Income Tax Return Save Money Take A Cruise The Skinny On 1031 Exchange Maximizing Profits By Minimizing Your Tax Liability Small Employers Rejoice Irs Simplifies Filings Will You Make The 39 Cent Mistake This Tax Season
What do filing an income tax return, saving money and taking a cruise all have in common? Well, if handled well, you can ‘have your cake and eat it too’! That’s right, you can save money and take a cruise by utilizing your tax return properly.
In Canada for example, earners have the opportunity to invest in an RRSP – a registered retirement savings plan. By saving in an RRSP, one can minimize the amount of income tax that they must pay.Most employees have income tax deductions taken off their pay based on their income, marital status etc. The RRSP contribution amount actually reduces the ‘income’ which lowers the amount of income tax payable. In short, this usually means a healthy income tax refund cheque.
Although there is a limit as to how much one can contribute to an RRSP for tax considerations, the year’s amount can be increased if one has not taken advantage of previous years’ investment limit. So, if one takes advantage of this ‘top-up’ the income tax payable is lower still, and the income tax refund increases.
Think about it for just a minute. By taking advantage of the RRSP contribution limit on your tax return, you can save money for your retirement and get a tax refund cheque with which you can purchase a cruise vacation! How’s that for ‘having your cake and eating it too’?
Many other countries or states have similar programs. By maximizing your tax refund, you are able to both save and spend.
Of course there is a deadline for placing the contributions for the current year’s consideration. You certainly would not want to miss this contribution deadline. That would mean that you would have to wait until next year to take your income tax refund cruise vacation.
You have worked hard all year long. You have been given the opportunity to put your efforts to work for you… again. So save your money and book your fabulous cruise vacation. You deserve it!
A 1031 exchange refers to Section 1.1031 of the Internal Revenue Code which was passed in 1990. Normally, when you sell all real and personal property, the tax code requires the payment of the Capital Gains Tax. That is to say, when you sell your office for $100,000 more than you bought it for, you must pay the gains upon those earnings. However, after the passing of a 1031 Exchange that is no longer necessarily the case.
What types of Property Qualify?
A 1031 Exchange allows sellers of some real and personal property the opportunity to avoid paying capital gains taxes (which are 15% plus state taxes) by “exchanging” their sold property for newly purchased property. However, certain restrictions apply. The most important restriction is that only business property and investment property applies. So, an exchange under a purely residential home does not qualify, whereas exchanging a property that your business has used for its office, or even one used simply for investment diversification does.
But simply selling your office isn’t enough to qualify you for a 1031 exchange. Rather, the code also requires that that you simultaneously buy a property of “like-kind.” This does not mean that if you are selling a 2000 sq. ft. office you must buy a 2000 sq. ft office. Rather, the term is interpreted very loosely to mean virtually any real estate held for productive use in a business or for investment, whether improved or unimproved can be exchanged for any other property to be used for productive business or investment purposes. So, if you sell and unimproved lot of land and purchase an improved one or visa versa, this still qualifies, just as selling industrial property and buying rental resort property does. The point here is that while “like-kind” is an important restriction, it has been interpreted so broadly as to give individuals a lot of free reign.
When most owners envision a 1031 exchange they envision a provision whereby they must buy and sell the two properties on the same week or even the same day. But that is not the case. A tax-deferred 1031 exchange allows up to 180 calendar days between the sale of the first property and the purchase of the second. But no matter the time between sale and purchase, a 1031 exchange is required by the Internal Revenue code to have a “qualified intermediary” to manage the exchange.
A Qualified Intermediary
The requirement of a qualified intermediary is intended primarily to prevent individuals engaged in the exchange from using the time in between the sale and purchase of property to their financial gain. Although the seller has up to 45 days to set up the intermediary, the exchange is designed so that the seller should not profit from the use of the money before the purchase of the new property is made. An intermediary serves the judicial purpose of ensuring this. But it is important to remember that the qualified intermediary charges fee for this. While these services can vary in cost depending on the additional advisory services provided by the Intermediary, individuals interested in a 1031 exchange should expect to pay somewhere in the vicinity of $500 to $700 for the first exchange and $200 to $400 for each additional property.
One of the largest burdens on very small employers is dealing with taxes. Fortunately, the IRS has taken a major step to reduce this burden.
Quarterly Federal Tax Returns – Not!
There are millions of small businesses that labor under the burden of filing federal tax returns each quarter of the calendar year. These quarterly returns have been a major gripe of business owners who often feel they see their CPAs more than their families. The IRS is finally listening. Well, sort of.
Beginning January 1, 2006, the quarterly federal tax return will go the way of the dodo bird for some small businesses. Instead of being required to file every three months, these small business will be allowed to just file an annual federal tax return with the IRS.
When it comes to taxes and the IRS, there is always a catch. So, what is it in this situation? The annual tax return procedure will only be available to very small businesses, often just sole proprietorships.
