Check Your Tax Code! You May Have Overpaid Tax

Oh, tax codes! How I used to loathe them when I first started training to be a tax advisor. They can be fiddly little things. If you get them wrong, the consequences can be quite severe. Your client might end up overpaying or, even worse, underpaying tax and at the end of the year be left with a large tax bill. As you can probably imagine, that client won't be a happy bunny.

I am a trainee tax advisor working in a small tax consultancy near London. Having arrived in London from Germany 8 years ago for a gap year adventure, I could not have imagined that one day I would end up becoming a UK tax advisor. Nowadays, I cannot imagine a better job for myself.

For most of us, having an incorrect tax code means that we end up overpaying tax. You have probably heard or been warned of the dangers of having an emergency tax code. Guess what? The emergency tax code - 1000L in 2014/15 - is the code most of us have to ensure that we pay the correct amount of tax.

A tax code tells your employer how much money you can earn tax free each year so that they can deduct the right amount of tax from your pay. For most of us, this will only be our basic personal allowance which is £10,000 for the 2014/15 tax year. The tax code itself is your tax free earnings divided by ten and followed by a letter (mostly "L") - hence the tax code 1000L. Unless you have additional earnings or untaxed income, this code will ensure that you get your full personal allowance and that roughly the correct amount of tax is deducted from your pay.

So what are the "dangerous codes" to watch out for? Basically, any code that is not 1000L requires a proper check. Below I have listed a few common ones:

1000L W1/ M1

W1/ M1 means week 1/ month 1. Normally, your tax position is recalculated every time you are paid taking into account your total income for the year to ensure that you receive your full personal allowance over the course of a tax year. However, if your employer uses a W1/ M1 code, they do not have enough information about your income before you started your job in order to calculate your personal allowance for the remaining tax year. Instead, you are given 1/12 or 1/52 of your personal allowance (depending whether you are paid monthly or weekly). However, this may not give you your full personal allowance if, for example, you had a lower or no income before you started your job and you may end up overpaying tax.

The W1/ M1 code is meant to be a temporary one and should be amended by HMRC. However, if this does not happen, you may want to call HMRC on the taxes helpline (tel: 0300 200 3300) and ask for it to be amended.

0T

If your tax code is 0T, alarm bells should ring. Your employer will use this tax code if you do not complete a starter declaration before you start your job.

When you begin a new job, in certain circumstances your employer may ask you to make a starter declaration to find out whether you had any employment or benefits income before you started your job or whether you have another job.

The 0T code will not give you any personal allowance and deduct tax at the respective tax rates. If you have such a code, you will almost inevitably be overpaying tax and should ring HMRC to request for it to be amended as soon as possible.

BR, D0 or D1

You are most likely to come across a BR code. This code deducts tax at a rate of 20% (D0 deducts tax at 40% and D1 at 45%). If you have a second job, this job is likely to have a BR code with the 1000L code being allocated against your main job. However, if you earn less than £10,000 per year in your main job, the 1000L code will not give you your full personal allowance. The unused part of the allowance should be transferred to your second tax code as otherwise you end up overpaying tax.

Other codes

Sometimes tax codes can be more complicated, for example if you have other untaxed income, are entitled to a higher personal allowance, receive benefits from your employer (e.g. private medical insurance or a company car) or incur job expenses. Your tax code must contain all your untaxed income and allowances for the correct amount of tax to be deducted. If you are unsure whether your tax code is correct, you may want to get advice from HMRC on the taxes helpline.

Where can you find your tax code?

You may have received a tax coding notice from HMRC prior to the beginning of the tax year. However, not everybody gets such a notice. If you recently stopped working and received a form P45 from your employer, you will find your tax code on that form. (An employer must provide a P45 to any employee that stopped working for them). Alternatively, you can ring up the HMRC taxes helpline to find out.

If you had a wrong tax code in the past

The standard tax codes in the past 4 tax years were as follows:

2010/11: 647L
2011/12: 747L
2012/13: 810L
2013/14: 944L

If you are concerned that you may have overpaid tax in the past due to an incorrect tax code, you can make a claim for repayment of tax for up to the past 4 years.

It has been a year since I started working in tax and I'm still not a big fan of those tax codes. However, luckily for most of us, our tax codes are likely to be quite straight forward. However, they are well worth checking as, if they are wrong, you may end up paying the wrong amount of tax. And who knows, you may discover that you have overpaid tax and can claim a refund.


I am the founder of Tax Friend - a tax service specialising in helping people to reclaim overpaid tax.

If you are interested to find out whether you may be able to claim a UK tax refund, please contact me for a free no obligation assessment (info@uktaxfriend.co.uk) or visit my website [http://www.uktaxfriend.co.uk].



By: Franziska Hirsch

Build a Better Nation, Pay Your Taxes Regularly

Paying taxes is an obligation that every individual with a sound mind will do regularly and would rather do it timely rather than risk of having to owe the IRS of back taxes. Yes, taxes are a burdensome obligation, and you have paid it ever since you can remember either voluntarily or not. The taxes you pay go a long way into the nation's treasury and you may not realize it but it comes back to you making your life as a citizen easier. This may not look that way but indeed, tax money is keeping this very nation alive and on its feet since the day it has been founded.

While the founding fathers of this nation may have founded it with blood and a constitution but for every nation or form of government it can clearly be said that the true foundation a nation has is its taxes. The taxes that the citizens pay and sometimes owe the IRS is what constitute the life force of the nation and without it, the nation would slowly and violently die a natural death. No person on their right mind would want for this to happen, that is the reason why every nation loving citizen would feel it as exercising their right and responsibility rather than an obligation when they pay their taxes.

The IRS or the Internal Revenue Service is the main agency which is task to carry out the responsibility of the collection of taxes. Not only is the IRS task of collection of taxes but also the enforcement of every tax laws and regulations there is, which oftentimes make it unpopular with the citizens of the nation.

Tax collection is not an easy job to do, as what has been said earlier it is a very unpopular job to do, but to keep the nation functional it has to be done. Though many would find it a necessary obligation and patriotic when paying taxes, there are still people who find either voluntarily or otherwise owe the IRS back taxes.

Even if the deliberate act of not paying taxes or tax evasion is considered unlawful, still there are ways and means which are being followed in order to resolve such acts without having to get to court. These regulations which allow you to resolve the back taxes you owe the IRS are there to make tax payment friendly, agreeable and also the tax collection efficient.

No matter how organized a citizen, a corporation or a group is it cannot be denied that there will come a time when it will experience financial instability and challenges which will result into the non-payment of taxes. Back taxes are the taxes a person or corporation owe the IRS, this become so when a failure of tax payment has been done from a previous year or number of years. If deliberately done and no act of resolution is being made then it might become a case of tax evasion which is a very serious crime or case anywhere in the world.

It would be safe to say that not all of us are financially fortunate as those who belong to the top 100 of wall street, that is why many if not most of us are struggling hard to make ends meet and oftentimes than not we need to cut back on payments to meet our needs, and the usual option is not paying certain taxes. These unpaid taxes will become back taxes that we owe the IRS. We wouldn't want that to happen but oftentimes we ran out of options and choices and so these things happen.

When being confronted with back taxes, income taxes, and all the other taxes we owe the IRS we often thought of ways to cut back on it. Well the IRS and tax laws understand the hardships of every taxpayer who want to commit in paying and resolving their taxes. Tax amnesties are available for those who are delinquents in paying their taxes which is a very helpful opportunity to every citizen who can avail of them. This is not the only opportunity to alleviate you of your tax problems, tax payers can also avail of tax relief to pay for your delinquent or taxes you owe the IRS. With tax reliefs certain percentage are taken off your taxes payable, the amount of percentage will also depend on the criteria and the class that a tax payer will fall unto.

What a taxpayer owe the IRS he or she owes every citizen of the nation, because these taxes is what funds the services of the government. Not paying the taxpayer's due to the IRS is like becoming a cancer that will slowly eat up the bulk of the government or nation. A sound person would not want to do that, which is why they pay their taxes on time if they can and pay their back taxes as soon as they are able to.

If a taxpayer, owe the IRS and deliberately would not pay it he or she is committing a serious offense to the government and will be prosecuted to the full arm of the law. A serious offense such as this can lead to imprisonment or a much higher fine which could make matters much worse than it should really is.

Taxes are the life source of this nation and we should really take care of this life source in order to keep this nation functioning at its best. The taxes we pay and owe the IRS are very essential to help the government give us protection, build better roads and bridges, schools, hospitals and also provide social welfare and social security. With all these in mind we should make sure that we pay our taxes regularly and resolve our back taxes that we owe the IRS. Paying our taxes makes us a better citizens, help build our nation into a much stronger and better nation for its citizenry and for the future generation that will follow.


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By: Pete F Morgan

Avoid Back Taxes, Avoid Additional Stress

The taxes we have or obliged to pay monthly, quarterly and annually will sometimes come to us as a burden, yet it is better to pay on time than to have back taxes which will be a possible headache in the making when the time comes for it to haunt you back. Taxes are here since this thing we called civilization has started its existence and taxes will be forever present to haunt us as long as we have a civilization to govern us, protect us and organize us. Though it might not be that bad as some of us are thinking, yes it might burden us at times but taxes play a great role in this civilized existence and so we must accept and follow through with the obligation of paying such.

