Sales Tax Items And Sales Tax Codes In QuickBooks - How They Work

Are you confused about Sales Tax Items and Sales Tax Codes in QuickBooks? I was too! It took me forever to finally figure out what they actually did, how to get the sales tax liability report to look right, and where they showed up on that report. After reading the QuickBooks help, and reading tons of articles online, I still had no clear answer. But I finally figured out how to set things up in a way that makes sense to me - I hope it makes sense to you too.

We're going to discuss the proper setup of sales tax items and codes; proper setup of customers for sales tax reporting; the difference between sales tax items and sales tax codes; using sales tax codes; and running sales tax reports in QuickBooks.

Proper Setup of Sales Tax Items and Sales Tax Codes

These guidelines assume that you have no Sales Tax Items or Sales Tax Codes set up yet in QuickBooks. However, many of you reading this already do. If this is the case, just go through your lists and see if your items and codes are set up like these. IMPORTANT: I strongly suggest that you do not change anything in your QuickBooks file until you read this entire article and understand it!

First, determine how many sales tax agencies and rates you need to report. You will need to set up your Sales Tax Items depending on this information. If you are unsure, contact a local accountant.

Here's how to set up the Items and Codes:

From the Items List, press Control-N. Select Sales Tax Item. Enter a name for the sales tax - something simple is fine, something that makes sense to you. Enter a more detailed description on the next line. Enter the tax rate, and choose the state reporting agency where the tax will be remitted.

Then, set up a non-taxable Sales Tax Item. From the Items List, press Control-N. Select Sales Tax Item. Item name should be Non-Taxable Sales. Enter a brief description, and 0.00% for the rate. Even though this is non-taxable, select the main tax agency you use.

Next, setup your sales tax codes. It will be helpful to have your sales tax return in front of you to do this. For example, for California, on BOE-401-A page two, there is a list of all of the reasons sales may be non-taxable. Here are some of them:

Resale

Food

Labor

Sales to the U.S. government

Out of state sales

From the Lists menu, select Sales Tax Code list. Then press Control-N. Enter a three-character code and description for each. For example, for non-taxable labor, you can use a three-character code of LBR, and a description of, "Labor Sales - non-taxable." Do this for all of the reasons that sales are non-taxable. Make sure the Non-taxable circle is selected.

For taxable sales, set up a Sales Tax Code called TAX. Write a brief description. Make sure the Taxable circle is selected.

Proper Setup of Customers for Sales Tax Reporting

It's important that the customers are set up correctly, because when invoices are generated, they will default to the setup you use here.

Go to the customer list, pick a customer you want to examine, right click, and select Edit Customer:Job. Click the Additional Info tab. In the bottom left area you will see Sales Tax Information.

First, select the Tax Item box. If this customer lives out of state or is otherwise non-taxable, select the Non Taxable sales tax item you established above. If the customer lives in-state or is otherwise taxable, select the Taxable sales tax item you established above.

Next, select the Tax Code box. If the customer is out of state and non-taxable, select the code, "OOS." If the customer is the U.S. government, select the tax code you established for these types of sales. If the customer is in state, select the code, "TAX." Generally, you will only need to use these codes in these screens for all customers.

Any time you generate an invoice for your customers, QuickBooks will default to the sales tax items and codes you established in the Edit Customer:Job screen.

Understand the Difference Between Sales Tax Items and Sales Tax Codes

The Sales Tax Item tells QuickBooks how much sales tax to computer for a given sale. On invoices, they are located just above and to the left of the Total. Sales Tax Items are pretty straightforward to understand and use.

The Sales Tax code tells QuickBooks why the customer or sale was taxable or non taxable. They are located along the right side of the invoice screen. Also in the invoice screen, in the grey area above the Memo line, you will also see a box that says Customer Tax Code. This defaults to the Tax Code you established above for each customer.

Sales Tax Codes are important, because the California sales tax return BOE-401-A requires that non-taxable sales be itemized. If the codes are setup and used correctly in QuickBooks, the reports will show this itemization.

Using Sales Tax Codes

As a general rule, anytime you have an out-of-state customer, you will use the Non Taxable Sales Tax Item, and the OOS Sales Tax Code. My recommendation is that even if there is non taxable labor or non taxable shipping on the invoice, do not change the codes, still use OOS.

For taxable customers, use the Taxable Sales Tax Item on their invoices. However, you may need to use different Sales Tax Codes on different lines. For example, you may sell some products to a customer, but on the same invoice you may have non-taxable shipping or labor. You will need to make sure the SHP or LBR codes show up correctly, and that the TAX code shows correctly along the right side of the invoice. This will compute sales tax only for your products, and not for your shipping and/or labor.

Running Sales Tax Reports in QuickBooks

If you've taken the time to get everything set up correctly, you efforts will pay off when it's time to run sales tax reports!

From the Vendors menu, select Sales Tax, then Sales Tax Liability. Make certain of the date range, that it matches the date range of your sales tax return.

You will see several columns, most notably Total Sales, Non-Taxable Sales, and Taxable Sales. Notice that the Sales Tax Items are listed down the left side, underneath the state agency. Also notice that the Sales Tax Codes do not appear on this report.

In order to see the Sales Tax Codes (remember, these are the reasons why sales are taxable or non-taxable), go to the Non-Taxable Sales column, and find the amount that intersects with the Non Taxable sales row. Double click. This report will show all of the amounts used for the Sales Tax Codes for Non Taxable sales. Use this information to help you prepare your sales tax return (for California, this information should appear on BOE-401-A, page 2).

The Sales Tax Liability Report can be used to finish the rest of the sales tax return.

Final Thoughts

Sales tax collection and reporting is very complex, and varies considerably even from city to city in some cases. These guidelines are intended to be general in nature, giving a broad overview of the sales tax process in QuickBooks. If you need more help, please refer to a professional who can help you make sure everything is set up according to your unique location and needs. If you wish, you can experiment with the ideas here in a Sample Company File, which was loaded onto your computer when you loaded QuickBooks.

About the Author: Jennifer A. Thieme is a Registered Tax Preparer and a Certified QuickBooks ProAdvisor who enjoys writing about tax and accounting issues. She brings unique insight, clear instructions, and over ten years experience to all of her business articles. Owner of Solid Rock Accounting Services, Jennifer's clients enjoy these same benefits on a personal and regular basis. You can too - visit http://www.jenniferthieme.com and contact Jennifer today.

What Does Extending Your Taxes Mean to You?

Introduction

As the tax filing deadline is quickly approaching, many procrastinators and those who legitimately are just not ready to file their returns become stressed out and frantic, trying to meet what may virtually be an impossible deadline. Many would rather rush to get their returns prepared than file an extension. Common concerns include, but are not limited to, being flagged as a late filer, being assessed penalties, or being more likely to be audited. If you are one of these individuals, I hope that I can put your mind at ease and inform you of what it really means to extend your tax return and the benefits of doing so.

A few notes before getting started:

This article is written assuming a tax year that is the same as the calendar year, which is the case for most individual taxpayers.
If a tax deadline noted falls on a holiday or weekend, the deadline is actually the next business day.
The focus of this article is on the filing of federal individual extensions except where noted otherwise.
"Tax professional" as opposed to "tax preparer" is referred to in this article. My definition of "tax professional" is someone who has extensive knowledge, education, and experience in taxation and can provide tax consultation and planning services in addition to preparing returns. Two commonly recognized credentials held by tax professionals include CPA (Certified Public Accountant) and EA (Enrolled Agent). CPAs and EAs are by no means the only tax professionals out there and not all CPAs do tax-related work.

With those preliminary notes out of the way, I will now discuss what you should know about extensions.

What is an extension?

First and foremost, it is important to know that an extension is an extension of time to file an income tax return, not an extension of time to pay the tax due. Unfortunately, many taxpayers miss the part about it not being an extension of time to pay, perhaps due to wishful thinking.

There are two federal individual income tax extensions that can be filed. The first extension, which is "automatic," is due by the April 15th tax deadline and is a four month extension of time to file. Thus, if you file this first "automatic" extension, you will have until August 15th to file your income tax return. Your best estimate of the tax that will be due with the actual return is still due by April 15th.

As for the first extension being "automatic," that does not mean it just happens - you need to actually file the extension. There are various ways to do so which are convenient and are discussed later. The reason it is referred to as "automatic" is that you do not need to provide an explanation for why you need additional time to file.

The second extension is not "automatic" like the first one. If you cannot complete your returns by the August 15th first extension deadline, you can "apply" for an additional two months. The second extension is considered an "application" because you need to provide a good reason why you need the additional two months to file. You need to demonstrate that you made a reasonable effort to get your returns completed within the first four month extension period or that you had extenuating circumstances. If the reason is merely for your convenience, your request can be denied. If your application is denied, your return will be due immediately or within a 10-day grace period. If you did not timely file a first extension, a second extension will only be approved in cases of undue hardship.

Between the two extensions, that gives you up to six months additional time to file beyond the April 15th tax filing deadline. Six months is generally the maximum total time a return can be extended by law.

Why should I extend?

