Insurance World

Service in a combat zone is tough, arduous duty. Being far from family, friends and comfortable, familiar surroundings is hard. Whether you serve in the Army, Navy Air Force, Marines, Coast Guard, active duty, reserve or National Guard you are entitled to a valuable tax break for your overseas deployment service to our country. Its called the Combat Zone Exclusion and its important for you to be informed about it.

Much of your pay, especially while deployed is tax free. For enlisted personnel and warrant officers, your base pay is tax free when you step foot into a tax free zone. It applies to the entire month. So if you step foot into the zone on the last day of the month, the entire month's base pay is tax free! There is a misconception by many service members that the tax free pay was changed to a day-for-day rate, meaning you only got tax free pay for the days you were actually "downrange" but, it is just that - a rumor. The only catch is that for higher ranking officers your pay is only tax free up to the pay rate of an E-9. Any pay above that rate is not tax free. Your Leave and Earnings Statement (LES) and your W2's will reflect the correct taxable income amount for Federal Taxes: lower than what you actually got paid. That is, if your administration or disbursing offices are doing their job correctly. It's very easy to claim this income exclusion. Since your non-taxable pay is not included on your W2's you do not have to check a box or fill out an additional form for your return. Just report the wages shown on your W2's on your tax form, usually the 1040.

Some other pay that is similarly non-taxable pay includes imminent danger and hostile fire pay, re-enlistment bonuses for agreements signed in theater and leave accrued in theater. Of course, your Basic Allowance for Subsistence (BAS) and Basic Allowance for Housing (BAH) are not taxable whether you are in a combat zone or not.

So where are the current, tax free, combat zones? Afghanistan has been considered a combat zone since September 19th 2001. Yugoslavia and Albania were designated combat zones on March 24th, 1999. The Persian Gulf area (also called the Arabian Gulf) has been a combat zone since January 17th 1991. The Persian Gulf area includes The Persian Gulf, The Red Sea, The Gulf of Oman, The Gulf of Aden, Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar and the UAE. The combat zone also extends into the airspace above all these areas.

We have all heard the stories of the General who commandeered a plane just to fly over hostile territory to get his tax free month but it is not "supposed" to happen. Contrary to popular belief, you cannot get the combat zone exclusion if you are just using the space to travel from one point outside the zone to another point outside the zone, if you are in the combat zone while on leave from a place outside the zone or if you are just there for your personal convenience.

Serving in a combat zone can be a rewarding experience. There are lots of opportunities for personal and professional growth. Friendships you forge there will last a life time. It can also be financially rewarding. To learn more, consult IRS Publication 3, Armed Forces' Tax Guide.

David Guild, MBA
Owner, Patriot Accounting LLC
http://www.patriotaccountingllc.com/

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Did you know that the Internal Revenue Service (IRS) charges a processing fee through third party providers for people who pay their taxes with a credit card? According to a recent FreeScore.com survey of 1,000 Americans, 68% are unaware of this IRS processing fee of 1.90 percent to 3.93 percent.

Further, the release reports that 66% of Americans who are planning to pay their taxes with a credit card already have a balance on the card. Adding a processing fee to an existing balance can easily increase the total amount paid for taxes. Additionally, a mounting outstanding credit card balance has the potential to severely hurt your credit scores and future buying power. Further, income tax debt is a debt that bankruptcy won't pardon.

The IRS's website states: "The Taxpayer Relief Act of 1997 authorizes the Treasury to accept these (credit card) payments for federal taxes but prohibits the IRS from paying a fee or consideration to service providers for processing these transactions." So, unlike your friendly shopping store that will cover your credit processing fee, the IRS makes you pay.

To provide taxpayers with the option of charging their taxes, the IRS has non-monetary contracts and agreements with service providers.

Also from the IRS site: "The service providers act like merchants and are necessary intermediaries in transaction processing. The service providers validate card numbers and expiration dates, obtain authorization from the card issuers and issue confirmation numbers to taxpayers at the end of the payment transaction. The service providers forward tax payment information to the IRS for posting to taxpayer accounts."

Due to these processing fees and credit interest rates that come with using a credit card, if you don't have the cash to pay your taxes and are thinking about using this plastic option, take some time to consider all of your options first.

For example, I recommend comparing the interest rate that the IRS will charge you for late payments versus the interest rate on your credit card. Or, see if you have a relative who'd be willing to loan you the money interest-free if you paid it back within a reasonable amount of time. The point is, paying with a credit card in many instances should be a last - not a first - resort.

No matter what, it is important that you send in your tax return form in on time. If you can't pay, the IRS will work with you to set up a monthly payment plan. Interest will be charged on any tax not paid by its due date, until the account is fully paid. You will also be charged a late penalty fee. The IRS website suggests considering a possibly less costly alternative like taking a loan out from a bank.

With the three-day tax return deadline extension this year because of Emancipation Day, you have three more days to figure out an alternative to paying your taxes with a credit card.