However which way we look upon it, taxes are here to stay and we need to abide by the obligations that we are bound to it. Taxes come in so many types and the most common are income taxes, amusement taxes, value added taxes, back taxes and a lot more taxes that we could think of that with the sheer number of them you only are able to complain about it but obliged to pay it forward. Many would ask themselves the question why they need to pay taxes and what are they really for, while others just take taxes for granted while not knowing what it gives in return.

Taxes and the money they produce are very essential to every form of government or civilization, since the beginning that man has learnt to create a governing body taxes has so then existed. The life source of every governing body in every civilization taxes have been collected since the ancient times either voluntarily or otherwise. Because of taxes, that might sometimes have been raised too high revolutions have been born and change civilizations and created history, but the role in the lives of people still remained crucially the same. They run our government, they protect our people and they create the basis for a much better existence.

The taxes you pay and including the back taxes as well are accumulated in the national treasury. These become the very source of valuable funds for the government in order for the government to sustain its functions and deliver goods and services to its constituents. Taxes pay for the salary of workers and also build better roads, better roads mean better access and access makes better business and will create a prosperous town, city, and nation.

Taxes also fund social welfare which the people greatly need, social welfare and social security are a must and without taxes it would not be possible to deliver such services. The importance of it and the resolution of back taxes is as clear as day.

With taxes we can build clinics, hospitals and other health services, purchase medicines and build schools for the better education of the future generation. Indeed taxes go a long way to further the survival of each citizen and the betterment of the standard of living. Paying taxes is an obligation that every citizen must diligently fulfill and as much as possible back taxes should be prevented as it would pose a big problem later on.

The most common taxes that exist today are the value added tax income taxes and value added taxes. Income taxes are generated by computing certain percentage out of the monthly, quarterly or annual income of a certain individual. Income taxes should be paid regularly in order to prevent back taxes but sometimes it could not be help that back taxes still occur due to some incidents that could not be prevented.

If you ever wonder how taxes are being taken from people who do not have enough income to qualify them for income tax collection, then value added tax and other taxes will come in to play their role. Value added taxes are percentage to the value of certain commodities and services which you purchase and will be collected by the internal revenue services. Value added tax have its advantage as that they don't create back taxes and that they can be collected a hundred percent every time.

Indeed taxes haunt us from womb to tomb and there is no escaping from it, but paying taxes is an obligation that you need to fulfill, not only to yourself but also to society itself. With paying taxes you can safely say that you help build schools, hospitals and social welfare for all the other citizens that benefit from such social services the government is giving out to its constituents.

Not only does paying your taxes on time make you a better citizen, it also prevents you from facing back taxes which is rather a headache to confront.

Indeed there are situations which cannot be prevented that may result to you having back taxes, but you must find the easiest and fastest way possible to resolve such thing immediately as you can. You must be vigilant with paying your taxes and you must take measures to prevent back taxes. Although sometimes you might find it very alluring to find ways not to pay taxes but you know very well that you have to, but if you really need to beat the system then you can always find ways to cut down on the amount you pay for taxes. You might find how advantageous it is to talk to your tax officers, doing so can help you file for tax exemption or tax relief which could very much help you.

Taxes are essential to the wellness of every municipality, city or nation an obligation you owe to your fellow countrymen. An obligation that will create a much better life for all the constituents of every nation including your own and your family, therefore exercise this right. Pay your taxes in due time and prevent unnecessary stress by not having any back taxes.


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By: Pete F Morgan

How To Benefit From Tax Diversification

Tax diversification is integral to a well-structured retirement plan. By holding assets in accounts with different tax treatments, such as traditional IRAs, Roth accounts and taxable investments, you can balance current and future tax benefits and gain flexibility to deal with unexpected circumstances.

The Three Types Of Investment Accounts

Many investors look down on taxable investment accounts because of the taxes they must pay each year on interest and dividends, as well as any gains resulting from sales. However, such accounts do offer several benefits. First, they are incredibly flexible. There is no restriction on the types of investments you can make on a taxable basis. And while both traditional and Roth-type retirement accounts are subject to annual contribution limits and to penalties for early withdrawal, there is no limit on contributions to a taxable account, and there are no penalties when you need access to the funds before your retirement.

Qualified dividends and capital gains are taxed at favorable rates in taxable accounts (zero for lower-income taxpayers, 15 percent for most taxpayers and 23.8 percent for high-income taxpayers). Also, investments sold at a loss can be used to reduce one's tax liability. Since you can generally control when you sell an investment, you can control when you pay much of the tax liability that such accounts generate. The government again favors taxable investments upon the owner's death. At that time, the cost basis is adjusted to the fair market value, and no capital gains tax is due if the estate immediately sells the holdings.

At first glance, tax-deferred retirement accounts, such as traditional 401(k)s, traditional IRAs and similar plans, may seem to be the most appealing savings options because, by reducing your current tax bills, they give you the biggest upfront benefit. Since none of the income is taxable until withdrawals are made, you may be able to save more overall as the benefits continue to compound.

Regrettably, savers can wind up paying for this upfront tax benefit later in life. Distributions from tax-deferred accounts are treated as ordinary income, even if the growth in the account was generated from investments that would have been taxed at lower capital gains rates in a taxable account. So you would effectively split any profits in tax deferred accounts with the government. If an account grows by 10 percent per year and your tax rate stays the same, the eventual tax liability grows by that same 10 percent. In addition, the Internal Revenue Service generally requires retirees to begin taking certain minimum distributions from tax-deferred accounts at age 70 1/2, which can force you to generate taxable income at inopportune times. Furthermore, investments in a tax-deferred account do not receive a basis adjustment when the account holder dies. Beneficiaries will need to pay income tax when they withdraw assets from these accounts.

Tax-free or Roth accounts can be hard to beat. Although there is no immediate tax deduction for contributions to these accounts, all of the profits go to the investor. The government receives its share at the outset, then current account income and qualified distributions are never taxable. As a result, $1 million in a Roth account is worth significantly more than $1 million in a tax-deferred account, because the balance in a Roth account can be spent during retirement without having to pay any taxes. Another benefit of Roth IRAs in particular is that the IRS does not require distributions from them the way it does from traditional retirement accounts (though such distributions are required from Roth 401(k)s).

Of course, there are drawbacks to tax-free accounts, too. For one, funding a Roth account is more difficult. It takes $15,385 of pre-tax earnings to contribute $10,000 to a Roth account, assuming a 35 percent tax rate. In addition, there's always the possibility that future legislation could decrease or eliminate the benefits of Roth accounts. If, for example, the federal government or individual states lowered tax rates or shifted to a consumption-based tax system, a Roth IRA would have been a poor choice compared with a traditional IRA, since there is no upfront tax benefit.

Choosing Which Account To Fund

Some rules of thumb can help you determine which types of retirement accounts to use. First, you should have sufficient safe, easily accessible assets in a taxable account as an emergency fund. Six months of living expenses is a good starting point, but the actual amount varies based on your expenses, the security of your current job and how quickly you could get a new job. Funds that you will need access to before retirement should also be kept in a taxable account.

If an employer matches contributions to a retirement plan, you should, when possible, contribute enough to get the full match. Any employer match will automatically be allocated to a tax-deferred account, but you should determine whether the plan will provide a match even if you contribute to a Roth account.

The common wisdom says that you should contribute to a traditional IRA or 401(k), rather than a Roth IRA or 401(k), if your current tax bracket is higher than the tax bracket you expect to occupy in retirement. If the reverse is true, a Roth IRA is the default choice. Although these guidelines are good starting points, savers are generally best served by keeping some assets in each type of account - which is the idea of tax diversification.

People's lives and future tax legislation are inherently uncertain. Even if you expect your federal tax bracket to remain the same in retirement, it might go up if tax rates go up overall or if you move to a higher-tax state. There is no way to know exactly what your situation will look like in any given year of your retirement. You should have some assets in each type of account, but the particulars of your circumstances will dictate their relative size. As with other sorts of diversification, there is not a one-size-fits-all plan.

Going Above And Beyond Retirement Savings Limits

Selecting the best retirement plans for your situation is beyond the scope of this article, but some planning can allow you to funnel much more money into tax-advantaged accounts than you might have otherwise expected.

Some employers offer defined contribution plans with higher limits than a 401(k), and it is very easy for self-employed individuals to set up SEP IRAs. For high-earning small-business owners, it may be worthwhile to set up a defined benefit (pension) plan, which can allow for much higher contributions. Certain employers also offer nonqualified savings accounts that allow you to defer income in excess of the limits for the qualified plans listed here, but they add different risks.

Besides employer-sponsored plans, annuities and life insurance can also offer tax advantages, but most savers should proceed cautiously. Annuities provide tax deferral, but lack the upfront tax benefit that makes other tax-deferred accounts so appealing. Also, distributions from annuities are taxed at ordinary income tax rates, so if your tax rate is expected to remain high through retirement, you effectively allow the government to take a higher share of your profits than would be the case in a taxable account. If your income tax rate is expected to drop substantially in retirement, certain annuities can be effective savings vehicles once you have exhausted your other options. In many cases, the higher costs of life insurance products outweigh their tax benefits.

