The Good Tax Guide » Tax Information

Estate Planning and Taxes

Tax Guide — Sun, 02 May 2010 14:08:55 +0000

When the tax season is over, it is the right time to start securing a better financial future for your family. And it doesn’t take a billionaire to do a proper estate planning. Estate planning is carried out by working out how your assets will be handled and what will happen if certain events take place such as incapacitation, disability, or death. This is done by elaborating a plan through all kinds of legal documents and processes.

Estate planning is for everyone and it is important to have an efficient distribution of your assets. Probably the biggest financial gift for your kids is to prevent them from being your financial caretakers after you are stop working or retired. Certain assets can be jointly owned with other persons, they could include investment accounts, bank accounts, real estate, and so forth. When an owner dies, the remaining owners will take over the asset and probate can be avoided. Some people may think that jointly owning an asset with their kids will also prevent inheritance taxes. Not so, even when probate is avoided through joint ownership, the assets are generally included when calculating inheritance tax.

It’s a good idea to apply for an ILIT (Irrevocable Life Insurance Trust). Ideally, life insurance proceeds should be included on the estate. Depending on the estate size, the federal estate taxes could be due upon death. When the ILIT is used correctly however, any the insurance proceed from the policy will not be included in your estate.

Obviously, an ILIT is irrevocable and can’t be amended after created. The ILIT requires a trustee, which could be anyone except the one who creates the trust (Grantor). The ILIT also needs designated beneficiaries, which are often the Grantor children. A properly structured ILIT can provide liquidity, for an estate burdened with illiquid assets, having an ILIT can be indispensable in order to pay large sum of estate tax bill without selling any assets. The grantor can’t withdraw contributions from the ILIT. When using an irrevocable trust, people can give away their money or assets even before death, which isn’t possible when using a revocable trust. Thus, an irrevocable trust become permanent after being established, no one can make changes or revoke it once formed. These arrangements should be set up according to the grantor’s wishes. When establishing the arrangement in estate planning, the goal of irrevocable trust should be to lower federal estate tax. When transferring the ownership of real estate or other properties, the grantor gives away the property to a beneficiary for good. It would mean that a grantor is no longer held responsible the property and so it doesn’t qualify as a part of the estate, as the result no federal estate tax payments are required. If the grantor secures a life insurance to pay a federal estate tax, it could be the only asset in the trust and it is possible for this policy to be separated from the grantor’s entire estate and isn’t subject to taxation.

Tax on Sick Pay

Tax Guide — Thu, 08 Jan 2009 08:46:12 +0000

Sick pay is a type of wage received by the employee. So as per the rules all salaries and wages are taxable. Hence sick pay is taxable. So a person getting the sick pay must include this amount in the tax return before filing. It should not be left out. If left out then penalties would be charged as the pay will be reported in the tax return of the person who pays you the sick pay. It is a taxable income. It is the money received by a person in case if he faces any injuries or accidents. All companies will allot some amount of money for their employer’s sick pay. It is given as the health insurance allowance. The taxable amount should be submitted in a Form W-4S to the insurance company. This is to be done to withhold the IRS tax. If the premium for the health insurance is made through cafeteria plan then the premium will be taken as the one paid by your employer and benefits can be reaped by you on the tax returns if the money paid as premium was not included as taxable income to you. In case of long term care insurance it will be exempted from tax in most of the time.

Tax on Lump sum distribution

Tax Guide — Sat, 03 Jan 2009 08:44:37 +0000

Lump sum distribution refers to the large amount of money paid to the employee’s balance in a single tax year. In this case the payment is made according to the qualified plans of the person. The IRS has provided a different method for calculating the tax on lump sum distribution. It is called as the Special Averaging Method. The tax to be paid can be found out using this method. They have also provided a 10 year averaging tax option. It is given as special tax treatment and it is applicable if the person is born before 1936 only. In order to show the taxable lump sum distribution one should receive Form 1099-R from the person who employs you. So for filing the lump sum distribution makes sure that you receive this form so that the tax return can be filed appropriately without any delay. Delay in tax payment will result in penalties. There is also another option available other than the 10 year averaging tax plan. It is the IRA rollover. So make sure that you get the right benefits at the right time so that some amount of money can be saved. As everyone knows, money saved is money earned.

Tax on Veterans insurance dividends

Tax Guide — Thu, 18 Dec 2008 08:39:57 +0000

All types of interest received by you are taxable in all cases. Interests are considered as a form of income. Interest on bank accounts, deposit, insurance, dividend and money market certificates are some of the well known examples of taxable interest. In the case of veterans, the insurance dividend provided is called by the name veteran insurance dividend. The veteran dividends are not taxable and are applicable to veterans and their beneficiaries. For getting this benefit one must receive two forms Form 1099-INT and Form 1099-OID. In the case of a normal individual no discounts will be given. Any interest above 10$ is taxable and should be included in the tax form before filing it. Failure to include the details will be notified to you by the tax authorities. They will get the information from the dividend providers which are checked by the computer. Failure to include will lead to penalties as a result of which additional tax should be paid. Also if the interest you receive is 1,500$ or less then you should file Form 1050EZ or Form 1040. If the interest is above 1,500$ then the Form 1040EZ cannot be filed. But the Form 1040 or Form 1040A should be filed

Is it necessary to pay tax on workers compensation?

