UK Taxation Treatment For Rental Income

Property Rental Assets for Individuals

UK Rents and licence's are admired as UK acreage and property. Acreage and acreage assets is all assets anticipation from such acreage as if it were a trade. Therefore this is affected as all assets actuality adjourned in the tax year on an "accruals" basis. This agency that assets is burdened on an "arising" base in the year of assessment, i.e. assets that is due in the year, and not all-important assets that is absolutely paid by the tenant.

For example if a tenant per the tenancy agreement is obliged to pay £495 a month, the taxable income is £5,940 a year, irrespective of the fact the tenant might say pay late for their rent.

Since rental income is an assessment like trade, all income from the different rental properties are pooled together, creating one income stream. Hence profits and losses of the same UK properties are amalgamated together to create the net profit or loss. In essence losses from one property is netted off against profits of the other.

If they are losses overall after pooling all the properties together, then these losses can be carried forward against future profits of property income. These losses cannot be set off against other income, e.g. employment income or self employed income. However, if losses arise due to "capital allowances" this may then be relieved against other general income.

Capital allowances is the allowable decrease in value of the assets each year that are used in the properties. For e.g. fridges and ovens. Capital allowance rates will be 20% or 25% a year depending on current capital allowance rates.

Expenses are allowed to be deducted if they are incurred "wholly and exclusively" for the purposes of the property.

The treatment for limited companies broadly follows the same rules as for UK individuals.

Income from Overseas Property for UK Residents and Domicile

A UK resident or domiciled person will be taxed on income arising on overseas property and hence must be declared on the UK self assessment return. A tax credit may be given dependant on double taxation treaties for tax suffered in the overseas country on that rental income.

On the other hand, non-resident individuals will not be taxed on overseas property income in the UK. Non domiciled individuals will also not be assessed on this income, but only assessed on a "remittance basis", whereby the income is only taxed if it is brought in the UK.

Recent rules affecting non-domicile individuals that have been resident in the UK for 7 years or more may have to pay tax on there overseas income, unless they choose to pay an annual tax charge of £30,000, if they wish to adopt the remittance basis in the future.

Income from properties overseas is treated like a separate business to that of income arising from UK properties. Hence losses for overseas properties can only be offset against profits from overseas properties arising in the future and cannot be offset against UK property income.

Rent a Room Relief

This is a relief is given for renting a room in one's main residence. This relief is not available for a property that is not occupied by the owner as their main residence, and hence fully let properties are not eligible for this relief. However, lease holders whose name is on the lease, can claim this allowance for their lodgers, providing of course the lease allows them to take on lodgers.

The relief is not available for commercial lets of the property i.e. home as office, or letting part of the property to a company.

Relief is given up to £4,250 per tax year. Rents from lodgers at or below this amount is not taxable. This is a total allowance for the property is not apportioned per room.  If income is received over and above the rent a room relief, then the amount above is taxable, and is declarable in the self assessment return.

The advantage of the rent a room relief is that it does not affect the principal private residence relief when coming to sell the property. If the property was let outside this allowance, and actual rental income and costs were declared in the normal way, then that element of the property being rented would not be exempt for capital gains tax, and hence capital gains tax would be chargeable on that apportionment of the property. Letting relief however may be available up to a maximum of £40,000.

Tax Return Forms

According to federal laws administering taxation, any person, accepting an assets in one anatomy or the other, charge to pay assets taxes to the government annually. But, the job of advancing tax returns, the calculations and the abounding tax forms involved, aggregate one of the agonizing adventures actuality an honest tax payer. To accomplish affairs worse, the complication of calculations increases with the income. That is, added the income, added circuitous will be associated tax calculations and additionally the cardinal of tax forms involved. This commodity focuses on the aftermost of the facts mentioned, the tax forms, abnormally 1040ez, 1040a, and 1040.

The first step in the run-up to tax return submission is selecting the right form. The basic of the tax forms is the 1040 – also 1040ez and 1040a – which has to be appropriately filled by every person filing tax returns in any case. It is meant for all kinds of income, over $100,000 annually, and also for itemizing deductions when not opting for standard deductions. 1040ez, again a basic tax form, on the other hand is meant for people who are single or when married, jointly. The conditions governing the 1040ez form are, the tax payees must not have any dependents, not blind, age less than 65, and have an annual earned income (taxable) less than $100,000 with an earned interest not more than $1,500, and have non-itemized deductions. Finally, the form 1040a is for those who have an income less than $100,000 annually, but with itemized deductions. 

The stickiest part with tax preparation in fact is the right selection of the tax forms. Boy! It can be really confusing. To make matters worse, most of the people, they start thinking about tax returns only in the 13th hour, all warnings and ads by the tax department not withstanding. Some even end up paying the fine for delayed tax returns. But, none of these last minute heroic acts is ever going to give any respite to the person as far as the ordeal waiting for them is concerned, if not compounding it further. Here, one simply cannot afford to go wrong in the selection of tax forms and filling it. An error anywhere – in the type of form (1040ez or 1040a or 1040) or the data incorporated - could lead to other complexities such as an unprecedented delay in tax refunds or even a fresh request to pay the income taxes from the tax department to clear the confusion.

Hence, considering such possibilities, it is advisable that if anyone is confused regarding the tax forms to use or with tax calculations, don’t hesitate to consult a tax specialist. They could help you with the tax calculations and the selection of the right form and documents (of course, they’ll take a pay for the service). On a general perspective, however, it is only advantageous to remain educated about taxation’s various dimensions and requirements. A professional could extend the much needed assistance, but it is always on a safer side for the individual himself/herself to be aware of the basic rules regarding taxation. Let’s not take everything for granted!

Another plus with acquiring enough knowledge about the different dimensions of tax preparation and the tax forms - 1040ez, 1040a, or 1040 – is that then he/she could easily and safely shift to tax preparation software like TurboTax that are easily available in the internet to complete the formalities. TurboTax software is accurate, easy and simple to use, and what all you need to do is to first download the tax preparation software on your PC, and then provide the figures the computer asks of you. However, it is very important that the right figures be provided to the Turbo Tax software always so that there are no mistakes that may arise in the 1040a, 1040ez, or 1040 forms, when all the calculations are finished.

One could get the tax forms - 1040ez, 1040a, or 1040 – from IRS or public library.
Make sure that you fill it out properly and include all the required documents before submitting it to the authorities. Ensure your signature on it and also the social security number without any errors. A misquoted SSN could cause lots of difficulties, both for the tax payer and the tax authorities.

What Does It Take To Pay Zero Taxes?

How abounding times accept you heard addition say, "I don't pay any taxes. My accountant takes absolute acceptable affliction of me . . . I haven't paid a dime in taxes in years."

Does that outrageous statement sound familiar?

Maybe it's your brother-in-law, or a fellow Soccer Mom, or a co-worker at the office.

And so you think to yourself, "What am I doing wrong? How come I'm paying taxes and so-and-so says he/she pays nothing? How do they do it!"

Is it really possible to pay "zero taxes"?

For purposes of this article, let's give your "no-tax" friend or relative a name. Let's call him "Charlie" (or if he is a she, just think "Charlene").

OK, what is Charlie up to? What's his secret?

Charlie has no secret. He's not doing anything that you should be doing. Do not be envious of Charlie, and here's why . . .

I can think of at least five reasons you should ignore whatever Charlie says about his "no-tax" situation.

REASON #1: Charlie is a liar. Every family has one, so don't feel bad. Let's face it, some people just like to indulge in fabrications to make themselves feel good. Charlie is telling you a big fat lie because Charlie has "issues." 'Nuff said?

REASON #2: Charlie is pond scum. OK, hear me out on this one. I don't mean to offend you if Charlie is a close and dear relative, or your best friend, but I'm going to give it to you straight: Charlie cheats on his tax return, and he cheats big time. There are plenty of folks out there like Charlie. He's one of the reasons that you and I pay so much in taxes -- he doesn't report all his income, and he deducts bogus expenses by the thousands.

He and his accountant may even be in cahoots on this. Charlie brings in his records and his accountant crunches the numbers, then calls Charlie and says, "You owe $5,000." So Charlie rummages around in his files and somehow manages to come up with another batch of expenses that miraculously
reduce his balance due to zero. It's like magic!

End result: Charlie's tax return is a big lie.

Charlie is a thief. Charlie should be put in jail for the tens of thousands in taxes he has illegally withheld from the government over the years.

REASON #3: Charlie is stupid. Again, I'm sorry if I'm being too hard on Charlie. But some people are so clueless about taxes that if they have no balance due on their return, or if they are getting a refund, they mistakenly believe they didn't pay any tax that year.

And believe it or not, this is actually a very common misconception that thousands of people cling to. Ah, to be so blissfully ignorant!

I hope you are not so naive to think that the "bottom line" on your tax return tells the whole story about your tax liability. It doesn't.

REASON #4: Charlie is broke. Charlie may actually pay zero taxes because --are you ready for this one? -- Charlie doesn't make any money!

Charlie owns a small business or works full-time at his self-employment activity, and Charlie may rake in hundreds of thousands in income from sales of his product or service -- but Charlie's business spends more than it brings in, and Charlie's business has a loss every year.

So Charlie doesn't really have a tax problem. Instead Charlie has any number of other problems. He has a marketing problem, or a management problem, or a personnel problem. Charlie's business is failing, and paying zero taxes is just a symptom of a business that will eventually close.

REASON #5: Charlie is just scraping by. Charlie's business may not be losing money every year, but it's not really making much either. He has a small profit -- enough to keep him busy. His business may even "look" profitable, but it's really the classic shoestring operation.

