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A tax charged on the money income of folks, firms, or other legal entities is commonly known as income tax. Nowadays, various income tax systems exist in the financial market with various levels of tax incidence. The income taxation can be specified under progressive, proportionate or regressive. Individual income tax is charged on the total salary of the individual ( with some deductions allowed ), while company income tax is on the net income.

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Income tax time or finance closing dates are hectic and stressed time of the year. As an interesting point, you’ve got to make certain of all of your receipts and cash matter concerns in a proper order. This will help you to understand about your expenses and savings which you have made in the prior money year. Also, it assists you to save tax in next year by some alterations. With the assistance of valuable income tax tips you can reduce that you owe at tax time. Importantly, the total you pay as tax makes a serious difference!

Consider paying your spouse an income of the work that he / she performs in your small business. The amount of income paid must be reasonable in relation to the hours worked and kind of work. For instance, it’d be irrational to pay your spouse 0 an hour for 8 hours a day, when your partner only works 3 hours per day in an executive capacity.

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Income tax withholding’s aren’t taken out of payments that you receive as a contractor. But simply because no tax is withheld does not necessarily imply that the government isn’t attempting to find you to send them in. The top concern for most freelancers are how much to pay in conjectured taxes and when to send them in. To pinpoint the amount of taxes due you’re going to need to compute your gross revenue. An income tax calculator and tax calendar are resources that help you guesstimate amounts and make timely payments. Additionally, if state and local taxes apply, you are going to need to remit payments to them also.

The section of your home dedicated to your business must be your principal place of business, where you meet with your clients in the ordinary course of your business, or where you perform the administration and management duties of your business. Billing your customers, ordering supplies, doing the book-keeping, calling folks to line up appointments, forwarding orders or writing reports all qualify as administrative duties if this is the only place you’ve got to do these things.

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Folks who have been employed in standard work settings are finding it critical to supplement or replace their income streams. While some voluntarily leave their jobs others may be the product of downsizing and redundancies. But many who keep a passion for their profession find possible choices , for example outsourcing, to get back in the work force. It is important to keep abreast of tax laws that impact self employed people. Here are 3 significant tax concerns.

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When filing income taxes many self-employed entrepreneurs are stunned to realize they might have decreased their taxable income and paid less in taxes in the year. It is important to have a plan in place that includes tax reduction techniques. For example, one frequently missed method is retirement savings. Contributing to a Self employed Annuity Plan is a good way to amass non-taxable savings and keep more of the cash you earn. Speak with a tax accountant to ensure that you are maximising benefits in this area.

Filing your Fed income tax online appears menacing at first, but is actually the fastest and simplest way to file, and you’d be amazed how fast you can receive your tax refund by filing online. If you aren’t exactly a “Net person,” you’ll have reservations about filing your taxes online. But do not worry the process is really much simpler than you’d expect, and you will have a full record of your filing and all the required paperwork to prove you have properly filed your return.

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Speaking of tax saving tips, different nations have different tax cuts. For instance, the India regime offers to pay less tax under section 80C. You can invest up to Rs 1 lakh and save tax up to Rs Thirty thousand. Likewise, for other countries, you can put it shortly after easy investment and tax information tax savings.

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Last, although not least, you must hire an accountant to control the books of your small company and to offer you valuable tax advice. The fees that you pay your Mississauga Accountant ( or other accountant ) will be more than offset, by the tax savings identified by your Accountant.

If you’re trying to save money, you ought to know how much the federal government is taking from what you earn. Most people just don’t know. Finding out will show you why it’s hard to get ahead. This article shows how the fed gets 35.4% of an ,000 working income.

We hear a lot about income taxes, but most people don’t know just how much income-related taxes they’re paying. We’re taxed by both our federal government and our state. Since the federal government takes the lion’s share, I’ll concentrate on its taxation.

Two simultaneous taxes on your income:

The federal government imposes two different taxes on what you earn by working. They are the:

* income tax, and

* payroll tax.

What everyone knows as your ‘income’ tax has a set of tax brackets each with its own tax rate from 10% to 35% (2009). These rates are applied to your taxable income which is income in excess of your ‘tax free’ income.

Your tax free income is any income you earn that’s below the ‘tax-threshold’ for your filing status – single, married, and head of household. This tax threshold is the sum of your personal exemption and the standard deduction. For a single person the tax threshold is ,350 (,750 if age 65 and over); for married it’s about twice this.

The more taxable income you have the more it moves into higher tax rate brackets – increasing the average overall tax you pay for ‘income’ tax.

The ‘payroll’ tax is a second tax system simultaneously applied to your working income. This tax pays your Social Security benefits (income) at retirement age and most of your Medicare benefits when you reach 65 – presumably.