If you want to funnel more money into a tax-free account, you might consider converting a portion of your tax-deferred retirement accounts to a Roth IRA. You will have to pay tax on the income at the time of the conversion, but if you expect your tax rate to remain the same or increase in the future, it may be profitable to shift some funds to a Roth. Finally, if you plan to use any of your savings to fund education expenses for a child or grandchild, you might consider funding a Section 529 college savings account. The investments in such accounts grow tax-deferred, and any distributions used for qualified education expenses are tax-free.

How To Spend Down Retirement Accounts

The order in which you withdraw assets during retirement is just as important as the choice of which accounts to fund. By mindfully selecting which account you withdraw from each year, you can lower what you pay in taxes.

The first assets you spend should typically come from your taxable accounts. However, in a low-income year, when your income tax rate may be lower, it may make sense to pull some funds from a tax-deferred account. In some cases, you can take taxable distributions without generating any tax liability at all. Spending from tax-deferred accounts may also make sense if your taxable accounts have highly appreciated securities that you plan to hold until death. Run tax projections each year to weigh the benefits of withdrawing from a taxable or a tax-deferred account.

Aim to keep assets in your Roth accounts for as long as you can, allowing the investments to continue to grow tax-free while you deplete other assets that generate tax liability.

For most retirees, no two years will look alike. More important, there is no way to know decades in advance what a given person's tax situation will be throughout retirement. As with any long-term investment plan, it is essential to create a strategy that is flexible and can work even when circumstances change. By taking care to diversify the tax character of your accounts, you build in choices that will allow you to adapt to a variety of financial situations much more easily and, ultimately, to preserve more of your diligently saved retirement funds.


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By: Benjamin C. Sullivan

Tax Concepts and Considerations of Municipal Bonds

Bonds are available in both taxable and tax-exempt formats and there are tax concepts to consider when a person is investing in bonds. Each type of bond, whether tax-exempt or not, has different tax aspects. Tax-exempt municipal bonds and taxable bonds are discussed, explaining how some of the tax rules work for these investments and their investment yields.

Acquisition of Bonds

When purchasing tax-exempt municipal bonds at face value or par, there are no instant tax consequences. When the bond is acquired between interest payment dates, the buyer pays the seller interest that has accrued since the last payment date. The interest paid in advance to the seller is treated as the cost of the investment and is treated basically as a return of some the initial investment when the interest is paid.

Bond Premium Amortization

When tax-exempt municipal bonds are purchased at a premium, the premium is amortized for the duration of the bond term. The effect of this is to decrease the cost of the investment in the bond on a pro rata basis. Thus, holding the bond to maturity means no loss recognized when the bond is paid off.

Interest Excluded From Taxable Income

Normally, tax-exempt municipal bond interest is not added to income for tax purposes (although, the interest may be taxable under alternative minimum tax rules). Also note, municipal bonds usually pay lower interest rates as compared to similar bonds that are taxable.

When comparing taxable investments to tax-free investments, the amount of interest included in income is not the most important issue. What is important is the after-tax yield. For tax-exempt municipal bonds, the after-tax yield is usually equivalent to the pre-tax yield. On the other hand, a taxable bond's after-tax yield will be based on the amount of interest remaining after deducting the corresponding amount of income tax expense associated with the interest earned on a taxable bond.

The after tax return of a taxable bond depends on a person's effective tax bracket. In general, tax-free bonds are more appealing to taxpayers in higher brackets; the benefit of not including interest earned in their taxable income is greater. In contrast for taxpayers in lower brackets, the tax benefit is less substantial. Even though municipal bond interest is not taxable, the amount of tax-exempt interest is reported on the return. Tax-free interest is used to calculate the amount social security benefits that are taxable. Tax-free interest also affects the computation of alternative minimum tax and the earned income credit.

Tax-Free Interest is excluded from 3.8% NIIT

Tax-exempt municipal bonds interest is also exempt from the 3.8% net investment income tax (NIIT). The NIIT is compulsory on the investment income of individuals whose adjusted gross (AGI) is in excess of:

· $250,000 for filing status Married Filing Joint and Qualifying Widower,

· $125,000 for filing status Married Filing Separate, and

· $200,000 filing status Single and Head of Household.

Tax Advantaged Accounts

Purchasing municipal bonds in your regular IRA, SEP, or §401(k) is a no-no. These accounts grow tax free and when withdrawals are made, the amount withdrawn is taxable. Thus, if you desire fixed income obligations in a tax advantaged account consider taxable bonds or similar income securities.

Alternative Minimum Tax Considerations

Interest on municipal bonds is usually not included in income for regular federal income taxes. Interest earned on certain municipal bonds called "private activity bonds" is included in the calculation of alternative minimum tax (AMT). The AMT is a parallel tax system established to make sure that taxpayers pay a minimum amount of taxes. The intention of creating AMT was to prevent people from getting to many tax breaks, for example tax-free interest. The tax breaks are added back into income and cause some people lose tax breaks and pay taxes.

Effects of Tax-Free Interest on Taxability of Social Security

A percentage of social security benefits are taxable when other income besides social security benefits surpasses certain amounts. For this purpose, the amount of taxable social security benefits adds tax-exempt interest into the amount of other income received besides social security benefits to determine the amount of taxable social security benefits. Consequently, if you receive social security benefits, tax-free interest could increase the amount of tax paid on social security benefits.

Effects of Tax-Free Interest on the Calculation of Earned Income Tax Credit

When a taxpayer is otherwise qualified to receive the earned income tax credit, the credit is lost completely when the taxpayer has more than $3,400 (2015) of "disqualified income." Disqualified Income generally is investment income like dividends, interest -income, and tax-exempt income. Thus, having municipal bond interest in excess of $3,400 causes a taxpayer to lose the credit. However, an individual qualified for the earned income tax credit is in a lower tax bracket and an investment in municipal bonds would yield a lower after tax return as compared to taxable bonds.

A Bond Sale or Redemption

Selling a bond before maturity or redemption has the same tax consequences as a taxable bond. Gains from sale are taxable. Losses are deducted from other gains; and losses in excess of gains are allowed up to $3,000, the remaining losses are carried over to future years.

Selling Bonds Purchased At a Discount

Bonds acquired with "market discount", have special calculations then they are sold. The discount that accrued during the period maybe treated as ordinary income.

Mutual Funds

Some investors want professionals to manage a diversified portfolio of municipal bonds, to lower the default risk on any particular bond issue. There are certain mutual funds that invest in tax-free municipals and manage them.

We hope this article was helpful. This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation.


Need assistance with above rules? Have any other questions.

Accountant Pompano Beach

http://www.cpafirmsouthflorida.com/



By: Peter D. Rudolph

Tax Avoidance and Tax Evasion Explained and Exemplified

Introduction

There is a clear-cut difference between tax avoidance and tax evasion. One is legally acceptable and the other is an offense. Unfortunately however many consultants even in this country do not understand the difference between tax avoidance and tax evasion. Most of the planning aspects that have been suggested by these consultants often fall into the category of tax evasion (which is illegal) and so tends to put clients into a risky situation and also diminish the value of tax planning.

This may be one of the prime reasons where clients have lost faith in tax planning consultants as most of them have often suggested dubious systems which are clearly under the category of tax evasion.

In this chapter I provide some examples and case studies (including legal cases) of how tax evasion (often suggested by consultants purporting to be specialists in tax planning) is undertaken not only in this country but in many parts of the world. It is true that many people do not like to pay their hard-earned money to the government. However doing this in an illegal manner such as by tax evasion is not the answer. Good tax planning involves tax avoidance or the reduction of the tax incidence. If this is done properly it can save substantial amounts of money in a legally acceptable way. This chapter also highlights some practical examples and case studies (including legal) of tax avoidance.

Why Governments Need Your Taxes (Basic Economic Arguments)

Income tax the biggest source of government funds today in most countries is a comparatively recent invention, probably because the notion of annual income is itself a modern concept. Governments preferred to tax things that were easy to measure and on which it was thus easy to calculate the liability. This is why early taxes concentrated on tangible items such as land and property, physical goods, commodities and ships, as well as things such as the number of windows or fireplaces in a building. In the 20th century, particularly the second half, governments around the world took a growing share of their country's national income in tax, mainly to pay for increasingly more expensive defense efforts and for a modern welfare state. Indirect tax on consumption, such as value-added tax, has become increasingly important as direct taxation on income and wealth has become increasingly unpopular. But big differences among countries remain. One is the overall level of tax. For example, in United States tax revenue amounts to around one-third of its GDP (gross domestic product), whereas in Sweden it is closer to half.

Others are the preferred methods of collecting it (direct versus indirect), the rates at which it is levied and the definition of the tax base to which these rates are applied. Countries have different attitudes to progressive and regressive taxation. There are also big differences in the way responsibility for taxation is divided among different levels of government. Arguably according to the discipline of economics any tax is a bad tax. But public goods and other government activities have to be paid for somehow, and economists often have strong views on which methods of taxation are more or less efficient. Most economists agree that the best tax is one that has as little impact as possible on people's decisions about whether to undertake a productive economic activity. High rates of tax on labour may discourage people from working, and so result in lower tax revenue than there would be if the tax rate were lower, an idea captured in the Laffer curve in economics theory.