So now, I ask you, do you really want to pay zero taxes? People who don't pay taxes are usually in one of these five categories: Chronic Liars, Pond Scum, Stupid, Broke, or Just Scraping By.

The purpose of business is to be profitable.

The unavoidable result of a profitable business is taxes. And yes, you should do everything legally possible to reduce those taxes. But if you are going to be successful, you are going to pay some taxes.

When it comes to taxes, stay away from Charlie.

The Ultimate Tax Planning Strategy

The taxes that are withheld from paychecks bulk to about 25% of your gross pay (including federal tax, accompaniment tax, amusing aegis tax and medicare tax). But these taxes that are withheld could be alive for you as investments if you apply what I alarm the ultimate tax strategy. This tax action consists of how you plan to pay no taxes aloof like all of the ample corporations. Ample businesses accept teams of accountants and attorneys activity over the tax cipher to accomplish best use of accepted deductions.

In my opinion, there is a distinct difference between an individual and a business in the U.S. tax code (others have called it the difference between the rich and the poor). Such as businesses are rewarded with tax deductions because they create jobs and engage in entrepreneurial activities that support individuals and government. But individuals are awarded few tax breaks because they don’t create jobs and don’t take risks that add substantial value to the economy. This is simply the fact and we just need to find a way to make the most of the few tax deductions that are available to wage earners as well.

When tax time comes around, the only substantial tax break most individuals have is a deduction for their home mortgage. This deduction is a social policy benefit to many people, but instead of helping people, it can motivate them to buy a larger home or higher mortgage than they would ordinarily afford. And unless you live in a neighborhood that continually appreciates, this is not a great strategy for you to target.

First, I need to make some big disclaimers about minimizing your taxes. There are many people in jail that have written books, tapes, websites and held seminars on how to never pay taxes. You can spot these people due to their focus on concepts that the IRS says are invalid; strained interpretations that haven’t held up in court, constitutional nonsense and a lot of straight fraud. Once the IRS audits these “patriotic educators”, the result is an invoice for back taxes, interest, penalties, and a jail or prison sentence. And illegal tax avoidance isn’t limited to wage earners. Nearly every month there is someone who tried to avoid taxes from a giant windfall (sold a company for millions, exercised stock options, received a large bonus) and paid some small shady offshore consulting company to create a fictitious tax loss to offset the big gain. The same thing happens; IRS files suit for back taxes, interest, penalties and possibly jail depending on the circumstances.

The ultimate tax planning strategy works when you buy investments that have a positive cash flow (before any tax consequences), and give you a legitimate tax deduction as an added bonus. Now it is just a matter of buying enough of these investments to reduce your tax liabilities close to zero. If you have too much of these investments, the IRS limits tax loss carry-forwards, and you may end up losing them.

The two legitimate deductions that I want to mention are real estate depreciation and oil well depletion. You are buying something that is going to put money in your pocket (or a very high probability of success), and because it is in alignment with government policy, they give you a tax deduction to take this risk.

To figure out how much of a deduction that you need, start with your 1040 federal tax form. Add together the Standard Deduction (which is around $3,000) and your itemized deductions from Schedule A. The difference between the number that you just calculated and your actual Adjusted Gross Income is the amount of depreciation you need to acquire for the ultimate tax strategy.

Investment real estate depreciation is calculated over 29.5 years right now, so take the amount of depreciation that you need and multiply it by 29.5 to calculate the purchase price you need to buy. (Note that depreciation is limited to $25,000 per year unless you meet the IRS qualifications as a real estate professional. The taxing authorities don’t like wage earners taking these types of deductions so there are many limits on them, including the Alternative Minimum Tax, to block you from taking excessive deductions).

Now even if you aren’t able to buy enough tax deductible investments to get your taxable income all the way down to zero, any investment that meets the IRS rules for a deduction, and is a positive cash flow investment, will increase your net worth, reduce your taxes and thus create more money available to you to spend or invest.

Cost Segregation give apartment owners tax relief

Apartment owners can face amazing costs to advance accommodation communities. The budget of alike a bashful association could absorb groundskeeping, assemblage renovation, and replacements, such as parking lot city and fencing. Another abrupt amount is federal assets tax - and in some areas an added accompaniment tax on assets - but through an avant-garde abstraction accepted as amount segregation, the abrasion of acreage apparatus can be acclimated to advice lower federal taxes.

Today, more apartment investors, especially those whose occupancy rates are challenged by the nation's single-family housing, are taking a close look at every possible avenue to lower costs. That's a frustrating task in the apartment business. One historically underused technique for saving money, in this case saving taxes, is to ensure that all depreciable items are reflected accurately on tax returns.

Those items are not limited to copiers, automobiles and heavy equipment. The list extends to a wide range of buildings and improvements. In fact, the IRS recognizes 130 items that depreciate over much shorter time periods than the standard depreciation of 27.5 years for an apartment community. Many of those items, such as parking surfaces, landscaping and even certain wall coverings, are present in large proportions on typical apartment communities.

A cost segregation analysis, when reflected on deprecation schedules, reduces taxable income now and also defers taxes on capital gain amounts until the community is sold. At that time, the recapture of taxes on the extra depreciation taken can occur at a much lower rate than the 35 percent max tax rate that was avoided with the extra losses.

Don't forget the time value of money by deferring that inevitable tax by a few years. In light of the 130 IRS-identified "short life" items, this conservative tax-planning tool can help apartment owners allocate more costs to five-year, seven-year, 15-year and 27.5-year improvements versus the land value on apartment communities.

Apartment communities, according to IRS rules, depreciate over the course of 27.5 years. This is 10 years less than the depreciation estimated for office, retail and industrial properties, which equal quicker savings for apartment community owners. Items that are found in every apartment, such as carpet, linoleum, window treatments and appliances, are categorized as five-year items, meaning that they are typically replaced after five years of use.

Wide Range of Applications
Whether the community was recently purchased, has been owned for a while or is on the market to be sold, a cost segregation analysis can help at any stage of ownership by reducing federal income taxes and showing future depreciation. The optimum time to do this is preferably as soon as ownership is taken, whether the property was bought or built. Any commercial property built after Dec. 31, 1986, is eligible, and there are "catch-up provisions" to accommodate higher savings in the first year when a cost segregation study is completed for communities that have been owned for several years.

Communities of all sizes can benefit, from small communities of fewer than 10 apartments to communities that span several city blocks. If the property has an assessed value of at least $200,000, the cost segregation evaluation can almost always produce substantial federal income tax savings.

Preparing for a Study
A small amount of an owner's time is required when working with a consulting firm that specializes in cost segregation. And it is advisable for the owner's CPA or tax accountant to collaborate with the consultant, ensuring the most advantageous application for that owner's particular financial circumstances.

The original purchase price of the apartment community is the cost basis, so owners receive savings on their initial investment, as well as on improvements. With research that is both quantitative (square footage of asphalt, pavement, ect., or quantities of wall or window coverings, ect.) and qualitative (judgment of remaining life) a specialized analysis and calculation is conducted before a report is issued. This report becomes the backup documentation for federal income tax returns.

Who Really Pays Income Taxes

With all the allocution of the affluent not advantageous their fair allotment of taxes and the tax cuts beforehand this decade alone activity to the rich, actuality are some facts to contemplate and you as the clairvoyant can accomplish up your own opinion.

·    The statement above could be true when you look at it from a pure dollar point of view.  Someone who makes $500,000 versus someone who makes $50,000, if they each get a 5% tax cut, the first one pays $25,000 less in taxes, where the second one only pays $2,500 less in taxes.

·    I believe if you want to make an argument who pays more in taxes, you should look at a percentage of income paid and not the dollar figure.

Let's look at some facts here from the latest statistics from the IRS that can be found on their website:

·    The top 25 percent of income earners pay 86% of all personal, federal income taxes. That is up from 84 percent in 2002.

·    The top 50 percent of income earners pay 97% of all personal, federal income taxes, which also means that the lower half of all income earners in this country pay 3% of all personal, federal income taxes.  The medium in 2006 was just over $48,200.

·    What is amazing is that the top 1 percent of income earners pay 39% of all personal, federal income taxes, which is up almost 6 percent since 2002.

·    20 years ago, the top 1% paid a little over 27 percent of all personal, federal income taxes, and the top 50 percent paid about 94 percent.

All the talk about the lower income bracket not getting enough of a tax cut has a mathematical problem.  How can you cut taxes for someone who already pays very little or nothing?  That was actually answered during the tax cuts in 2003 by cutting the lowest bracket from 15% to 10%.  So the people who pay most of their taxes in the lower of two lowest brackets received a 30% tax cut. This obviously is not a large dollar figure, but a nice percentage cut.  In addition tax credits were increased.

Anyway, the issue we have at hand is that the taxes are paid by a smaller and smaller part of the population. This results in several problems:

·    There is a large part of the population that is no longer contributing, even if it is a small amount.  Any tax law changes do not affect them and therefore they don't care.

·    The smaller the pot from where the taxes come from, any changes in the economy or the behavior of people will have a much bigger impact on the amount of money received by the treasury.

The problem is even worse than people not paying any taxes, you can actually get money back even if you don't owe any.  There are two that come to mind, the Child Tax Credit and the Earned Income Credit. I think the second one is a good thing as it is an incentive to work, and the more you work, the more you get and it is capped at a low income and favors people with children.  There is nothing wrong with the Child Tax Credit, but I don't see why someone actually needs to get a refund beyond their over payment.