The ‘payroll’ tax applies at a fixed percentage of your working income – no brackets. As an employee, you pay 6.2% of your working income for Social Security (only up to 6,800 income) and 1.45% of it for Medicare (no limit). Together they take an additional 7.65% of your income. There’s no tax threshold (or tax free) level of income for this system.

But your employer also has to pay 7.65% of what income he pays you for your Social Security and Medicare. Most employees are unaware of this extra tax money your employer is paying for you. So, between you and your employer, the federal government takes 15.3% (= 2 times 7.65%) of your income. If you’re self-employed you pay the whole 15.3%.

So from your working income, the federal government taxes takes your ‘income tax’ you pay according to your taxable income applied to the tax brackets and also gets 15.3% of your working income too.

How much does the fed get from a single person making ,000?

Let’s take a person under age 65 who makes ,000 for a salary and apply the two federal income tax systems on his salary to see how much tax he generates for the fed.

For the ‘income’ tax system, we subtract off his tax free income – i.e. the tax threshold of ,350 from his ,000 – to get his ‘taxable income’ of ,650 (= ,000 less ,350). This is applied against the tax brackets as:

The first ,350 is taxed at 10% tax rate to give 5

The next ,600 is taxed at the 15% tax rate to give ,840, and

The next ,300 (but he has only ,700 left) is taxed at the 25% tax rate to give ,425

That results in a total ‘income’ tax of ,100 which is 20.1% of his ,000 salary.

For his ‘payroll’ tax as an employee he pays 7.65% of his ,000 which is ,120. His employer, though, must pay the same 7.65% – another ,120. So between the employee and his employer, the fed gets 15.3% of his ,000 which comes to ,240. Note that an employee costs an employer his income plus 7.65% more.

If the employee was self-employed with ,000 of net income, he’d have to pay the full 15.3% for ‘payroll’ tax.

So the total tax paid to the federal government based on his working income comes to ,340 made up of:

* ‘income’ tax of ,100

* ‘payroll’ tax of ,240 (,120 from employee and ,120 from employer)

The employee pays ,220 of this which is 27.8% of his salary. His employer pays the rest.

If he were self-employed with an ,000 net business income, he’d pay all ,340 taxes

Yes, ,340 is 35.4% of an ,000 working income. That’s what the fed gets.

Someone making ,000 per year is really not making a lot of money. The fed’s ‘take’ is too much now. Income taxes originally started at 1% for the very rich. And now the government is planning to tax you more.

Sam sold 2 commercial properties in June 2008 and was discussing tax planning with his CPA and cost segregation provider.  The sales price for the properties was .2 million and .3 million.  Sam had owned both properties for about 8 years.  The cost segregation specialist estimated Sam could save more than 5,000 in 2008 income taxes.  This would be accomplished by using cost segregation and “catching-up” previously under-reported depreciation.

Sam has passive income from oil and gas investments and from his real estate.  Sam is in the property management business and is actively involved in managing his real estate investments.  Sam’s net income from his management company is about 0,000 per year.  The fascinating question is, how does Sam reduce his income taxes by over 5,000 after he sold the properties?

Tax Rate Arbitrage

Sam is benefiting from tax rate arbitrage.  The income tax rate for Sam on ordinary income is 35%.  His capital gains rate is 15%.  Sam did not obtain a cost segregation study when he purchased the properties 8 years ago.  Therefore, he has been reporting too little depreciation and unknowingly paying excessive income taxes.  By claiming the depreciation on his 2008 tax return, he is able to use the additional (“catch-up”) depreciation to reduce ordinary income, just as if he had claimed the depreciation during the prior 8-year period.

The preliminary cost segregation analysis indicated Sam had understated real estate depreciation during the prior 8-year period by 5,000.  The tax rate arbitrage between ordinary income tax rate (35%) and the capital gains rate (15%) is 20%.  Sam can reduce his 2008 income taxes by 7,000 (5,000 times 20%) by claiming the depreciation not used in prior years.  (Precisely correct calculations are more complex but the end result is very similar.)

What is Cost Segregation?

Cost segregation is simply an accurate way to allocate the cost basis of real estate and establish a depreciation schedule.  The real estate depreciation schedule is often established by allocating a portion of the cost basis to land and allocating the balance to  a long term depreciation recovery period (27.5 or 39-yr straight-line depreciation).   Cost segregation fine-tunes the depreciation schedule by identifying short-life items.  These can generally be depreciated over 5, 7 or 15 years.  In preparing a cost segregation report, an appraiser or engineer will visit the property and identify, quantify and evaluate the quality of various types of short-life property.  After the site visit, the appraiser will literally establish a beginning cost basis for each of the short-life items, as of the acquisition date.  In a typical engagement, there may be 35 to 50 types of short life property items depreciable 5, 7 or 15 years.

What are the Short-Life Items?

Some of the common short life items are carpet, vinyl tile, blinds, landscaping, fencing and paving.  Others, more unassuming, are underground utility infrastructure, storm sewage, specialized plumbing and electrical, etc.