Link to IRS processing fees and payment rules and regulations: www.irs.gov/efile/article/0,,id=101316,00.html

Carrie Coghill is the Director of Consumer Education for http://freescore.com/. She has co-authored two books on personal finance, "The Newlyweds' Guide to Investing & Personal Finance" and "What's Your Investing IQ", and contributed to a third work, "Getting Started in 401(k) Investing."

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April 15th has traditionally been the last day of the year to file taxes. However, due to Emancipation Day falling on April 15th most state and federal individual income taxes can be filed by April 18th. There are many solutions for filing taxes on time. There are online tax programs that will allow for filing taxes in the comfort of home. However, filers should always attempt to pay their taxes by the deadline. Tax payers need to be aware that a variety of penalties can be issued to those who do not file on time.

Computer programs such as TurboTax and H&R Block make it convenient to file taxes from home. With step by step instructions these programs are easy to use, and guarantee that tax payers will receive the maximum tax refund. Some of these tax programs are free for federal tax filings, and some charge a small fee for filing state taxes. TurboTax and H&R Block online tax filing programs are a great way to file taxes by the April 18th deadline.

Filing online will save time and money. Since taxes can be completed at any pace, filers will not have to take extra time attending an appointment with a CPA. There also will not be any fees to pay for services rendered by an accountant. Although these programs make it easy to file at their own pace, it is extremely important tax payers remember to file on time, or file for an extension on time.

Assistance is available for any questions filers may have. The online professional tax assistant can be contacted via email, phone, or chat. These tax experts can also help with complex tax situations such as audits, and filing extensions. Those who do not file their returns on time can expect to be penalized up to almost 50% of their unpaid taxes. Online tax services help ease the tax season burden.

Computer tax programs provide a solution for those with returns that will not be ready to be filed by April 18th. The IRS allows a 6-month extension. Online services can be used to file for the 6-month tax extension. Tax payers should be aware that even though they are filing for an extension they will still need to pay on time. This date is usually April 15th. However, due to the Emancipation Day holiday the date has already been extended to April 18th. Extension filers must estimate and pay the amount they will owe when filing for the extension. Tax payers should also be aware that if they do not send at least 90% of the estimated payment they will be charged a late payment penalty. Exceptions will be made for US citizens or resident aliens whose main place of work is abroad (outside of the United States and Puerto Rico). Those who are overseas because they serve in the military also will not have to file for the extension. These filers have the extra two months to file without requesting the extension. Although there will usually be a charge, this may be the best option for some.

This gifted author gives interesting resources about Tax Software Coupons. You can learn pertinent hints to help you maximize your tax filing with deals on Tax Extensions and more.

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One of my favorite tax arguments is:

"Why do they always use High Profile Cases To Scare Us Into Paying Taxes"

When it comes to the IRS getting people to pay up, they usually use high profile cases to scare us into paying. One such case is the recent trial involving actor Wesley Snipes. For anyone looking to avoid paying taxes, all you need to do is hear his name and suddenly you realize "oh no, I better pay up or risk going behind bars!" While there are consequences for not paying your taxes, one must look deeper into this case to see why he ended up in the slammer. First off, he did pay his taxes. Yes, he had money with-held from his movie checks and did pay into the system. Then why did he go to jail? He went to jail because his accountant found a way to get him a full refund of all the money he paid in. This worked at first only to horribly backfire. In his case, it was the thought of getting a full refund based on a "tax protest" loophole which doesn't really exist that put him away. To top it off if he would've just left it alone he wouldn't have had to pay all the interest and penalties that were added to his total bill. The worst part about his case is his career as an entertainer allows for plenty of deductible expenses that would've legally gotten him a refund, but he got greedy and paid the price.

Another famous case is notorious mobster Al Capone. This is the biggest scare tactic since anyone who hears the name Al Capone thinks of hundreds of felonies from bootlegging to murder, however, despite his criminal spree it was tax evasion that put him in Alcatraz. In this case, it induces fear into the masses of trying to legally circumvent the tax code as they know that someone who blatantly engaged in so many illegal activities met his fate from not paying his taxes.

So what's the big deal anyways? Tax professionals know that there are many legal loopholes that don't involve filing for unnecessary refunds or just avoiding taxes altogether. Even if you are behind on your taxes, it is to your benefit to see a tax professional as soon as possible to become compliant. Best of all, there are many avenues you can take to avoid the hefty penalties and in some cases can pay in installments or even complete an "offer in compromise" which is where you can negotiate with the IRS for a fraction of what you owe. These cases are rare, however, they require the knowledge of a licensed professional and it is strongly recommended that you do not go at it alone or with an amateur.

Clint Masser
Licensed Tax Patriot & Director of Marketing
Jefferson Franklin Tax Services
Goodyear, AZ

Working on tax returns since 2006, Clint is currently a licensed tax professional in the process of studying for the Enrolled Agent exam. All of his work has been performed under the guidance of his father, a CPA/Enrolled Agent with over 30 years of experience who has provided tax preparation services and tax strategies for everyone from minimum wage employees to multi-millionaire business owners.