The tax laws are also screwed once you make too much money in the government's point of view regarding credits and deductions.  Anyone making more than $100,000 is rich in the government point of view.  I would certainly disagree on that, ask a mom or dad with two or three kids making in the low $100s if they feel rich.  Anyway, once you reach that level, many of the deductions like tuition are being phased out, the child credit disappears just to mention a few.  You will not get a dollar for dollar deduction anymore for your mortgage, charity, state taxes etc.  I could go on and on.  In some circumstances, because of the phase outs, the effective tax rate for a certain income range (like the income from $110K to $115K, which is just an example as it depends on the situation), is in the confiscatory category where literately a huge chunk of extra earned money goes to the government.  This is offset somewhat by not having to pay social security taxes anymore, but that is story for a different day.

I think what we need is a flatter tax with less deductions.  All of us should pay something, because once you have some money invested, you might actually have some interest how it is spend.  We need to be generous to the ones in need and the unfortunate, but that is not almost half the population that pays only 3 percent of the taxes.  We should be more generous with families than with single people, nevertheless they should all pay the same rate, just the dollar figure when you start taxing should be different.

Don't Delay In Managing IRS Tax Debt

Debt Resolution, IRS Settlements Offer Help for Serious Tax Problems

San Mateo, Calif., - With tax day behind us, consumers and business owners who owe the IRS are not out of the woods. But while death and taxes are the big two inevitabilities, those with serious tax problems should know that it is possible to negotiate with the IRS to reduce past-due tax penalties and payments, according to Bradford G. Stroh, co-founder and CEO of Freedom Financial Network, LLC.

Americans, carrying more debt than ever, are also more likely to have tax problems than in the past. In 2004, the total of uncollected IRS taxes reached upwards of $250 billion. The number of levies (a key enforcement tool in which the IRS takes possession of assets to collect on unpaid taxes) topped 2 million during fiscal year 2004 - a 21 percent increase from 2003 and triple the 2001 number.

According to Stroh, taxpayers with tax debts under $10,000 usually can manage the payment on their own or via an installment plan arranged with the IRS. "Tax problems merit professional help when individuals cannot pay tax liabilities of $10,000 or more," Stroh says. "At that point, specialists can negotiate directly with the IRS on behalf of these consumers, helping them obtain settlements."

Tax relief specialists usually are attorneys or certified public accountants with special training and experience. Stroh explains that these experts can navigate the intricacies of IRS forms and calculations, help consumers understand the criteria the IRS imposes, and then help them get back into good standing with the IRS.

Depending on the severity of an individual's situation, two types of IRS settlement are available:

An offer in compromise reduces the principal amount owed to the IRS.

An installment agreement is a payment plan for the amount due and often includes reduced penalties.

"Remember that you cannot let overdue taxes languish," Stroh warns. "The IRS is serious -- and increasingly aggressive -- about tax collection and evasion. Tax debt can result in a lien on a house or garnished wages."

Advisors can help consumers with the following steps:

Evaluate the situation and determine the amount of taxes owed to the IRS.

Ascertain whether the situation meets IRS standards for "doubt as to collectability" (i.e., unable to pay the full tax burden), "doubt as to liability" (i.e., consumer might not owe the tax), or "economic hardship."

Establish the full amount owed, including taxes, penalties and accumulated interest, and understand whether collection limitations or penalty cancellations are possible.

Determine the best method for managing and eliminating the tax debt.

Negotiate with the IRS to settle on an agreed course of action and resolve the debt.

While facing and handling tax debt can be painful, last year's bankruptcy reform legislation made it even more crucial for consumers to act. Historically, consumers in severe IRS debt might file for Chapter 7 bankruptcy protection or wait for the 10-year statute of limitations on tax liability to expire. Now, people are much more limited in the ability to obtain Chapter 7 filings. The bill's new "means test" leads many consumers instead to file Chapter 13 bankruptcy, which establishes a repayment plan, rather than wiping out all debt. Consumers with tax debt may find it much less costly and simpler to work with a debt resolution firm's tax relief service, which allows individuals to set up tax payment plans while avoiding court fees, attorney fees and bankruptcy judgments on their records.

"Whatever means you choose, tax season means it's time to face the inevitable and manage your tax burdens," Stroh says. "Fortunately, experts are available to help you along the way."

Freedom Tax Relief, LLC (http://www.freedomtaxrelief.com) provides consumer debt resolution services through its Freedom Debt Relief and Freedom Tax Relief divisions. The company works for the consumer, negotiating with creditors to lower principal balances due that can often result in savings of up to half the amount owed. Based in San Mateo, Calif., Freedom Financial Network serves more than 5,000 clients nationwide and manages more than $200 million in consumer debt, offering an alternative to bankruptcy, credit counseling, and debt consolidation.

Tax Advice: Middle Class Tax Shelters Everyone Can Use, Many Don’t

Many people lose money for years to landlords because they mistakenly believe they cannot afford to buy a home. However, in most cases, these renters are where they are only because they are unaware of all their other options. Most people know that it's better to put your money into a house that you own than into a rent check you never see again. Some are aware that mortgage payments could actually be fairly close to what they currently pay in rent.

What few people realize are the tax benefits stemming from owning a home can actually save them hundreds of dollars each month. After taking into account these additional savings, which would you choose: giving up a large chunk of your paycheck each month to a landlord for a small apartment, or, for significantly less money, having not just your own home, but also the freedom to take your money out again in the future?

How Tax Benefits Work

Tax benefits from home ownership come in the form of deductions. Come tax time, the amount of money you spent on tax-deductible expenses related to your home financing (many of which are outlined below) is subtracted from the total amount of taxes you owe. Depending on how much you owe and how much you put into your home over the course of a year, home financing could actually result in zero tax liability. That means that your new home may actually bring you a refund check!

For example, assume you owe $12,000 in taxes for the past year, and your mortgage payment is $1,000 per month. In the early years of a mortgage, payments are usually almost entirely for the interest you owe on your home loan. Mortgage interest payments are tax-deductible, so from this one deduction alone, you now owe $12,000 less in taxes—which brings the total amount you owe the government to zero. If your employer withholds taxes from your paycheck, you will receive a refund check for the tax you overpaid.

Tax Benefits for All Mortgages

- If you own property, then you pay property taxes. These are always fully tax-deductible.

- Points on a home mortgage are fully deductible.

Tax Benefits for New Mortgages

- As mentioned earlier, the payments you make in the early years of a home financing loan generally go straight to interest. The principal, or actual amount of the original loan does not start to go down until later in the loan period. This means that early on, you can deduct most, if not all, of an entire year of mortgage payments.

- Both late and early payment fees charged by your lender are considered interest and can be deducted.

- Many tax benefits available in the first year of your mortgage are not available later on. It is always a good idea to go over your situation with an accountant to be sure you do not miss any opportunities for savings. These first-year tax benefits include moving expenses and capital gains.

Tax Benefits for Refinancing a Current Mortgage

- If you are refinancing in order to make improvements to your property, then the interest is deductible. Anything that could reasonably improve your property value—from fixing the driveway to adding on an entire new story—counts.

- Interest on refinanced mortgages that are taken out for expenses not related to home improvement can also be taken as a deduction, but only within certain guidelines. Currently, the maximum deduction for the life of the loan is $100,000. (Married couples filing separately each have a maximum of $50,000.)

- Points on a refinanced home mortgage are still tax-deductible in most cases.

Benefits Beyond Tax Savings

No one would complain over having a few extra dollars in their pocket. Not only can financing your home save money on your next tax return, but it can also save money on purchases made using money received from refinancing a mortgage (or simply money not lost to rent). In fact, paying off credit cards after financing can be one of the smartest financial moves you can ever make—especially if you keep those cards paid off.

Consider that even the worst mortgage interest rates can be at least ten or twenty percentage points lower than those for the average credit card. People with poor credit are often better off with a higher mortgage interest rate if it means their other debt can be reduced, thereby bringing their credit score up. After re-establishing their credit, they can then refinance their home at a better interest rate.

How To Audit-Proof Your Tax Return Forever: A Recent Close Encounter Of The IRS-Kind

Congress has passed legislation that is supposed to result in a more "sensitive" Internal Revenue Service. You know, not such a lean, mean, tax-collecting machine.

Hmmm . . . . What do you think?

A few months ago, one of my clients (let's call him Mr. Jones) got one of those IRS "love letters" requesting more information about his return, and the IRS wanted to meet with Mr. Jones in person to discuss the situation.

Mr. Jones (a local small business owner) was required to show up at the local IRS office with all his records. The IRS was questioning the legitimacy of several business deductions -- and so the IRS was doing what it is allowed by law to do -- demand that the taxpayer prove that those deductions were valid.

Turns out that Mr. Jones lost the audit and ended up owing the IRS a significant amount of money -- the additional tax, plus penalty and interest for late payment of that tax. Why did Mr. Jones' lose the audit? Mr. Jones made two "classic" taxpayer mistakes:

MISTAKE #1: "NO RECEIPT, NO DEDUCTION"

Mr. Jones lost several deductions simply because he didn't have the proper documentation to prove the deductions.

What do I mean by "documentation"?

Well, if the IRS requires you to substantiate a deduction on your tax return, you must be able to provide written proof that the deduction really happened. The easiest way to prove a deduction is to hang on to:

a) The receipt or invoice, and

b) Proof of payment, which can be a canceled check, cash receipt, or credit card statement.

Mr. Jones reported numerous deductions for which he simply didn't have the documentation. No receipts, no canceled checks, no nothing. Turns out that Mr. Jones was one of those "cash guys". Maybe you know what kind of guy I'm talking about -- he never wrote a check in his life, just carried a wad of cash around in his pocket. He paid for everything with cash, and never kept any of his receipts.