Cost Segregation Myth

Many real estate investors and even some tax return preparers believe cost segregation simply defers income taxes.  Their concern is they will be creating an excessive tax bill when the property is sold.  However, the concern is unfounded.  Cost segregation provides a net reduction in income taxes (based on the difference between the ordinary income rate and the capital gains rate).  While that the tax payer is deferring taxes at ordinary income tax rates, he is only increasing taxes, at the time of sale, at capital gains rates.  The net benefit is roughly 20% of increased depreciation in total tax reduction.

Of course, using cost segregation when a property is sold does not include deferral benefits.  However, it includes substantial tax reduction benefits based on the catch-up depreciation.

Unknown Tax Tip

Depreciation understated in prior years can be claimed in the current year without filing any amended income tax returns.  In addition, the net depreciation not reported in previous years can be claimed in one year.  This is a fairly recent development established in Rev. Proc 2001-19. Depreciation adjustments used to be divided evenly over 4 years.

Under-reported depreciation is reported in the current year (“Year of Change”) using form 3115 (change of accounting method form).    The 3115 form, for cost segregation purposes, has been designated by the IRS as an “automatic consent” change of accounting method.

Simple Example

Sam obtains cost segregation reports to document the 5, 7 and 15 year property in his recently sold properties.   The cost segregation reports indicate Sam understated depreciation in prior years by 5,000.  This additional depreciation reduces Sam’s ordinary income taxes and increases his capital gains taxes.  Ordinary income taxes are reduced by 9,750 (5,000 times 35%).  Capital gains taxes are increased by 2,750 (5,000 times 15%).  Net tax savings are 7,000 (9,750 less 2,750).

Is this Legal?

Absolutely, since Sam voluntarily made a loan to the government of 7,000.  Sam loaned Uncle Sam the money by overstating his net income, because he was understating his real estate depreciation.  Sam certainly would have never intentionally lent the US government money for 8 years at 0%.  The only thing worse than making Uncle Sam a 0% loan is letting him keep the principal.

Why Didn’t My CPA Recommend This?

Federal income tax law is complex; there are many nuances.  It is accurate to say no single person is an expert on all aspects of US income tax law.  Cost segregation has also changed substantially over the past 10 years.  It used to cost ,000+ for a simple cost segregation study.  In addition to lower costs, the benefits of cost segregation have become better understood.  However, there are still income tax return preparers who believe cost segregation simply defers payment of income taxes.

In addition, the writer believes remuneration for tax return preparers is ill conceived.  They are paid a flat fee to complete the forms.  Other than client retention, there is limited incentive for a tax return preparer to focus on tax reduction.  The remuneration issue is compounded by the peak work load prior to the tax filing deadline.  Clients want to visit with the tax return preparer when he is processing his peak load and is least able to give focused attention to individual clients.

Does This Make Sense for Me?

You need to answer a few questions to determine whether getting a cost segregation study will reduce your income taxes.  The first question is whether you are paying income taxes.  (It is hard to reduce taxes below .)  The next issue is the type of income.  Is it passive or ordinary.  If it is ordinary income, can you claim the depreciation as someone who is “materially participated” in operating the real estate or as a real estate professional.  Additional depreciation can definitely be used to offset passive income.   Materially participated is a term of art.  Consult your CPA or tax return preparer on this issue.  There are also limitations related to your at risk basis.  You can deduct depreciation to offset ordinary income if you are a real estate professional.  In broad terms, this means your day job is related to the real estate business.  This would  include real estate brokers, mortgage brokers, title company staff, real estate attorneys and others.

The next step is to determine how much additional depreciation can be generated and the net consequences of the additional depreciation.  An experienced cost segregation advisor should be able and willing to provide both a preliminary analysis of the additional depreciation, evaluate the income tax consequences, and evaluate the capital gains consequences.  That will provide the information you need to make an informed decision.

Conclusion

The byzantine US Income Tax Code is too complex for any person to understand entirely.  A lower tax rate and fewer deductions would benefit taxpayers and the economy.  However, for now, the tax code is voluminous, has convoluted rules and tortuous logic.  Legally reducing your income taxes is possible.  However, it requires planning and a team effort.

O’Connor & Associates is a national provider of commercial real estate consulting services including cost segregation studies, tax reduction, due diligence, renovation upgrading cost analyses, Dallas federal tax reduction, tax return review and apartment inspections.

It is that time of year when an individual wants to understand how much he or she has earned and how much tax is owed. To define income tax, it may be said the tax charged on the once a year fiscal salary of folks, corporations or other legal entities. In the case of individual income tax, the tax is charged on the total salary of the individual ( with some refunds which are authorized by law ), while corporate income tax is on the once a year net earnings.