The Internal Revenue Service prefers that you file a complete and accurate return. A return you have to rush through, do not have all information for, or make estimates of figures for is unlikely to be complete and accurate. Thus, it is better to file an extension if you are approaching April 15th and you do not have all information needed or otherwise cannot file complete and accurate returns.

If you use a tax professional and you are getting your tax information to him or her just a few weeks or so before April 15th, do not be surprised if he or she indicates an extension will need to be filed. You are more likely to have a complete and accurate return if your tax professional is not trying to rush to make the April 15th deadline.

A few more comments for those of you who use tax professionals. If it is approaching the tax deadline and you have not yet contacted your tax professional, do not be surprised if he or she is unable to speak with you when you call his or her office. Also, do not assume that just because you used his or her services last year they will file an extension for you without you specifically requesting it. Tax professionals are very busy dealing with many clients and working long hours all of tax season and they get even busier as April 15th approaches. Moving forward, you should consider getting in contact with your tax professional's office well in advance of the tax deadline to determine what he or she needs to file an extension, if necessary, and prepare your taxes.

In addition to having a complete and accurate return, there are certain planning opportunities that can be taken advantage of if you or your tax professional is not forced to rush through your return. One example is funding certain retirement plans such as SEPs and Keogh Plans - these can be funded for the prior year through the extended deadline of the return that falls in the current year. Some plans, such as a SEP, can actually be established for the prior year up through the extended due date of the tax return. It is important to note that traditional and Roth IRAs need to be funded by April 15th to qualify as contributions for the prior year. For more information on such planning opportunities for the year just past as well as the current and future years, you should consult with your tax professional.

What are common concerns over extending?

As referenced earlier, many individuals are adverse to even the idea of extending due to concerns such as being "flagged" as a late filer, being assessed penalties, or being more likely to be audited. Filing an extension in and of itself is not going to raise any "red flags" or cause problems as long as your extension is timely filed and the tax due is paid by April 15th. As for being audited, you are more likely to be audited if your return is incomplete, includes estimated figures, or is inaccurate.

Another concern individuals have is that it will cost them more to file an extension. The IRS does not charge for filing an extension. Your tax professional may charge you for doing so, but the fees charged most likely will be far outweighed by the benefits of the return being complete and accurate. Incomplete and/or inaccurate returns can result in you being contacted by the IRS and generally require that an amended return be filed. Your tax professional will likely charge you for preparing an amended return. If additional tax is due, penalties and interest may be assessed. A complete and accurate return is much less likely to result in any correspondence from the IRS. Additionally, it includes an accurate tax liability, which means lower taxes or reduced penalties and interest as related to an understated tax liability. Like with many things in life, it is better to do something right the first time as there is more time, effort, and expense associated with having to correct something later.

Yet another reason that some individuals do not want to extend is because they are in the process of buying a new home or refinancing and their lender is requesting a copy of their tax return. Many lenders will accept a copy of an extension along with copies of documents substantiating income (W-2s, 1099s, K-1s, etc.) and copies of the prior year tax returns.

What information is needed to file an extension?

You will need your general taxpayer information, which includes your name, name of your spouse if married and filing a joint extension, your social security number, your spouse's social security number (if applicable), and your complete address. To avoid potential delays in the processing of your extension, special attention is required if any of the following apply: your name has changed due to marriage, divorce, etc.; your address has changed since you last filed a tax return; or you want to have correspondence related to your extension sent to your tax professional or otherwise. You should refer to the instructions for the extension form to properly address any of these items.

There is not much other information needed. The items needed for the tax year that the extension is for are an estimate of your total tax liability and the total tax paid. The estimate of the total tax liability is the more difficult of the two. You need to come up with your best estimate of what the tax liability is. The IRS instructions for the completion of Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return" clearly state: "Make your estimate as accurate as you can with the information you have. If we later find that the estimate was not reasonable, the extension will be null and void." If that were to be the case, your return would be considered late. A late filed return is subject to late filing and late payment penalties and interest.

How do I file an extension and, if applicable, pay the (estimated) tax due?

Either you or your tax professional can prepare and file your extension. The methods for filing it include e-file by phone, e-file by computer, or filing a completed paper Form 4868. Regardless of who is going to prepare and file your extension, the information discussed in the previous section will be needed. Thus, if you use a tax professional, you need to get in touch with him or her in advance of the tax deadline to ensure that he or she has that information.

E-file by phone is a very convenient option if you are going to file your own extension. The Form 4868 and its instructions can be easily downloaded from the IRS' website. After reviewing the instructions for the form, use Form 4868 as a worksheet and then call the toll free number in the instructions. You will be prompted for the information from the completed form and given a confirmation number at the conclusion of the call. In order to e-file by phone, you must have filed a federal return for the prior tax year.

As for paying the (estimated) amount due, you can do so via electronic funds withdrawal (EFT, from a checking or savings account), credit card, or check. The EFT option can be used if you e-file by phone or e-file by computer. You will need to enter additional information when filing the extension to include AGI (Adjusted Gross Income) from your prior year tax return and the routing and account numbers for your bank account. Payment by credit card can be done via one of several service providers, each of which charge a convenience fee based on the amount of the tax payment being made. Payment by check can be made if you e-file by phone, e-file by computer, or file a paper extension form. More detail about these payment options is included in the instructions for Form 4868.

It should be noted that if you are a taxpayer that makes or should be making estimated tax payments, you should compute and timely make those payments for the current year even if you filed an extension. The federal income tax system is a "pay as you go" system and if you are self-employed or otherwise have income that results in a tax liability that is not paid via withholding, you may be required to make estimated tax payments throughout the year. If you are not sure if this applies to you, it is recommended that you research this topic or consult with a tax professional.

For further information about filing a second extension, please refer to the instructions for Form 2688, "Application for Additional Extension of Time to File U.S. Individual Income Tax Return" which can be easily downloaded from the IRS website as http://www.irs.gov.

What about state, local, and other income tax returns?

Some states will accept the federal extension while others require that you file an extension document with them. Ohio accepts the federal extension and does not require that you send them a copy of it, though you do need to send in the tax due, if applicable, by the April 15th deadline. If you live in a state with municipal or other local income taxes, you may need to file an extension with the locality (or localities) that you have a filing responsibility with. Further discussion about state and municipal filing requirements are beyond the scope of this article as they vary from state to state. Check with the respective department(s) of taxation or your tax professional for more detail. Like with the federal extension, you generally need to pay any state or local tax due at the time the extension is filed.

In Conclusion

Whether you prepare your own taxes or work with a tax professional, I hope that you have a better understanding of what an extension is, when it should be considered, and what is involved in completing and filing one. If it is close to the April 15th filing deadline and you have not finished or even started preparing your returns, you should consider filing an extension. This will allow additional time to ensure that the returns are complete and accurate and, in turn, should reduce the stress associated with filing your taxes.

About the author:

Tiffany J. Morisue is both a Certified Public Accountant and a professional photographer who lives and works in the Columbus, Ohio area.

She can be reached via e-mail at morisue@hotmail.com.

Please visit her website at http://www.morisuephotography.com and her Facebook fan page at http://www.facebook.com/morisuephotography to view examples of her work and for more information about her photography services.

Advantages And Disadvantages Of Using Tax Software

Each year millions of Americans have their taxes prepared by a professional tax preparer. Having tax returned professionally prepared reduces the likelihood of errors being reported on a tax return; however, professional tax preparation is often expensive. For this reason there are a large number of individuals who are making the decision to file their own federal and state tax returns. While it is possible to file tax returns the traditional way with paper tax forms there are now many taxpayers who are relying on tax preparation software to quickly and accurately prepare and file their taxes. Tax software programs have increased in popularity over the past few years; however, like many other software programs tax software programs have advantages and disadvantages.

Before learning about the different advantages and disadvantages of tax software it is important that taxpayers learn the different types of software programs that are available. There are a number of popular tax software programs that include Turbo Tax, TaxCut, TaxAct, and more. Each of these tax software programs are likely to offer multiple tax software versions. Many tax software programs come in a standard version, a deluxe version, or a premium version. Each brand of a tax software program may include different features under each tax version; however, many of the tax software programs operate in the same way. Standard or basic versions are likely to only include federal income tax return forms. Deluxe and premium software versions are likely to include both federal and state income tax forms. Premium tax software versions are likely to include additional help in finding tax credits and deductions.

One of the main advantages of using a tax software program is that they are fairly easy and quick to use. Tax software programs are usually step-by-step; therefore, many individuals can complete a tax return faster than on traditional paper and in less than half of time. Many taxpayers who use tax software prefer the software versions that offer both state and federal tax forms. The majority of software programs will transfer the information from a federal return over to a state tax return. This not only saves time, but it also guarantees that the information found on a state tax return is accurate.

Another advantage to using a tax preparation software program is that is costs less than hiring the services of a tax professional. Tax preparation fees generally depend on where the taxes are being prepared at and how many tax forms need to be filled out and how complicated they are. The majority of individuals end up paying one hundred dollars or more to have their taxes professional prepared. The price of a tax preparation software program can range from free all the way up to sixty dollars or more.