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Today we are tackling the issue of:

"I only want to pay taxes on the services I use."

While we agree that this argument sounds fair on the surface, it would never work in the real world. First off there are over 300 million people in this country, do you think that we could actually agree on a unified tax code? We can't even agree on who should win Dancing With The Stars! In addition, we live in a country where money talks and those without money don't have much of a voice. With this in mind, is it the wealthy minority or the poor and working class majority who should get their way? This is why our tax code is so complex.

This relates to arguments made by both high income and low income tax filers. For high income tax filers they usually gripe with tax loopholes that benefit the lower and middle classes. Lower income filers, in contrast, have issues with the business and upper class tax benefits. If we chose to let the majority decide then there would not be the same production based tax benefits that helped grow this country into the #1 economic superpower. On the other hand a lot of the consumption based benefits such as welfare, Medicaid and education assistance would be eliminated. Most who will never benefit from these programs directly are perfectly fine with eliminating what they consider wasted money and programs that are often abused. The reality is that these programs sprung up from all of the abuses of unregulated capitalism. First it was the monopolies of the late 19th and early 20th centuries. Then it was the Great Depression which resulted from a major wealth inequality caused by greedy business owners and a greatly underpaid work force. Through the rest of the 20th century with the Civil Rights Movement, the Cold War and the Tech Revolution, there was always a need to give opportunities to those less fortunate.

The irony here is that while there is abuse in programs such as welfare and Medicaid, there's also abuse in business tax incentives. That said, there is a lot of good that can come out of both sides. One good result of assistance programs is a more competent and educated work force. On the other side, businesses that get tax benefits have shown great innovations lately and continue to push the technological envelope.

A few examples of elective tax programs are both "pay to play fire protection" and pre-paid college tuition. The first is a service that some feel they have no need for where as the second is only for taxpayers with children. With "pay to play" fire departments there have been horror stories of individuals who thought they did not need the service only to have their home burn down while the fire department watched, all because they wanted to save money on their taxes. For tuition benefits, this is an example where you benefit from "pre-paying" for your children's tuition which is essentially investing in a fund and then letting that fund grow tax-free while not paying tax on the money earned to make the investment.

There are several other programs, however, it is clear that even if you don't personally agree with where most of your tax dollars are going, chances are you still reap the benefits of these same tax dollars you are spending. If not, then chances are you just need a better tax preparation service.

Clint Masser
Licensed Tax Patriot & Director of Marketing
Jefferson Franklin Tax Services
Goodyear, AZ

Working on tax returns since 2006, Clint is currently a licensed tax professional in the process of studying for the Enrolled Agent exam. All of his work has been performed under the guidance of his father, a CPA/Enrolled Agent with over 30 years of experience who has provided tax preparation services and tax strategies for everyone from minimum wage employees to multi-millionaire business owners.

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Many companies today are faced with a harsh reality, the need to cut costs in order to stay in business. Health insurance premiums have gotten very expensive, for many they are just too expensive. Every year they watch as their premiums increase by double digits. You know you have to do something to cut costs and what most employers are doing is cutting coverage or worse, getting rid of the group health plan altogether. There has to be a better way. There is! It's one of the best kept secrets and also one of the biggest tax give-aways that the government has. It's called the HRA.

Wouldn't you like to reduce employee and company costs by 30% - 40%?

You can do so by setting up an HRA ( Health Reimbursement Aggaingement ) for your company. An HRA is a tax favored health plan offered by the employer. As of 2006, a new tax legislation allows for an employer to reimburse 100% tax deductible dollars towards an employee's health insurance premiums by setting up an HRA. The dollars that the employer deposits into the HRA are tax-free to the employee. The employer has the option to reimburse all or part of the employees' health care premiums. If employer reimbursements are made, the employee is responsible to pay the balance which will be made on a pre-tax basis. This program includes individual health insurance policies from top rated national carriers. Below are some highlights of individual insurance:

Individual plans are priced lower than group plans which offers a savings to the employer and employee
The insurance plans can be customized to fit the needs and budget of each employee
The employee owns the policy and takes it with them if they change jobs or become unemployed
The plans can never be cancelled unless the premiums are not paid
The HRA program also eliminates the need for the employer to manage their employees' health benefits. This will give the company more time to concentrate on their core product lines.

An HRA maybe the way for your company to save on it's health insurance costs without sacrificing coverage. By switching from group coverage to individual coverage your company can save 30 - 40% on your premiums. Less cost and you still get the tax write off! Since the individual owns the policy and not the company there is are compliance issues, no management and no cobra to worry about. Your employees will have a choice of coverages that best suit them, not what best suits the companies budget.

Michael J. Ferro
President
Ferro Financial Services, Inc
http://www.ferrofinancialservices.com/

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Well, another tax season has come and gone. When it comes to taxes, there are two things to worry about, filing on time and audits. Since a majority of people have filed their taxes by now, we thought it would be beneficial to talk a little about IRS audits. Here is a look at some facts you should be aware of when it comes to being audited by the IRS.