Certainly, the marginal rate of tax may have a bigger effect on incentives than the overall tax burden. Land tax is regarded as the most efficient by some economists and tax on expenditure by others, as it does all the taking after the wealth creation is done. Some economists favor a neutral tax system that does not influence the sorts of economic activities that take place. Others favor using tax, and tax breaks, to guide economic activity in ways they favor, such as to minimize pollution and to increase the attractiveness of employing people rather than capital. Some economists argue that the tax system should be characterized by both horizontal equity and vertical equity, because this is fair, and because when the tax system is fair people may find it harder to justify tax evasion or avoidance.

However, who ultimately pays (the tax incidence) may be different from who is initially charged, if that person can pass it on, say by adding the tax to the price he charges for his output. Taxes on companies, for example, are always paid in the end by humans, be they workers, customers or shareholders. You should note that taxation and its role in economics is a very wide subject and this book does not address the issues of taxation and economics but rather tax planning to improve your economic position. However if you are interested in understanding the role of taxation in economics you should consult a good book on economics which often talks about the impact of different types of taxation on the economic activities of a nation of society.

Tax Avoidance and Evasion

Tax avoidance can be summed as doing everything possible within the law to reduce your tax bill. Learned Hand, an American judge, once said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible as nobody owes any public duty to pay more than the law demands. On the other hand tax evasion can be defined as paying less tax than you are legally obliged to. There may be a thin line between the two, but as Denis Healey, a former British chancellor, once put it, "The difference between tax avoidance and tax evasion is the thickness of a prison wall." The courts recognize the fact that no taxpayer is obliged to arrange his/her affairs so as to maximize the tax the government receives. Individuals and businesses are entitled to take all lawful steps to minimize their taxes.

A taxpayer may lawfully arrange her affairs to minimize taxes by such steps as deferring income from one year to the next. It is lawful to take all available tax deductions. It is also lawful to avoid taxes by making charitable contributions. Tax evasion, on the other hand, is a crime. Tax evasion typically involves failing to report income, or improperly claiming deductions that are not authorized. Examples of tax evasion include such actions as when a contractor "forgets" to report the LKR 1, 000,000 cash he receives for building a pool, or when a business owner tries to deduct LKR 1, 000,000 of personal expenses from his business taxes, or when a person falsely claims she made charitable contributions, or significantly overestimates the value of property donated to charity.

Similarly, if an estate is worth LKR 5,000,000 and the executor files a false tax return, improperly omitting property and claiming the estate is only worth LKR 100,000, thus owing much less in taxes. Tax evasion has an impact on our tax system. It causes a significant loss of revenue to the community that could be used for funding improvements in health, education, and other government programs. Tax evasion also allows some businesses to gain an unfair advantage in a competitive market and some individuals to not meet their tax obligations. As a result, the burden of tax not paid by those who choose to evade tax falls on other law abiding taxpayers.

Examples of tax evasion are: ï?~ Failing to declare assessable income ï?~ Claiming deductions for expenses that were not incurred or are not legally deductible ï?~ Claiming input credits for goods that Value Added Tax (VAT)has not been paid on ï?~ Failing to pay the PAYE (pay as you earn a form of with holding tax)installments that have been deducted from a payment, for example tax taken out of a worker's wages ï?~ Failing to lodge tax returns in an attempt to avoid payment. The following are some signs that a person or business may be evading tax: ï?~ Not being registered for VAT despite clearly exceeding the threshold ï?~ Not charging VAT at the correct rate ï?~ Not wanting to issue a receipt ï?~ Providing false invoices ï?~ Using a false business name, address, or taxpayers identification number (TIN) and VAT registration number ï?~ Keeping two sets of accounts, and ï?~ Not providing staff with payment summaries

Legal Aspects of Tax Avoidance and Tax Evasion Two general points can be made about tax avoidance and evasion. First, tax avoidance or evasion occurs across the tax spectrum and is not peculiar to any tax type such as import taxes, stamp duties, VAT, PAYE and income tax. Secondly, legislation that addresses avoidance or evasion must necessarily be imprecise. No prescriptive set of rules exists for determining when a particular arrangement amounts to tax avoidance or evasion. This lack of precision creates uncertainty and adds to compliance costs both to the Department of Inland Revenue and the tax payer.

Definitions of Tax Mitigation Avoidance and Evasion It is impossible to express a precise test as to whether taxpayers have avoided, evaded or merely mitigated their tax obligations. As Baragwanath J said in Miller v CIR; McDougall v CIR: What is legitimate 'mitigation'(meaning avoidance) and what is illegitimate 'avoidance'(meaning evasion) is in the end to be decided by the Commissioner, the Taxation Review Authority and ultimately the courts, as a matter of judgment. Please note in the above statement the words are precisely as stated in judgment. However there is a mix-up of words which have been clarified by the words in the brackets by me. Tax Mitigation (Avoidance by Planning) Taxpayers are entitled to mitigate their liability to tax and will not be vulnerable to the general anti-avoidance rules in a statute. A description of tax mitigation was given by Lord Templeman in CIR v Challenge Corporate Ltd: Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income or entitle him to reduction in his tax liability.

Tax mitigation is, therefore, behavior which, without amounting to tax avoidance (by planning), serves to attract less liability than otherwise might have arisen. Tax Avoidance Tax evasion, as Lord Templeman has pointed out, is not mere mitigation. The term is described directly or indirectly by ï?~ Altering the incidence of any income tax ï?~ Relieving any person from liability to pay income tax ï?~ Avoiding, reducing or postponing any liability to income tax On an excessively literal interpretation, this approach could conceivably apply to mere mitigation, for example, to an individual's decision not to work overtime, because the additional income would attract a higher rate of tax. However, a better way of approaching tax avoidance is to regard it as an arrangement that, unlike mitigation, yields results that Parliament did not intend.

In Challenge Corporation Ltd v CIR, Cooke J described the effect of the general anti-avoidance rules in these terms: [It] nullifies against the Commissioner for income tax purposes any arrangement to the extent that it has a purpose or effect of tax avoidance, unless that purpose or effect is merely incidental. Where an arrangement is void the Commissioner is given power to adjust the assessable income of any person affected by it, so as to counteract any tax advantage obtained by that person. Woodhouse J commented on the breadth of the general anti-avoidance rule in the Challenge Corporation case, noting that Parliament had taken: The deliberate decision that because the problem of definition in this elusive field cannot be met by expressly spelling out a series of detailed specifications in the statute itself, the interstices must be left for attention by the judges.

Tax Evasion Mitigation and avoidance are concepts concerned with whether or not a tax liability has arisen. With evasion, the starting point is always that a liability has arisen. The question is whether that liability has been illegitimately, even criminally been left unsatisfied. In CIR v Challenge Corporation Ltd, Lord Templeman said: Evasion occurs when the Commissioner is not informed of all the facts relevant to an assessment of tax. Innocent evasion may lead to a re-assessment. Fraudulent evasion may lead to a criminal prosecution as well as re-assessment.

The elements which can attract the criminal label to evasion were elaborated by Dickson J in Denver Chemical Manufacturing v Commissioner of Taxation (New South Wales): An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion. Not all evasion is fraudulent. It becomes fraudulent if it involves a deliberate attempt to cheat the revenue. On the other hand, evasion may exist, but may not be fraudulent, if it is the result of a genuine mistake. In order to prove the offence of evasion, the Commissioner must show intent to evade by the taxpayer. As with other offences, this intent may be inferred from the circumstances of the particular case. Tax avoidance and tax mitigation are mutually exclusive. Tax avoidance and tax evasion are not: They may both arise out of the same situation. For example, a taxpayer files a tax return based on the effectiveness of a transaction which is known to be void against the Commissioner as a tax avoidance arrangement.

A senior United Kingdom tax official recently referred to this issue: If an 'avoidance' scheme relies on misrepresentation, deception and concealment of the full facts, then avoidance is a misnomer; the scheme would be more accurately described as fraud, and would fall to be dealt with as such. Where fraud is involved, it cannot be re-characterized as avoidance by cloaking the behavior with artificial structures, contrived transactions and esoteric arguments as to how the tax law should be applied to the structures and transactions. Tax Avoidance in a Policy Framework We now turn from the existing legal framework in the context of income tax to a possible policy framework for considering issues relating to tax avoidance generally. The questions considered relevant to a policy analysis of tax avoidance are: What is tax avoidance? Under what conditions is tax avoidance possible? When is tax avoidance a 'policy problem? What is a sensible policy response to tax avoidance?

What is the value of, and what are the limitations of, general anti-avoidance rules? The first two questions are discussed below What is Tax Avoidance? Finance literature may offer some guidance to what is meant by tax avoidance in its definition of 'arbitrage'. Arbitrage is a means of profiting from a mismatch in prices. An example is finding and exploiting price differences between New Zealand and Australia in shares in the same listed company. A real value can be found in such arbitrage activity, since it spreads information about prices. Demand for the low-priced goods increases and demand for the high-priced goods decreases, ensuring that goods and resources are put to their best use. Tax arbitrage is, therefore, a form of tax planning. It is an activity directed towards the reduction of tax. It is this concept of tax arbitrage that seems to constitute generally accepted notions of what is tax avoidance. Activities such as giving money to charity or investing in tax-preferred sectors, would not fall into this definition of tax arbitrage, and thus would not be tax avoidance even if the action were motivated by tax considerations. It has been noted that financial arbitrage can have a useful economic function. The same may be true of tax arbitrage, presuming that differences in taxation are deliberate government policy furthering economic efficiency.