In the past few years e-filing has become popular. E-filing allows a tax return to be received and processed quicker which often results in taxpayers getting their tax refunds sooner. Even though e-filing has dramatically increased in popularity there are still a number of individuals who do not feel comfortable e-fling their taxes. These taxpayers are often worried about their personal information being transmitted over the internet. All tax software programs give users the options of e-filing their federal and state tax forms or printing them out.

While e-filing tax returns may be convenient there are many tax software programs that charge an additional e-filing fee. Taxpayers are encouraged to fully read the box of a tax software program or read the description of the software program online. It is not uncommon for many taxpayers to not realize that they will be charged an additional fee for e-filing. There are some tax preparation software programs that only mention the e-filing fee in the fine print of their product description. Even with the additional fee it is still likely that the majority of tax software programs are cheaper than having a tax return professionally filed. In addition to e-filing fees, taxpayers are encouraged to be on the lookout for any other hidden fees because there are likely to be some with many tax software programs.

With many tax software programs guaranteeing their work it is evident that tax software programs are easy to use and accurate. With mathematical checks and easy print offs for personal records it is obvious that there are many advantages to using a tax software program. Taxpayers are encouraged to weigh the above mentioned advantages and disadvantages of tax software programs and then make an informed decision on how their tax returns should be prepared and filed.

About The Author
Gray Rollins is a featured writer for the http://TaxHelpDirectory.com. To learn more about tax software, visit http://www.taxhelpdirectory.com/taxsoftware/ and to learn more about accounting software, visit http://www.taxhelpdirectory.com/software/.

Corporate Tax Provison Software - Integrating FIN 48 Into the Tax Provision Process

FIN 48 is an interpretation that was meant to provide clarity around certain aspects of FAS109, specifically, the computation and disclosure of Uncertain Tax Positions ("UTPs"). As such, FIN 48 is an integral part of FAS 109 and needs to be considered within the tax provision work flow.

Under FIN 48, UTPs formerly computed under FAS 5 must now be reviewed under new standards for identification, probability, computation, and disclosure. Once this has been done, the results need to be fully integrated with the rest of the tax provision.

The integration of UTPs under FIN 48 applies to all of the schedules required to be disclosed in the tax footnote. For example, an increase in a UTP that has a significant impact on the tax rate might have to be seperately disclosed in the effective tax rate reconciliation. Likewise, the breakdown of the tax provision into federal, state, and foreign components need to reflect UTPs in each of those jurisdictions. If there are UTPs set up for temporary differences, this could impact the presentation of deferred tax balances.

Under FIN 48, UTPs formerly computed under FAS 5 must now be re-viewed using new stan-dards for identification, probability, computation, and disclosure.

Integration of UTPs with the current taxes payable account presents special challenges. Before FIN 48, tax reserves computed under FAS 5 were typically recorded in the current payable on the theory that the government could demand payment at any time. This meant that refunds and payments due with the filing of the return were co-mingled in the ending balances. Past FIN 48, these items are still included in the ending balances; however, the movement in the UTPs must be disclosed in a separate rollforward using the following prescribed categories: Beg Balance, PY Increase, PY Decrease, CY Increase, CY Decrease, Settlements Expiration.

In the past, companies often shifted reserves within the payable with little or no disclosure. The rollforward of UTPs now requires companies to clearly breakout increases and decreases due to changes in judgment and the expiration of statute of limitations, both of which are offset by charges to the current tax provision. In practice, this means that the current tax provision related to the tax return needs to be tracked separately from the current provision related to UTPs to allow for separate rollforwards. Likewise, payments and refunds related to the filing of the tax return will have to be separated from payments and refunds related to the settlement of UTPs in order to populate the Settlement column of the UTP rollforward. Where a UTP is relieved with an audit settlement, a "true up" may have to be recorded as a PY Increase or PY Decrease, offset by an adjustment to the current tax provision.

The rollforward of UTPs within the current taxes payable may give rise to a cumulative translation adjustment where activity is recorded in local currency and is translated into a different reporting currency. A cumulative translation adjustment arises because the beginning and ending balances are recorded at the beginning and ending spot rates, and the activity is recorded at the rates used in the income statement for the period. In their presentation of the UTP rollforward, companies will have to decide the best presentation of this item; i.e. should the cumulative translation be combined with the activity columns or should it be separately stated. For calendar year filers, this disclosure is not required until the 4th quarter of 2007.

The rollforward of UTPs now requires companies to clearly breakout increases and decreases due to changes in judgment and the expiration of statute of limitations, both of which are offset by charges to the current tax provision.

Changes in tax rates can also have a signifi-cant impact on the integration of UTPs into the tax provision.

Changes in tax rates can also have a significant impact on the integration of UTPs into the tax provision. UTPs will normally be recorded at the tax rates used to file the tax return for the year in which the issue arose. For example, a potential disallowance of an expense in a prior year must be measured at the tax rates in effect for that year. This could be different from the tax rates used to compute the tax provision in the current year. This means that UTPs must be tax effected and carried forward using a unique rate structure that is not dependent upon the rates used in the tax provision for the current year. As noted above, the UTPs must be integrated into all aspects of the tax footnote disclosure. The different tax rate structures make it difficult to simply add UTPs and tax return activity together on a pretax basis. Instead, it may be advisable to tax effect the UTPs separately and then add them to the standard tax provision computations.

Under FAS 109, de-ferred tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision.

Where a UTP is expected to increase a state tax liability, the federal benefit of the state deduction must be taken into account. If this computation is made within the FIN 48 exercise, care must be taken not to duplicate the federal benefit of state tax within the rest of the FAS 109 calculation. In practice, this can lead to a state tax procedure that is different for UTPs than it is for items reported on the tax return in the normal course.

If a company records UTPs that are temporary in nature, these items must be included in the deferred tax accounts. Under FAS 109, deferred tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision. Since temporary UTPs are recorded at the rate used to file the return (which is the rate that will be used by the government to assess the tax) future tax rate changes will also impact the ultimate relief when the disallowed tax deduction is claimed on a future return. In this sense, temporary UTPs operate in the same manner as regular return-driven temporary differences. There is, however, one notable exception.

In the case of an expense caused by a tax rate decrease which reduces the value of an uncertain deferred tax asset, there is general agreement that this expense should be recorded in the deferred tax provision along with similar adjustments to return-driven deferred tax assets. However, some practitioners have taken the view that benefits resulting from an increase in tax rates applied to uncertain deferred tax assets should not be immediately recognized, but rather, companies should wait until either: 1. the expense is in fact disallowed by the government, or 2. the deduction is claimed on a future return. In either case, the uncertain deferred tax asset is not adjusted in the normal course with other return driven temporary differences. Following this view, uncertain deferred tax assets will have to be tracked separately, so that they are not adjusted for future tax rate changes in the current period.

Interest and penalties on UTPs can be reported above the line (gross) or below the line within the tax provision (net of tax benefit). Here, too, tax rates can have a significant impact. If reported above the line, the accured interest which is typically not deductible until paid will give rise to a deferred tax asset, subject to the same impact of tax rates on uncertain UTPs noted above. Non-deductible penalties will create a permanent difference that will impact the tax rate. If reported below the line, interest (net of tax benefit), will not be recorded in the current tax payable account with an offset to deferred tax asset (net of tax benefit). When the interest is actually paid (gross), the deduction is claimed on the return, but not the books, and the deferred tax asset is relieved. In practice a decision to report interest and penalties below the line can lead to bookkeeping problems in matching up the gross cash payment against the net liability recorded in the current taxes payable account. The choice to present interest and penalties above or below the line will also impact the presentation of the effective tax rate reconciliation disclosed in the tax footnote. This is due to the fact that the tax provision is divided into two potentially different figures for pretax book income, one which is reduced by interest and penalties and another which is not. This creates two different starting points for the effective tax rate reconciliation, thereby creating alternate presentations.

Most companies have procedures in place to "true up" their tax provision to the actual results reported on the tax return. FIN 48 can be viewed as a final "true up" which takes into account the final settlement of the return on examination by the government. In order to make this final adjustment, it is necessary to keep records of the return as filed, stated on a FAS 109 basis, so that the final "true up" can be recorded. In practice, this means keeping detailed records of the current and deferred accounts for all open years.

FIN 48 can be viewed as a final "true up" which takes into account the final settlement of the return on examination by the government.

FIN 48 is a clarification of FAS 109 which extends the basic tax provision computations into the area of UTPs. The creation of UTPs under FIN 48 creates some new issues related to additional disclosure such as the UTP rollforward as well as some computational challenges in the area of tax rates and cumulative translation adjustments. Companies need to consider the ways in which FIN 48 will impact their existing tax accounting procedures under FAS 109.

Kevin Brady, General Manager and VP. is an original founder of TaxStream, now a part of Thomson Tax & Accounting, providing the domain expertise and strategic direction for the company. In addition to his executive roles, Kevin serves as a senior advisor on engagements and proposals. TaxStream has become the industry standard for FAS 109 and FIN 48 Software [http://www.taxstream.net]. To learn more about how we can help your company feel welcome to visit our website at [http://www.taxstream.net]

Local Property Taxes In New Jersey - A Primer

LESSON ONE

First Remember that:

THE LOCAL PROPERTY TAX in New Jersey is in fact a LOCAL TAX.