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Income tax time or closing dates is a busy time for any business. The businessman is supposed to make sure the all bills and all documents concerned are quite in order and are availed to the relevant pro. This aids in knowing the type of costs and savings they made over the year or over the duration. Moreover this assists in tax saving in the subsequent finance year with the right tax modifications. What an individual or a company must be aware of is that the tax of their earnings they pay makes a great difference, therefore no mistake should occur while they’re at it.

Free income tax preparation is commonly available as a motivation for refund anticipation loans. A tax specialist will analyze your money affairs and ready your taxes. If it is decide you are entitled to a reimbursement, they take a proportion of that refund.Consequently, the tax preparation service earns cash, although not until your refund comes through. There is not any out-of pocket expense to you, and you get the increased assurance that your tax preparation is done comprehensively and meticulously.

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While paying out the income tax, one should employ the tax breaks as they typically lowers the tax amounts to be paid in a selected tax duration to the IRS. For example if your kid is in a school, then you need to claim for an education tax break. The tax savings you make here can often be used to open an education saving accounts for your kid.

Sometimes taking a hit can be of use in Tax savings. Suppose you’ve done well with your investments in the prior part of money year. Due to this you’re looking at important capital gains, prior to year-end. Now, you can offset some of those gains by selling a losing venture can save a lot on tax front. Tax free investments are vital tools in the direction of income tax savings. They might not be that worthwhile in returns but save a lot fro your tax payments. Making charitable donations are also helpful.

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The Chief Justice of Pakistan, while hearing a case on May 05, 2009, has aptly remarked that the people of Pakistan have lost faith in the Income Tax Department. The loss of faith pointed out by the Chief Justice is not limited to the tax department only, it is reflective of general trust deficit prevailing among the people against different government departments.

Even judiciary is not immune from this deficit. Nizam-e-Adl Regulation, 2009 is manifestation of the same phenomenon. It is high time that all state departments take stock of the situation, so that hearts and minds of the people are won for strengthening the Federation of Pakistan.

‘Mistrust syndrome’ in case of the Federal Board of Revenue (FBR) manifests itself in different forms and is caused by mutually supporting factors. The main causes are ‘perception and reality of tax money being wasted by our ruling elite, complex and ambiguous tax law viewed as a trap and the working of the department itself. This article aims at providing some food for thought to improve the situation.

USE OF TAX MONEY According to J. Holmes, “Taxation is the price we pay for civilisation”. People pay taxes in the hope of living in a welfare society peacefully. Tax culture can be developed if people are made to realise the nexus between taxes paid and what they get in return. They expect that the state will protect their lives and properties. It will provide roads, hospitals, utilities, etc.

However, when the government collecting taxes is corrupt and there is bad governance, tax culture cannot be promoted. This explains why despite so many reforms tax to GDP ratio in Pakistan is one of the lowest in the world, and that in Scandinavian countries one of the highest. Rampant corruption in tax collecting and tax spending organs of the state erodes trust of the people.

While the people hesitate to pay tax as they think they do not get any thing in return, the government states low tax collection as the main reason for non-development of the country. The vicious circle continues. Trust deficit and fiscal deficits are directly proportionate to each other.

Reduction in one will reduce the other. Every government has a right to levy taxes through Parliament. But no Government can be allowed to cause misery and harassment to the taxpayer and the bitter feeling that the taxpayer has been made the victim of palpable injustice.

Analysis of cases decided by different courts as reported in PTD of February 2009, indicates that 75% decisions of the higher appellate forums and of Federal Tax Ombudsman are against the department. The same trend can be observed in each month which needs no further comment on the poor quality of assessment orders and high handedness of the departmental officers.

Late N.A. Palkhivala, eminent tax scholar of India, had once said that “Taxes are the life-blood of any government, but it cannot be over-emphasised that the blood is taken from the arteries of the taxpayers and, therefore, the transfusion has to be accomplished in accordance with the principles of justice and fair play.”

DOES THE DEPARTMENT PROMOTE TAX EVASION? Unbelievable but true. Most of the time it may be unintentional collateral damage of some policy, but sometimes it seems due to criminal negligence or collusion.

One recent example is Investment Tax Scheme, 2008 in which unexplained or under-assessed assets were allowed to be incorporated in the books by paying 2% tax only. Apparently it looked as if it would add at least something to the revenue and bring assets from black to regular economy. Unfortunately drafting was such that the department lost revenue more than it collected.

It was due to availability of tax depreciation allowance on such assets in the tax year 2009 and onwards. Besides, date upto which assets created were covered under the scheme was faulty and assets created in the current tax year were also included in it. Later amendment of the date was too late to arrest the damage.

Thus it acted as a tool for tax planning in which paying two rupees as tax under the scheme saved more than ten rupees in the same tax year besides enjoying immunity from tax of the previous years. Further, remaining value of the assets (WDV) shall be allowed as deduction over the years in the form of tax depreciation, thus giving more benefits to such tax evaders over the years. What was achieved? Nothing.

