withdrawals may be eligible for 10 year averaging which can provide a tax benefit.
Another IRA type used for self employed sole proprietors is a SEP IRA which has less complex filing administrative paperwork and allows higher contributions.
What is a Roth IRA?
The Roth IRA came into existence in 1998 and is named after the late Senator William V. Roth, Jr. The chief advantage of a Roth IRA is obvious. Although there is no deferral of taxes on the money originally invested in a Roth IRA, as in other IRAs, all income earned by the investments in a Roth account is tax free when it is withdrawn. Another benefit is that you are not required to take distributions beginning at age 70 1/2 as with other accounts, so if you don't need the money to live on, it can continue growing and earning for you tax free. Also, a Roth IRA makes it easier in some cases to take early withdrawals without penalties compared to other retirement accounts.
For many people, the Roth IRA is a wonderful retirement investment account. Some employers offer Roth 401K plans.
There are, however, limitations on who may contribute and under what conditions. Individuals with higher incomes may not be able to use a Roth IRA. Check with your accountant or the IRS for current rules.
You need to plan early and do your homework thoroughly. Review your choices regularly since rules and types of accounts change over time. Don't wait until you are 60 to start planning for your retirement or you'll be sorry.
By : Ian Williamson
For more tax Marketing Articles by Ian Williamson please visit http://www.real-articles.com/Category/Tax/123
What is an Individual Retirement Account (IRA)?
An Individual Retirement Account (IRA) is a retirement investment into which you put contributions on which you do not pay taxes until you withdraw the money from the account after you retire. Usually, your tax bracket will be lower after retirement and so you won't have to pay as high a percentage of the money in taxes as you would have if the money had been taxed at the time it was originally earned. When you put money into an IRA, you get a tax deduction. When you take a "distribution" from that IRA later, it counts as taxable income. There are penalties for early withdrawal up to age 59 1/2.
You are required to start taking money out of your IRA no later than at age 70 1/2.
You should check with your accountant or the IRS to see how much you can contribute in the current tax year. How much of this money is tax deductible depends on your Adjusted Gross Income (AGI) and whether you are covered under an employer retirement plan.
There are other variations of the standard IRA, such as the "Simple IRA," a relatively new but popular employer based plan allowing employer contributions and a higher contribution by the taxpayer.
What is a 401K Retirement Account?
A 401K plan is named after a section of the 1978 U.S. Tax code. It is a plan offered by employers which allows you to automatically save a portion of your income for retirement without paying taxes now on the money you are saving. As with the IRA, the idea behind it is you'll be in a lower tax bracket after retirement and therefore will have less tax to pay on the saved money than you would pay now at your higher salaried income rate. You only pay taxes on the money when you withdraw it from the 401K account after retirement.
Usually, the 401K money is automatically deducted from your paycheck by the company's payroll system in much the same way your taxes are withheld.
In its basic configuration, a 401K account is similar to a standard IRA, but in many employers' plans, there is a matching contribution from the employer which provides the real power to the plan. Beware. Many companies invest the 401K plan money heavily in their own company stock. If the company has an unusually bad financial problem, you might find this money in jeopardy as well as your job. The best 401K plans allow you to control the investment vehicles for your money.
Typically, at the time of retirement, a 401K plan is "rolled over" into a standard IRA, from which the retiree then makes withdrawals over time to provide retirement income.
What is a Keogh Retirement Account?
A Keogh retirement account is a tax deferred retirement plan for self employed people. If you are self employed, with a sole proprietorship or a partnership, then this is the plan you may want to consider setting up. Any type of qualified retirement account can be set up to cover self employed individuals. You should also look into 401K plans, and standard and Roth IRAs.
There are advantages and disadvantages to each. One advantage to the Keogh plan is that contributions are deducted from the gross income. Contribution limits are more liberal than those allowed with some other retirement accounts. As with other retirement accounts, tax is deferred until money is withdrawn, usually after retirement. In some cases, lump sum withdrawals may be eligible for 10 year averaging which can provide a tax benefit.
Another IRA type used for self employed sole proprietors is a SEP IRA which has less complex filing administrative paperwork and allows higher contributions.
What is a Roth IRA?
