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  • Taxes
  • Income
  • Tax Strategies
  • Investments
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Taxes

The following itemized taxes are general in nature and meant as an introduction to the most important aspects of tax planning.  


1. Federal Income Tax 

America employs a progressive income tax system in which higher-income earners pay a higher tax rate compared to their lower-earning counterparts.  Filing status, (as depicted in the cartoon above), exemptions, deductions, and other offsets of your Adjusted Gross Income, (AGI), figure into your overall tax strategies.


2. Capital Gain Taxes

Capital gain is an increase in a capital asset's value. It is considered to be realized when you sell the asset. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.  Understanding this distinction and factoring it into investment strategy is particularly important for day traders and others taking advantage of the greater ease of trading in the market online.  Capital gain taxes can be substantially less than ordinary income taxes, hence the attraction to most wealthy taxpayers.  Investment assets play a large role in your tax planning for retirement.  SEEK PROFESSIONAL assistance when looking to add capital assets to your personal investment portfolio.


3. State Income Tax 

Tax levied on income at the state level. State income taxes have their own set of deductions and credits that may be awarded for certain activities. 

Not all states assess income tax. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no state tax of any kind. New Hampshire and Tennessee levy tax on dividend and interest income only. Of course, the overall level of taxation varies from one state to another.

Establishing residency in a lower or no income state tax IS NOT NECESSARILY A GOOD PLAN! States have to receive revenue in order to exist and will make up the difference with other types of taxes; sales, property, etc. CAREFULLY CONSIDER WHERE YOU WANT TO LIVE VERSUS JUST THE APPEAL OF LOWERING YOUR TAX RATE.


4. Estate Tax 

An estate tax is levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. The estate tax is mostly imposed on assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse. The right of spouses to leave any amount to one another is known as the unlimited marital deduction, but when the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate exceeds the exclusion limit.


Because the estate tax can be quite high, careful estate planning is advisable for individuals who want to leave significant assets to their beneficiaries or heirs tax. 

As of 2018, the Internal Revenue Service (IRS) only requires estates with combined gross assets and prior taxable gifts exceeding $22 million, (married), to file a federal estate tax return and pay estate taxes. As a result, if someone has a $11 million, (single), estate, there are no estate taxes levied upon it at his death.


The new administration plans on returning to prior levels of estate caps, around $5 million for single and $11 million for married.  Perhaps even more important than realizing the potential exposure to estate taxes is coming down, it is also being proposed to eliminate the "stepped up basis" rule, which allows heirs to receive any estate item gain tax-free.  If this is reinstated, then heirs will be also be facing an additional income tax exposure on their inheritance. 


5. Gift Taxes

While an estate tax is levied on an individual's assets and estate after death, gift taxes apply to funds given away while the taxpayer is living. Gift taxes prevent individuals with large estates from giving away all of their assets to their heirs during their lifetimes to avoid estate taxes.

However, the IRS offers generous gift exclusions.  The current annual exclusion is $15,000, meaning tax filers can give away $15,000 to each and every person they select. If a tax filer wants to give the maximum gift to 10 people, for example, he can give away $150,000 without facing any tax penalties. in contrast, if he gives $20,000 to a single person, he has exceeded the exclusion by $5,000. When he dies, this sum is added to his estate when calculating his estate tax.


Unless special arrangements have been made, it is always the gift giver, not the recipient, who is responsible for paying the gift tax and for filing the gift tax return. The gift tax return is IRS Form 709. In order to avoid the gift tax, many people use estate planning, working with a financial planner, tax professional and/or attorney to strategically choose when, how and who gets the estate owner's money.


Use of a Gifting Assignment is important here.  It defines the date, the recipient, and the amount of the gift in whatever form it may be in.  This allows a very low valued item at the moment to be declared and intended to be given away at a certain date and time, PRIOR to the actual gift being given.  


6. Difference Between Estate Tax and Inheritance Tax

An estate tax is applied to an estate before the assets are given to the beneficiaries. In contrast, an inheritance tax applies to assets after they have been inherited by someone. In the case of inheritance tax, each beneficiary may have to pay a different amount, depending on how much is inherited. Some states, including:  Iowa, Kentucky, Maryland, Nebraska, New Jersey and Oregon have estate taxes.


7. Federal Foreign Income Tax

If you are a U.S. citizen or a U.S. resident, you must report foreign source income on your U.S. income tax return. Foreign income is reported in the same way as other income, e.g., wages, interest, dividends, etc., on a 1040. 

You may avoid U.S. income tax on foreign source income if you qualify for the foreign earned income exclusion or the foreign tax credit. You must file IRS Form 2555 to qualify for the foreign earned income exclusion and Form 1116 to claim the foreign tax credit.

Get professional assistance if you have any investments outside of the US.


These topics will become clearer as you move forward in your financial adventure.  The next part is understanding which types of income are subject to which type of taxes.  To continue the link below.

Type of Income

DISCLAIMER

  

All information, links, and discussions posted on this website are for educational and entertainment purposes only, are general in nature, and not intended as investment, legal or tax advice.  Each person’s personal and financial situation is unique and different, and the information provided may not apply or work effectively for you.  In all events, you should discuss any investment, tax situation, retirement options, or any other material provided on this website, with independent licensed professionals of your choosing. By signing up for, and attending or participating in our informational internet or in-person workshops, seminars and follow up meetings, you agree that Bob Adams, and all affiliate companies, representatives, associates, or employees (“Information Providers”) are hereby held harmless from all liability and loss associated with the information and discussion provided, and as to any action or strategy you may choose to implement with regard to the same. 


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