The Task Force on Tax had warned against such schemes as they serve as an incentive for tax evasion and a disincentive for honest taxpayers. Nobody was taken to task for such a fiasco. Rather the persons who were movers and approvers of this scheme were given promotions and better postings, as reward for their ‘good’ work.

A number of amendments are introduced in haste and in a haphazard manner which result in loss of revenue. This aspect needs more attention as has stressed by the Hon’ble Chief Justice of Pakistan. Amendments in the law should be made after comprehensive study and its impact on different other provisions of tax laws, other laws and businesses.

It is suggested that the parliament should have a ‘Ways and Means Committee’ as it exists in the USA. Members of the committee should represent all provinces, all political parties in the Parliament. The Committee may also have non-voting co-members from the tax profession (including accountants, lawyers, economists, etc). The jurisdiction may include both expenditure and revenue measures.

Judicious analysis at this level will help prevent unscrupulous expenditure as well as imprudent tax measures which currently get approved without much discussion in the Parliament.

FBR will have to plead its case for each new tax provision/amendment with its full scientific analysis based on different parameters, keeping in view all the affected stakeholders.Such a committee or its sub-committee should be given the task of supervising subordinate legislation also.

IMPROVING TAX LAW Currently the Income Tax Ordinance, 2001 is in practice. The earlier ones (Income Tax Act, 1922 and Income Tax Ordinance, 1979) have been repealed. In just 7 years, more than 1,000 amendments have been made and many more are being contemplated.

In India, 3300 amendments were made in their Ordinance over a period of 30 years, we are at a greater pace in that direction and expect to beat that record in just 10-12 years. On account of these amendments, N.A. Palkhivala called their Ordinance a national disgrace. What word should we use for our nascent but badly mutilated tax ordinance?

Taxation through an Ordinance ipso facto is a national disgrace in a democratic country. The Ordinance suffers from more deformities. Its diction is ambiguous; its impact is unfairness; its compliance is cumbersome; its discretion is awesome. Dilating upon its diction and structure, the Hon’ble Karachi High Court observed as under:

“The Income Tax Ordinance, 2001 is a very badly drafted document and has in fact distorted the entire law and scheme of Income Tax in this country, which prior to the coming into force of Income Tax Ordinance, 2001 was very clear. The drafting of law contained in the Income Tax Ordinance, 1979 was much better and clear than the drafting of law contained in the Income Tax Ordinance, 2001.

The scheme of law contained in the Income Tax Act, 1922 and Repealed Income Tax Ordinance, 1979 was clear and unambiguous while the provisions contained in the Income Tax Ordinance, 2001 are confusing on account of inaptness, lack of dexterity and lack of clarity on the part of draftsman.” [2006 PTD 734]

ABSENCE OF FAIRNESS Income Tax is a tax on persons on the basis of their income. However, since 1991-92, there was started a new type of taxation called presumptive taxation on a large scale. In this case anything can be deemed as income and taxed. For example, all your supplies made to different companies shall be treated as ‘income’ without allowing any expenditure.

Such taxation was challenged, but in the Elahi Cotton case, the Hon’ble Supreme Court of Pakistan, after discussing the then prevailing conditions of the country and general tax evasion, held such taxation to be constitutional on the principle of ‘the power of taxation rests on necessity’. The department took it as a free license. Now FBR is always on the hunt.

It searches new avenues where it could impose a withholding tax responsibility on a person, then making it a final tax under the presumptive scheme. This taxation is unjust on many grounds. First of all it ignores the bottom line of profit or loss in the business.

Secondly, such type of taxation is beneficial to the higher income groups and detrimental to the lower income groups creating socio economic distortions in the system, for redressal of which the income tax is supposed to play a part. This can be seen from the following examples:

Further, this type of taxation has divested income tax of its ‘directness’ and the burden can usually be shifted, as indirect taxes, causing inflation in the economic system. Apart from other withholding tax provisions, Chapter XII, in original form, contained 3 types of advance tax. The aim was to do away with these taxes in first few years of the Ordinance.

However, the department has managed to enhance the scope of these provisions from 3 items to 8 items. Further in many cases, tax deducted/collected has been converted from advance tax to final tax. Nothing can be more unfair than to deem tax collected on electricity bills as final tax where electricity bill is upto Rs 20,000 per month.

Similarly, tax is collected from each mobile phone card even if it is used by a college student having no source of income is liable to tax. Such categories of taxpayers are loved by the FBR because tax is collected from them even when they do not have any taxable income and they do not dare to apply for refund, thanks to the fear the FBR has in the general public.

Is it not moral duty of the department to pay a refund in all such cases suo moto? At present, it is wishful thinking, as tax refund is not paid in the majority of the cases, even on application for refund. You dare to apply and they come equipped with all possible provisions of law to deny it and unsettle your settled matters.