The first thing you need to be aware of is that the IRS is being way more aggressive with audits than it has in a long time. We have all seen the recent financial drama caused by Government spending, which has dramatically increased in the last 10 years. For example, from 2002 to 2008 the national deficit increased 3.5 Trillion Dollars. And from 2009 to the present the national deficit has increased almost 2.5 Trillion Dollars more. How does the government plan to pay for the increase in debt? Well, the main source of funding for the government is through taxes. This means that the IRS is increasing, and will continue to increase, its efforts to collect taxes to help fight this dramatically increasing debt. The IRS will do this through auditing individuals and small businesses.

In addition to standard IRS audits, there is an increase in IRS letters going out questioning various tax deductions claimed on tax returns. Many people don't know how to deal with these letters from the IRS, so they just pay the bill and end up paying anywhere from a few hundred to a few thousand dollars in unnecessary tax.

Another way we can tell that audits are increasing is the amount of auditors being hired by the IRS. For example, a few years ago there were only two auditors in the entire state of Utah. Now there are over twenty. And in addition to more auditors, we have also noticed an increase in auditors making in person contact with individuals they suspect of owing tax by going to their homes and places of business. It has been years since we have seen actual IRS auditors going to someone's house or job. But in the last six months, we know of three people have an auditor show up in person to their home or work.

We are not giving you this information to scare you but to motivate you. We simply want you to know that you should be prepared.

There are several things you can do to be prepared. One great resource can be found at http://avoidbeingaudited.com/. They have some great tools to help you avoid being audited and to help you in case you are audited.

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A divorce is going to change the way you've always done your federal and state income taxes, especially for the year immediately before your divorce is finalized. As long as you're still married on the last day of the year, you can choose the way you want to file your taxes. Applying the various tax laws that are in effect within your state, you'll have some decisions to make about filing jointly for one last time or by going the single route. Obviously, no matter how much animosity there is between you and your ex-spouse, you don't want to end up paying more in taxes just to spite your ex. You need to work out something equitable.

Generally, it will be to your advantage to file jointly if you can. This usually results in saving the most money. Of course, nothing is ever absolute, and you may need to do some figuring to find out which way would be the most beneficial. If you file separately, you have to be cautious about the way you decide who reports both income and withholding that was taken. If you don't have a prenuptial agreement saying otherwise, the income you earn prior to your separation is considered community income and must be reported equally by both spouses. Income earned after your separation belongs to the party that earned it.

You'll have to take into account the various properties that each of you received in your divorce settlement. For example, you don't want to claim only 50% of the income from a rental property if you, in fact, separately own the title to the entire property. Try and agree on items like separation date, the character of various incomes, and the allocation of tax payments when it comes time to have your tax documents prepared. If you can't agree, your attorneys will have to be brought into the mix to help work them out for you.

Keep in mind that any agreement made between you and your spouse can't be in violation of your federal and state laws regarding tax issues. Some of the areas where you need to pay close attention are the laws that pertain to incomes such as child support and alimony. Tax settlements don't have to be taxing if you follow the rules and agree to agree with your soon-to-be-ex. Your attorney or tax-preparer will be able to walk you through the steps so that you'll be able to submit perfect returns, even if you've never done them in the past.

Get 8 hours of live marriage coaching and proven marriage advice that really works at: Stop divorce or here: Save My Marriage.

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So you hate taxes? Well you shouldn't! The first major complaint we will deal with is the following:

"The wealthy and powerful have tons of money, but pay nothing in taxes."

Our response to this concern is no, they DO pay taxes, however, as a percent of income it depends on which tax loopholes they utilize. Most common among the uber-wealthy is keeping their money invested and only paying Capital Gains taxes. This same strategy is used by some of the wealthiest individuals in the world, as in billionaire investors. It is essentially paying yourself through dividends on investments to qualify for 15% taxation and only taking a small salary on top of those dividends which is usually taxed between 15% and 28%.

Another example is a wealthy individual who will tie up most of their cash in real estate investments. The benefit of this is the ability to deduct more expenses, mainly interest and property taxes on these investments. Another perfectly legal strategy.

Where either of these strategies becomes an issue is when the money is being invested off-shore in tax havens whereby there is no taxation. Until recently this was perfectly legal utilizing the proper asset management services, however, only time will tell if the government actually cracks down on this. The businesses and individuals who utilize this strategy strongly believe that consumption should be taxed more than production and as such try to keep their rewards of production, their profits, in a tax-free account.

Many of these strategies can be utilized by even low or middle income individuals. First off, most low income individuals end up paying nothing in as far as taxes and receive refunds thanks to credits that they qualify for. Secondly, middle income individuals have plenty of incentives, one of which is the "Saver's Credit" whereby you not only get tax deferral for certain retirement investments, but you also qualify for an additional tax credit for saving for a rainy day.

Even better is you don't need to have tons of money to start your own business. It can be anything from home day-care for friends and neighbors or making some money off of your handy work. For lower income individuals income from such activities can actually qualify you for a higher refund, thus your production gets rewarded. This is why we are astounded by the number of low-income individuals who will not allow their relative to claim child-care expenses for fear of taxation, when in reality, it benefits both individuals.