This means that the tax is assessed and collected at the local municipal level for the support of:

LOCAL SCHOOLS

MUNICIPAL GOVERNMENT

COUNTY GOVERNMENT

THE STATE RECEIVES NO PORTION OF THESE PROPERTY TAXES.

As a matter of fact the State pays out 48¢ of every State revenue dollar collected to counties, municipalities and schools in some form of State Aid. In 1961, some 44 years ago, the State paid out 43 cents of every State revenue dollar collected.

In FY 2005 the State budgeted approximately $12,465.6 million in State funding for property tax relief programs for the following purposes:

($Millions)

Schools Aid $8,657.3

Municipal Aid 1,757.0

Other Local Aid 716.0

Direct Taxpayer Relief 1,335.3

TOTAL $12,465.6

LESSON TWO

Next we must understand that:

THE LOCAL PROPERTY TAX in New Jersey is a RESIDUAL TAX.

A Residual Tax is one which is levied to raise the amount of money required over and above the total revenues available from other sources.

For example, in Jerry's Small Town, total budget requirements are:

For Local Schools $ 149,000

For Municipal Services 175,000

For County Services 75,000

Other Items 1,000

TOTAL BUDGET REQUIREMENTS $400,000

Available Revenues to offset these requirements:

State School Aid $ 75,000

Other Revenues 25,000

(Parking Meters, Licenses,

Court Fines, Etc.)

TOTAL AVAILABLE REVENUES $100,000

AMOUNT TO BE RAISED BY LOCAL PROPERTY TAXATION $300,000

This $300,000 is the RESIDUAL amount to be raised by Taxation after giving effect to all other sources of revenue.

LESSON THREE

Now we must also understand that:

THE LOCAL PROPERTY TAX in New Jersey is an AD VALOREM TAX.

Don't let that fancy name frighten you.

An AD VALOREM tax simply means that each taxpayer shares in the total tax burden of his town in the direct proportion as the value of his property bears to the total value of all the property in his town.

AD VALOREM means each taxpayer pays according to the value of the property he owns. The amount of property he owns is used as a yardstick in determining his ability to pay.

For Example:

Jerry owns a house and lot having a market value of $ 300,000

The total market value of all property in Jerry's towns is $60,000,000

ACCORDINGLY:

Jerry's share of the total Local Property Tax base is $300,000 / $60,000,000

$300,000 equals ½ of 1% of the total property tax base of $60,000,000.

Reducing this to a decimal, Jerry's share of the total Local Property Taxes in his community is ½ of 1%, or .005.

This percentage is usually shown as a Tax Rate charged for each $100 of Assessed Valuation. (See Lesson Four)

AD VALOREM means nothing more than PROPORTIONATE OR FAIR SHARE.

REVIEW

So far we have learned that the Local Property Tax is a -

LOCAL Tax

RESIDUAL Tax

AD VALOREM Tax

LOCAL TAX levied at the local municipal level for the support of local schools, municipal and county governments.

RESIDUAL TAX levied to make up the difference between available miscellaneous revenues and budget requirements.

AD VALOREM TAX, which means that each taxpayer pays his proportionate share based on the value of the property he owns.

LESSON FOUR

Now, we must learn the answer to the question:

WHAT IS THE MEANING OF TAX RATE?

TAX RATE is the number of dollars per $100 of Assessed Valuations which must be applied to the assessed valuation of all property in a taxing district in order to produce the amount of money required to support school, county and municipal budgets.

TAX RATE is another method used to arrive at the amount of each taxpayer's proportionate share of local taxes.

The TAX RATE is determined by a simple arithmetic calculation similar to the method illustrated in Lesson Three.

Total Amount to be Raised by Taxation - $300,000

Total Value of all property in Town - $60,000,000

$300,000/ $60,000,000 = .05

The Tax Rate is then 5¢ per $1 of Assessed Valuation

or

$5.00 per $100 of Assessed Valuations

EXAMPLE:

Jerry's house and lot have an Assessed Valuation of ------------------ $300,000

Tax Rate per $100 of Assessed Valuation ------------------------- X $5.00

Jerry's Tax Bill is --------------------------- $ 1,500.00

LESSON FIVE

What is the meaning of -

TRUE VALUE

ASSESSMENT RATIO

ASSESSED VALUATION

TRUE VALUE means market value - the amount a parcel of real property would sell for at a fair and bona fide sale.

ASSESSMENT RATIO is that percent of True Value used by the assessor in making up his assessment rolls as prescribed by his/her County Board of Taxation).

In New Jersey assessors use the statutory 100% ratio or Full True market value in making up their assessment rolls; assessors in others states use assessment ratios or percentages less than 100%.

ASSESSED VALUATION or ASSESSMENT is the value placed on each parcel of property by the assessor as indicated above; it is determined by the use of True Value or some percentage thereof.

REVIEW

In Lessons One and Two we learned that:

Total Budgets less available revenues result in the Residual Amount to be raised by taxation which is the total tax bill.

It follows then that the amount to be raised by taxation is a primary factor in determining the amount of each individual property owner's tax bill.

In Lesson Three we learned that:

Local Property Taxes are apportioned among property owners according to the value of each individual taxpayer's property in proportion to the value of the property of all taxpayers.

We learned that this method of taxation is called AD VALOREM taxation.

In Lesson Four we learned that:

Tax Rate is the dollar amount per $100 of assessed valuation which must be raised to support local budgets.

In Lesson Five we learned that:

Assessed Valuation is the true value or percentage of true value placed on each parcel of property by the assessor. This is the basic factor which implements the AD VALOREM principle of taxation.

LESSON SIX

What are the relationships among:

Total Amount to be Raised by Taxation

Tax Rate

Amount of the Individual Taxpayer's Bill

The relationship among these factors can best be illustrated by the following example. This example incorporates some of the lessons we have already learned.

In Jerry's Hometown:

The Total Amount to be Raised by Taxation is $300,000

The True Value of All Real Property is $60,000,000

The Assessor Uses an Assessment Ratio of X 100%

Thus the Total Assessed Valuation Taxable is $60,000,000

The Tax Rate then is ($300,000)/ - $5 per $100 of Assessed Valuation

$60,000,000)

Accordingly, if Jerry's House and Lot have a market value of $300,000

And the assessor uniformly applies an Assessment Ratio of 100% 100% (Note: All New Jersey County Boards Of Taxation Require 100% Ratio)

Jerry's house will be Assessed at: $300,000

By applying the Tax Rate in Jerry's Town X $5.00

JERRY'S TAX BILL WILL BE $ 1,500

LESSON SIX (Continued)

NOW, assuming 10 years have passed and property values have doubled in value due to property inflation, And, assuming that the Budgets remained the same:

And, the Total Amount to be Raised by Taxation is still. $300,000

And, with the Assessor assessing at 100% of true value. (NOTE: Reducing the ratio to 50% as happens in states, other than New Jersey, would mathematically just result in a doubling of the tax rate.)

And, property inflation has increased the town's total Assessed Valuation Taxable, so after a revaluation with a 100% ratio the town's total assessed valuation taxable is now. $120,000,000

The Tax Rate is then ($300,000) / - $2.50 per $100 of Assessed Valuation (120,000,000)

After the Revaluation the total tax base in the town doubled in value.

Since all assessments are at True Value,

Jerry's House after the revaluation will now be assessed at $ 600,000

By applying the Tax RATE of $2.50 per $100 of value X $2.50

JERRY'S TAX BILL WILL STILL BE $ 1,500

Thus, we learn that if the Amount to be Raised by Taxation remains the same:

Tax Rates are high when Assessment Ratios are low in some states other than New Jersey. Conversely, Tax Rates are low when Assessment Ratios are high in some states other than New Jersey.

The amount of a property owner's Tax Bill is not affected by Assessment Ratios or by Tax Rates.

The amount of an individual's tax bill is determined by The Amount to be Raised by Taxation, and by the proportionate value of his property as it bears to the total value of all property in his municipality.

LESSON SEVEN

What is meant by EQUALIZATION?

The term EQUALIZATION as commonly used has a twofold meaning:

INTER-DISTRICT EQUALIZATION, i.e., Equalization among taxing districts, has as its purpose the determination of the true wealth of every municipality to the end that each receives a fair amount of State School Aid and pays an equitable share of the costs of county government.

Inter-district equalization is substantially an accomplished fact in New Jersey.

The State School Aid Equalization Table, which is based on a continuing statewide sales-assessment ratio study, provides for the equitable apportionment of the costs of county government among the taxing districts within the several counties.

This Table is also used as the basis of apportioning certain costs of Joint, Consolidated and Regional School Districts.

INTRA-DISTRICT EQUALIZATION, i.e., Equalization within a municipality, means equitable tax treatment among property owners of the same class of property and equitable tax treatment among property owners of different classes of property.

This simply means that homeowners having homes of similar value are assessed alike - that is, Jerry's home and your home, having an equal value, are assessed at the same value. Similarly, Jerry's place of business, having the same value as other places of business, is assessed at the same value.