Under the new regulations, small businesses will only be eligible for the annual filing if their estimated annual employment tax is $1,000 or lower. Put another way, this equates to paying roughly $4,000 in wages in a calendar year. That is a significant catch.
Ostensibly, this new annual tax return procedure is designed to help mom and pop businesses or businesses that are barely running. Depending on the specifics of the regulations, however, a significant loophole may let a lot more people through the door. The IRS, for instance, categorizes a single member LLC as a sole proprietorship. As a result, the LLC doesn’t technically pay employment taxes. Instead, the member can simply draw money from the business and then report it on his or her personal taxes.
To find out if you qualify for the annual return option, just sit and wait. The IRS is going to send out notices to qualifying small businesses during the first two weeks of February 2006. If you don’t receive one, you can contact your CPA to see if there are any options for your business.
When it comes to filing your tax return, spending 39 cents could be the biggest mistake you ever make.
Millions of taxpayers make the mistake of putting their income tax return in a regular letter-sized envelope, sticking on a 39 cent stamp, and placing the envelope in the mailbox.
And millions of taxpayers “get away” with this mistake year after year.
Why do I say that putting your tax return in the mailbox is a mistake? Let me explain.
Every year, a small percentage of mail doesn’t get delivered. The U.S. Postal Service doesn’t like to admit this, but it’s true.
Furthermore, even if your tax return gets delivered to the IRS, every year a small percentage of tax returns get lost by the IRS.
Don’t believe me? I’ll never forget the day one of my clients showed me a letter he received from the IRS:
“We regret to inform you that we received your return…. but have lost it.”
Believe it or not, this actually happened!
So my question to you is this: What are you doing to do if this happens to you?
If your tax return doesn’t get delivered, or if it gets delivered but is subsequently lost inside the mammoth IRS, what are you going to do to prove that you actually mailed the return?
Just calling the IRS and saying, “Well, I mailed it on time. I know I did!” isn’t going to prove anything. And the burden to prove you mailed the return on time will rest on your shoulders.
You have two ways to solve this potentially dangerous problem:
OPTION #1: File your return electronically.
There are many benefits to e-filing:
— Accuracy. In order for a return to get e-filed it must pass several strict accuracy tests, thereby significantly reducing the chance of human error. E-filed returns are subject to this level of scrutiny at the point of origination.
— Security. The filer creates his own electronic signature, resulting in a truly paperless experience.
— Speed. If you’re due a refund, it can take 6-8 weeks with a paper return. Combined with direct deposit, your e-filed return will generate a refund in as little as 10 days.
— Proof of acceptance. This is the benefit I want you to focus on right now. When you e-file your return, you receive an electronic acknowledgement within 48 hours that the IRS has accepted your return.
Bingo! Now you have proof positive that the return was filed. ‘Nuff said?
E-filing is rapidly becoming the filing method of choice. But the majority of returns are still filed on paper, so here’s a second way to avoid the “missing return” dilemma.
OPTION #2: If you’re a “paper filer”, go to the post office and spend a measly $4.05 to send the letter via Certified Mail, Return Receipt Requested.
Doing this will accomplish two very important things:
1. Certified Mail (which costs $2.40) provides the proof that the return was mailed, and that it was mailed on time, on or before the due date.
According to the IRS, a paper return is filed on time if it is mailed in an envelope that is properly addressed and postmarked by the due date. When you use Certified Mail, you will get a receipt postmarked by the postal employee, and the date on the receipt is the postmark date.
So, should the return get lost by the IRS, or if the IRS questions whether you mailed it on time, you will have written proof.
Plus, every piece of Certified Mail is assigned a tracking number which can then be traced by the U.S. Postal Service should a problem arise.
2. Return Receipt provides another level of insurance. For an extra $1.85, when the letter is delivered, the IRS must sign or stamp a receipt that documents the date of delivery. This receipt then gets mailed back to you, so you now have the written proof that the IRS received it.
Technically, you only need to send the return via Certified Mail to prove that it was mailed on time. But I really like the Return Receipt as well — it gives you that extra “peace of mind” to know that the IRS received it. And you’ll know exactly what day it was received. This is the proof of delivery.
So don’t run the risk of having your tax return get lost in the mail. And don’t run the risk of having your tax return get lost in the piles and piles of paper that flood the IRS each year.
Think about it. Well over 100 million personal income tax returns are filed with the IRS every year, and the majority of them are still prepared on paper and mailed by the U.S. Postal Service.
The U.S. Postal Service and the IRS are staffed by hard-working people who are only human. People make mistakes. To greatly reduce the chance of a mistake being made with your return, don’t you make the mistake of just putting your tax return in the mailbox.
Instead, e-file it, or take it to the post office and send it Certified Mail, Return Receipt Requested. It could be the best $4.25 you ever spent!.
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