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Minimizing on Taxes: Practical Investment Schemes

Taxpayers can either be small-time investors working in various sectors or big investors like businessmen who have a big source of income. The aim of both of them is to minimize tax payments. Tax planning entails investing in the right schemes at the right time.

You are a successful investor if you know what are the objectives of your tax planning, and you further go ahead realizing your objectives by carefully planning in the right schemes. Some of the common and most practical investment schemes include:

A. Not Very Famous Category of Investment among Investors.

1. Tax-saving mutual funds.

2. Bank Investment schemes.

These investment schemes are at extreme ends of the risk-return spectrum.

B. Very famous category of investment among investors.

1. Infrastructure bonds.

2. Private Investment schemes.

These investment schemes fall under the purview of fixed income instruments, and bypass the unnecessary tax burden.

Classification of Tax Paying Categories

Age is considered as the standard criteria for classification by the investment community. It is generally felt that low age yields maximum risk factors owing to less experience, whereas high age yields less risk, because one is more experienced.

Following are the broad categories of listing taxpayers according to their age:

A. 25-35 years of age - If you fall within this age group, then you are young, and may or may not be married, be with or without kids. If you are the only breadwinner of the family then getting insured is the most feasible option that you should think of. This is because if anything happens to you, your family will be in a comfortable position to sustain their living in your absence. A tax-saving mutual fund (ELSS) fits well into your risk profile and you can avail investing option of up to $10,000 limit. You can also invest in property on a home loan and get a tax benefit on the same under Section 199.

B. 35-45 years of age - At this age, tax-saving funds, having $ 10,000 limit (for claiming tax benefits), are a very practical option. This is the age where you plan for your future.

C. Over 45 years of age - At this age you are within the age of retirement, so your entire focus should be on pension policy. In addition, your investments need to be more retirement-oriented.

Thus, with this piece of information at your disposal, you can surely earn rich benefits by saving your income to the maximum.

Eunice Wallace writes for niched content sites like these: Articulos Gratis and Spanish Articles and Natural Health.

Health Savings Accounts and Taxes

HSAs have a "triple" tax advantage from a federal tax standpoint. Individuals receive full tax advantages for HSAs on their Federal Income Tax return (or through a salary reduction program in certain employer-sponsored settings) regardless of particular state's tax treatment of HSAs.

An account beneficiary may take an above-the-line deduction (i.e. the amounts may be used to determine the individual's adjusted gross income before any itemized or standard deductions are considered) for contributions made to an HSA during any month of the individual's taxable year that the individual is eligible. The permitted deduction cannot exceed the sum of the "monthly limitations" for such months. In 2006, the monthly limitation for any month is 1/12th of the following amounts:

- For those with single coverage on the first day of the month, the lesser of the annual deductible under the HDHP or $2,700.

- For those with family coverage on the first day of the month, the lesser of the annual deductible under the HDHP or $5,450.

Funds in an HSA grow on a tax-deferred basis, and distributions from an HSA are tax-free so long as the funds are used for qualified (as defined by Section 213d of the IRC) health care expenses.

How does state tax treatment of HSAs differ from federal tax treatment?

HSAs (and the enabling legislation) are federal. As a federal program, each state decides whether to: a) comply with the federal guidelines, or; b) establish their own state guidelines regarding the tax treatment of HSAs. As a result, some income that may be tax-free at the federal level may not be tax-free at the state level.

Many states harmonize their tax treatment with the federal government. Those states include Arizona, Arkansas, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Indiana, Kansas, Kentucky, Louisiana, Maryland, Missouri, Mississippi, New York, Montana, Nebraska, New Mexico, Oklahoma, North Carolina, North Dakota, Pennsylvania, South Carolina, Oregon, Rhode Island, Virginia, Utah and Vermont.