This is known as Intra-Municipal Equalization, and is the very core of the principle of Ad Valorem Taxation.

Intra-Municipal Equalization is generally attained by carrying out an overall professional Revaluation Program where all properties are re-evaluated as to their market value or 100% value.

LESSON EIGHT

What is meant by REVALUATION?

The REVALUATION of a taxing district is accomplished by having an appraisal made of every piece of real property within the taxing district by a competent professional revaluation firm.

CARRYING OUT A HIGH QUALITY REVALUATION PROGRAM involves the application of uniform standards and procedures in arriving at equitable appraised values for all parcels of property in the taxing district.

THE PURPOSE OF A REVALUATION PROGRAM is to secure the basis for attaining uniform and equitable assessments on all properties within the same classification and as among the several classifications of property in order to assure an equitable apportionment of the increasingly heavy local property tax burden among all the taxpayers within a taxing district.

PROFESSIONAL REVALUATION PROGRAMS are carried out in about 50 municipalities a year.

THE GOVERNING BODIES of those municipalities that have regularly revalued have faced up to their obligation to treat all property taxpayers uniformly and equitably.

: Gerald ?Jerry' Dowgin "The Property Tax Doctor" and the author of the Homeowner's Assessment Review Guide (http://www.propertytaxdoctor.com) a former tax assessor worked in the field of public finance at the State and local levels in New Jersey for more than three decades until his retirement in 2001. As a Supervising Tax Analyst in the Office of Research and Statistics in the Division of Taxation in the New Jersey Department of Treasury he worked principally on local property tax issues. Then he joined the Office of Legislative Services (OLS) in 1983 and served as the Secretary to the New Jersey Property Tax Assessment Study Commission for four years. While working in the OLS, Local Government Section he researched, drafted, and estimated the cost of the Senior Property Tax Freeze Bill which was signed onto law and worked on legislation that became law that virtually stopped the tax assessment practice of "Spot Assessments" in New Jersey that had treated many property taxpayers unfairly.

The Biggest Mistake With C Corporations and How to Save Taxes Using the C Corporation Double Tax

When used correctly, C Corporations are a great way to supercharge a tax strategy. I find that when my clients make the most of their C Corporations, they reduce their taxes by a minimum of $10,000 every year.

- The Biggest Mistake With C Corporations -

The key to saving $10,000 in taxes every year is knowing how to use a C Corporation correctly. When I meet with prospects and review their prior year tax returns, it's not unusual that I find a C Corporation that isn't being used correctly. In these cases, the C Corporation is not saving any taxes and in some cases it is actually creating more taxes! So what makes these C Corporations not work? These C Corporations do not save taxes because the wrong type of business is in the C Corporation.

Only certain types of businesses will generate tax savings by operating as a C Corporation. The type of business that does work is what I refer to as a support business or a secondary business. Now, you may be wondering, what is a support or a secondary business? Sometimes it's easier to define what it isn't.

The Types of Businesses That Don't Save Taxes in a C Corporation:

Primary Operating Business. This is a business that creates the main source of cash flow for the owner. The owner relies on this cash flow for living and other personal expenses. The primary operating business is how the owner makes a living. In this type of business, it is critical that the owner be able to get cash out of the company in a very tax efficient way. While it is possible to get cash out of a C Corporation, it becomes inefficient from a tax standpoint to do so with large amounts of cash. Bottom line: if you rely on the cash from your business to pay for your living expenses, that business is not ideal for a C Corporation.

Investment or Rental Real Estate Business. There are several reasons why this type of business doesn't work in a C Corporation. I'll share the top two reasons.

First, this type of business involves assets that appreciate. C Corporations do not have a "special" lower tax rate for capital gains (which are generated from appreciated assets). Individuals do have a special capital gains rate so that benefit is completely lost in a C Corporation.

Second, the income generated from these investments is often subject to a special (additional) tax in C Corporations called a personal holding company tax. This tax only applies to this type of income and only in a C Corporation. The tax effectively eliminates the lower tax rates that a C Corporation normally has. This tax was specifically put in place to keep taxpayers from putting investment assets in a C Corporation as a way to pay less tax on their investment income.

The Type of Business That DOES Save Taxes in a C Corporation:

Now that we have eliminated primary operating businesses and investment businesses from the types of businesses that do not save taxes in a C Corporation, what is left? What is left is secondary or support businesses. These are best defined as businesses that generate a modest amount of profit (no more than $75,000 annually) and the cash flow that is generated is not needed by the owner to pay for living or personal expenses.

By far the biggest objection I hear anytime I bring up a C Corporation is...

But What About the Double Tax? Sometimes just the mere thought of paying a double tax sends people running in fear. Fortunately, I'm not afraid of the double tax and I actually have a strategy where the double tax can work to reduce my clients' taxes.

What Is the Double Tax? The double tax is this:

First tax: A C Corporation pays its own tax on its net income. This is the first tax.

This is a great tax reduction strategy! Because a C Corporation pays its own tax, it has its own tax rules and you can legally use these rules to reduce your taxes.

Second tax: A C Corporation can use the cash it has after paying its own tax to pay dividends to its owners. When a C Corporation pays dividends to its owners, the owners pay tax on that dividend. This is the second tax.

At first glance, which is usually the only look most people (including CPAs) give a C Corporation, it seems that the double tax is the worst case scenario when it comes to tax planning. So many are surprised when I share this:

It Is Possible to Pay Less in Tax Even With a Double Tax!

Let's take a look at how the C Corporation double tax can play out:

First tax = 15% A C Corporation pays 15% tax if it has net income of $50,000 or less.

Second tax = 15% An individual pays 15% tax on dividends.

Total double tax = 30% (The double tax can end up being a little less than 30% but to keep things simple for this example, 30% will be used).

This means if an individual is in a 35% tax bracket, it is possible to pay less tax by incurring a double tax that totals 30%!

Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on these strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information please visit http://www.provisionwealth.com

Lower Your Taxes With International Tax Planning

International tax planning means development of the most fair tax regime for the taxpayer. Globalization brought new opportunities for both resident and non-resident individuals and legal entities. Based on our practical experience the following are useful tips for those who wants to save on taxes.

How to Lower Your Taxes

First of all there is a number of standard tax planning principles you should never neglect. All of them are quite applicable to national and international level of tax planning. The advices include:

Reduce your income to reduce tax amounts. One of the best-recommended ways is saving for retirement.
Be aware of the exempted categories of income, like life insurance, gifts-bequests and inheritance, health insurance, employer reimbursements, scholarship grants etc. However, remember it is the recipient who gets them income tax free.
Make the most of deductions. Those biggest ones are normally mortgage interest, state taxes, and gifts to charity.
Take advantage of tax credits - they don't reduce your taxable income, but reduce your actual tax liability.
Try to get a lower tax rate where possible.
Consider deferring paying taxes - this can be reasonable in many cases.
Shift income to other taxpayers, for example gift highly valued assets to children.

Aspects Determining Your Tax Liability

Apart from the above listed general rules analyze each and every of the below aspects that may finally require notable changes of your business structure.

Object of Taxation. Every tax relates to its own independent object of taxation. It can be real estate, goods, services, works and/or their realization as well as income, dividends, interests. Changing the taxable object may lead to a better tax regime. For example, sale of equipment is being often replaced by giving it into leasing.

Subject of Taxation or Taxpayer. It's an individual or legal entity liable to pay taxes with his/her/its own funds. By changing its legal form the business may get a more favorable tax regime. A classic example is a business originally set up in the form of a U.S. corporation transformed into a limited liability company (LLC) having a tax-flow regime and thus eliminating the federal level of corporate taxation.

Tax jurisdiction. You are free to choose your tax jurisdiction. Use benefits of offshore low tax centers same as beneficial features of tax regimes in countries with high taxes. A number of jurisdictions welcome non-resident investments in exchange for total exemption of taxes and reporting. Some countries favor particular types of activities attracting investments into specific industries.

Choosing between low tax centers, looking for an offshore jurisdiction favorable for trading and professional services check Dominica or Seychelles first, for financial holding companies and insurance business consider BVI, Cyprus, Panama, for ship management and maritime operations - Cyprus, Dominica, Nevis or Panama, for licensing and franchising - Cyprus, Gibraltar, Panama, and so on. It's very probable that you'll find a suitable option for you among the existing offer. But have in mind that some businesses are not really mobile in terms of changing jurisdictions.

Location of the company and of its management and administration. They also call it "mind & management" test. This may be the key factor to determine tax residency of the company. It totally depends on taxation policies of the countries involved, but the company may be obliged to pay taxes in the country where its "mind and management" is located.

Double Taxation

Potential double taxation happens when one country pretends to the right to tax the income on the basis of residence (or citizenship) of the taxpayer and the other country - on the basis of that income source. In certain occasions it happens because both countries claim the taxpayer to be their resident or the income originates from their sources.

Avoid double taxation by means of possible tax credit, tax deduction and tax exemption options. Most of the existing double tax treaties between countries normally follow the OECD model tax convention and cover taxes on income and capital in any form. The choice of jurisdiction as per paragraph "Tax jurisdiction" above may often depend on availability of the appropriate tax agreement between two countries.