Every year he'd sit down with his wife and "remember" how much he spent on different things. No way to prove any of this, of course. He just had a "feel" for how much cash he had spent, and he had run his business for so many years that he just "knew" how much it cost to purchase certain things.

Well, this is the kind of taxpayer that the IRS loves! It really is true -- if you can't prove that you paid for something (with receipts, invoices, canceled checks, etc.), then you run the risk of losing that deduction in the event of an audit.

One of the most common questions I am asked by clients is this: "I know I paid for something, but I don't have a receipt. Should I still report the deduction."

My response is usually this: "You only need a receipt if you get audited."

At first, people don't know if I am joking or not. Well, I do make that comment with my tongue planted firmly in cheek, but there really is a lot of truth to it. If you don't have the documentation to prove a deduction, you can still report the deduction (if you want), because you only have to prove the deduction if you get audited.

But if you do get audited, knowing that there are undocumented deductions on the return, be prepared to lose the deduction. Fair enough?

And here's the other major mistake that Mr. Jones made:

MISTAKE #2: BOGUS DEDUCTIONS

It turns out that Mr. Jones wasn't completely honest with me about some of his deductions. He reported deductions that simply were not real deductions. Here's one example: Mr. Jones owned several rental houses. These rental houses, of course, required maintenance and repair work. Many times Mr. Jones would do the work himself rather than pay someone else to do the work.

Well, Mr. Jones would estimate what he would have had to pay someone else to do the work that he did himself, and then he would report that amount as a deduction, even though he didn't actually pay anybody to do the work.

In other words, Mr. Jones deducted the value of his time -- which is non-deductible.

This is an important point -- you can never legitimately deduct the value of your time for work you did. You have to actually pay someone else to do the labor.

If you ever get a letter from the IRS demanding additional information, you'll have nothing to worry about if you do exactly the opposite of what Mr. Jones did. If you can properly document your deductions and assuming you have no bogus information, you'll pass the audit with flying colors.

Tax Tips for IT Consultants and Contractors

I live and work, quite literally, down the road from the main Microsoft campus. No surprise, then, that I’m commonly asked by freelance consultants for free advice about how these self-employed independent contractors can minimize their income taxes.

If I can, I try to weasel my way out of the discussion, offering up such basic tidbits as, “Well, be sure to look at the home office deduction.” And “make sure you’re taking advantage of deductions for health insurance and pension funds.”

Usually, those simplistic answers work. Everyone once in a while, though, I encounter some guy who’s really motivated to save on taxes. Usually, someone now making good money consulting or contracting… When I can’t deflect their questions in some other way, I tell them about the three best ways that independent contractors have to save on taxes.

Technique #1: Smooth Your Income

Whatever you think of the US Internal Revenue Code, you need to know that it’s quite progressive. That progressivity means the more you make, the more you pay. The progressivity also means that if your income fluctuates, your income taxes go up even if you make the same money on average as someone else makes.

To give you an example of this, suppose that you compare two consultants, John and Jane. If John makes a steady $60,000 a year and has a mortgage, a spouse and couple of kids, he might pay about $1000 over four years (net of tax credits for these like his children.)

In comparison, suppose that Jane averages $60,000 a year, but sees her income fluctuate between $30,000 a year and $90,000 a year. If she also has a spouse, two kids and a mortgage, she’ll probably pay $8,000 to $10,000 over those same four years.

Please note that over the same four years, the two consultants make the same amount of money: $240,000. But what they pay in taxes differs radically. Jane pays eight to ten times what John pays. Bummer.

What can Jane do? Well, let’s bring this back to the example of working consultants. Jane can probably smooth her income. She can make sure that she’s not stacking two big retainers or performance bonuses in the same year. She can spread out year-end payments over the ending and beginning year in ways that smooth her income out. She can even try to stuff more of her expenses into the good years. In the good years, for example, she can buy new computers, take those graduate classes, or top off her pension.

Technique #2: Setup an LLC and Elect S Corporation Status

I’ve written and talked much about how S corporations save taxpayers money and how the right way to set up an S corporation is first create a limited liability company and then ask the IRS to treat the LLC as an S corporation for tax purposes.

Let me review the basics here again, however. Suppose that you’re making $90,000 a year as a consultant or contractor. If you just treat your business as a sole proprietorship, you might pay $12,000 in income taxes on the $90,000 and then another 15.3% self-employment tax, or roughly $13,500 on the $90,000.

If you set up an LLC and have the LLC treated as an S corporation, you’ll still pay the same $12,000 in income taxes. But you’ll only pay the 15.3% self-employment tax on that portion of the profit that you categorize as wages. If you categorize, say, $50,000 of the profits as wages, you’ll pay $7,500 in self-employment taxes. (The other $40,000 in remaining profits, by the way, gets paid out as a dividend-like “distribution.”)

Note, then, that the S corporation saves you roughly $6,000 every year. Sweet, right?

Two quick points about S corporations: First, S corporations require some extra tax and accounting so you don’t get to spend all of your savings. Some of the savings go to the lawyer, the accountant, and the bank. Second, you absolutely must set your salary to a reasonable level.

Technique #3: Relocate Your Residency

One final, easy planning gambit if you telecommute. Remember that there are states like Alaska, Florida, Nevada, Texas and Washington that don’t charge residents state income taxes. Accordingly, if you relocate to one of these states, you’ll automatically drop your overall tax bill because you won’t have state income taxes.

Sometimes, one of the benefits of independent contracting and freelance consulting is that is that you do get to live wherever you want. Why not choose a place that doesn’t tax your income?

But a caution: Do be careful that you don’t get blindsided by the other taxes a state levies. For example, Washington state where I live charges a one and half percent excise tax on service revenue. This is probably still less than the income taxes that many other states charge. But it highlights an important caveat: Before you move to some other state, you definitely want to run the numbers and compare your current state to the possible new state.

Tax Traps for New Real Estate Investors

Perhaps one shouldn’t be surprised that new real estate investors fall into the same tax traps again and again. Real estate burdens investors—especially new investors—with some tricky tax accounting.

But just because some other newbie makes these mistakes, that doesn’t mean you need to. You just need to know where the traps are so you avoid them. And here are the biggest real estate tax traps you don’t want to fall into:

Tax Trap 1: Passive Loss Limitation

On paper at least, real estate often loses money. Even if the rent pays the mortgage and the operating expenses, the books still show a loss because you get to write off a portion of the purchase price through depreciation each year.
If a rental house that cost $275,000 breaks even on cash flow, for example, you might also get a $10,000 annual depreciation deduction. If your marginal tax rate is 28%, that depreciation should save you $2800 annually.

Sounds sweet, right? Well, it is—or should be. Except that the U.S. Congress labeled real estate investment a passive activity and said that, except in a couple of special circumstances, you can’t write off passive activity deductions unless overall you show positive passive income.

This passive loss limitation rule means that many real estate investors don’t get to use tax
saving deductions from real estate—or least not annually.

Two loopholes, courtesy of Congress, do exist that let you write off deductions from real estate even if overall you show a loss from real estate investing. If you’re an active real estate investor with adjusted gross income below $100,000, you can write off up to $25,000 of passive losses annually. (If your income is between $100,000 and $150,000, you get to write off a percentage of the $25,000. Ask your tax advisor for the details.)

Here’s the second loophole: If you’re a real estate professional, Congress says the passive loss limitation rule doesn’t apply to you when it comes to real estate. A real estate professional, by the way, is not someone who’s licensed as an agent or broker. The law instead creates a time-based test: A real estate professional is someone who spends at least 750 hours a year and more than 50% of their time working as a real estate agent, broker, property manager or developer.

Tax Trap 2: Capitalization of Improvements

The next mistake that new real estate investors make? Thinking they can write off the amounts they spend to improve the property. Sometimes you can. Often you can’t.
Here’s why: Any expenditure that increases the life of the property or improves its utility needs to be depreciated over the next 27.5 years (if the property is residential) or over 39 years (if the property is nonresidential).

You can’t, therefore, write off the money spent improving or renovating a house—except through depreciation.

I’ve seen new real estate investors in tears about this wrinkle. Some investor draws, say, $20,000 from his IRA or 401(k) to fix up some rental. He figures he’ll be able to write off the $20,000 as a tax deduction in the year improvements are made.

No way. Instead, he’ll have to write off the $20,000 at the rate of a few hundred bucks a year over the next three or four decades.

The trick with renovation—if you want to call it that—is to keep the property well maintained as you go. Repainting, new carpeting, general repairs—these items should all be all deductions in the year of expenditure (er, subject to the passive loss limitation rule discussed as the first tax trap.)

Tax Trap 3: Missing the Section 121 Exclusion

Here’s the final tear-jerker. And I see it several times a year. Someone decides that rather than sell their principal residence when they “move up” to a larger new home, they’re going to turn the original home into a rental.

This is a disastrous decision most of the time because of Section 121 of the Internal Revenue Code . Section 121 says that if you’ve owned a home and lived in a home for at least two of the last years, you won’t pay any tax on the first $250,000 of gain on the sale ($500,000 of gain in the case of someone who’s married and filing a joint return).
By converting a principal residence to a rental property, you turn tax-free gain into taxable gain if you don’t sell the property in the first three years.

Two quick notes about goofing up the Section 121 exclusion. If you don’t have appreciation in your old principal residence, you’re not losing any Section 121 benefit by converting to a rental.

Second, if you do have a lot of appreciation in your old principal residence and want to use that equity to acquire a rental property, consider this: Sell the old principal residence when you move out so the gain is excluded from taxable income. Then use the tax-free proceeds to purchase another rental—perhaps even the house next door.