It is possible that tax arbitrage directs resources into activities with low tax rates, as intended by government policy. It is also likely to ensure that investors in tax-preferred areas are those who can benefit most from the tax concessions, namely, those facing the highest marginal tax rates. If government policy objectives are better achieved, tax arbitrage is in accordance with the government's policy intent. Tax avoidance, then, can be viewed as a form of tax arbitrage that is contrary to legislative or policy intent. What Makes Tax Avoidance Possible? The basic ingredients of tax arbitrage are the notion of arbitrage, and the possibilities of profiting from differentials that the notion of arbitrage implies. This definition leads to the view that three conditions need to be present for tax avoidance to exist. A difference in the effective marginal tax rates on economic income is required. For arbitrage to exist, there must be a price differential and, in tax arbitrage, this is a tax differential. Such tax differences can arise because of a variable rate structure, such as a progressive rate scale, or rate differences applying to different taxpayers, such as tax-exempt bodies or tax loss companies.

Alternatively it can arise because the tax base is less than comprehensive, for example, because not all economic income is subject to income tax.

o An ability to exploit the difference in tax by converting high-tax activity into low-tax activity is required. If there are differences in tax rates, but no ability to move from high to low-tax, no arbitrage is possible.
o Even if these two conditions are met, this does not make tax arbitrage and avoidance possible. The tax system may mix high and low-rate taxpayers. The high-rate taxpayer may be able to divert income to a low-rate taxpayer or convert highly-taxed income into a lowly-taxed form. But this is pointless unless the high-rate taxpayer can be recompensed in a lowly-taxed form for diverting or converting his or her income into a low-tax category. The income must come back in a low-tax form. The benefit must also exceed the transaction costs. This is the third necessary condition for tax arbitrage.
o Since all tax systems have tax bases (The thing or amount to which a tax rate applies.

To collect income tax, for example, you need a meaningful definition of income. Definitions of the tax base can vary enormously, over time and among countries, especially when tax breaks are taken into account. As a result, a country with a comparatively high tax rate may not have a high tax burden (Total tax paid in a period as a proportion of total income in that period. It can refer to personal, corporate or national income. ) if it has a more narrowly defined tax base than other countries. In recent years, the political unpopularity of high tax rates has lead many governments to lower rates and at the same time broaden the tax base, often leaving the tax burden unchanged. )that are less than comprehensive because of the impossibility of defining and measuring all economic income, tax arbitrage and avoidance is inherent in tax systems. Examples of Tax Arbitrage/Avoidance The simplest form of arbitrage involves a family unit or a single taxpayer. If that family unit or taxpayer faces differences in tax rates (condition 1 above), and condition 2 above applies, then the third condition automatically holds.

This conclusion follows because people can always compensate themselves for converting or diverting income to a low tax rate. An example of such simple tax arbitrage involving a family unit is income splitting through, for example, the use of family trust. An example of simple tax arbitrage involving a single taxpayer is a straddle whereby a dealer in financial assets brings forward losses on, say shares, and defers gains while retaining an economic interest in the shares through use of options. Transfer pricing and thin capitalization practices through which non-residents minimize their tax liabilities are more sophisticated examples of the same principles. Multi-party arbitrage is more complex; the complexity is made necessary by the need to meet condition 3 above, that is, to ensure a net gain accrues to the high-rate taxpayer. In the simpler cases of multi-party income tax arbitrage, this process normally involves a tax-exempt (or tax-loss or tax-haven) entity and a taxpaying entity. Income is diverted to the tax-exempt entity and expenses are diverted to the taxpaying entity. Finally, the taxpaying entity is compensated for diverting income and assuming expenses by receiving non-taxable income or a non-taxable benefit, such as a capital gain.

Over the years many have indulged in numerous examples of such tax arbitrage using elements in the legislation at the time. Examples are finance leasing, non-recourse lending, tax-haven(a country or designated zone that has low or no taxes, or highly secretive banks and often a warm climate and sandy beaches, which make it attractive to foreigners bent on tax avoidance and evasion ) 'investments' and redeemable preference shares. Low-tax policies pursued by some countries in the hope of attracting international businesses and capital is called tax competition which can provide a rich ground for arbitrage. Economists usually favour competition in any form. But some say that tax competition is often a beggar-thy-neighbor policy, which can reduce another country's tax base, or force it to change its mix of taxes, or stop it taxing in the way it would like.

Economists who favour tax competition often cite a 1956 article by Charles Tiebout (1924-68) entitled "A Pure Theory of Local Expenditures". In it he argued that, faced with a choice of different combinations of tax and government services, taxpayers will choose to locate where they get closest to the mixture they want. Variations in tax rates among different countries are good, because they give taxpayers more choice and thus more chance of being satisfied. This also puts pressure on governments to be efficient. Thus measures to harmonize taxes are a bad idea. There is at least one big caveat to this theory. Tiebout assumed, crucially, that taxpayers are highly mobile and able to move to wherever their preferred combination of taxes and benefits is on offer.

Tax competition may make it harder to redistribute from rich to poor through the tax system by allowing the rich to move to where taxes are not redistributive. Tactics Used by Tax Evaders Moonlighting Tax evasion at its simplest level merely involves staying out of the tax system altogether. The Revenue deploys small teams of volunteer officers to carry out surveillance to track down moonlighters. Early success was followed up by the deployment of compliance officers in virtually every tax office. Revenue Investigation Officers routinely scan advertisements in local newspapers or shop windows and even before the advent of the modern personal computer they frequently had access to reverse telephone directories to track down moonlighters from bare telephone number details. They also study bank and other financial institutions deposit and loans databases, customs records, and star class hotel bookings for private functions and ceremonies to identify rich individuals who maybe evading taxes.

Non Extractive Fraud Alternatively it can arise because the tax base is less than comprehensive, for example, because not all economic income is subject to income tax. ï?~ An ability to exploit the difference in tax by converting high-tax activity into low-tax activity is required. If there are differences in tax rates, but no ability to move from high to low-tax, no arbitrage is possible. ï?~ Even if these two conditions are met, this does not make tax arbitrage and avoidance possible. The tax system may mix high and low-rate taxpayers. The high-rate taxpayer may be able to divert income to a low-rate taxpayer or convert highly-taxed income into a lowly-taxed form. But this is pointless unless the high-rate taxpayer can be recompensed in a lowly-taxed form for diverting or converting his or her income into a low-tax category. The income must come back in a low-tax form. The benefit must also exceed the transaction costs. This is the third necessary condition for tax arbitrage. Since all tax systems have bases that are less than comprehensive because of the impossibility of defining and measuring all economic income, tax arbitrage and avoidance is inherent in tax systems. This involves profit switches or timing differences, for example:

o Post dating Receipts
o Ante dating Expenditure
o Hidden Reserves
o Incorrect accounting of transactions such as showing an income as a payable.
o Stock manipulation Perhaps the most common place method seen in practice is the manipulation of stock to produce the desired "profit".

It is not unknown for the evaders' Accountant to be involved - putting at risk the livelihood and, if the amount involved is significant, personal liberty! The most blatant case of this kind is where the Accountant virtually treated this as year end tax planning. Based upon the formal disclosures made by the evader under the Hansard procedure to the Inland Revenue (in which he implicated the Accountant and in connection with an account in a false name also his Bank Manager), the following scene can be recreated: "Studying the draft accounts the Accountant did a quick calculation to work out what range of figures could be used for closing stock in hand without giving rise to suspicion. He then apparently discussed with the client the impact on net profit of reducing Closing Stock.

Arrangements were then made for the audit to take place and in the meantime some stock was moved off site! "The Accountant and Bank Manager who assisted the evader are both guilty of conspiracy to defraud - it matters not that they made no financial gain themselves. Extractive Fraud This might take the form of Suppressed receipts or inflated outgoings: Suppressed Receipts Typically these involve defected mainstream takings and often an undisclosed bank account. However the more resourceful evader may take advantage of special arrangements or unexpected receipts: Where the proprietor or director personally deals with some customers it may be possible for cheques to be made out in a manner which facilitates diversion. Alternatively cheque substitution may be used, such that the otherwise "off record sale" cheque is banked and an equivalent amount of "on record cash" is extracted.

It is not unknown for late cash payment of credit sales to bypass the bookkeeping system with the debt subsequently being written off as bad. Unexpected receipts always present a good opportunity for deflection. For example:

1. Scrap sales
2. Insurance or bad debt recoveries
3. Refunds, rebates or discounts
4. Returned goods sold for cash, disposal of fully written down assets and windfalls in general.

The evader may take advantage of a new business opportunity, which remains hidden, and off record. Examples of this seen in practice include:

1. the dentist with three practices of which only two were discloses
2. the off record sale of hitherto obsolete car parts to the burgeoning classic car market Inflated Purchases & Expenses Where the ability to deflect receipts is too difficult the evader might draw cash from the business bank account and disguise such withdrawals as some form of legitimate business expense. In practice this often involves the use of "ghost" employees or fictitious outgoings to cover such extractions. Fictitious outgoings have to employ the use of false invoices. These might take the form of altered invoices, photocopied or even scanned "blanked" versions of genuine invoices, completely bogus invoices or even blank invoices supplied by an associate.