Besides tax treaties a number of developed countries have in place special tax regulations allowing for credit of the foreign tax paid even without the according tax treaty in force between the involved countries.

Double taxation may also have place within the distribution processes of the company's revenue. It may be first taxed as profits of the company and later as dividends to the shareholders subject to withholding at distribution. Check the related local legislation to find a possible remedy for this case.

Practical Tips

It's more beneficial to avoid tax resident status in the country of the biggest profits trying to limit it to withholding tax.
It's better to defer withdrawal of funds from business and repatriation of profits. In certain occasions deferral equals tax exemption.
Transfer of assets is more preferable as movement of capital rather than movement of revenue or profits.
Comparing tax regimes of different jurisdictions pay attention to the process of formation of taxable income besides the tax rates figures.

Matters you are to settle at the conclusive stage of tax planning, such as tax expedient distribution of assets and profits, do not relate to tax calculation and settlement directly. However development of priorities in profits accommodation, capital repatriation and investment policy provides for additional tax benefits and some return of paid taxes.

The original version of the article: Lower Taxes with International Tax Planning.

Mary is a consultant and blogger at Offshore Advisor - free online consultancy on offshore services covering asset protection, offshore banking, second citizenship and more.

History Of The Federal Income Tax

The powers of Congress, and the limitations set upon those powers, are set forth in Article I of the United States Constitution. Section 8 specifies both the power to collect, "Taxes, Duties, Imposts and Excises," and the requirement that, "Duties, Imposts and Excises shall be uniform throughout the United States."

One of the major concerns of the Constitutional Convention was to limit the powers of the Federal Government. Among the powers to be limited was the power of taxation. It was thought that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the Federal Government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."

The courts have generally held that direct taxes are limited to taxes on people (variously called capitation, poll tax or head tax) and property. (Penn Mutual Indemnity Co. v. C.I.R., 227 F.2d 16, 19-20 (3rd Cir. 1960).) All other taxes are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se. (Steward Machine Co. v. Davis, 301 U.S. 548, 581-582 (1937).) What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.

In order to help pay for its war effort in the American Civil War, the United States government issued its first personal income tax, on August 5, 1861 as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872). Other income taxes followed, although a 1895 Supreme Court ruling, Pollock v. Farmers' Loan & Trust Co., held that taxes on capital gains, dividends, interest, rents and the like were unapportioned direct taxes on property, and therefore unconstitutional.

The Sixteenth Amendment to the United States Constitution removed the limitations on Congress, paving the way for the income tax to become the government's main source of revenue; it states: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

A growing number of citizens seeks to challenge the power of the state to collect taxes by finding a way to discount the sixteenth amendment. The italicized paragraphs below are represenative of these attempts:

Lower federal courts sometimes refer to "unapportioned direct taxes" and similar catch phrases to describe the power of Congress to tax income. (See U.S. v. Turano, 802 F.2d 10, 12 (1st Cir. 1986). ("The 16th Amendment eliminated the indirect/direct distinction as applied to taxes on income.")) This, however, does not seem to be the stated position of the Supreme Court.

Yet, despite popular opinion, the 16th Amendment did not give Congress any new taxing powers. In Treasury Decision 2303, the Secretary of the Treasury directly quoted the Supreme Court (Stanton v. Baltic Mining Co. (240 U.S. 103)) in saying that "The provisions of the 16th amendment conferred no new power of taxation," but instead simply prohibited Congress original power to tax incomes "from being taken out of the category of indirect taxation, to which it inherently belonged, and being placed in the category of direct taxation subject to apportionment."

The closest the Supreme Court has come to saying that "from whatever source derived" in the amendment expanded the taxing power of Congress was in Justice Holmes' dissent in Evans v Gore (253 U.S. 245, 267 (1920). (Holmes dissent) (Partially overruled by U.S. v Hatter. 532 U.S. 557 (2001), with respect to the prior reasoning about the compensation clause.)). In that case, the Court was considering the effect the 16th Amendment had on the compensation clause, and specifically whether the compensation of judges was unlawfully reduced by the imposition of the income tax. Justice Holmes opined that under the 16th Amendment, "Congress is given power to collect taxes on incomes from whatever source derived ...[so] it seems to me that the Amendment was intended to put an end to the cause and not merely obviate" the result in Pollock. (Id.) Even in this case, though, the majority affirmed the more restrictive interpretation of the Amendment. (Id. at 262-263. (Majority opinion))

The federal income tax statutes echos the language of the 16th amendment in stating that it reaches "all income from whatever source derived," (26 USC s. 61) including criminal enterprises; criminals who fail to report their income accurately have been successfully prosecuted for tax evasion. Since the language of the amendment is clearly meant to restrict the jurisdiction of the courts, it is not immediately clear why the courts emphasize the words "all income" and ignore the derivation of the entire phrase to interpret this section - except to reach a desired political result.

Arguments about the meaning of the current income tax has continued for nearly 100 years. Courts are reluctant to support a literal reading of the tax laws in favor of potential taxpayers, since it can lead to tax avoidance. Professor Soled points out why judicial doctrines are used against tax avoidance strategies in general,

"The use of judicial doctrines to curtail tax avoidance is pervasive in the area of income taxation. There are several reasons for this phenomenon: central among them is that courts believe that if the Internal Revenue Code ("Code") were read literally, impermissible tax avoidance would become the norm rather than the exception. No matter how perceptive the legislature, it cannot anticipate all events and circumstances that may unfold, and, due to linguistic limitations, statutes do not always capture the essence of what is intended. Judicial doctrines fill the void left either by the legislature or by the words of the Code. Another reason for the popularity of these doctrines is that courts do not want to appear duped by taxpayers..." (Jay A. Soled, Use of Judicial Doctrines in Resolving Transfer Tax Controversies, 42 B.C. L. Rev 587, 588-589 (2001).)

Of course, if the intent of Congress was to actually reach all income then the simplest way to state s. 61 would be "all income ***however realized.***" Instead, s. 61 mentions sources and other sections of the federal tax code actually lists about 20 sources of income that are specifically taxed. (26 USC ss. 861-864.) A common rule of statutory interpretation is the doctrine inclusio unius est exclusio alterius. This doctrine means "[t]he inclusion of one is the exclusion of another...This doctrine decrees that where law expressly describes [a] particular situation to which it shall apply, an irrefutable inference must be drawn that what is omitted or excluded was intended to be omitted or excluded." (Black's Law Dictionary 763 (6th Ed. 1990).) Since particular sources are listed as taxable in the tax law, then it is reasonable to infer that other sources of income are excluded from taxation. This argument is called the "861 source argument" and the courts refuse to analyze the argument despite consistently holding against it, even going so far as to issue restraining orders against people who publish websites about it. (U.S. v. Bell, 238 F.Supp.2d 696, 698 (M.D. Pa. 2003).''

In 1913 the tax rate was 1 percent on taxable net income above $3,000 ($4,000 for married couples), less deductions and exemptions. It rose to a rate of 7 percent on incomes above $500,000.

During World War I the top rate rose to 77 percent; following the war, the top rate was scaled down (to a low of 25 percent).

During the Great Depression and World War II, the top income tax rate rose again, reaching 91% during the war; this top rate remained in effect until 1964.

In 1964 the top rate was decreased to 70% (1964 Revenue Act), and then to 50% in 1981 (Economic Recovery Tax Act or ERTA).

The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets).

During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.

In 2001 the top rate was cut to 35% and the bottom rate was cut to 10% by the EGTRRA, or Economic Growth and Tax Relief Reconciliation Act.

In 2003 the JGTRRA, or Jobs and Growth Tax Relief Reconciliation Act, was passed, expanding the 10% tax bracket and accelerating some of the changes passed in the 2001 EGTRRA.

For more free legal information on Tax Law, please visit Free Legal Information.

Top Ten Tax Tips For Foreign Property Owners

1. Don't Forget You Still Have UK Tax To Pay!

Arguably, this is more of a warning than a tip, but it is vital to remember that any UK resident individual buying property abroad is still exposed to UK tax on that property. This may include UK Income Tax on rental income, UK Capital Gains Tax on property sales and UK Inheritance Tax on any foreign properties you leave to your children.

The UK tax burden is often greater than any foreign tax liabilities, so it makes sense to undertake UK tax planning for your foreign property. Many of the same planning techniques that work well on UK property can be used equally on foreign property, although the overseas angle adds an extra dimension and brings both additional opportunities and additional pitfalls to be wary of.

2. Main Residence Relief for Foreign Holiday Homes

There is nothing in the UK tax legislation to say that a foreign holiday home cannot be a UK resident individual's main residence for Capital Gains Tax purposes.

A holiday home can be treated as your main residence by making an election to that effect, generally within two years of buying the property.

The foreign property must be your own holiday home for at least part of the time but, by making the election, you will be able to exempt some or all of the capital gain on your foreign home from UK Capital Gains Tax.

Beware, however, that you're only allowed one main residence and, if you're married or in a civil partnership, you're only allowed one between you, so electing to treat your holiday home as your main residence could backfire if you sell your main house back in the UK.