Tax Guide — Wed, 10 Dec 2008 08:38:26 +0000

According to the workers compensation act one do not have to pay the tax on workers compensation which is received by the person who is given or by survivors for work related sickness. It is mentioned in workers compensation act. Also tax exemption is not applicable to the benefits given on the retirement plans. These benefits are given on the basis of age, service period or length, your contributions to the plan. This is applicable even if the cause of the retirement is injury or sickness related to occupation. In case if the payment is obtained from your employer then you have to include the obtained workers compensation in the taxable amount. Workers compensation may include social security benefits. The social security benefits included in the workers compensation is taxable and should be reported while filing the tax returns. Failure to report the social security benefits can lead to charges of penalties to you. In such a case one may have to pay more money as tax. So make sure that you enter all the income details before filing the tax form. The railroad benefit is also taxable and comes under the category of social benefits. So, it should be included in the taxable income.

Is it necessary to pay tax for household employees?

Tax Guide — Wed, 03 Dec 2008 08:38:21 +0000

If the amount paid to the household employee is $1,500 or more then one has to remit the IRS social society tax and Medicare tax, called as FICA. There will be another tax also known as FUTA. FUTA refers to Federal Unemployment tax which is to be paid to the IRS. This amount is to be paid if the employee does not work for any agency. FICA will not be applicable if the employee is your spouse or a child under the age of 21 years or if the wages are paid to the parents or if the household employee is under the age of 18 years. In case of FUTA tax, it is not applicable if the household employee is your spouse or a child under the age of 21 years. Also if the wages are paid to your parents then also the FUTA tax will not be applicable. The FUTA tax will be applicable if the amount of money paid to the household employee is 1,000$ or more. So if the salary exceeds the limit tax has to be paid for household employees, but if it remains within the limit then that amount will be exempted from taxes.

Is it necessary to pay tax on wages and salaries?

Tax Guide — Mon, 10 Nov 2008 08:20:59 +0000

Wages and salary belong to the taxable income. They are taxable because they are the payments received by the person for doing services for an employer. But there will be exemption in certain cases also. It include social security tax, Medicare tax, pensions, insurance and union dues. These things must be included in the gross taxable income on one’s tax return in that particular year. The items which are taxable income include commissions, royalties, salaries, tips, vacation pay, dismissal pay, sick pay, wages, back pay and bonuses. In case if the employer pays you social security tax and Medicare tax without making any tax deductions then they have to be included in the gross taxable income. All the wages and salaries obtained through all the means should be mentioned in the tax form. Failure to mention anyone may risk you to pay penalties. So before filing the tax form ensure that all the salaries or wages are properly mentioned in the form at appropriate places. In certain cases you may receive another tax form after filing the first original tax form. The new form sent has to be filled with the changes if any and should be filed.

Is it possible to get a tax extension from the IRS?

Tax Guide — Wed, 05 Nov 2008 08:19:11 +0000

Yes, it is possible to get a tax extension from the IRS. A six month automatic extension will be provided by them. This can be obtained if one files the extension tax form. It is filed for getting more time for the payment of tax. It is also useful in certain situations where you can escape from tax penalties due to the late payment. But here the problem is that once you file the extension tax form you will have to pay the interest when you make the tax payment on that year up to the date. Such a rule is made so that the person will pay the tax as early as possible for avoiding the further interest. The extension tax form should be sent to the IRS service centre. There is another option available for the person; he can pay the tax in instalments. The penalties of late payment can be avoided if the amount paid as tax equal about 90% of the total tax due. In this case the interest will be charged only on the unpaid amount left. In case of tax extension there are two separate rules. One rule is for the U.S citizens and the other one for the non residents.

Tax on employee achievement awards

Tax Guide — Mon, 27 Oct 2008 08:17:43 +0000

One can reduce the tax in case of an employee achievement award if and only if the employer deducts the employee achievement awards on its tax returns. Not only that, there are some other requirements which are to be fulfilled in order to get excluded from this tax. The IRS has mentioned the requirements clearly. According to their rules the reduction will be made as a part of meaningful presentation only. Also they have mentioned a limit above which such deductions will not be granted. Only those amounts which come under this limit will be considered for tax reduction if other requirements are met. It can be avoided from tax if it is given in the form of gift certificates rather than in the form of cash. It will be excluded if the amount is given for the service of the person towards the company for long time. Such achievement awards can be categorised in to two plans basically. They are non tax qualified plan and tax qualified plan. In the case of the tax qualified plan tax will be deducted for that tax year. But in the case of non taxable qualified plan they are eligible for tax exemption.

Is it necessary to pay tax on savings and loan association dividends?

Tax Guide — Sun, 12 Oct 2008 20:56:25 +0000

It is essential to put the savings and loan association dividends in the tax return. All interest that one receives comes under the category of taxable income. So, it should be reported on the tax return. Dividends include dividends on share accounts, deposits in banks, credit unions, mutual savings, and federal savings and loan associations. One who pays the interest income of yours must be provided with your security number. Otherwise it can result in a tax penalty. In such a case one may have to pay extra tax. Also it is necessary to receive a tax statement from the paying institution. The tax document can be Form 1099-INT and Form 1099-OID. A similar tax document is also acceptable. In case if you did not receive any such tax statements also you have to report the dividend on tax returns. If the interest paid is above 10$ then it should be reported. The payer also has to submit the tax returns along with the necessary documents showing these. So if the dividend receiver tries to hide the dividend he will be caught with the help of a matching process done by the computer. In such a case you will be charged with penalties by the IRS.