So as you see, the wealthy aren't lucky, they're just smart when it comes to taxes. Using a few of their tactics will help you receive the same benefits. For advice on how to use the tax laws to your benefit, please contact one of our Tax Patriots who can help you utilize tax strategies of the wealthy, even if you work a minimum wage job.

This is just the first reason why we love taxes when you probably hate them. Stay tuned for Part 2...

Clint Masser
Licensed Tax Patriot & Director of Marketing
Jefferson Franklin Tax Services
Goodyear, AZ

Working on tax returns since 2006, he is currently a licensed tax professional in the process of studying for the Enrolled Agent exam. All of his work has been performed under the guidance of his father, a CPA/Enrolled Agent with over 30 years of experience who has provided tax preparation services and tax strategies for everyone from minimum wage employees to multi-millionaire business owners.

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There is nothing more frustrating than to work hard all year, pay what you think is your fair share of income tax and then turn around on April 15th and get slapped with MORE tax because you did not pay attention or find a way to pay less taxes throughout the year. Just once, wouldn't you like to know how to pay less taxes and maybe, just maybe, get a refund for once? Well, good news, there are several tips I will show you how to pay less taxes every year.

Buy a house. This is considered the number one way to pay less taxes by using the mortgage interest tax deduction. If you currently rent, consider asking your landlord if you can buy the house you live in now. Why let your landlord get all the tax deductions?

Get a 401k. Put a percentage of your paycheck into your 401k every payday. This reduces your taxable income so you pay less taxes. Note, however, you cannot withdraw it before age 59 1/2 without paying a penalty. Many employers match your contributions so the combination of reducing your taxable income and the matching funds practically PAYS you to save. Do the calculations, sometimes you are effectively paying yourself what you would have paid the IRS if you had not contributed.

Convert your credit card debt. You cannot deduct credit card interest but CAN deduct mortgage interest. If you have a lot of credit cards to pay, consider the possibility of making that debt secured debt. If you own a home and have equity, you may be able to refinance your home or secure a second mortgage to pay off those credit cards. Be careful, however, and ensure first that you can afford to pay the mortgage(s) or else you can lose your home. This swapping of debt actually HELPS your credit score because you are swapping unsecured debt for secured debt so it has a double benefit.

Start a hobby to make money. This should actually say, START A BUSINESS. If you truly want to learn how to pay less tax, then this is the key to your success and the easiest and cheapest to implement. You cannot run your business like a hobby, however, or you risk losing all your tax deductions/business expenses. But if you learn how to turn that hobby into a tax deduction goldmine, that is the formula on how to pay less taxes.

Author of 7 Keys To Deducting It All - Opening the Vault to Maximizing Your Tax Deductions - Learn more and get a free report at http://www.7keystodeductingitall.com/.

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So you hate taxes? Well you shouldn't! The second major complaint we will deal with is the following:

"My taxes only pay for the poor and lazy who don't want to work."

This is usually in regards to the "welfare kings or queens" or those who collect disabilities from the government despite not showing any signs of being permanently disabled. To a lesser extent this also covers those who make their money from illegal activities such as drug dealing or prostitution, yet still get government benefits like welfare. The final example is the illegal immigrant who gets free health-care benefits and food stamps.

Yes this is unfair, but it is not as much of a tax burden as you might think. To top it off, you have to realize that the individuals that live this lifestyle, despite driving "pimped out" Escalades or having decked out apartments with flat screen TVs and all the latest video game systems, their lives are miserable. First off, they are living paycheck to paycheck or in this case welfare or disability check to check. Secondly, if they are involved in illegal activities they have the "lifestyle tax" of always having to look over their shoulder.

Is it worth having a free flat screen TV knowing that someone could break into your house at any moment and steal it? NO!

Is it worth having a free Escalade with rims knowing that you could get car jacked at any moment? NO!

Is it fair to the rest of us? NO!

The reality is as a business owner or even a law-abiding citizen you can utilize tax strategies to your favor that welfare and disability recipients never could. As far as welfare and disability recipients, since welfare is not taxable and social security/disability is only taxable if the recipient has earned income above a certain threshold, they cannot qualify for any Earned Income Tax Credit. This is where working a job and producing for society is rewarded! Yes it will probably not be as much as receiving welfare for the year, but it can still be significant, we've seen hard working clients with 3 children receiving $8-10k refunds just by receiving refundable credits. Did we mention that these clients also had little to no taxes withheld from their check!

As far as a business owner, to focus on the welfare cases is barking up the wrong tree. You know that most of your purchases are deductible where as a welfare recipient makes the trade of a paycheck to paycheck lifestyle for the inability to rise from poverty and inability to gain any tax benefits from their purchases.

