January 9, 2012

How State Income Tax Works

The majority of Americans will have to pay a state income tax in addition to the federal income tax. 41 of the 50 states have a state income tax of some sort. Only nine states Wyoming, Texas, Nevada, Washington, South Dakota, Florida, Tennessee, New Hampshire and Alaska have no state income tax. Residents of these states only have to pay the federal income tax.

Not every resident of the other states will have to pay a state income tax. To determine if you will have to pay this tax and the rate you will need to contact your state government directly. The agency that collects the income tax is usually the state department of revenue. This can usually be accessed through your state government’s website.

Collection of State Income Taxes

State income taxes are not collected by the IRS instead they are collected directly by the state government. If you have to pay state income tax you will have to send a payment to the state. If you are entitled to a state income tax refund you will receive a second refund payment from the state.

In most cases you will receive your federal tax refund before your state refund. Most states will send your refund to you electronically.

Reporting State Income Taxes

Most states will base the amount of state income tax on what you report on your federal tax return. You will have to put the amounts from your 1040 on your state tax return. Most tax software will fill out your state return as well as your federal income taxes.

If you are using an online tax preparation program or tax preparation software make sure that it includes your state. Not every program includes every state’s taxes. Almost every state will take electronic tax returns.

Something to remember is that some states charge additional capital gains taxes. Others charge additional taxes on higher income individuals.

Multiple State Taxes

If you live in more than one state in a tax year you will probably have to pay income taxes to both states. That means you will have to fill out a tax return for each state. It also means that you could receive a tax refund from more than one state. It might be possible to get a lower tax rate or avoid income tax by declaring your legal residence in a state with no income taxes or low income taxes.

State Income Tax Deductions

State income deductions are not the same as federal income tax deductions. Most federal income tax deductions will not apply to state income taxes. Some states will actually give residents more deductions.

Most states but not all states, allow residents to deduct all or most of their Social Security payments from their state income tax. Some states such as Michigan and North Carolina will let residents deduct all retirement income from their income taxes. That includes pensions, annuities and military retirement pay. That means it is possible to reduce your income tax bill by moving to another state when you retire.

There are also special tax deductions available in many states. Most states allow senior citizens to deduct property taxes from their state income tax. Many states also allow residents to deduct sales taxes collected on food from their state income taxes. Some states also give special tax refunds to lower income people to make up for sales tax.

This is why it is always a good idea to read the material from your state department of revenue carefully. There maybe deductions you are missing out on.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuities Explained, Fixed Income Annuity, and Annuity Leads.

January 9, 2012

How Sales Tax Works

A sales tax takes the form of a charge added to the cost of a good or service. This is usually calculated as a percentage of the cost of the item. Sales taxes are usually automatically collected when a person makes a purchase at a store. Most register receipts will show you what percentage of tax was added to the sale.

General Sales Tax

The most common sales tax in the US is a general sales tax which is imposed on all or most purchases within a specific jurisdiction. In states without income taxes this is used to support the state government. In most areas it is used to support local governments such as the city or county or a special district.

The collection of this tax varies widely. In many places food purchased from grocery stores is exempt from it. Some states such as Colorado will not collect sales taxes on services. Others such as Texas tax services. If you run a home business or work as a freelancer in a state that taxes services you may need to charge or pay sales tax. The state tax agency can show you how this is done.

Other items that can be exempt are clothing, rent, medical services, medical equipment and prescription medicine. In many cases non-profit organizations and some businesses are exempt from the tax.

Collection of the Sales Tax

The sales tax is usually collected at the point of sale. That is it is paid by the business rather than the consumer. In some cases consumers will be held liable for state sales tax. A person who orders something from out of state via an online vendor or a catalog could have to pay the sales tax as part of the income tax. If there’s a state sales tax in your state you should check with your state department of revenue to see if you will have to pay it.

Sales Tax Rates

You can usually calculate what your sales tax rate is by adding up the sales tax on your receipts. Something to remember is that there maybe several levels of tax added to a purchase. The city, county, and special districts may add taxes to an item. That means the effective sales tax rate can often be much higher than you expect. Some urban areas such as New York City and Chicago effective charge sales taxes that are well over 10%.

Excise Taxes

There is no general federal sales tax in the USA but there are excise taxes. An excise tax is a levy that is charged on a specific item or product. The federal government charges excises taxes on vehicle fuel, tobacco, alcohol and a number of other products. The 2010 healthcare reform act added excise taxes on tanning salons and some high-dollar insurance policies.