What Is The Fair Tax And Why Should You Care?

The U.S. Federal Income Tax Code is a tax on the income of American companies and citizens enacted by the government. The U.S. Constitution gives Congress the power to impose taxes, duties, imposts, and excises.

The purpose of the Tax Code is to provide income for the operation of the government. The Tax Code is found in Title 26 of the U.S. Code of Federal Regulations (CFR).

Any U.S. citizen who has filled out a federal tax return knows how confusing the current U.S. Tax Code is. Additional layers of complexity appear if the taxpayer itemizes deductions, deducts home business expenses, or has a profit or loss due to investments.

When the convolutions of corporate tax law are considered, it is no wonder that companies hire teams of accountants to prepare their income tax returns.


What Is The Fair Tax?

The Fair Tax is a proposed income tax system intended by its founders to replace the current Tax Code. The Fair Tax Bill was proposed by Representative John Linder (R-GA) in July 1999 to the 106th Congress.

One definition of the Fair Tax is "a proposed change in United States tax laws to replace all federal personal income taxes, payroll taxes, corporate taxes, capital gains taxes, self-employment taxes, gift taxes and inheritance taxes with a national retail sales tax and monthly tax rebate to all households."

At the time of this writing, the Fair Tax proposes to apply a tax of about 23% on purchases. This purchase tax would replace the current income tax paid by Americans. Generally, those who spend or purchase more would pay more taxes. Conversely, those who spend less would pay less or even nothing.


Differences Between The Tax Codes

The current Tax Code is based on the income of a person or corporation. The proposed Fair Tax would be based on the purchases of a person or corporation. The expectation of the proposed Fair Tax is that those who are more wealthy generally purchase more, and will therefore would likely pay higher taxes than they do now.

Another major difference is the complexity of the two Tax Codes. As the Fair Tax Bill sponsor Representative Linder states on his website:

"I would also encourage everyone to review the Fair Tax, as it is only 132 pages, which stands in stark contrast to the more than 50,000 pages of tax code laws and regulations currently in effect."

Furthermore, the proposed Fair Tax Code would be administered by the States. Most states already enact a state income tax, and therefore have the infrastructure in place to collect the Fair Tax revenues. This would also mean greatly reducing, or even eliminating, the Internal Revenue Service (IRS)!


Monthly Tax Rebate Checks

Under the Fair Tax plan, each household would receive a monthly tax rebate check, paid in advance. The amount of the check would be estimated as the amount of Fair Tax owed on poverty level spending. The goal of the monthly rebate check is to prevent anyone from being taxed on household necessities, especially those under the poverty level.


Will The Fair Tax Provide Enough Government Income?

The feasibility of the proposed Fair Tax is the topic of endless discussion. On one hand, the entire taxation process would be greatly simplified. Wealthy persons and corporations would pay a greater share of taxes.

On the other hand, a Tax Code change of this magnitude will require massive reeducation of the public. People are resistant to change, and would no doubt cry foul at being denied many of their usual tax deductions.

Finally, the only way to accurately assess the effectiveness of the proposed Fair Tax Code is to see it in action over a period of years. That does not look likely in the very near future, although the Fair Tax proposal is gaining support.


Tax Your Brain

Whether you are for it or against it, you must agree that the proposed Fair Tax would represent a dramatic shift in U.S. taxation policy if enacted. Proponents and opponents of the Fair Tax Bill will no doubt continue to generate tax estimates that are supportive of their arguments.

It is up to you as an American taxpayer to become educated on the Fair Tax Bill. Determine whether the proposed changes and tax payment methods would benefit you and the country more than the current system.

Once you've made a decision about the proposed Fair Tax, contact your Senators and Representatives and tell them how you feel about it. Regardless of the tax system in place, you are still paying their salary.

The website below provides free information about income tax preparation tips and tax assistance articles and resources.

Tax Magic: How To Turn Taxable Income Into Tax-Free Income

Believe it or not, there are ways to convert taxable income into non-taxable income, without any fear of an IRS audit.

Here's one of my favorites. It's been part of our tax code for over 30 years, yet many still don't take advantage of it.

What am I talking about?

The IRA -- Individual Retirement Account.

Now, before you say, "Oh, I know all about that one; what's so great about an IRA?", give me 10 minutes to explain 3 new benefits to the IRA rules that you may not realize.

BENEFIT #1: How To Avoid Tax Rather Than Postpone Tax

First, did you know that there are now 2 kinds of IRA's available?

The so-called Traditional IRA is the one that first came out way back in the 1970's.

But there's a newer version of the IRA that's only a few years old -- it's called the Roth IRA. And the difference between these 2 IRA's is huge.

Traditional IRA contributions are tax-deductible, resulting in immediate tax savings. The growth of those contributions is also tax-sheltered while the funds remain in the account.

But eventually all tax-deductible Traditional IRA contributions, as well as the growth of those contributions, will be subject to income tax when the money is withdrawn from the account.

In other words, Traditional IRA's offer the opportunity to temporarily postpone taxes.

In contrast, the Roth IRA offers the opportunity to permanently avoid taxes. With a Roth IRA, you don't take a deduction for your contributions; instead, you make a contribution with "after-tax" dollars.

Whatever you put in not only grows tax-free, but can also be withdrawn tax-free.

Here's an example to illustrate:

If you invest $2,000 per year for 20 years into a Roth IRA, you will have invested a total of $40,000. Now if that Roth IRA earns an average of 10% per year, that $40,000 will grow into $126,005.

Now comes the fun part: Assuming the IRA has existed for at least 5 years and you are at least 59 ½ years old, you can withdraw the entire $126,005 tax free.

In contrast, if this money had been invested in a Traditional IRA, the entire $126,005 would be subject to income tax as it is withdrawn.

The $86,005 of growth is magically converted from taxable income to non-taxable income. Assuming you are in the 15% federal tax bracket, that's a savings of $12,901. Add any state income tax, and you could save over $15,000 in taxes.

BENEFIT #2: Take An Extra 3 ½ Months To Fund Your IRA

The deadline for contributing to your IRA is April 15 of the year AFTER the year for which the contribution made.

So for Year 2005, you have until April 15, 2006 to put money into your IRA.

If you've already invested the maximum (more about that in a moment) by December 31, 2005, then you're done. No more money can go into the IRA for 2005.

But if you haven't maxed out your IRA, you have until April 15 to do so.

Which brings me to . . .

BENEFIT #3: The Maximum Contribution Amounts Have Increased

For many years, the most you could put into an IRA was $2,000. Now, the maximum is $4,000 (assuming you have at least that much earned income from wages or self-employment income).

And if you are over 49, you can put in another $500, bringing the total maximum to $4,500.

A married couple, both age 50 or older, can put a whopping $9,000 per year into a IRA. Not too shabby, eh?

One final note about these Roth IRA rules: For married people, you can only contribute the maximum of $4,000 or $4,500 if your combined income is less than $150,000.

If you are single or head of household, you can contribute the maximum if your income is less than $95,000.

For most middle-class folks looking for a perfectly legal way to permanently avoid tax (rather then merely temporarily postpone tax), the Roth IRA fits the bill.

Now comes the hard part -- how to actually implement this tax avoidance strategy.

"We'd like to save as much as we can for our golden years. But $9,000 a year? It's hard to put aside that kind of money. We need every dollar we make just to pay the bills."

If that's your situation, I'm not going to get up on my "what-do-you-mean-you-can't-save-any-money-for-retirement" soapbox and start preaching at you.

I will say this: You've got to start somewhere, and you've got to start saving something, don't you?

People who have a problem saving for retirement usually have a budgeting problem. For an excellent resource on budgeting, I highly recommend the Budget Stretcher web site:

http://www.homemoneyhelp.com.

This site offers a free budget system complete with simple forms and worksheets to help you figure out how to put some money aside for a Roth IRA or other savings plan.

Take advantage of this resource and get started today.

Will You Make The 39 Cent Mistake This Tax Season?

When it comes to filing your tax return, spending 39 cents could be the biggest mistake you ever make.

Millions of taxpayers make the mistake of putting their income tax return in a regular letter-sized envelope, sticking on a 39 cent stamp, and placing the envelope in the mailbox.

And millions of taxpayers "get away" with this mistake year after year.

Why do I say that putting your tax return in the mailbox is a mistake? Let me explain.

Every year, a small percentage of mail doesn't get delivered. The U.S. Postal Service doesn't like to admit this, but it's true.

Furthermore, even if your tax return gets delivered to the IRS, every year a small percentage of tax returns get lost by the IRS.

Don't believe me? I'll never forget the day one of my clients showed me a letter he received from the IRS:

"We regret to inform you that we received your return.... but have lost it."

Believe it or not, this actually happened!

So my question to you is this: What are you doing to do if this happens to you?

If your tax return doesn't get delivered, or if it gets delivered but is subsequently lost inside the mammoth IRS, what are you going to do to prove that you actually mailed the return?

Just calling the IRS and saying, "Well, I mailed it on time. I know I did!" isn't going to prove anything. And the burden to prove you mailed the return on time will rest on your shoulders.

You have two ways to solve this potentially dangerous problem:

OPTION #1: File your return electronically.

There are many benefits to e-filing:

-- Accuracy. In order for a return to get e-filed it must pass several strict accuracy tests, thereby significantly reducing the chance of human error. E-filed returns are subject to this level of scrutiny at the point of origination.

-- Security. The filer creates his own electronic signature, resulting in a truly paperless experience.

-- Speed. If you're due a refund, it can take 6-8 weeks with a paper return. Combined with direct deposit, your e-filed return will generate a refund in as little as 10 days.