Other states, however, treat HSAs differently from the federal government, at least for tax purposes. The following states have indicated that legislation must be passed at the state level before HSAs receive a tax benefit at the state level: California, Illinois, Maine, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, Ohio, Washington DC, Wisconsin, West Virginia and Tennessee. New Hampshire and Tennessee do not tax income, but do tax dividends and interest. Alabama has not indicated their position regarding state-level tax benefits for HSAs. Finally, some states are not affected by federal income tax guidance vis-�-vis HSAs: those states include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Kurt Stammberger is VP, Marketing at Healthia Inc. Healthia provides integrated comparison-shopping information on health care products and services, doctors and health insurance plans to empower the drive towards Consumer-Driven Health Care.

Debt Settlement & Income Taxes -- What You Need to Know

Debt settlement has become a popular approach to resolving problem debts without having to file bankruptcy. With this approach, creditors agree to accept a portion of what you owe (usually around 50% or less) to settle the account, and the remaining balance is forgiven. This technique will certainly continue to grow in popularity now that the new bankruptcy law makes it tougher to fully discharge debts in a Chapter 7 bankruptcy.

As with anything, there is no free lunch, and creditors are required to report canceled debts to the IRS on Form 1099 (when the canceled balance is $600 or greater). Therefore, the possibility exists that you may owe taxes on the forgiven portion of the debt. For this reason, many financial writers and debt counselors are strongly critical of debt settlement, to the point where they actually recommend against it just because you might end up owing taxes. But the tax consequences of settling your debts are greatly over-emphasized, and this is a really just a minor issue at best.

First, even if you end up owing taxes on the canceled balances, that's because you saved a bunch of money off your original debts. The total of what you paid the creditor, plus the taxes, will still be much less than what you owed to begin with. There is still a net savings. So it's hard to understand why this is viewed as a problem in the first place!

Second, the great majority of people who settle their debts are not required to pay taxes on the forgiven part of the balance. That's because of the "insolvency" rule, described in IRS Publication 908, "Bankruptcy Tax Guide." Don't let the title fool you. You don't need to have filed a formal declaration of bankruptcy to take advantage of the insolvency rule.

Basically, "insolvent" means that you have a negative net worth -- that is, you "owe" more than you "own." As a consequence, most debtors do not have a tax liability on the canceled debts, simply because most debtors are insolvent! It usually comes down to home equity. If you have enough equity in a home (or other property) to outweigh the total of your liabilities (debts), then you have a positive net worth, and will likely have to pay taxes on the forgiven debt amounts. However, the majority of people in serious debt trouble have a negative net worth, and are therefore insolvent. The way it works is that you can offset the canceled debt up to the amount by which you were insolvent at the time you did the settlement.

Come tax time, be sure to get professional tax advice specific to your situation. Also, be sure to read the section in IRS Publication 908 on "reduction of tax attributes," which requires people using the insolvency rule to reduce their basis in such things as rental property, loss carryovers, etc. Most of that probably won't apply to you, but again, get specific advice before winging it.

So, the message is, relax about paying taxes on canceled debt balances. That should be the least of your concerns if you're upside down financially. Don't let the misguided criticisms of financial writers (who haven't done their homework) discourage you from looking into one of the most popular and flexible options for achieving debt-freedom.

Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation's largest debt settlement firms, he is the author of the Debt Elimination Success Seminar�, a five-hour audio-CD course that teaches consumers how to choose between debt program options based on their financial situation. The course focuses on comprehensive instruction in do-it-yourself debt negotiation & settlement designed to save $1,000s. Personal coaching and follow-up support is included. Achieves the same results as professional firms for a tiny fraction of the cost. http://www.zipdebt.com

Why You Should Avoid Paying Income Taxes with a Credit Card

We all agree that the credit card is very convenient. That is why the IRS allows you pay your taxes through it. To sweeten the deal, credit card companies offer rewards in the form of frequent flyer miles. So you can get a free air ticket too. But hang on, is that convenient to your pocket too? Sadly, the answer is no.

Disadvantages

The IRS has authorized third party companies to process your credit card payments. However, you, the taxpayer has to pay for it. So, every time you use your credit card to pay tax, you also have to pay a fee that is usually around 2.49 % of your tax. Thus if you are paying $18,000 in taxes, you also pay an additional fee of around $450. Now add the fee charged by travel rewards credit cards and you can drop the second letter from the word �free' as in free airline ticket.