Many state and local governments also charge excise taxes on certain items. Most states charge excise taxes on tobacco and alcohol. Recently there have been demands to charge excise taxes on fatty foods and fast foods.

Sales Taxes and Income Taxes

Something to remember is that sales tax can be deducted from your federal income tax. The IRS considers sales taxes a deductible expense. Some states with sales taxes on food, allow citizens to deduct those taxes from the state income tax.

Value Added Tax

There is no Value Added Tax or VAT in the United States. A VAT is a sales tax that is collected on all levels of a business transaction. A retailer would pay the VAT when it purchased an item from a wholesaler and when it sold the item to the customer. The VAT is the main sales tax used in Europe.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Ordinary Annuity, Retirement Annuity, and Income Annuity.

January 9, 2012

How Capital Gains Tax Works

A capital gain is the increase of the value or potential value of an asset. A capital gains tax, is an income tax that treats increases in value as it increase in income. The US like most countries has a capital gains tax.

Under the Internal Revenue Code any increase in the value of an asset is treated as an increase in income. Generally the IRS only charges capital gains tax if you sell the item and gain a profit on it. If you sell something and lose money you will have a capital loss not a capital gain.

Something that you may not know is that the Internal Revenue Service regards almost anything you own as a capital asset. This includes investments, property, intellectual property rights, patents and anything else that could be of value. If your comic book collection doubles in value the IRS could consider that a capital gain.

How Capital Gains are Calculated

The method by which capital gains are calculated is actually very simple. If you own any sort of asset whether it’s a stock or an antique you simply subtract its current value from what you pay for it. If you purchased 10 shares of stock five years ago for $50 and sold those shares today for $300 you would have a capital gain of $250.

The normal capital gains rate for most assets is 12%. There are some exceptions to this for higher income individuals. Some lower income individuals will not have to pay a capital gains tax.

Under current law, you will have to report all increase in investment income except for funds held in tax-deferred instruments such as IRAs, life insurance policies or annuities. That is why it is often a good idea to keep a large percentage of your investment income in such vehicles. Capital gains and losses have to be reported on a Schedule D and line 13 of your 1040 tax return.

The best way to estimate capital gains is to use a capital gains calculator there are many of these available online. You can use these to figure out what your capital gains will be.

Capital Gains and Losses

Unfortunately you can only deduct certain capital losses on your income tax. If your personal property or investments lose value you cannot report that as a capital loss. If your investment property or business assets lost value you can report that as a capital loss on Schedule D. The IRS regards investment property losses as a business expense so they are deductible.

That means you could report a loss in value of your rental property as a capital loss. You could not deduct a loss in value of your home as a capital loss. The good news is that deductible capital losses can be deducted from your total income tax. That means you could deduct a loss on the sale of your rental property from your total income.

The limit for capital loss deductions is $3,000 for most taxpayers and $1,500 for those filing married or filing separately. If the amount of your capital losses exceeds those amounts you can carry them over to next year.

Always report all sales of investments and other assets on your taxes. If fail to report the IRS could consider it tax evasion and take action such as garnishment of your wages or bank accounts.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Single Premium Immediate Annuities, What is an Annuity, and Current Annuity Rates.

January 9, 2012

Insurance Policies You Should Have

One of the biggest financial mistakes that people make is to not have enough insurance coverage. Many individuals and families find themselves in poverty because they lack certain insurance policies. Some insurances policy most people need include:

Disability Insurance

Those silly AFLAC TV ads with the duck are actually sending you an important message. The message is that you will need some way of paying the bills and the food if you cannot work because of injury or illness. Health insurance will only cover your medical costs it will not pay the mortgage or the electric bill. Social Security Disability payments are only available if you become permanently disabled.

You should have a disability policy that will cover the cost of your day to day living expenses. If you work full time check to see if long term or short term disability insurance is available as a benefit and take advantage of it. If you or self employed or can’t get through your work buy your own disability policy.

Homeowners or Renters’ Insurance

The insurance you purchase with your mortgage will only reimburse your mortgage company not you if something happens to your home. If you rent your landlord’s insurance will not cover the loss of your possessions. Homeowners will need to get a policy that covers the contents of their home. Renters will need a renters’ policy that covers their possessions. Make sure the policy covers all the risks common in your area.

Life Insurance

Many people believe that life insurance is only for those who have children or other family members to support. The truth is almost everybody needs life insurance. It will pay off your debts if you die. Without life insurance your heirs or loved ones could end up having to pay your debts if you die unexpectedly. Something to remember is that life insurance policies are tax deferred so you can deduct from your income tax. It can also be used as an investment.