It is therefore suggested that even if withholding tax provisions are essential, the concept of treating withheld tax as final tax be changed. Final tax liability of each person should be determined on the basis of income computed in accordance with the generally applicable principles of accounting with certain necessary adjustments as per tax law.

UNDUE EXEMPTIONS IN TAX LAW In economies like ours, there is always a need to promote certain underdeveloped areas and sectors by giving tax incentives. However, tax exemptions and concessions contained in the Second Schedule to the Ordinance at the time are not for this purpose.

They give exemptions to the already privileged classes. Elimination of exemptions contained in clauses (51), (52), (53), (55), (56) of Part I of the Second Schedule applicable to President, Generals, Governors, Ministers, Judges, etc is expected to build up the image of our tax law as a fair law.

SIMPLIFICATION OF TAX LAWS Tax laws are complex and many. You have to consult a number of laws and regulations, etc before you reach a conclusion. These include the Income Tax Ordinance, 2001, Income Tax Rules, 2002, Circulars and SROs issued regularly, Advance Rulings, different treaties with other countries and judicial pronouncements, etc.

The FBR tries to achieve what is not in the law through different SROs. Here is the authority to make or break a taxpayer depending upon how influential or weak a taxpayer is. FBR has made the life of taxpayers miserable by trapping them.

For example, FBR has not come up with comprehensive withholding tax statements. Instead it prefers to send notices to the taxpayers a number of years later to reconcile the figures with those given in the tax return with the final accounts, as well as the withholding tax statements under Rule 44 of the Rules. This delayed approach of the department pays.

It collects tax both from the payee and the payer of amounts liable to withholding tax illegally, when it is authorised to collect only from one such person under section 161 or 162. Unscrupulous elements in the department make use of this discretion to their own advantage also.

Similarly, income tax return formats are not prepared with dexterity which makes their filling difficult for ordinary taxpayer increasing his cost of tax compliance. Tax Returns should be prepared comprehensively and once prepared should not be changed each year. If any change is necessary, it may be incorporated in a manner the previous return retains its format except this change, instead of changing the entire format.

The returns for the tax year 2008 have been found so difficult to understand that the department itself has to suggest a provision authorising it to ask the taxpayers to provide a reconciliation statement showing how taxable income was arrived at from the accounting income.

The department should be competent enough to extract all such reconciliations from the tax return. Lack of capability to design such a return, should not result in punishment of the taxpayers in the form of increased burden on compliance in such cases.

Change management in the department is almost non-existent which has already caused loss of billions of rupees (from such acts like the destruction and misplacement of record during the process of structural transformation from the circle based system to the function-based system).

Besides what is discussed above, the following few acts can be helpful in improving the performance of the department and better tax administration on the income tax side in FBR.

i. There is need to seriously deliberate how tax cases can be disposed of within a reasonable period, otherwise our system would never acquire credibility. The ordinance has a number of provisions where no time frame is given. The departmental officers make use of this lacuna and issue notices at their pleasure and to their advantage. For example, they can issue notice of audit at any time in respect of a tax year.

Notices of tax year 2006 are being served now in 2009. In the repealed Ordinance the limit was one year. There is no time limit to complete audit under section 177. The limit to issue order after completion of audit is not provided in the law. No time frame has been given to pass orders in respect of withholding tax default under section 161.

ii. The tax authorities must announce a well considered long term tax policy for the next 5-10 years so that people can properly plan their businesses and FDI is also attracted.

iii. Tax laws need to be rationalised and the provisions of the act be made simple and concise. There is need to revisit deeming provisions which are used to tax otherwise untaxable amounts of income.

iv. Tax evaders should be punished strictly. That does not mean to cause undue inconvenience and harassment to honest taxpayers. Rather strictness should be focused on people who, despite having taxable income, are not taxpayers.

v. Bona fide and genuine mistakes or lapses should not lead to penalties and prosecutions in case of existing taxpayers.

vi. The tax authorities should not resort to court litigation indiscriminately.

Restoring confidence of the tax machinery itself Tax machinery should have faith in the fact that it can deliver. It will deliver when there is cohesion in the work force and the work force is satisfied. Improvement in remuneration package was a step in the right direction.

However, salary package alone is not enough. The FBR needs transparency in its internal management especially human resource management. At present, the situation is not enviable. Many lobbies and groups are working in the department. Creation of Inland Revenue Service without an Act of the Parliament has disturbed the people of the Customs, Sales Tax and Excise Group.

On petition of the aggrieved parties, the Hon’ble Islamabad Hight Court was pleased to cancel the formation of this new service and issue status quo orders till finalisation of the case. At a critical juncture when the country demands concerted efforts to collect every single penny due from all tax payers, tax managers are fighting for their own perceived rights.