Another approach seen in practice involved the use of a seemingly unconnected off shore company to raise invoices for fictitious services. To hide the true ownership of the off shore company the evader uses a "black hole" trust to hold the shares. Essentially this involved a compliant non-resident trustee and "dummy" settler - the trustee providing "stooge" directors as part of the arrangements.

Employment Tax Evasion Schemes Employment tax evasion schemes can take a variety of forms. Some of the more prevalent methods of evasion include pyramiding, employee leasing, paying employees in cash, filing false payroll tax returns or failing to file payroll tax returns. Pyramiding "Pyramiding" of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the relevant departments. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme. Employment Leasing Employee leasing is another legal business practice, which is sometimes subject to abuse.

Employee leasing is the practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over to the authorities any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid. Paying Employees in Cash Paying employees in whole or partially in cash is a common method of evading income and employment taxes resulting in lost tax revenue to the government and the loss or reduction of future social benefits. Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns Preparing false payroll tax returns understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes. Payments of Benefits These include free benefits such as personal entertainment, excessive allowances for foreign travel, provision of educational schemes (foreign education) to only preferred employees, car and driver paid by company etc are simple examples.

Conclusion

I hope that I have made clear the difference between doing things right and legitimately and in a fraudulent manner. Whether you are a taxpayer or a consultant it is important to make sure that you understand the nuances of good tax planning. Whilst it is understood that tax planning is becoming more difficult and there is only a thin line between what is right and wrong it obviously requires the expert to do the needful. However be careful not to be tricked by those who claim to be experts in tax planning when they are mere computational experts.



Name: SKANDA Kumarasingam

Title: Business Professional and Facilitator

Organization: [http://www.profitmaps.com.au]

Contact Details: skandak@profitmaps.com.au (02) 9960 1916



By: Skanda Kumarasingam

General Tax Strategies and Principles For the Independent Minded Person

General Tax Strategies

Tax planning is highly dependent on where you live, but there are general strategies that apply to tax systems in many countries. Please check with the tax code that applies to you - there may be more than one. The mindset surrounding taxes is important in understanding what the motivation behind a tax is. Taxes should be treated as the ongoing cost of making money. They should always be accounted for prior to making an investment, taking on employment or forming a business. It is not what you earn in revenue that matters, it is what you get to keep net of all expenses - and this includes taxes. If you think in this format, you will know what to expect from your tax situation, and you will know if the activity you are undertaking is worthwhile. Going to work should also be viewed this way. Take note of how much money you get to keep after taxes. If you are getting a promotion, or choosing between two jobs, the one with the most income after all taxes and expenses should be the one you choose. This assumes that everything else about the two choices is the same, which is very rarely the case. The purpose of the prior statement is to raise awareness of strategic thinking when it comes to taxes. If you are going to take a contract job or run a business versus salaried employment, these choices become more important. The next paragraphs outline general concepts that would apply to most situations because they are fundamental to how a tax system is constructed.

Timing is Important

You will notice that taxes are always filed in annual periods, or quarterly periods if you report or pay quarterly. Notice as well that the more money you earn, the higher the percentage of tax you pay on that extra money you earn. This is what is called a "progressive tax system" which is how the Canadian tax code is constructed. If tax rates are flat over all incomes, meaning that the percentage of taxes paid are the same regardless of how much money you earn, this strategy would not apply in the same way. In a progressive system, timing is important because if you claim $100,000 in income in a single year, you will pay more taxes than claiming $100,000 in income spread over 2 years. If you have an option to claim income over more tax periods, you will pay fewer tax dollars.

Are you getting a tax refund? Using the idea of the annual period, whatever is deducted throughout the year is then matched with a calculation that is done at the end of the tax period. If you paid more throughout the period than you are required to pay, you would get a refund. If you pay less than the amount required, you would have to pay an additional payment when the end of the period arrives. If you are deducting a lot of taxes in advance, you would tend to get a refund. The downside is that you are not earning interest on the money. Interest rates are very low now, so this may not be worth thinking about, but as rates rise, giving the government money in advance will be more expensive. If you are a savvy investor, and you can invest these taxes for a portion of the year before remitting them to the government, this is income you would not have otherwise been able to generate. If you are paying an additional payment at the end of the year, you are holding onto your money longer. Other factors to consider on this topic are whether paying a larger tax payment at the end of the tax year is disruptive to your cash flow. If you are borrowing money to pay your taxes, this is an additional cost which is over and above your required tax payment.

RRSPs and Tax Timing

Registered Retirement Savings Plans and related accounts like the RESPs and RRIFs are tax timing vehicles. You would get a tax deduction upfront and pay taxes later - in the year that you take money out of the tax shelter. Keep in mind that your tax situation when you put money into the tax shelter can be different than when you take money out. The tax code itself may also be different at both times. This is hard to plan for, but it is usually assumed that taxes will rise as time goes by. The ideal scenario is to contribute to an RRSP when your income is at its highest, and withdraw it when your income is at its lowest. This would translate into the biggest deduction upon deposit, and smallest tax burden upon withdrawal. The frequency of your withdrawal can also affect how much taxes you pay within the tax year. The larger the lump sum withdrawals, the higher the rate of taxes charged upfront. When the tax year ends, the taxes payable will be adjusted to the same amount regardless of this initial deduction. Throughout the year however, you can either pay the tax man in advance, or pay the tax man more at year end. If you are able to generate return within the tax year, delay the tax payment as long as you can and generate that extra income.

Type of Income and Associated Risk is Important

The tax code in Canada generally looks at three types of income. These are income (working as an employee and interest earned on guaranteed securities fits here), dividends, and capital gains. These three buckets represent 3 different levels of risk, and so there are 3 different sets of rules for each. Generally speaking, the more risk of loss that you have in creating this income, the less taxes you will pay, and the more likely it is that you can offset losses with your gains. Another aspect of these rules is that tax treatment of income is generally limited to the year in which it was earned. Once the year is over, you cannot revisit the taxes paid unless there is some error or recalculation due to a retroactive tax code adjustment. This concept is true for dividends as well. Once they are earned in a specific year, you generally cannot offset taxes in future years. With capital gains however, you are able to adjust past tax returns and future tax returns by carrying gains or losses to other years and "smoothing out" the amount of taxes paid over your lifetime. This is allowed because in order to incur capital gains, you will likely also incur capital losses, and by not allowing you to offset these losses, you are being taxed in an unbalanced way. The tax rate itself is highest for income, lower for dividends, and lower still for capital gains. Take note that these concepts hold true if you are talking about working and living in the same country. Once you get into foreign jurisdictions (like US dividends from US companies being paid to a Canadian), the rules may change. If you are affected by this situation, ask your tax preparer specifically about the situation you are in. As an example, if you are a Canadian being taxed on U.S. dividends, ask about the tax treatment in this specific situation. A U.S. resident earning that same dividend and in the same income scenario would be paying a different amount of taxes. Each pair of countries that are relevant to a situation (the country you are a resident or citizen of, and the country where the income is generated) are the countries I would inquire about. The situation will be different for each set of countries, and would apply if you earn income in more than two tax jurisdictions.

Federal and Provincial Taxes Are Important

In Canada, there are federal taxes and provincial taxes. The provincial taxes are calculated as a percentage of the federal taxes, so it is harder to predict the effect of these taxes in total. The best way to know how much taxes you are paying is to look at your historical tax returns and look at the entire amount paid in taxes. Other ways to prepare for this situation are to use tax calculators or ask your tax preparer to estimate the combined effect. People tend to look at the federal rates but underestimate that there is also a provincial tax rate on top of that. Related to this idea, as you lower your taxable income, you will lower your federal taxes payable, and your provincial taxes payable. If your income is high, the provincial taxes will go up at a faster rate in a scenario where the provincial tax rates are progressive.

Tax Credits

If you are eligible for tax credits, use them as much as you can. These can change with every budget, and they sometimes expire - so an up to date source of tax information is highly advised here. Remember as well that governments issue tax credits to encourage investment in a sector, or change consumer buying patterns. When you see that the government is losing too much money from a credit, or the desired influence has largely been achieved, the credit will likely get modified or deleted. Make sure to look at the tax credit with respect to your whole tax situation. If you have to give up some other benefit to get the credit, or spend money you wouldn't have otherwise spent, this credit may not be worthwhile. If you are spending money only to generate tax deductions because it is legal, examine whether you really need to spend this money. As an example, if you spend $100 to generate an expense, you will receive $30 in taxes back. If that $100 was not spent in the first place because you didn't really need to spend it, you would keep $100 more. If you are spending $100 no matter what, and you are able to legally expense it, then you are saving that extra $30. Taxes should not drive your financial decisions for the most part, but they can take a situation that is generally neutral, and skew it to a desired outcome. As the person paying the taxes, you should consider whether you would make this transaction with and without the tax implications, and see which outcome works the best for you. This concept would apply to taxes in general, but especially to tax credits.