Long Term Care Insurance

The biggest insurance mistake made by older people is not to have long term care insurance. Such a policy covers the cost of nursing home care, assisted living facilities or in-home nursing care if somebody requires it. Many older people end up selling their homes or using their savings to pay for this. Nursing home and long-term nursing costs are not covered by Medicare. Medicaid will cover some of these costs only for lower income people. For persons over 70 and those in poor health long-term care insurance is a must.

Health Insurance

The national health insurance program in the US, Medicare only covers those over 65 and some disabled people. The other government healthcare program Medicaid only covers the poor. Most residents of the US will have to purchase some sort of health insurance policy. Even those eligible for Medicare will need coverage for expenses covered by the program.

Contrary to popular belief President Obama’s healthcare reform will not provide health coverage. Instead it will penalize people without private health insurance when it goes into effect in 2014. Therefore most residents of the US will have to purchase health insurance after 2014.

If you are traveling outside the US you will need to purchase travel health insurance. Many health insurance policies will not provide coverage outside of the country. Government health insurance programs in countries like the UK will not cover traveling US citizens.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Definition, Annuity Rate, and Best Annuity Rates.

January 9, 2012

Common Insurance Mistakes

It is very easy to make mistakes regarding insurance coverage. Everyday many people lose large amounts of money because they make mistakes concerning insurance coverage. Some of the most common and costly insurance mistakes include:

Not Adding Specific Peril Coverage to Homeowner’s Insurance

There are many losses that specifically excluded from property coverage. These losses include floods, earthquakes and in some cases forest fires. Always read your homeowners’ insurance to see what is covered. If there is a high risk of uncovered risks you may need to purchase additional specific peril coverage. Many people end up facing large losses because they fail to get such coverage.

Not Making Sure Valuables are Covered

Standard homeowners’ and renters’ policies often specifically exclude high-value items from coverage. This can include jewelry, gold, coins, silver, silverware, collectibles, antiques and anything of a high value. If you have high-value items in your home check the policy to see if they are covered. You can purchase additional coverage for them if they are not. You can also ask your insurance agent for a rider to your homeowners’ or renters’ policy to cover such items.

Not Getting Total Replacement Coverage

Read your homeowners’ or renters’ policy to see if it provides for total replacement coverage. Some policies only provide actual cash value coverage. This means that the insurer will only pay you the cash value for what is lost or destroyed.

If Bob had a five year old computer that was stolen and an actual-cash value policy. The insurance company would send him a check for the cost of a used computer of the same model. That would only be $200 or $300. If Bob had total replacement coverage the insurer would send him a check for the price of a brand new computer.

Total replacement coverage covers the cost of replacing destroyed or stolen items at today’s costs. Actual cash value is based on depreciation which is at lot less. Most people will be better off with total replacement coverage.

Not Getting Home Business Insurance

Most homeowners and renters’ insurance policies will not cover losses related to home business. You will need to get additional coverage if you have a home office or workshop.

Mary is a freelance writer who works out of her home. If her computer was stolen or destroyed her homeowners’ policy might not cover its cost. To make matters worse if Mary was sued over an article she wrote the homeowner’s policy would not cover her legal expenses. A business liability policy might cover legal expenses.

Not Taking Advantage of Insurance Tax Deductions

Life, business and health insurance premiums are deductible expenses on your federal income tax. Health insurance and dental insurance are considered healthcare expenses. Life insurance is considered a retirement account so it is tax deferred. Any business insurance is a deductible business expense. These deductions can reduce your tax bill by hundreds or thousands of dollars each year.

Not Having Life Insurance

Many people under 40 or 50 make the mistake of not having a life insurance policy. Parents should definitely have such a policy so their children will benefit if they die. Other people should have a life insurance policy because it will pay off their bills if they die.

Not Having Renter’s Insurance

Many people that rent their homes fail to get renters’ insurance. This is a huge mistake because insuring the contents of a rented home is the renter’s responsibility. The landlord’s policy only covers repairs to or replacement of the structure itself not the tenant’s property.

If George was renting an apartment and had no renter’s insurance. He would have to pay for the replacement of everything in his apartment if the apartment house burned down. That means George would have to use his savings or salary to pay for everything including clothes, appliances, furniture, the TV set, the computer. He would also have to pay for a new place to live.

If he had a renter’s policy, George would get a check to pay for that stuff. The renter’s policy might even cover the cost of renting another apartment.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Calculator, Annuity Interest Rates, and Annuities Good or Bad.