-- Proof of acceptance. This is the benefit I want you to focus on right now. When you e-file your return, you receive an electronic acknowledgement within 48 hours that the IRS has accepted your return.

Bingo! Now you have proof positive that the return was filed. 'Nuff said?

E-filing is rapidly becoming the filing method of choice. But the majority of returns are still filed on paper, so here's a second way to avoid the "missing return" dilemma.

OPTION #2: If you're a "paper filer", go to the post office and spend a measly $4.05 to send the letter via Certified Mail, Return Receipt Requested.

Doing this will accomplish two very important things:

1. Certified Mail (which costs $2.40) provides the proof that the return was mailed, and that it was mailed on time, on or before the due date.

According to the IRS, a paper return is filed on time if it is mailed in an envelope that is properly addressed and postmarked by the due date. When you use Certified Mail, you will get a receipt postmarked by the postal employee, and the date on the receipt is the postmark date.

So, should the return get lost by the IRS, or if the IRS questions whether you mailed it on time, you will have written proof.

Plus, every piece of Certified Mail is assigned a tracking number which can then be traced by the U.S. Postal Service should a problem arise.

2. Return Receipt provides another level of insurance. For an extra $1.85, when the letter is delivered, the IRS must sign or stamp a receipt that documents the date of delivery. This receipt then gets mailed back to you, so you now have the written proof that the IRS received it.

Technically, you only need to send the return via Certified Mail to prove that it was mailed on time. But I really like the Return Receipt as well -- it gives you that extra "peace of mind" to know that the IRS received it. And you'll know exactly what day it was received. This is the proof of delivery.

So don't run the risk of having your tax return get lost in the mail. And don't run the risk of having your tax return get lost in the piles and piles of paper that flood the IRS each year.

Think about it. Well over 100 million personal income tax returns are filed with the IRS every year, and the majority of them are still prepared on paper and mailed by the U.S. Postal Service.

The U.S. Postal Service and the IRS are staffed by hard-working people who are only human. People make mistakes. To greatly reduce the chance of a mistake being made with your return, don't you make the mistake of just putting your tax return in the mailbox.

Instead, e-file it, or take it to the post office and send it Certified Mail, Return Receipt Requested. It could be the best $4.25 you ever spent!

How To Avoid Those Mind-Boggling Depreciation Rules

Tired of dealing with those complex depreciation rules? Thanks to recent tax law changes, here's how to avoid them completely while benefiting from a lucrative small business tax break that not only puts money in your pocket, but also makes the filing of your income tax return much simpler.

What am I talking about? It's called the Section 179 deduction, and if there's one tax law you need to understand, this is it. Here's why:

The Section 179 deduction enables the Small Business Owner to "expense" (i.e. deduct in the current year) up to $105,000 of the cost of most business equipment, rather than use those stingy depreciation rules that require you to write-off the cost over five or more
years.

What's so great about that?

Think about it like this: I've got a dollar and I'd like to give it to you. You have two choices -- I give it to you now, or I give it to you 5 years from now.

Which do you prefer?

Obviously, you'd rather have it now, right?

And why is that?

Because of what you learned way back in Finance 101: something your banker calls "the time value of money."

I'll spare you a boring textbook definition. Instead, let's just assume we agree on this simple point: Is a dollar worth more today or 5 years from today?

It's worth more today.

And that's why the Section 179 deduction is so valuable.

Huh?

Let's use an example to bring all this financial theory into reality.

You buy $5,000 worth of office equipment in 2005. Under normal depreciation rules, you wouldn't get to take a deduction for $5,000 in 2005. Instead, you'd write off the $5,000 over 6 years -- part in 2005, part in 2006, etc.

If you're in the 35% tax bracket, you get your $1,750 in tax savings over 6 years. Yawn. That's a long time!

You'd get your deduction, and the resulting tax savings, but you'd have to wait 6 years to realize all the benefits.

Section 179 says that if you meet certain requirements, you can deduct the full $5,000 in 2005. You reduce your taxes by $1,750 in Year 2005.

So let me repeat my rhetorical question: Uncle Sam has $1,750 he'd like to give you. When do you want it? All at once, or spread out over 6 years?

That's the beauty of Section 179.

But you have to meet certain requirements to benefit from Section 179. One requirement concerns the total amount of equipment you can deduct rather than depreciate. In 2002, the amount was $24,000. And for 2003, the amount was originally set at $25,000.

Then Congress and the President passed a new tax bill in late May 2003 that raised that amount to a whopping $100,000. And since that $100,000 is adjusted for inflation each year, the maximum Section 179 deduction amounts have been increasing:

Year 2004 -- $102,000
Year 2005 -- $105,000
Year 2006 -- $108,000

Never liked depreciation? Well, you can pretty much kiss it good-bye now.

One final note: A few other requirements must be met to claim the Section 179 deduction. Here's a brief, but not comprehensive, overview:

1. Most personal property used in a trade or business can be deducted via Section 179. Real property cannot. Typical examples of personal property include: office equipment such as computers, monitors, printers and scanners; office furniture; machinery and tools. Real property means buildings and their improvements.

2. The $100,000 amount (adjusted for inflation) can be used through 2007. In 2008, unless new legislation is passed, the amount goes back down to $25,000.

3. There are special rules regarding the application of Section 179 to the purchase of business vehicles. For example, the special "SUV rule" that allowed 6,000 LB vehicles to be fully deducted (up to the $100,000 amount) was recently changed to $25,000, effective October 22, 2004.

4. Your total Section 179 deduction is limited to the business' annual profit. In other words, you cannot use the Section 179 to create or increase a loss.

This is known as the "taxable income limitation." For "C" Corporations, this limitation is very cut and dried. But if your business is an "S" Corporation, Partnership, LLC, or Sole Proprietorship, it may not be as limiting as it seems. For these non-"C" Corp businesses, the Section 179 deduction can be used to offset both business and non-business income.

And if you're married filing jointly, the Section 179 deduction can offset your spouse's income, including W-2 income.

Example: You start a new business in 2005 that ends up with a loss for the year of $5,000 (before taking the Section 179 deduction). Your spouse has W-2 income of $60,000. Even though your business is unprofitable, you can still take the full Section 179 deduction of $5,000 (again, assuming your business is an entity other than a "C" Corporation).

Be sure to consult with your tax professional to get the scoop on all the Section 179 rules.

Stupidest Tax Mistakes To Avoid This Time Around

As the season to fill tax returns and forms approaches people get confused and nervy. The IRS dons the role of a huge brooding monster that is all set to devour you. Unfortunately most of us keep postponing filing of papers and putting our affairs in order until the very last minute and then confusion and stress reign supreme.

The last minute dash and the lack of knowledge of tax laws, depreciation formulas, and deductibility guidelines can land you in a soup. And, this means coughing up precious dollars that you could find better use for.

Errors however small can result in payment of higher taxes and can mean a delayed or no refunds. As in everything, the way to smoothen things is to be systematic and file papers pertaining to tax returns carefully throughout the year. Do not throw away bills, vouchers, or receipts that support your tax forms. Next discipline your self to read the IRS rules and regulations. Do not depend on what others tell you or hearsay. Check out facts for yourself.

Everyone makes “tax” return mistakes even professors, CEOs, and VPs. Some common mistakes which are just plain idiocy or stupid are:


1.    Benefits claimed pertaining to dependent children. Often if you fail to know the allowed exemptions you may fail to make a correct claim or make an incorrect one. To help clear confusion in 2006 the IRS created a uniform definition of a child and the broad outlines are at: http://www.bankrate.com/brm/itax/tips/20010208a.asp . However if you have any doubts or questions clear them before filing your return.

2.    Most errors are calculation mistakes and wrongly filled in figures. Always check and recheck where the full stop or comma is applied. Go through the numbers patiently and do your totaling on two separate days. Better still ask a family member or friend to check the figures for you. Consider using “tax software programs” these ease many problems in filing your return. When filling details keep in mind the fact that the IRS will check entries against W-2, 1099 and other statements that pertain to your tax. If a discrepancy is found it just means trouble as well as delays.

3.    Forgetting to sign and date the forms is a mistake that leads to the IRS just not processing your return. Be sure to check all the pages carefully and ensure you have not missed anything however small and insignificant.  Another common error is forgetting to write your social security numbers or tax ID numbers.

4.    Often tax payers forget to submit all relevant forms like W-2, 1040, or 07, or 16. Check the relevant schedule for each claim and ensure that all relevant and supporting forms are attached to the return.

5.    Failing to keep track of investments, allowed deductions, interests paid or earned and so on. You need to maintain details of when you invested, what dividends were paid, whether any taxes were deducted on maturity, any capital gains, taxes paid on sums earlier. If you clearly keep track of taxes paid you could avoid paying tax on amounts already taxed. The calculations must be done carefully and systematically to avoid faux pas.

6.    Choosing the EZ form 1040Ez rather than the long form. If your earnings, expenditure and other things are simple then just take the trouble of filling the longer form. You will be surprised at the amount you can save in taxes. The longer form allows subtractions from taxable income like student loan interest, alimony paid, donations of charities and so on.

7.    Missing the deadline and asking for an extension. This means paying late penalties as well as interest. In case a personal problem prevents filing in April you need to submit form 4868 by the April deadline to get an extension.

8.    Using a wrong table to make calculations. Two things need care filing status and the right tax tables. Using wrong ones or filing under a wrong status will put you in more trouble than you need.  And, the mistake could mean paying taxes on taxes or on investment earnings. Be astute and compute your tax using the work sheet at the back of the booklet.