You can get the best of both worlds though, if you only elect to treat your foreign property as your main residence for a short period, say a week. How does this help? Well, since every main residence is also exempt for the last three years of ownership, that week buys you three years. In other words, you lose one week's worth of exemption on your main house but gain three years (and a week) of exemption on your foreign holiday home.

3. Travel at the Treasury's Expense

If you're renting out foreign property, you have a foreign rental business. Like any other business, you're entitled to claim tax relief for your business expenses. That includes any travel costs which you incur for business purposes.

Furthermore, all foreign property rentals are treated as one business. Hence, for example, you could claim the cost of going to Dubai to look for a possible new rental property against the rental income from a villa which you already have in Spain.

4. Understand the Local Taxes

Most countries will tax foreigners on any property they own in the country. Local taxes often apply to property purchases and sales and to rental income. Furthermore, you will often have to pay annual taxes on foreign property, even if you do not rent it out, and many countries also have gift and death taxes.

You will get double tax relief in the UK for any foreign tax on the same income or capital gains when the UK accepts that the foreign tax is broadly equivalent to the UK tax you are paying.

Beware, however, that every country has a different tax regime and not all of them are compatible with the UK tax system. If you suffer a foreign tax which is different in character to any UK tax, or which arises when no UK tax is due, you may not get any relief for it in the UK.

So, a foreign tax at 30% which is deductible from your UK tax liability on the same income may actually cost you less than a foreign tax at 10% for which no double tax relief is available. All these factors need to be considered before you invest in foreign property.

5. Do You Want Double Tax Relief?

As a general rule it is usually worth claiming double tax relief for any foreign taxes whenever you can. By claiming double tax relief, you deduct the amount of foreign tax paid from your UK tax liability.

However, you cannot get any repayment of foreign tax through a double tax relief claim and the best you can ever do is to reduce your UK tax liability to nil.

Sometimes, the foreign tax may actually exceed the amount of the taxable income or capital gain for UK tax purposes. In these situations, it is better to claim the foreign tax as an expense rather than to claim double tax relief.

Where you claim foreign tax as an expense, it reduces the amount of the taxable income or capital gain and can even create a loss. This loss can be carried forward to give you future tax relief and hence, in some situations, can actually give you better value for your foreign tax than a double tax relief claim.

6. Reduce Your Foreign Exchange Tax Risk

All UK tax calculations for individual taxpayers are carried out in pounds sterling. This creates some particular problems when it comes to capital gains on foreign property. You may make very little gain in the local currency, but when you translate your purchase and sale costs back into sterling, you may have a big Capital Gains Tax exposure in the UK.

Let's say you buy a property in Utopia for 100,000 Utopian Dollars at a time when the exchange rate is two Utopian Dollars to the pound. That means you have a purchase cost of £50,000.

Later, you sell the property for 120,000 Utopian Dollars. In local terms, you have a modest gain of 20,000 Utopian Dollars. However, let us suppose that the exchange rate is now 1.2 Dollars to the pound. This means that your sale proceeds for UK Capital Gains Tax purposes are £100,000 and you have a taxable gain of £50,000.

Maybe that's fair: after all, if you bring the money back to the UK, you will have made a profit of £50,000 on your investment.

Beware, however, that if you hang on to your Utopian Dollars, they will become a new chargeable asset for UK Capital Gains Tax purposes and may give rise to a capital gain or capital loss when you eventually spend them or exchange them into sterling or any other currency.

The real problem to watch is that if you make a capital loss on your foreign currency in a later UK tax year (year ended 5 th April), you will not be able to set that loss off against the earlier capital gain on your foreign property.

The tax tip here, therefore, is to make sure that you dispose of your foreign currency sale proceeds in the same UK tax year as you dispose of the foreign property itself.

7. Get VAT back with leaseback

In the UK, we are accustomed to the idea that any purchase of residential property is exempt from VAT. This is not the case in every country, however, and many European countries charge VAT, at rates of up to 20%, on new residential property purchases.

One way to recover the VAT on such a purchase is to enter into a 'leaseback' scheme. Under these schemes you, the owner, lease the property back to a hotel operator. This means that your property becomes a business property and you are able to recover the VAT. Typically, you are allowed a few weeks of personal use of the property each year and, eventually, after a suitable number of years, it is yours outright again.

The scheme only works for certain types of property, such as hotel rooms and apartments, and may carry disadvantages for other foreign taxes, such as higher Income Tax rates; so it's one to investigate carefully before you sign up.

8. Borrow to Save

Many countries impose Wealth Tax, Inheritance Tax, or both, on foreigners owning property in their country.

Wealth Tax is usually an annual charge on the property owner's net wealth in the country.

Foreign Inheritance Tax also usually applies only to a foreigner's net assets in the country.

In most cases, you can reduce your net wealth in the foreign country for tax purposes by taking out a mortgage on your foreign property. In this way, it will usually be just your net equity in the property which attracts foreign tax.

If you don't actually need a mortgage, you can invest the borrowed funds somewhere else outside the country where your property is located.

9. Avoid Evasion

When you buy property in a foreign country, you will usually also be acquiring tax obligations in that country. In fact, many countries require prospective foreign property purchasers to register themselves with the local tax authority before they can complete their purchase.

If you want to sleep at night, you need to make sure that you fulfil your local tax obligations in the country where your property is situated. Many foreign tax authorities have the power to seize property where taxes are unpaid.

Naturally enough, the local tax authority will write to you in their own language. Do not ignore this correspondence just because you don't understand it: this is no defence. You will need local help and advice to make sure that you deal with the local tax authority appropriately and meet all of your obligations as a taxpayer in the country.

10. Expect the Unexpected

If the UK tax system is all Greek to you, or seems like Double Dutch, why should you expect foreign taxes to be any different? Every country has its own tax and legal system and, when you buy property abroad, you must abandon all of your preconceptions.

Assume nothing until you have investigated the local tax system thoroughly. Your destination country will have different taxes, different tax rates, a different tax year and a whole different set of rules, regulations, reliefs and exemptions.

Local property law and succession law is likely to be different too and a UK investor who overlooks this fact may suffer a great deal more than just tax!

For more info on Overseas Property Tax visit Foreign Property Tax or Property Tax Abroad.

Victory Tax

One of my favorite movies is The Matrix. The reason why I like it so much is because it is actually based on truth (like a lot of fiction movies are). While doing research on the things of this world, I have come to realize that a lot of things that we have been told, and things that we believe to be true, are not.

For example, most Americans believe the following statements:

Microwaved food is safe for human consumption.

There is a law requiring citizens to have a social security number.

Fluoride is good for your teeth.

Michael Moore exposed the REAL truth behind 9/11.

The cost of living goes up every year.

Vaccines are effective, necessary and safe!

High cholesterol causes strokes and heart disease.

The house you live in is a good investment.

The Federal Reserve Bank is federal and has reserves.

There are no known cures for HIV/Aids.

Now, all of the above statements are "known" facts. But if you would do your own research.... Wait, let me state that again. IF YOU WERE TO DO YOUR OWN RESEARCH, you would find that not only are the above statements false, but in most cases, they are the complete opposite of the truth.

Now, I don't have time to go through all this, so right now I will focus on the tax controversy.

There are two basic types of tax. There is indirect tax and direct tax. The term indirect is in reference to a person's labor. For example, gas tax, tobacco tax or sales taxes are all indirect taxes. Social security, Medicare and Federal income taxes are direct taxes on your labor. Generally speaking indirect taxes are avoidable, whereas direct taxes are not.

Now, the Constitution states in Article 1, section 9, "No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken." To make this real simple and plain, "No direct tax on labor is allowed unless it is split up evenly among everybody"

By the way, if you are a federal employee, you are considered by the government to be privileged as opposed to a private sector worker. Since your income is derived from gains (tax of citizens), it is constitutional to lay tax on your wages. That is "considered" an indirect tax.

Here is how the Supreme Court describes it;

"An income tax is neither a property tax nor a tax on occupations of common right, but is an excise tax." "The legislature may declare as 'privilege' and tax as such for state revenue, those pursuits not matters of common right, but it has no power to declare as a 'privilege' and tax for revenue purposes, occupations that are of common right" Simms v. Ahrens, 271 SW 720 (1925)

Congress on the other hand has the right to tax gains or profits. Examples would be dividends, royalties, alimony, pensions and things of that nature.

So doesn't this mean that the Federal Income tax that we pay nowadays is unconstitutional? No it doesn't!!! Let's start at the beginning.

The Beginning of Income Tax

In 1862, America was in the midst of a civil war. Abe Lincoln thought that this would be a quick and painless war, but it turned out to be long and bloody. President Lincoln had left the gold standard and started printing money (greenbacks) out of thin air to finance northern government. This caused inflation in the dollar supply. So on July 1st 1862, they passed the Internal Revenue Act of 1862 (which was a revision of an earlier flat rate income tax passed in 1861) to combat inflation and finance the war.

This was the first income tax and it was put on the pay of government workers and it was withheld. Luxury taxes (remember the monopoly board?) were imposed on a long list of commodities, including alcohol, tobacco, jewelry, yachts, playing cards etc. The act taxed licenses (on almost all professions) and also gains and profits (receipts from corporations, interest and dividends) as well as stamp tax and inheritance tax.