A great example is going back to the Escalade. If a drug dealer drives an Escalade for "business" use, he could possibly deduct it, but most likely wouldn't as he does not want to report his income for fear of incarceration. On the other hand, I have a friend who is a successful author and wrote a book about his success journey. One of his great promotional items is his Lamborghini. In addition, to the Lamborghini helping him sell books, he rarely drives the vehicle for pleasure and always has books to sell when driving. While it would be a stretch and he would have to keep thorough records, his car expenses could be deductible as business expenses!

Cheating the system isn't really worth it! You do everything by the books and you can reap much larger rewards with much lower risks than those who live the welfare case lifestyle. Using tax planning strategies that they could never use helps you receive many benefits they could never dream of. For advice on how to use the tax laws to your benefit, please contact one of our Tax Patriots who can help you utilize these tax strategies.

This is the second reason why we love taxes when you probably hate them. Stay tuned for Part 3.

Clint Masser
Licensed Tax Patriot & Director of Marketing
Jefferson Franklin Tax Services
Goodyear, AZ

Working on tax returns since 2006, he is currently a licensed tax professional in the process of studying for the Enrolled Agent exam. All of his work has been performed under the guidance of his father, a CPA/Enrolled Agent with over 30 years of experience who has provided tax preparation services and tax strategies for everyone from minimum wage employees to multi-millionaire business owners.

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Many taxpayers find themselves unable to pay their taxes for a variety of reasons. When that is the case, understanding what your options are can mean the difference between eventually finding yourself unable to control the circumstances and being in the driver's seat, so to speak. Procrastination is a taxpayer's worst enemy and will result in owing significantly more than the original tax amount and being pulled along by the process; the longer they wait the worse it gets.

Since most taxpayers are unfamiliar with the IRS and the tax code they may be under the impression that the issue will go away, since the IRS is slow in process, or that they can simply beg off and the IRS will "let them off of the hook". The key thing to understand here is that the IRS operates under a tax code, which is a law, so they are legally obligated to assess and collect taxes...to enforce the tax law. For them not to do so would be the equivalent of the local police department not enforcing the law. As sobering as that fact may be there is a flip side. And that is this...those laws that obligate the IRS to enforce the tax law also restrict them from abusive practices when formal processes are followed by the taxpayer. That is why procrastination is a taxpayer's worst enemy and prompt action is the best way to address the issue even you can't pay.

Retaining professional representation is a must because the IRS is not concerned with saving the taxpayer money...according to their own mission statement they are concerned with making sure taxpayers "pay their fair share". To take advantage of certain options and benefits the taxpayer must not only know what they are but also know how to communicate with the IRS effectively and plead their case for a positive outcome. Again, professional representation is a must in accomplishing this. Below is a list of options if a taxpayer cannot pay their tax liability.

Option 1 - Ignore the problem and don't file a return. This is not a good option and is NEVER recommended for a variety of reasons. There are a number of penalties that the IRS assesses and among them is a "failure to file" penalty. Also generally there is a 10 year statute of limitations on the IRS ability to collect tax. However the clock doesn't start ticking until the tax has been assessed; the tax cannot be assessed until the return has been filed and reviewed by the IRS. This means that until a return is filed there is no statute of limitations binding the IRS on its collection activity. This is an example of one of those laws that limit abusive IRS practices as long as the taxpayer has followed the process. Also according to the IRS they may file a substitute return for you. Conclusion: ALWAYS file a return even if you can't pay.

Option 2 - Request an extension of time to file. This is not to be confused with extending the time to pay as the IRS expects the taxpayer to estimate and pay their liability by the original due date in April. The extension simply gives the taxpayer more time for information gathering in order to file as accurate a return as possible. Getting an extension will help avoid a failure to file penalty if the return is then filed by the extended due date. This will at least give the taxpayer some time to explore some options.

Option 3 - Borrow the funds or pay with a credit card. It may seem a little odd to suggest this but often the interest and penalties the IRS will charge are more than the interest the taxpayer will pay borrowing money or even using a credit card.

Option 4 - Request a temporary delay in collection. If the IRS determines that a taxpayer cannot pay any of their tax debt they may temporarily delay collection until their financial condition improves. This means that they will wait patiently and then collect once the taxpayer has the income or assets in order for them to do so; it is not a free pass to avoid ever paying at all.

Option 5 - Request an installment agreement. Installment agreements allow the payment of a tax debt in smaller, more manageable amounts.

Option 6 - Submit an Offer in Compromise. This option allows the IRS to settle the taxpayers debt for an agreed upon amount. The amount is determined by the taxpayer's assets and income. The documentation and process are complicated and should only be submitted through professional representation as only a small percentage of offers are accepted so representation will improve taxpayer's odds dramatically.

When dealing with tax debt it is crucial to remember that the IRS is acting under the law so they can do things that other creditors cannot such as a wage garnishment, bank levy, or tax lien. Also it is important to note that generally speaking penalties will be assessed and interest will continue to accrue on unpaid amounts until they are paid in full. And again professional representation is always best especially if a tax debt has turned into a tax problem.