The division does not stop there. There are groups in the income tax department itself. The perception that a particular group is being given important posts and promotions is wide spread in the department. There are rumours that a few officers were promoted even without meeting mandatory training requirements at NIPA/Staff College.

While normally there are no transfers in the last quarter of the fiscal year, this year the circus is on without realising its adverse impact on revenue collection. The government had to accept an IMF loan with harsh conditionalities due to insufficient revenue generated by the tax and non-tax avenues, the target is not being focused on by the FBR. There is need to implement the policy of rewarding honest, capable and competent officers of the tax department.

At present, it is exactly the opposite. Sycophancy is being treated as a virtue for posting and transfer. Those who caused the loss of millions of rupees by letting hundreds of cases going time barred in MTU Lahore are treated as heroes.

FBR is still far from presenting a holistic picture of a taxpayer regarding his income, sales etc which could have been achieved by integrating the computer systems of all four taxes and duties. However, after spending millions of rupees on the project, it is still not ready to start.

Now Mahasil is being tested at LTU, Lahore and the unofficial feedback of the users is discouraging due to defects in the system. It means that the taxpayers will have to suffer for internal intrigues and inefficiencies of the department.

Those who failed complete such an important task in time need to be replaced with competent and focused persons. In the presence of a reputable company PRAL, the department should not have been struggling with Mahasil at this belated stage.

The FBR needs to attend these matters, or clarify whether it is just grapevine propaganda so that tax officials work in tandem to perform their national duty of implementing the tax laws judiciously.

With the recession and surging unemployment swelling the ranks of people reinventing themselves, millions of taxpayers are setting up home-based businesses and providing their services as self-employed independent contractors. Whether your new self-employed independent contractor status is a temporary measure or part of your long-planned road map to fortune and glory, there are tax dangers (plus surprisingly lucrative income tax relief) that should grab the attention of every self-employed independent contractor.

We know the IRS is targeting self-employed independent contractors. The government estimates that 85% of the 5 billion tax gap is due to self-employed individuals – freelance professionals and independent contractors who don’t get a 1099 the way large business employees do. Being a self-employed independent contractor means you’re the boss, unfortunately it also means you’re the one on the hook for any problems with back taxes. How you handle your back tax problems will not only determine whether your business will succeed, but it also carries the real threat of jail time if you get it wrong.

To learn more ways to legitimately maximize deductions while avoiding IRS problems, check out Part 2 of this series on Tax Help Tips for Saving Money on Taxes for Freelance Professionals and Self-Employed Individuals.

Read on for my best year-end tax help tips to show self-employed independent contractors how to get the biggest income tax relief possible.

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #1: Did you owe back taxes because you made a mistake in your quarterly estimated taxes? If you’ve spent your life working as an employee, you may be delighted that the first money you receive as a self-employed independent contractor is a flat fee without any taxes taken out. But your joy should be short-lived, this is a case of the taxman being delayed but not denied. To get a preliminary idea about self-employment taxes check out http://www.irs.gov/businesses/small/article/0,,id=98846,00.html. Before you start, you should contact a tax attorney to make sure you have structured your business correctly. If you haven’t gotten tax help from a tax attorney yet, there is still time to structure your business to get the maximum income tax relief before the year end. (After that you’re stuck with your mistakes. Well, mostly. A good tax attorney or tax resolution specialist can still get you out of back tax trouble, but the best approach is to avoid owing back taxes in the first place.)

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #2:  Are YOU really a self-employed independent contractor? Many businesses (large and small) mislabel their employees as “self-employed independent contractors” to get income tax relief and sidestep a host of state and federal laws. The IRS has a comprehensive page to help determine whether you’re an employee or a true self-employed independent contractor: http://www.irs.gov/businesses/small/. If your boss has you misclassified as a self-employed independent contractor and you file as one, you could be in a heap of trouble when the IRS comes knocking on either your door or your boss’s door to collect back taxes. Suddenly, all those lovely deductions go out the window and your tax bill explodes. If you feel your boss has misclassified you as a self-employed independent contractor, contact a tax attorney or tax resolution specialist immediately for some self-employed independent contractor back tax help before the year ends.

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #3: Are your subcontractors really self-employed independent contractors or are THEY employees? While you may be a true self-employed independent contractor, you need to establish whether your subcontractors are self-employed independent contractors or employees. According to IRS Summertime Tax Tip 2009-20, “the cost of misclassification to employers in additional taxes, as well as administrative time, or the loss of tax-favored status for employee benefit plans, can be steep.” If you’re not sure, contact a tax attorney or tax resolution specialist to get tax help immediately.

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #4: Want to get income tax relief on your 2009 self-employed independent contractor work by delaying paying taxes until 2011? For a host of income tax relief reasons, a self-employed independent contractor might want to defer getting paid until next year. If you did work in 2009 but don’t want to pay 2009 taxes on it, simply wait to invoice your clients until January 1, 2010. This 2009 income tax relief technique is perfectly legal for self-employed independent contractors as long as you pay taxes on that income in your 2010 tax return.