This Act established that income is 'gains' or 'profits'. This is the reason why only government workers paid it. If income meant anybody's wages that had a job, then obviously everyone would have been taxed, and of course, that would have been unconstitutional. A person's labor is his own personal property and cannot be taxed.

"It has been well said that 'the property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of the poor man lies in the strength and dexterity of his own hands, and to hinder his employing this strength and dexterity in what manner he thinks proper, without injury to his neighbor, is a plain violation of this most sacred property'." Butcher's Union Co. v. Crescent City Co., 111 U.S. 746 (1883)

The Sixteenth Amendment

In 1894 Congress enacted another federal income tax. This tax would allow for not only salaries but ANY OTHER compensation that was paid to anyone who was in the privileged sector. The Supreme Court declared that this was unconstitutional because if you tax gains from personal property, then that is just like taxing the property itself, and is therefore a direct tax.

"The power to tax real and personal property and the income from both, there being an apportionment, is conceded: that such tax is a direct tax in the meaning of the Constitution has not been, and, in our judgment, cannot be successfully denied:..." Pollock v. Farmers Loan & Trust, 157 U.S. 429 and 158 U.S. 601 (1895)

But this created a loophole. Someone who had otherwise "taxable income" could attempt to get out of paying taxes by assigning that income to his/her personal property which would take it out of the category of indirect and make it a direct tax. To make a long story short, this is what led to the 16th amendment.

The 16th amendment reads "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States...."

So, did this amendment authorize everyone to be taxed, or did it just close the loophole? If you notice, it doesn't say that congress has the power to lay and collect direct taxes. So in order for this amendment to be compliant with Article 1, section 9 of the constitution, it would seem that it could only mean the same indirect tax that it had always meant. What did the Supreme Court have to say about it?

"The 16th Amendment does not extend the power of taxation to new or excepted subjects, but merely removes the occasion for apportioning taxes on income among the states. Neither can the tax be sustained as a tax on the person, measured by income. Such a tax would be by nature a capitation rather than an excise." PECK v. LOWE, 247 U.S. 165(1918).

"The 16th Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged." STANTON v. BALTIC MINING CO., 240 U.S. 103 (1916).

"The 16th Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attributed to them before the amendment was adopted." EISNER v. MACOMBER, 252 U.S. 189 (1920).

So, it looks like the fact that it is said that international bankers (J.P. Morgan, Paul Warburg, and John D. Rockefeller) bribed Secretary of State Philander Knox into fraudulently declaring that the 16th amendment had been properly ratified when it had not, really didn't matter. Even after the 16th amendment, only a small percentage of Americans paid "income" tax.

So why are we ALL paying it today?

Ah yes, the plot thickens. During WWII (by now you probably realize that wars are just GREAT for the economy.... Who's economy?), the government wanted to raise money for the war so they enacted the Victory Tax of 1942. This was to be a temporary two year tax supposedly authorized by Article 1 Section 8 clause 12 of the constitution which says that Congress has the power: "To raise and support armies, but no appropriation of money to that use shall be for a longer Term than two years"

This was a direct tax on everyone's labor and would have been unconstitutional if it was enforced, so it had to be voluntary (even though they didn't tell the public about the voluntary part). Now the IRS says the 16th amendment authorizes them to tax everyone's labor. But since the sixteenth amendment was already signed, it would appear that this Victory Tax would have been unnecessary. Maybe the government didn't realize this at that time. There had to be a way that they could get everyone to pay this voluntary tax so the wicked ones unleashed one of their greatest weapons (Hollywood) to do what it was made to do, program the minds of the people!

Henry Morgenthau, the Secretary of the Treasury at the time, ordered John J. Sullivan, a Treasury Department official, to contact none other than Walt Disney! Walt flew in to D.C. to have a meeting with Morgenthau and Internal Revenue Commissioner Guy Helvering. Morgenthau told Walt that the U.S. wanted him to help sell people on paying the income tax. Walt wondered why this was even needed. Couldn't you just throw people in jail if there was a law saying you must pay? Mr. Helvering told Walt that he wanted people to be enthusiastic about paying taxes.

So Walt went back to California and put a short movie together called "The New Spirit". The objective was to make people feel it was their "patriotic" duty to pay the income tax. It starred Donald Duck (Walt's biggest star at the time). Along with this movie, "Inflation" and "Spirit of 43" all played instrumental roles in the tax propaganda.

The New Spirit

Donald wants to help the war effort but becomes reluctant when the radio announcer tells him to pay taxes, but the announcer shows him that the U.S. needs his money, and helps him through the simple tax forms. By the end of the movie, Donald is so energized that he rushes to Washington to pay his taxes in person! Donald learned to pay his "Taxes to beat the Axis" http://en.wikipedia.org/wiki/Axis_powers. This movie was nominated for an academy award.

Inflation

The Devil receives a telephone call from Adolph Hitler, who asks for the Devil's help in the war effort. The Devil tells Hitler that he will cause high inflation in the USA, and his worries will be over. He encourages the audience to buy as much as they can so that goods will become scarce and prices will go up. Hoarding rationed goods and cashing in war bonds will also help. Factory worker Joe Smith just got a raise in pay, so he starts buying everything on the installment plan, including a fur coat for his wife. After the Smiths hear a radio address by President Roosevelt, they realize that they should be more prudent in their spending habits to help the war effort. Written by David Glagovsky

Spirit of 43

Donald cashes his paycheck and is unsure how to best spend his money. Two aspects of his personality materialize: 'Thrift' and 'Spendthrift'. Thrift tells Donald he should save to pay his taxes, but spendthrift tells Donald that it is his money and he should spend it how he pleases. In the end, Donald realizes that it is his duty to serve his country and pay taxes.

According to tax historian John Witte, "In 1939, about 15% of the people paid income tax. That's all, period. At the end of the war, we had 80% of our families paying income tax." Just entertainment huh?

In 1944, the Victory Tax was repealed by section 6 of the Income Tax Act of 1944 after it had been renewed. But, for some strange and unknown reason, Congress decided to keep it on the down low. Because most people didn't know about it, they just kept paying taxes.

So I guess we are all here today, still paying the Victory Tax voluntarily. Tell me, do you feel victorious?

Trickeration of the IRS?

The IRS would like you to believe that everyone must pay tax. They would like you to believe that the 16th amendment gives them that right and that the law is the IRS code. But according to the Supreme Court, the code is not the law, it is just the regulation and assessment of the law. The law is the Constitution.

The revenue laws are a code or system in regulation of tax assessment and collection. They relate to taxpayers, and not to nontaxpayers. The latter are without scope" United States Court of Claims, Economy Plumbing and Heating v. United States, 470 F.2d 585, at 589 (1972)

The IRS threatens the public and says, "All employees must be taxed. All employers must make their employees fill out a W-4, and administer a W-2. All income must be taxed". But, according to Pete Eric Hendrickson, author of "Cracking the Code":

"That "income", "wages", "self-employment income", "employee", "employer" and "trade or business"-as these and certain other terms are used within, and in regard to, the tax law-have narrow legal meanings exclusively involving, and applying to, certain privileged activities, such as holding or administering a government office, or working in one."

Maybe this is why the 16th amendment does matter. Because the 16th amendment's language is what enables the general public to believe they have to pay. Maybe the wicked ones knew this when it was declared ratified. It seems that this bribe would be a good investment. Without this amendment, very few of us would believe we have to pay tax today.

According to the Supreme Court, when you fill out your W-4, you are voluntarily entering into an agreement with the federal government, and claiming that the money you receive is taxable "income". And since you sign this under penalty of perjury, you are also voluntarily waving your 5th amendment right! You just don't realize it.

"A tax on income is not economically or legally a tax on its source." However, wages, salaries, commissions, and tips (sources) are considered to be "income" for an individual when he lists them as "income" on an IRS tax return form. When he signs the tax form under penalty of perjury, he has made a voluntary oath that his wages, salary, commissions, and tips listed on the return are "income" and that he is subject to the tax." Graves v. People of the State of New York ex rel O'Keefe, 59 S.Ct. 595 (1939)

So when the IRS, comes and knocks your door down, seizes your property and throws you in jail, don't say that it is unconstitutional. The Supreme Court says it's not unconstitutional, for you told them that you worked for the government and that you made "income". Since the lower courts are not in compliance with the Supreme Court, the judges don't care about Supreme Court rulings, and since the government has already stated that they don't have to show a law that requires citizens to pay tax, your complaints could very well go unanswered.

Is this the dirty little secret that the IRS doesn't want you to know? Is this why the IRS chooses to audit certain people when they know millions don't pay and they could just go after them?

I am not an accountant or a lawyer! This article is not intended to incite you to take any action. THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY! Do your own research, and make an informed decision.

Until next time,

Free Your Mind Online!

Matt Mason is the expert and founder of Free Your Mind Online, which is designed to empower individuals to take control of their finances and achieve REAL wealth. For free info, go to http://freeyourmindonline.net and subscribe to the monthly newsletter.

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