Tax Strategies Outside the Scope of the Tax Code

Be mindful of tax strategies that save taxes but are outside the scope of the tax code. These are not deemed illegal initially, but if they get too popular, the government may make an official statement that it does not recognize the tax strategy and it is therefore invalid. A good illustration of this scenario is the charity tax credits where people would give money to a charity and earn a greater return that what they contributed. The Canada Revenue Agency eventually shut down this idea as it was deemed abusive. Another example of this situation is the first years of the Tax Free Savings Account (TFSA). There were issues surrounding transfers between the TFSA and the RRSP, and since specific conditions were not stipulated in the tax code, these transfers were assumed to be legal. It turned out that people were charged taxes in hindsight, and the issue was resolved by modifying the TFSA rules at later years. The safest thing to do in these cases is not to delve into these gray areas. If you believe in doing so, acknowledge that there risks and find a tax lawyer who has knowledge in the specific tax idea. Should you get audited or challenged in court, you will have the resources you need.

Running a Business and Taxes

Generally speaking, if you can operate a business versus working for an employer, having a business would allow you to deduct more expenses, and pay fewer taxes all else being equal. There are many implicit assumptions in this statement. The first one is that you can make the identical income at the same time frequency as working as an employee. If you don't think you can generate income consistently, it may not be worth to have a business. The truth is that business income tends to be lumpy and unpredictable. The second one is the deductions. Small businesses pay fewer deductions and less EI, but would pay more in CPP. Insurance may cost more as well if you choose to have it as a business versus being an employee, since the employer subsidizes the insurance costs. Within this point is the assumption that you are running a business at home. Your home expenses would be partially deductible, leading to less tax paid. If you run your business from another location, you will incur more expenses, and the tax situation may be better or worse depending on the net effect of your revenue and expenses. The third point of clarification is that there are different tax rules between being a contractor and a small business. Lastly, the type of business is important. It is fairly simple to be a sole proprietor, but to incorporate involves different costs and commitments. Yes, the corporate tax rate is generally lower than for individuals. However, corporations take more time to operate, have setup costs, legal costs and reporting costs that sole proprietors don't have. Corporations would also have separate HST numbers which is another layer of record keeping over and above that of a sole proprietor. Keep in mind that complexity in general involves more time and effort as well. To incorporate for legal reasons or strategic reasons is a whole other matter. Professionals should be consulted before considering forming a corporation.

These general tax strategies are applicable to most areas of the world, as most governments know how other governments raise tax dollars.


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Financial education that is customized to what you already know or want to know
Fee is based on work performed and not by the assets you have
If you answered yes to any of these questions, contact me at:


Contact me, Joe Barbieri by email at joetheinvestor.today@gmail.com, my web site at http://www.joetheinvestor.ca or by telephone at 647-286-8020 for an independent consultation on what your options are. Note: This article is intended for people who want to learn about the world of finance and how to research for themselves. If you would like to buy or sell investment products, or specific advice on investment products, tax or legal issues, please consult your investment advisor, accountant or legal counsel.



By: Joe Barbieri

Taxes, Our Share to Building a Better Nation

Taxes have been with us since the birth of civilization, taxes like, transport tax, tax relief, income tax and whatever word that may come before and after that one word which we call tax.

Indeed there is truth when we say that we are paying taxes since the very moment of our birth until such time that we leave this world, taxes obligates us to face it either which way but head on. That is the truth about it and nothing in this world could ever change that truth, because without it the civilized world as we know it would seize to exist and nobody would dare want for that to happen.

We often hear people complain of the taxes they pay, and some would even say that it is an unnecessary obligation that we should not respect to pay at all. Maybe they are just burdened with the obligation of taxes or they just need to realize the importance of taxes. Tax relief could very well help people like them and they can very well acquire such tax relief if only they know how and obligate themselves to learn the nook and cranny about taxes, its importance and its role in making our life better.

Why does the government collect taxes? Why do we obligate ourselves in paying taxes and what is in taxes that we need it to make our lives better? These are just a few questions that we asked ourselves when we face those documents on our mailboxes, billing us of our monthly, quarterly, and annual obligation to our governing institution. Are taxes really that essential to our daily living? The answer to that is a definite yes.

Taxes or tax money is the life source of this civilization we call government, without the financial aspect of taxes no government can sustain itself and therefore could not survive. Tax money funds the government's programs and activities which are needed to keep the wheel of the government rolling. Even taxes with tax relief paid diligently can really make a difference in changing and sustaining the lives of the people who are looking up to its governing body for protection, stability and survival. No civilization, government, city or municipality in the world exists today that does not collect taxes in one way or the other, either directly or not. Taxes are there for every commodity that we enjoy every day. Most of us do not even take time to learn about the taxes we pay every time we purchase something, yes we pay taxes every day of our lives and we often take it for granted.

When we pay taxes either with tax relief or not, the money goes to our government's treasury. There, it will be accumulated for some period until such time that it will be audited and presented unto our representatives, government officials, senators and budget officers. From there our elected representatives in the government will decide as to where to allocate this tax money or funds, Setting priorities and amount which are necessary to sustain a certain department or welfare, which the government is giving its constituents.

Social welfare, social security, public hospitals and all government entities that cater to the people are being funded by taxes. Taxes that the common people pay from purchasing basic commodities, through income taxes, tax relief and all the other taxes that we heard or read and pay for and even for some time complained about.

Some people do complain, while others are just content on keeping silent when it comes to the topic of taxes. While there may be a significant number of people who obligate themselves in paying taxes there are still a handful or even numerous sector who would rather prefer not to pay it if given the chance. For yes indeed not all are fortunate when we speak of financial status, and in this financially trying times most of us would likely prefer a tax relief if not a tax exemption if possible.

Tax exemption is really a catchy idea, and what person in his or her right mind would not accept such an invitation or notion. Indeed there are activities, events and endeavors which the internal revenue department would give you tax relief or much better yet tax exemption, but not without certain guidelines imposed and followed to the letter of course.

To learn more of how to you can file for tax exemption or tax relief you will have to visit the nearest internal revenue office near you.

The next best thing which you can have besides tax exemption is tax relief, which the government is giving to taxpayers who deserves such privilege. You do not have to be someone especial instead you only have to meet certain criteria to be able to acquire the privilege of tax relief.

There are many types of tax relief available and used by the internal revenue, and they are intended for specific criteria and target taxpayers. One type of tax relief may be available for a certain class of taxpayer while rendering it inapplicable to another. This way the taxes we pay are balanced and equally implemented to its rightful taxpayer.

These are only a few of the taxes that are being implemented to taxpayers, and each and every one of these taxes have been carefully researched, developed and made into law and implemented as to make it feasible and helpful towards the betterment of the government and the life of the taxpayer.

Indeed there are times when we the taxpayer would want to somehow ease our lives from taxes even for just some limited time or for certain percentage of what we are presently contributing. There is a solution indeed to it and taxpayers only need to understand how taxes, its collection, rules and regulations work in order to qualify for certain privileges which would greatly help in alleviating a taxpayer's obligation. One way is finding out how to acquire or pass for a tax relief. It really isn't hard, you just need to ask for help from the nearest internal revenue office near you.


Are you looking for more information regarding Taxes? Visit http://www.911taxrelief.com today!