Trace George is a Certified Public Accountant and is the Executive Vice President of Action Tax Relief. headquartered in Abilene, TX. Action Tax Relief provides services to individuals who are facing signficant tax problems with the IRS. We partner with consultants and CPAs in order to assist taxpayers through the process of dealing with the IRS to resolve their tax issues, including tax levies and liens.

(c) Copyright Trace George. All Rights Reserved Worldwide

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How can I avoid income tax! The answer is simple, "you can't!"

However, you can reduce the amount of tax you pay and keep more of your after tax dollars. As an example, consider the average family which spends $800 annually on health care, such as prescription drugs, chiropractic and physiotherapy. The following scenarios detail the significant impact of income tax on health care expenses.

Scenario one:

In order for you to pay the $800 in expenses, you must earn $1,333 in gross income, pay taxes (assume 40 per cent marginal tax rate) and the net $800 would be used to pay the bill.

Scenario two:

Let's assume you have a Group Insurance Plan in which the claims are submitted and the eligible expenses are reimbursed. Simply put, you pay the $800 health care bill and the plan pays you back $800. Your cost is the premiums paid into the plan, which are deductable as a business expense for the company. Let's review - you pay $800 ($1,333 gross income) in medical bills OR you pay Group Insurance Plan premiums (which are business deductions). Which would you prefer to pay?

Another legal and very effective way of reducing income taxes is utilizing "spousal RRSPs." A spousal RRSP is a long-term income splitting strategy that shifts income to the spouse with the lower tax rate. A taxpayer may split the RRSP deduction limit for the year between contributions to the taxpayer's own RRSP for his/her spouse. In this way, the taxpayer can create an RRSP in the other spouse's name, even though that spouse may have little or no earned income. Income tax is payable based on the amount of income received in a calendar year. When planning for retirement, the key is to determine the level of income required and how this can be accommodated in the most tax effective manner.

As an example, consider a retired couple that needs $60,000 annual income.

Scenario A:
One spouse withdraws $60,000 from his/her RRSP which will result in income tax at the marginal tax rate.

Scenario B:
Each spouse withdraws $30,000, in which both spouses now receive their basic personal exemption and the income received will result in being taxed at the lowest marginal rate. Why pay more tax than you have to?

Note: Revenue Canada has a three year attribution rule which states that spousal contributions must not be withdrawn by the spouse in the year of contribution or two years following. Should this occur, the income will then be attributed to the contributor.

Doug Buss
CLU, CPCA, CFP
YourStyle Financial

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Having worked for the Internal Revenue Service for 10 years as an Instructor, there are a few acid tests Revenue Officers/Agents will use when working a taxpayers' case in their inventory. I also want to mention that when I was an instructor at the IRS, this was the first bit of instruction I would give to Revenue Officers coming on board. "Assume the taxpayers are lying." While this is a bit of an over statement on my part, you should know that as an IRS Agent, "taxpayers on a regular basis never tells the whole truth". While some taxpayers are as honest as the day is long, most are deceiving - and in that case you must dig further for the truth.

Therefore going into each case, these three acid tests are the fastest and quickest ways to spot liars and deceivers.

Three main tips:

1. Make sure the bank statements, tax return, financial statements all have a common thread of income. While there are many exceptions to this rule because of changing circumstances i.e. loss of jobs, life events, generally the money you deposit in your bank needs to tie into your current wages and your income information on your tax return. If this doesn't match up, you can bet your last dollar, IRS will investigate further to see if there may be hidden income. Also your cost of living should be in line with your wages. Exceptions exist such as you are borrowing money or living on savings.

2. IRS can and will pull credit reports to verify monthly payments you are making on other debt or assets. Many people who try to hide and/or deceive the government, will buy money order or cashiers checks. A smart IRS Agent will pull credit reports to verify your IRS financial statement with items found on your credit report.

3. IRS will check through credit reports for loan applications submitted to banks, car dealerships or other financial institutions to verify income and assets. IRS will compare the financial statement you gave the financial institution with the financial statement you submitted to IRS. It should match up; however this is rarely the case.

While this is not a comprehensive list, however, IRS knows where to look for lies and deception and they will find it.

Always turn in a truthful financial statement to the IRS.

Anytime you deal with the IRS, it is always wise to seek reputable professional counsel.

Michael D. Sullivan is a seasoned IRS tax expert. Learn more about Michael and the services he provides at http://www.freshstarttax.com/.

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In the past couple of years, bad debts and theft losses have become almost commonplace. Years ago we rarely ever saw a bad debt or theft loss on a tax return. But today, between the economy, fraudulent investments, and failing businesses, these debts are everywhere.

To understand how to deduct these bad debts you need to understand the differences between debts that can happen on an individual tax return and those that can happen on a business tax return. Let's look at individual first.

Most bad debts that occur with an individual's finances will end as a capital loss, which is limited to $3000 a year or to only go against passive gains. For example, if you invest or loan money to a business, buy stock in a business, or put money into a failed investment, all of these are considered capital losses and fall under the $3000 a year limitation. The only way to deduct more than $3000 a year, other than having passive gains, is to prove the bad debt happened because of theft, fraud, or casualty losses. In order to prove this one of the following things must happen:

The person or business you loaned or invested money has to have been indicted by the SEC, FBI, or other federal or state agencies.The principles involved in the business or investment have been arrested and put in jail.An unforeseen natural disaster is the cause of the loss.