The Roth IRA came into existence in 1998 and is named after the late Senator William V. Roth, Jr. The chief advantage of a Roth IRA is obvious. Although there is no deferral of taxes on the money originally invested in a Roth IRA, as in other IRAs, all income earned by the investments in a Roth account is tax free when it is withdrawn. Another benefit is that you are not required to take distributions beginning at age 70 1/2 as with other accounts, so if you don't need the money to live on, it can continue growing and earning for you tax free. Also, a Roth IRA makes it easier in some cases to take early withdrawals without penalties compared to other retirement accounts.
For many people, the Roth IRA is a wonderful retirement investment account. Some employers offer Roth 401K plans.
There are, however, limitations on who may contribute and under what conditions. Individuals with higher incomes may not be able to use a Roth IRA. Check with your accountant or the IRS for current rules.
You need to plan early and do your homework thoroughly. Review your choices regularly since rules and types of accounts change over time. Don't wait until you are 60 to start planning for your retirement or you'll be sorry.
By : Ian Williamson
For more tax Marketing Articles by Ian Williamson please visit http://www.real-articles.com/Category/Tax/123
Tuesday, October 6, 2009
Sign Up For A Mobile Home Tax Deduction
Some of us are a bit unfortunate that we may be living in mobile homes. Nothing wrong with that. In fact the government recognizes their needs and gives them some relief too.
People who pay taxes to the local government for having parked their homes in that state also come under the purview. Thanks to IRS rules which define a home as a house, co-op, condominium, mobile home, trailer, or even a houseboat. The basic condition for any property to qualify as a home is that it should have sleeping, cooking, and toilet facilities. Since mobile homes meet all these conditions they can avail the tax deductions notified by the federal government.
Mortgage interest is the biggest tax deduction available to these guys. Joint tax holders, in fact, can deduct the entire interest amount up to a maximum of $1 million in mortgage liability paid on a first and possibly second house.
You don't have to calculate how much amount you deduct. All that you need to do is to wait for the lender to send Form 1098 at the end of the year. This form will tell you how much interest you have paid on the loan, and the points that are due to you. This becomes your deductible interest. It is much simpler than you think.
Home acquisition debt is where your second advantage lies. This debt is equal to the first or second mortgage used to buy, build, or improve your home.
The third is Home equity debt .Basically, this is any loan amount in excess of what was spent to purchase, build, or improve your home. Points paid during refinancing are also tax deductible.
Fourthly, you can deduct any property tax that you paid to a local or state government where you parked your mobile home. These are great tax benefits and every mobile home owner must avail them. What's the point in paying the local taxes and not making the best use of our elected bodies? They are our source of inspiration in saving some money. Aren't they?
About the Author
Find more about Tax Deductions at http://taxdeduct.net
People who pay taxes to the local government for having parked their homes in that state also come under the purview. Thanks to IRS rules which define a home as a house, co-op, condominium, mobile home, trailer, or even a houseboat. The basic condition for any property to qualify as a home is that it should have sleeping, cooking, and toilet facilities. Since mobile homes meet all these conditions they can avail the tax deductions notified by the federal government.
Mortgage interest is the biggest tax deduction available to these guys. Joint tax holders, in fact, can deduct the entire interest amount up to a maximum of $1 million in mortgage liability paid on a first and possibly second house.
You don't have to calculate how much amount you deduct. All that you need to do is to wait for the lender to send Form 1098 at the end of the year. This form will tell you how much interest you have paid on the loan, and the points that are due to you. This becomes your deductible interest. It is much simpler than you think.
Home acquisition debt is where your second advantage lies. This debt is equal to the first or second mortgage used to buy, build, or improve your home.
The third is Home equity debt .Basically, this is any loan amount in excess of what was spent to purchase, build, or improve your home. Points paid during refinancing are also tax deductible.
Fourthly, you can deduct any property tax that you paid to a local or state government where you parked your mobile home. These are great tax benefits and every mobile home owner must avail them. What's the point in paying the local taxes and not making the best use of our elected bodies? They are our source of inspiration in saving some money. Aren't they?
About the Author
Find more about Tax Deductions at http://taxdeduct.net
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