9.    Three laughable mistakes tax payers make is to fill out the check wrong and forgetting to sign it. Posting the forms without the proper postage on the return package. And, worst of all not using the pre-printed label and envelope provided by the IRS.

The IRS has modernized its systems and some of the silly mistakes can be avoided if you opt for electronic filing. Last year almost over 50% of the taxes were filed using e-filing. The advantages are many. All the forms you will need are on tab, the software takes you step by step through the filling process, the electronic calculators rarely make errors, and most of all e-filing forms get processes quicker the turnaround is 14 days.

Education Tax Credits for Higher Education

Is higher education costing you a fortune?  There may be a way to help pay for those costs with the help of education tax credits.  What are education credits, who is eligible, and why should we take them?  Well, let’s start with the first part of the question, and work our way to the end.  Education credits are tax credits available for qualified education expenses paid by the taxpayer in the furthering of their education.  Qualified education expenses are defined as an expense paid during the tax year for tuition and fees required by an eligible educational institution for student enrollment and attendance.  It really doesn’t matter how you pay these expenses, only that the expenses are valid.  Now, let’s give some examples of expenses that are not qualified so that you can determine those that are qualified, and how you account for these expenses.  Room and board, medical expenses, student health fees, transportation, personal living expense, insurance, course-related books, supplies, equipment, or any non-academic activity or non-credit course are not qualified expenses.  What does this leave? Basically: tuition and fees required for enrollment or attendance at an accredited college, university, vocational or post secondary educational institution.

If you take a tax deduction for education expenses in any other area of the personal tax return, you cannot use that expense when figuring a Hope or Lifetime Learning credit.  If you received tax-free assistance, such as a Pell Grant or scholarship, you must deduct that amount from your qualified expenses; however, most scholarships and Pell grant monies are taxable, so you may be taxed, but you can also get the tax credit.  If you make any prepayments of tuition, you can use the prepaid amounts on your current year’s federal income tax return, provided you have followed all other guidelines.

Now, there are two different tax credits: the Hope credit and the Lifetime Learning credit.  What are their differences?  Well, first you cannot take them jointly; you must choose one or the other.  The Hope credit can only be taken during the first two years of college, as defined by the educational institution, enrolled at least half time and cannot exceed $1500.  The Lifetime Learning Credit maximum for 2005 is $2000.  This credit can be used for undergraduate, graduate and professional degrees courses.  It is not based on a student’s school workload which means it is allowed for one or more courses at an eligible school.  It cannot be taken in conjunction with the Hope Credit, even if your expense exceeds the Hope limitations.  If your expenses exceed the Hope limitation the first two years, simply include the excess on your Schedule A. 
   
Your tax credits are also limited by your level of income, and your adjusted gross income totals.  The higher the income the less tax credit the taxpayer receives.  Credits could be reduced depending on your level of income and how you file, i.e. single, married, etc.  So, when figuring these tax credits, you need to consider your current student status, your income levels, and your expense levels as Hope will expire after your second year of higher education.  You can take any excess expense deductions under your itemized deduction expenses on Schedule A, when Hope or Lifetime Learning is at their maximums.  On a side note, you can not claim either credit for a student named as a dependent on your tax return if you used the Tuition and Fees Adjustment for that same student so it is always advisable to seek professional tax help.

Who is eligible to take these tax credits?  You are eligible as a taxpayer or eligible dependent of a taxpayer that was enrolled as a student in an eligible educational institution.  If you can be claimed as someone’s dependent, they will be able to claim the education credit, not the dependent.  Generally, dependent students’ expenses will be claimed by their parents or legal guardians.  Now, here is an interesting note: if you are a student, and you cannot be claimed as someone’s dependent, only you can take the education credit; even if you are not the person paying the expense.

Why would you take the credit?  I think a better question would be why would you not take the credit?  In case you haven’t noticed, it can be very expensive to attend higher education classes.  For anyone seeking to further their education, receive a degree, and pursue their dream, any federal income tax credit that can be taken, is a helping hand toward achievement of that dream.  Today, without furthering your education, you’re almost positively sentenced to a lifetime of minimum wage earnings, and struggling to make ends meet.  A college education is the fastest route still, to a better life, better wages, and the achievement of the American Dream.

Which 1099 Tax Forms concern you?

It’s tax time again and you must be sure to receive all the necessary forms. What is a 1099 tax form and who gets one?   A Tax Form 1099 is used to report income other than wages, salaries and tips.  Here of late, this term is used more and more frequently as many employers are opting to use contract labor versus hiring employees, who can turn out to be quite expensive when you factor in the insurance, payroll taxes, and other possible liability.  If you had an independent contractor perform $600 more of services to you or your business, you are required by law to complete and deliver a 1099 form to that person or business.  This article will take a look at the different 1099 tax forms, their purpose, who can receive one, and why.

The 1099 tax forms, if you are the recipient, should be furnished to you by January 31, 2006, and must be furnished and filed by the company furnishing the form no later than February 28, 2006.  But which 1099 form will you receive?

If you are classified as an independent contractor (i.e. attorney, guest speaker, performer, physician, rent, etc.), or you receive income that is classified as non-employee income, or miscellaneous income (you were paid $600 or more) you will receive what is known as a 1099-Misc.; these are the information returns most often received for contract for-hire work, leased workers, or general contractor payments for which there is not a direct sale as a merchant to a consumer.
   
The other most often used 1099 tax form would come as a 1099-Int; this is a 1099 received for interest income purposes; whether the income be from a bank or any lending institution, or from the sale of a seller financed mortgage, the recipient of any income from interest will receive  a 1099-Int.  You would receive a statement that summarizes your interest income for that year.  This form is also used to report other tax items related to your interest income such as early withdrawal penalties, federal tax withheld and foreign tax paid.  A close relative of the 1009-Int is the 1099-OID. This is an information return provided when you receive an original issue discount, usually from transactions related to mortgages served by the Federal Housing Authority. 

The 1099-Div tax form is used often for investors.  This tax form is sent to investors by brokers, mutual funds or the investment company.  The form is a record of all taxable gains and dividends paid to an investor.  The amounts that are stated on the form represent amounts the fund companies are attributing to each investor’s investment return for the year.  The amounts on the 1099-Div could contain ordinary dividends, total capital gains, qualified dividends, foreign tax paid, federal income tax withheld and foreign source income.
   
Another 1099 can come as a 1099-B for barter exchange transactions.  What does this mean? It means that instead of monetary payment, you received a bartered form of payment, an exchange of something other than money, with value attached in order to pay for a service. 
   
Other less used 1099’s are 1099-A, 1099-C, 1099-CAP, 1099-LTC, 1099-Q, 1099-R, and 1099-SA; the R, Q and SA are for retirement and social security payments, and are received by many retired individuals.  The payments from IRAs, MSAs, Coverdell ESAs, and HSAs are reported on these 1099s.  The 1099-A is received is there has been an acquisition of secured property, or an abandonment of secured property.

1099-C is received if there is a cancellation of debt, as from a bankruptcy proceeding, credit card default, or other failure of a maker to make good on a debt that the lender or seller can use as a tax deduction.  The 1099-CAP is a 1099 used to report significant changes in corporate control and capital structure.  What does this mean in laymen’s terms?  If you and several other individuals are in business together, as an incorporated entity, and 3 of you buyout another individual, you will be required to furnish that individual with a 1099CAP so that the individual reports any income or gain from the capital sale of stock.

A 1099 tax form that we’ve not seen very much until recently, but one that I’m sure we’ll see much more of in the not too distant future is the 1099-LTC.  Long-term care and accelerated death benefits are filed on this 1099; with a larger segment of our population aging, this segment also known as the “baby boomers” will make more use of long-term care insurance and payouts, and many of them will receive these types of 1099s.
   
Although these are most often forms of taxable income to the recipient, this is not always a steadfast rule.  For many of the older citizens, for individuals receiving the tax returns as part of a discounted program through the government, and for certain other situations, these are only information tax returns that do not result in added income tax liability.  For the rest of us, however, a 1099 tax form usually means we have increased our income tax liability.

Use Child Tax Credit for Tax Savings

Now, here’s a real tax savings to the individual taxpayer with dependents.  The child tax credit is a direct federal income tax credit based on the number of dependent children in your family. This federal tax credit is available to provide credit to taxpayers with income below certain established levels.   Started in 2003 and going to 2010, the maximum credit per child is $1000 and is first applied to reduce or eliminate the taxpayer’s federal tax liability.  In 2011, the Sunset Provision will decrease the tax credit unless the credit is extended or made permanent. 

How does this federal tax credit work and who qualifies for this credit?  Well, let’s start with the last question first.  Every family with children qualifies, however the federal tax credit phases out when income is above $110,000 for married filing jointly, $75,000 for single, head of household, or widow, and $55,000 for married filing separately.  In addition, the child tax credit might be limited by the amount of income tax you owe as well as any alternative minimum tax you might owe. But like everything else in this world, there are exceptions.  If the amount of your child tax credit is greater than the amount of federal income tax you owe, you may be able to claim a portion or all of the difference as an "additional" Child Tax Credit.  

First exception:  if your earned income exceeds $10,750, you may be able to claim up to 15 percent of that amount.  Second exception:  if you have three or more qualifying dependent children in your family, you may claim up to the amount of Social Security taxes you paid during the year, minus any Earned Income Tax Credit you received. If you qualify under both these exceptions, you receive the greater of the two amounts, up to the difference between your federal tax liability and your regular Child Tax Credit.  You may want to seek a tax professional for help with this credit.