A business is a little easier to prove and write off. If your business loans money or invests money and the money is lost because of any of the above mentioned circumstances, it can be used to claim the bad debt. But in addition to the reasons listed above, the business can deduct a bad debt if the business makes an attempt to collect and the attempt fails. There has to be some sort of documented attempt. A few phone calls will not be sufficient. The best way is to hire an attorney to attempt collection. You don't have to spend thousands of dollars or spend years trying to collect. Make a reasonable attempt, and as soon as it is obvious you can no longer collect the money, the business can write off the bad debt.

One additional thing to keep in mind is that in order to deduct this type of debt on your taxes, you need to have documentation that there was an exchange of money such as a cleared check, wire transfer documentation, etc. There also needs to be an agreement as to compensation, such as a note or business agreement.

Claiming this type of loss on your taxes is a delicate and thorough process. Knowing that the individual or company is having a rough time and being pretty sure you won't get your money back is not enough. You need to be able to prove to the IRS, if necessary, that you did everything in your power to get reimbursed. Then, in the year you determine it a lost cause, you can claim the bad debt.

For more information on bad debts and to learn more about other tax deductions you may qualify for, visit http://avoidbeingaudited.com/.

To learn how to find financial peace of mind using the services Soulence Tax and Accounting provides, visit their website: http://soulence.com/

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If you own your own business, your worst nightmare is the situation when your business fails. To add further salt to the wound, not only did your business fail, but you realize you still owe the taxing authorities for sales taxes and payroll taxes, and you are still personally responsible for those, even if you are no longer in business. Filing for bankruptcy may help, depending on your situation. There are several categories of taxes, and they are treated differently in bankruptcy, depending on what category they are in.

Personal Income

Personal income taxes that you personally owe are dischargeable if they are more than three years old, filed more than two years ago, assessed more than 240 days ago, not filed fraudulently, and the taxpayer is not guilty of willful tax evasion are dischargeable in a Chapter 7 or Chapter 13 bankruptcy. If they do fall under this category (meaning the taxes are less than three years old, or filed less than two years ago, or assessed less than 240 days ago, was filed fraudulently, or the taxpayer was found to be guilty of willful evasion), are considered "priority taxes" which are not dischargeable in bankruptcy. Any debt that is considered non-dischargeable in bankruptcy means that you are still responsible for paying this debt whether you file for bankruptcy or not. If you have any non-dischargeable debt, see Non-Dischargeable Taxes: What Happens if I Cannot Afford to Pay My Tax Liability?

Sales

If you owe the state sales tax, whether or not they are dischargeable will depend on whether the sales taxes are considered an "excise tax" or "trust fund tax." How the sales taxes are categorized depends on your state. Sales tax is considered a trust fund tax if the tax is assessed on the customer at the time of the sale and the responsibility to collect the tax is on the business owner. The business owner is supposed to collect the tax to turn over to the taxing authority. Trust fund taxes are not dischargeable in bankruptcy.

Sales tax that is the responsibility of the owner for the privilege of doing business in the state is considered an excise tax. California is an "excise tax" state, so that means that the business owners are responsible for the sales tax, not the customer. It may be a little confusing, since almost all the business owners pass on the sales tax to their customers, but the ultimate liability of the sales tax is still on the business owner. Excise taxes are dischargeable in bankruptcy, so that is good news for failed business owners in the state of California.

Payroll

Payroll taxes are broken out into two parts: those taxes that are taken out of an employee's paycheck, and those taxes that are paid by the employer. The taxes that are taken out of an employee's paycheck (such as federal income tax, state income tax, social security, and medicare) are considered "trust fund taxes." It is the business owner's responsibility to turn over those funds taken out of the employee's paycheck to their taxing authority. The funds taken out of the employee's paychecks are "held in trust" by the business owner to be turned over to the taxing authority. If the business failed (or even if the business is still continuing), and the funds were used to pay off other debt or expenses other than to turn over to the taxing authority, the taxing authority will not be sympathetic. They only care that the business owner withheld these funds, but used it for other purposes than which it was held for. As with the sales taxes that are considered to be "trust fund taxes" payroll taxes withheld from an employee's paycheck are considered non-dischargeable in bankruptcy.

The payroll taxes that are paid by the employer are "non-trust fund taxes." These taxes are dischargeable in bankruptcy depending upon how your state classifies the taxes.

West Coast Bankruptcy Attorneys is a Bay Area and California consumer bankruptcy firm filing Chapter 7 and Chapter 13 bankruptcies for individuals in need. Visit West Coast Bankruptcy Attorneys online to find a Oakland Bankruptcy Attorney or a San Jose Bankruptcy Lawyer committed to providing the best bankruptcy experience for a reasonable fee.

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