By: Jacob L Turner

The History of Income Taxes in the US

1913 celebrates the 16th Amendment to the constitution of the United States marking the beginning of income taxes. The tax code is more complicated than anyone can imagine and a look at the major events over the past 100 years might help you understand how we got to where we are today. In researching for this article, I kept looking for a single word or phrase that could easily describe the "History of Taxes". The only thought that kept popping into my head was... "Schizophrenia". Defined by Webster: schiz·o·phre·ni·a Noun; 1) A long-term mental disorder of a type involving a breakdown in the relation between thought, emotion, and behavior, leading to faulty... 2) A mentality or approach characterized by inconsistent or contradictory elements. Today's tax code is made up of perhaps the most complex assembly of contradictory rules, regulations, and laws on earth. For the sake of this article, I'm only going to touch on the key factors and point out how to make your way through this maze. Even the most respected authorities on the topic of taxes are confused by the nearly 10,000 pages of tax code. There were many taxes before the 16th Amendment. To help fund the War of 1812 there was a tax on gold, silver, jewelry, and watches. Once the debts from the war were completely settled, the taxes were halted in 1817. Revenue to operate the government was adequate with tariffs and fees on traded goods until the Civil War. In 1862 Congress enacted the first income tax law to support the costs of the Civil War. The tax rate was at 3% and higher on some luxury items. Then in 1868 Congress enacted a new tax on tobacco and distilled spirits. This is the first sign of a 'parallel' tax along with an income tax. Revenue was the highest ever achieved at $310 million and quickly settled all debts of the country, so in 1872 Congress eliminated the income tax. Following the Civil War, America experienced a great economic boom with the 'Reconstruction Era'. In the years from 1870-1900 the benefits from the Industrial Revolution were put into action. Chicago hosted the World's Fair in 1893, celebrating the 400th anniversary of Columbus' arrival in the new world in 1492. In 1894, Congress revived the income tax law and looked to aggressively grow revenue. Just one year later on May 21st 1895 the Supreme Court Ruled that income taxes were 'unconstitutional'. The 5/4 decision stated that a direct tax on the income of real and personal property was unconstitutional and void. In the years that followed this Supreme Court decision the economy once again grew rapidly. The very wealthy became wealthier and there were jobs for everyone. The good life in America was celebrated with growing immigration from Europe bringing tradesmen looking for a better life. In 1904, Saint Louis hosted the World's Fair celebrating 100 years of the 1803 Louisiana Purchase. This event showed the world how abundant every aspect of life was in America. In 1907, only three short years later, America faced a huge crisis. The economy of America fell to a point where the average family income fell by 40%. A panic set in because many banks closed and people lost trust and hope. Times were difficult for average families. When banks closed, hardworking people lost their savings. President Taft addressed Congress in 1909 proposing a 2% federal income tax on corporations (for the privilege of doing business). On July 12, 1909, Congress passed a resolution proposing the 16th Amendment. This amendment to the constitution allows Congress to levy an income tax. Federal Income tax is not required to be distributed or apportioned to states nor have any connection to Census results. It was written to avoid being a 'direct tax' and avoid conflict with the Supreme Court ruling in 1895. With 48 states in the union, 36 states were needed to ratify before it could be passed as an amendment. Then in 1910 a secret meeting was held on secluded Jekyll Island with the most powerful bankers and financial decision makers of the time. This event really requires much more discussion and entire books have been written about this meeting. What is important to take from this is the fact that this meeting was the start of what we know today as the Federal Reserve Bank. Few people even today understand the impact of this meeting. It is interesting to note that since the proposed 16th amendment in 1909; only 31 states ratified it through 1911. The US presidential election of 1912 was a rare four way contest. Incumbent President William H. Taft ran along with former President Theodore Roosevelt and Woodrow Wilson (finally nominated by his party on the 46th ballot) and Eugene Debs from the Socialist Party. Throughout the 1912 presidential campaign (typically a 2 month event), the 16th Amendment was a 'hot topic'. At the time of the election in November only two more states were needed to ratify the 16th amendment. Woodrow Wilson was elected and the 16th Amendment to the US Constitution was ratified on February 3, 1913. With the Congress' windfall of revenue it was time to jump on the roller coaster of cash. World War I came along and in 1918 Congress set the taxes at a rate of 77% for those with income over $ 1,000,000. That's a 2012 equivalent of $15 million annual income, so most people didn't even care that there was an income tax. With this first major income tax in 1918, our US annual revenue surpassed one billion dollars for the first time ever. That's a "one" as in single and "B" for Billion. Then just two years later, in 1920 the US annual internal revenue grew to $5.4 billion. This represents a 500% increase in just 24 months. A lot of other history was being made over the years from 1920 to 1940 and the tax front was relatively quiet. The economy grew at a rapid pace during the 20's, hence the name 'Roaring Twenties'. Then in October of 1929 the "What goes up must come down" effect took place. The stock market crashed and brought with it a depression. Like many events in history, the government's intervention slowed the normal recovery and this era is now known as the "Great Depression". When people talk about the 'highest tax rate' they often see a number that is reserved for the very rich. What gets overlooked in addition to that highest rate is the income 'threshold' which determines the number of people impacted by that rate. In 1941 the highest income tax rate was 81.1% for those making over $5,000,000. That certainly limited this high rate to a minimal number of people. Then in 1942 (the very next year), the highest rate was raised to 88%. In itself, this does not seem too bad until you consider that the threshold was lowered to those making over $200,000. Lowering the threshold from $5 million to $200,000 meant that many more people would be paying that new higher rate. In 1942, World War II created a huge increase in employment and stimulation of the economy (compared to the years of the depression). With this spike in employment there was also a spike in tax revenue and the US revenue exceeded $7.3 billion in collections. Up to this point in time the collection of taxes were voluntarily paid by taxpayers. People filed their tax reports and made payment of their taxes. In 1943, Congress adopted 'Mandatory Federal Income Tax Withholding' requiring employers to pull out taxes from employee's pay and forward it to the US Treasury. This measure increased the number of taxpayers to over 60 million (estimated increase of 30+% in number of taxpayers). After WWII ended in 1945, Congress increased that top rate to 94% and kept the threshold at $200,000. Congress/IRS closed some loopholes on the 'tax withholding' bill and included more complications on who had to pay quarterly tax payments. The annual internal revenue in 1945 surpassed $43 billion, up nearly 50% each year for 15 years. The end of WWII marked a period of substantial growth, both the economy and the birthrate. We entered a new era in America with tremendous growth and individual responsibility. Families were living the American Dream. Congress and the Internal Revenue Service continued to 'tinker' with the tax codes after WWII. At the end of 1969, Congress enacted the "Tax Reform Act of 1969" which established the Alternate Minimum Tax (AMT). This was a new totally separate tax system for some Americans. The number of Americans who were required to pay the AMT in 1970 was around 19,000 and the amount collected was $122 Million. Years go by with an obvious abundance of income for the Federal Government. Budgets are set to automatically increase, regardless of the actual amounts needed or spent. In 1981 Congress enacted the largest tax cut in US History by cutting $750 Billion over 6 years from revenue. Then in 1982, yes just the very next year, Congress passes a tax act to INCREASE revenue. The increase wasn't enough, so in 1984, Congress passed another tax act increasing revenue. Between the 1982 and 1984 tax acts, the total revenue was around $265 Billion. This is about 1/3 of the revenue cuts passed in 1981, which were to take place over 6 years. On October 22, 1986, President Ronald Reagan signed the "Tax Reform Act of 1986" which dropped the top tax bracket from 50% to 28%. This represents a significant drop in the top rate, the lowest top rate since 1916. Another part of the 1986 Act was a change in the AMT to expand and include many homeowners. Congress got into a bad habit of making their "Tax Act" an annual event with more changes in 1987, 88, and 89. On November 5, 1990 the "Revenue Reconciliation Act of 1990" was signed into law. This was just a fancy name for "Tax Act" and had most of the same tinkering with our income taxes. This Act primarily focused on raising taxes on wealthy Americans. The economy was growing and inflation rates were recovering from the 80's. When President Clinton signed the "Reconciliation Act of 1993", the purpose was to reduce the federal deficit by $496 Billion. Revenue to the Federal government was still greater than what was required to operate and surpluses existed. In 1997, President Clinton signed the tax Act cutting taxes by $152 Billion. This bill brought down the capital gains tax, provided a $500 per child tax credit, and had tax incentives for education. In 2001, President Bush signed the "Economic Growth and Tax Relief Reconciliation Act of 2001". This contained the 3rd largest tax cut since WWII, set to cut $1.3 Trillion over 10 years. With such a long name and such a huge tax cut, you would hope that maybe this would be enough to last 10 years. Well that makes too much sense. In 2003, President Bush signed the "Jobs and Growth Tax Relief Act of 2003" accelerating the rate cuts of 2001. While not a law, in 2004 the 'World Trade Organization' ruled that the US Corporate tax provision was illegal. This did have an impact on how corporations planned their business and tax strategies. This also indicates the foreign influence and encouragement for American corporations to be more like European business models. In 2005 the favorable rates on capital gain and dividends were extended. The exemption levels for the Alternative Minimum Tax were raised in 2006. Remember a few paragraphs ago when we looked at that Alternative Minimum Tax? Established in 1969, the AMT was established as an entirely separate tax system to the income taxes. While most Americans were not aware that this tax even existed, the changes made to the AMT affected nearly 5 Million taxpayers in 2011. In 1970 the AMT accounted for $122 Million in revenue and in 2011 the AMT revenue exceeded $40 Billion. This is nearly 260 times more than 1970. Through the years since our founding, America has been on a path of rapid government growth. Taxes are the price we pay to live in a civilized society providing basic services and caring for those unable to care for themselves. If the government showed a history of being good stewards with our tax dollars, more Americans would proudly pay taxes without complaining. However, the layers upon layers of tax regulation have brought us to a point of dependency for many who rely on our complicated tax system. The kind of changes that are needed will require a major overhaul. Most politicians and special interest groups today will not allow the drastic measures needed to establish a new fair tax system. This means that anyone looking to the future would have sense enough to figure that future taxes will most likely be much higher than they are today. People need to be careful how much money they accumulate that is considered 'tax-deferred'. I try not to use the term 'deferred' when talking about taxes because they really are 'tax-postponed'. Think of it as the government providing you with a loan. They tell you that you can keep this money until a later date. If a bank did this, the first thing you would ask would be; how much is the interest and when do I need to pay you back. Well, 'tax-deferred' savings is like this except that the government says, you keep the money and when we need it, we'll ask for it back and tell you the interest rate at that time. OK, so maybe this example is harsh, but we don't know what the future taxes will be on 'tax-postpones' savings and investments. References: 1) http://www.taxpolicycenter.org/ 2) http://www.loc.gov/ If you needed the money and someone offered you a loan, what would you want to know? If someone offered you the money and told you that you could have the money right now and since they didn't need the money immediately they simply said, you can repay me later on when I need the money and I'll set the interest rate at that later time. Would you take that deal? Probably not. When you think of this example it really is the same thing that the government is doing with tax-deferred retirement savings. You don't really know when you are going to withdraw the money creating a taxable event. Also, you don't know what the future tax rate will be. So, one thing that is evident from this article is that taxes will not remain the same in the future. A smart look would have one conclude that future taxes WILL BE HIGHER. By: Dean Hempel