Now, to answer the “how does it work” aspect; the best approach might be to simply break down the requirements, and explain each fully.  The child tax credit is the responsibility of the Internal Revenue Service (IRS), and the credit issuance is determined through the federal tax returns the individual taxpayer completes each year.  Taxpayers must complete either the 1040 or the 1040A and the IRS form 8812.  The IRS will then determine eligibility, and process accordingly; the requirements and limits change each year, so the individual’s eligibility may change each year.

In order to qualify, a family must have earned at least $10,500 in income, and that figure will rise each year, according to inflation.  There must also be at least one qualifying child.  In order to be classified as a “qualifying child”, the child must meet the following requirements: under age 17 of the tax year, claimed on your tax return as a dependent, must pass the relationship test (son, daughter, stepchild, grandchild, brother, sister, foster child, adopted child, etc.), be a US citizen or a resident alien, and have a social security number.

During its original year of inception, many families with qualifying children were mailed an advance federal income tax credit of either $300 or $400 dollars; but they were also told this would reduce their end-of-year tax credit, dollar for dollar. 
The method used for determining the tax credit is fairly simple, and is not difficult to calculate; however, any individual taxpayer with uncertainty should seek the advice and assistance of a tax professional when preparing their federal tax return. 

The credits, as stated earlier are claimed when you complete a 1040 or 1040A and file your returns with the Internal Revenue Service.  Although many individual taxpayers pay for a professional to complete their federal tax returns each year, there are qualified preparers that are available free of charge each year, through the IRS; either way, make sure that you communicate your qualifications for the child tax credit, and check your tax return to see that the credit was applied.  You do not want to let this tax credit slip by.

The child tax credit, along with the Hope and Lifetime Learning credits are a direct means to affect the individual taxpayer’s tax liability and offer some level of tax relief.  This is meant to help parents with the costs associated in raising children, and educating them.  Most often, the child tax credit is a way to alleviate the existing federal tax liability for middle-income taxpayers.  For the extremely low income families, there is often no income tax due, so there is no allowable tax credit.  Although it does not help the poverty level families as a form of federal income tax refund or tax-free income, it does help to alleviate any federal tax liability.  The Earned Income Credit is used by many poverty level or low-income families as a supplement to their earned income.

What Is A Deferred 1031 Tax Exchange?

A tax deferred exchange represents a simple, strategic method for selling one qualifying property and the subsequent acquisition of another qualifying property within a specific time frame.

Although the logistics of selling one property and buying another are virtually identical to any standard sale and purchase scenario, an exchange is different because the entire transaction is memorialized as an exchange and not a sale. And it is this distinction between exchanging and not simply selling and buying which ultimately allows the taxpayer to qualify for deferred gain treatment. So essentially, sales are taxable and exchanges are not.

Internal Revenue Code, Section 1031

Because exchanging represents an IRS-recognized approach to the deferral of capital gain taxes, it is important for us to appreciate the components and intent underlying such a tax deferred or tax free transaction. It is within Section 1031 of the Internal Revenue Code that we find the core essentials necessary for a successful exchange. Additionally, it is within the Like-Kind Exchange Regulations, previously issued by the Department of the Treasury, that we find the specific interpretation of the IRS and the generally accepted standards and rules for completing a qualifying transaction. Throughout the remainder of this booklet we will be identifying these rules and requirements, although it is important to note that the Regulations are not the law. They simply reflect the interpretation of the law (Section 1031) by the Internal Revenue Service.

Why exchange?

Any property owner or investor who expects to acquire replacement property subsequent to the sale of his existing property should consider an exchange. To do otherwise would necessitate the payment of capital gain taxes in amounts which can exceed 20-30%, depending on the appropriate combined federal and state tax rates. In other words, when purchasing replacement property without the benefit of an exchange, your buying power is dramatically reduced and represents only 70-80% of what it did previously.

Basic exchange rules

Let us look at a basic concept, which applies to all exchanges. Utilize this concept to fully defer the capital gain taxes realized from the sale of a relinquished property:

1. The purchase price of the replacement property must be equal to or greater than the net sales price of the relinquished property, and

2. All equity received from the sale of the relinquished property must be used to acquire the replacement property.

To the extent that either of these rules is abridged, a tax liability will accrue to the Exchangor. If the replacement property purchase price is less, there will be tax. To the extent that not all equity is moved from the relinquished to the replacement property, there will be tax. This is not to say that the exchange will not qualify for these reasons; partial exchanges do in fact qualify for partial tax deferral. It simply means that the amount of any discrepancy will be taxed as boot, or non-like-kind, property.

Four common exchange misconceptions:

1. All exchanges must involve swapping or trading with other property owners. (NO)

Before delayed exchanges were codified in 1984, all simultaneous exchange transactions required the actual swapping of deeds and simultaneous closing among all parties to an exchange. Often times these exchanges were comprised of dozens of exchanging parties as well as numerous exchange properties. But today, there is no such requirement to swap your property with someone else in order to complete an exchange. The rules have been streamlined to the extent that the current process is reflective more of your qualifying intent rather than the logistics of the property closings.

2. All exchanges must close simultaneously. (NO)

Although there was a time when all exchanges had to be closed on a simultaneous basis, they are rarely completed in this format any longer. In fact, a significant majority of exchanges are now closed as delayed exchanges.

3. Like-kind means purchasing the same type of property which was sold. (NO)

The definition of like-kind has often been misinterpreted to mean the requirement of the acquisition of property to be utilized in the same form as the exchange property. In other words, apartments for apartments, hotels for hotels, farms for farms, etc. However, the true definition is again reflective more of intent than use. Accordingly, there are currently two types of property that qualify as like-kind:

- Property held for investment, and/or
- Property held for a productive use in a trade or business.

4. Exchanges must be limited to one exchange and one replacement property. (NO)

This is another exchanging myth. There are no provisions within either the Internal Revenue Code or the Treasury Regulations that restrict the amount of properties that can be involved in an exchange. Therefore, exchanging out of several properties into one replacement property or vice versa, relinquishing (selling) one property and acquiring several, are perfectly acceptable strategies.

Obtaining a Federal Income Tax Refund

“You’re getting an income tax refund”!   Those are the words that every taxpayer would love to hear.  A federal income tax refund occurs if the tax you owe is less than the sum of the total amount of refundable tax credits claimed and the total amount of withholding paid.  For many individual taxpayers those federal tax refunds can be obtained through Earned Income credit, a real refund of overpayment of tax, or through an overpayment from previous years.  Some people really believe that getting a large income tax refund is not the greatest thing.  Instead they feel that the tax refund represents a loan paid back by the government interest free.   Others use their IRS tax refund as a “simple savings plan” where they are surprised to get money back each year. Always remember that it is still better to get an IRS tax refund than to owe money to the government. 

Once you determine you’re receiving a tax refund, there are several options for actually putting that money in the taxpayer’s hands.  Standard paper filing, electronic filing with direct deposit, rapid refunds, and refund anticipation loans are the options we have the choice of exercising, and for many refund anticipating individuals, the rapid refund or the refund anticipation loan is the refund of choice.

Since the advent of the computer age, and the great invention of the internet, the Internal Revenue Service (IRS) has been fairly quick to react to the benefit of electronic filing.  The income tax returns are filed much faster, tax refunds are made faster, and money due the IRS can be obtained faster.  Let’s take a minute to look at the different IRS refund options, and what each offers the individual taxpayer.
   
The standard paper filing, although many are more familiar with this method of filing, is slowing reaching obsolescence.  There will soon come a time that the old system of paper tax filing will be entirely eliminated and replaced by the electronic tax filing methods.  If you are still one of the dying numbers of Americans who files a paper tax return, you should anticipate receiving a tax refund in about six weeks; today, thanks to the great use of the internet, six weeks to receive a tax refund, seems like an extremely long time.

The rapid tax refund, that is rapidly replacing the standard paper filing, is an electronic method used for filing your federal income tax return, and allowing you to receive your refund in about 10-14 days.  Much faster than the six weeks it used to take.    There are usually no excess fees attached to this type of filing, and returns may be filed for free through many local, public access facilities.

The refund anticipation loan, however, is a little different.  These must be administered by a tax professional through an established alliance with a financial and lending institution.  There are several excellent choices available, and many qualified tax professionals to complete your tax return, you will however be required to pay a loan fee or a small interest fee for the opportunity to obtain an refund anticipation loan.  There are several restrictions placed on receiving a refund anticipation loan, and some of the restrictions may affect many people.  For example, if you owe back taxes, back child support, or liens and judgments, you can’t qualify for the refund anticipation loan.  Most often, the individuals who apply for and use the refund anticipation loan are recipients of earned income credit, and their tax refunds are usually well into the thousands of dollars.  The refund anticipation loan can be processed in as little as three hours, and back in the hand of the taxpayer by late afternoon; this is provided everything works exactly as planned.   The higher interest rates charged by the bank product providers, and the higher processing fees charged by the tax preparers, equate to less money for the taxpayer, but many of these individuals don’t even blink when told how much it will be to process their federal tax return, they just want the refund immediately.  This is just one more example of the instant gratification upon which our society chooses to operate.  Even for individuals filing with the electronic returns, and choosing to have their funds direct deposited, the turn around time is usually no more than 10 to 15 days.  You would think that a turn around of less than two weeks would be quick enough for many taxpayers, but typically, the bigger the federal income tax refund, the faster the necessary return. 

It would seem to me that this is just another way for the system to profit from the poor; as it is usually the poor that qualify for the earned income credit tax refunds, and these can be extremely large, especially for families with two or three dependents.  In all reality, avoid refund loans if possible.  They are highly expensive.  Wait patiently for your federal income tax refund and keep every penny for yourself.