If you are in debt, the last thing you want is more debt. Annual interest charges are quite high, even going up to 30%. You could spend the rest of your life paying for the $18450 �convenience.' If you are in debt with many credit cards, this additional debt can lead to bankruptcy. But even that cannot save you. As per law, you still have to pay taxes along with other payments like child support or alimony.

It is for these reasons that consumer agencies like the Association of Independent Consumer Credit Counseling Agencies (AICCA) suggest alternative ways of paying income tax. You could dip into your savings bank account or take a loan at a lower interest rate.

There are only two conditions under which this transaction looks good. You pay the IRS with your credit card and simultaneously pay off the credit card company as well. This way, you avoid the interest payments, if it is any consolation. The other condition is that if it is impossible for you to meet the IRS deadline. While the IRS can grab most of your assets immediately, your credit card company cannot. While the case is in court, you may just win a lottery or inherit a windfall!

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Why Paying Your Income Taxes With a Credit Card is a Rip Off

If you own your own business or have not been deducting enough from your paychecks each week, you will probably owe some income taxes when tax time rolls around. This is never fun, and if you do not have the money in your checking account right now, you might be tempted to pay the taxes with your credit card. A word of advice: don't.

When you owe income tax to the federal government or the state government, they are aware that the amount you owe may be over the amount you have access to at the moment. They prepare for this eventuality by allowing tax payers to file for an extension to pay their debt. You can arrange for a payment plan to be in effect for the total amount.

You will of course pay interest on the amount that you are putting off, but the interest rate that the government charges is relatively low. With state governments this number will vary, so check with your local state tax office. But for the federal government, the current rate of interest on unpaid taxes is seven percent, which is the federal short-term rate plus three percent.

Now consider your credit card. Most credit cards carry an interest rate of anywhere from twelve to twenty-one percent. If you owe taxes that you can't pay, you probably have a higher interest rate credit card. This means that whatever you pay in a lump sum to the government, you will be financing with your credit card company at the interest rate you pay for your regular purchases. If this is fifteen to twenty percent, you will end up paying much more for your taxes.

In the end, it pays to work within the government's system of extensions and take their lower interest rate on the amount of your tax you cannot pay yet. If the payment play that they offer you is still too steep for you to pay each month, then call the hotline number provided on the offer and request another plan be arranged. You may need to show proof of your income to do this, but it will be worth it so you don't default on the unpaid taxes.

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The IRS Owes You Money If You Have Paid Long Distance Phone Taxes

The IRS has decided to give up the fight on an ongoing legal issue regarding taxes it has collected on long distance telephone services. Here is the scoop.

The IRS Owes You Money If You Have Paid Long Distance Phone Taxes

Every one of us pays for some form of long distance telephone service. The more you use the service, the more you start hunting for better rates. Whatever choice you make, however, you are always stuck paying a federal tax on the bill. For those of you with large long distance phone bills, this tax can add up quickly given the fact it is calculated at three percent of your total bill.

The tax in question is known as the federal excise tax on long distance telephone service. It was created in 1898. Yes, this tax arose well over one hundred years ago. As you might image, a few people started to wonder how a tax established in 1898 could possibly apply today, particularly given the advancement of telephone technologies. Turns out it doesn't apply! Given a chance to review the situation, five appellate courts have ruled the tax invalid.

After contemplating the situation, the IRS has decided not to challenge the legal rulings. Instead, it has voluntarily agreed to issue credits or refunds for the excise taxes paid the past three years. Specifically, you will be able to claim a refund of all taxes paid from February 28, 2003 till the date the IRS stopped collecting them.

To collect the refunds, the IRS will create a new box on all 1040 filing forms for the 2006 tax year. In practical terms, this means you will be able to check a box and get a refund when you prepare your 2006 tax return in 2007. The IRS will pay interest on these funds.

It should be noted the refund is applicable only to the long distance excise tax. You still must pay local service taxes and the refund does not apply to taxes collected by states and such. Still, any refund is a good refund in my opinion.

Richard A. Chapo is with BusinessTaxRecovery.com - providing information on taxes. Visit us to get more tax help.