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #5: Get that root canal before New Year’s. The secret to income tax relief is just like the secret to great comedy…timing. A self-employed independent contractor’s medical expense deduction is limited to 7.5% of the self-employed independent contractor’s adjusted gross income. If you haven’t reached that cap yet, go have those dental procedures or that bit of elective surgery (we’re not just talking about that nose, the swimsuit season will be here again before you know it). As long as you’re under that 7.5% limit, you can get income tax relief from your standard variety medical expense deductions. A little known year-end income tax relief tip – you don’t even have to pay for the medical procedures before January 1, 2010. Just put the medical charges on plastic and pay the minimum balance. As long as you had the procedures in 2009, the deduction is good. If your medical expenses are already over the 7.5% level of your self-employed independent contractor’s adjusted gross income, you should delay breaking your leg until January 1st, 2010.

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #6: Pay your state taxes before the ball drops. As a self-employed independent contractor, one of the best income tax relief strategies is to pay your state estimated tax before December 31st. If you pay by December 31, 2009 you get the deduction (on your federal return) in 2009. You can also charge these expenses on your credit card(s) in 2009 and receive the deduction in 2009, even though you won’t be paying for them until 2010. If you are having issues paying your estimated state taxes, a tax attorney can give you tax help to get the maximum income tax relief possible.

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #7: Make your stock market losses work to your advantage. If your personal portfolio has taken a nose dive, realize your tax losses before New Year’s Eve. Long term capital losses can be used to offset long term capital gains, and up to ,000 of ordinary income, with any remainder carried forward for use in future years. This is about getting income tax relief not whether you made the right investment choices. If you still believe those stocks will go up again, buy them back on January 1st. Keep in mind that some mutual funds can have high capital gains distributions even as they lose money. The best income tax relief advice is to ditch these first because they are hitting you with a double whammy. As a self-employed independent contractor you have access to some of the best retirement accounts out there like a SEP-IRA. To understand which investing should be done as part of a retirement account, and which should be in your personal portfolio and when to take losses for maximum income tax relief, get tax help from an experience CPA or tax attorney.

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #8: Give your personal gifts before Rudolph goes flying. As a self-employed independent contractor, you can give a friend or family member up to K annually before the year end without having to pay gift taxes. (Your spouse can give that same amount to the same individual.) You can also give that same amount to your child’s or grandchild’s tax-free 529 education plan. If you haven’t funded such a plan yet, you can make a single contribution covering five years of gifting. That’s ,000 you can give per donor per recipient tax-free. (Your spouse can match that contribution as well.)

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #9: Give gifts to clients: Gifts to clients are limited to per recipient per year, BUT if the gift has your embossed logo on it and tells about your services, it isn’t a gift, it is an advertising or promotional expense. There is a fine line here, a quick call to a CPA or tax attorney for year-end tax help will help you stay on the right side of the law.

Self-Employed Independent Contractor Year-End Income Tax Relief Tip #10: Take your retirement contribution to the max. Self-employed independent contractors have the best income tax relief vehicle the federal government has ever offered. While individual worker contributions to a simple IRA max out at ,500, if you’re under 50 in 2010 (,000 if you’re over 50), how is this for serious income tax relief, as a self-employed independent contractor you can use SEP-IRAs to contribute 25% of your wages (or up to 20% of your Schedule C income) up to a maximum of ,000. The income tax relief to a self-employed independent contractor are massive. A tax lawyer or CPA an give you the tax help to set up the right retirement vehicle for you.

I know that this is a long list but the income tax relief you can get from just paying attention to the calendar is huge. These 20 self-employed independent contractor tax help tips can make the difference between being a Grinch and having a Happy New Year. Your call.

For more information on achieving a tax resolution for your back taxes or IRS debt, visit www.taxresolution.com for a free tax relief consultation or call 866-IRS-PROBLEMS.

I worked over the summer and my salary was 2500. However, they already took taxes out and I only got 2100. I already filled out a W4 form before I started work. Would I still have to file an income tax form with a salary like this? Also, will I be getting some of that 400 dollars back during tax return time?
I’m 22 yrs old.
So would I be given my full 400 back?

I have a plan to pay 90.00 a month for 36 months. Which I will end up paying back 3240.00. And that is probably the amount that I will get back from my income tax refund since I am single with a daughter and make less than 20,000.00 a year. Does the trustee keep my refund and if so how will that effect my payment plan.
Also just to mention I have 34 months left of the plan so I just started making payments. SO will they take all my refund and if that is so does that mean that I would be through with my payment plan

I made close to $4,000 last year and I have two dependents and I was wondering is it enough to file income tax and if so, what is the estimated amount I may get back? Thanks.