Pay Less IRS Taxes Through Optimal Tax Planning
A US government tax is normally imposed on any large gift, which a Registered Tax Return Preparer must advise a taxpayer about owing. The gift is not reported by the recipient as taxable income. Rather, a donor reports the amount on a gift tax return and pays any taxes due. The purpose of the gift tax is to avoid permitting a donor to give away property right before death in order to avoid estate tax. Gift tax is therefore part of the law dealing with estate tax. A RTRP should advise a taxpayer about a reportable gift even if the tax professional only prepares income tax returns. This is one of the ethical standards requiring tax preparers to assist individuals in not underreporting taxable transactions.
The same lifetime exclusion for the estate tax applies to gift tax. That is, estates or gifts below a total lifetime value do not incur the tax. This amount is subject to change by statute. It is $5,000,000 beginning with the 2011 tax year. Therefore, anyone who dies that year may have excluded up to $5,000,000 of combined gifts and estate value from the tax. Educational training for the tax preparer exam includes information about taxable gifts. Gifts are not taxable in many cases. There is a tax-free exclusion representing the amount that one person can give away annually to anyone else. This exclusion is $13,000 for the 2010 tax year but is adjusted each year for the cost-of-living.
When estimating these quarterly payments, the self-employed should keep two important considerations in mind. First, the taxpayer should estimate the tax rate not on the amount of the quarterly earnings, but on the projected annual amount of earnings. For the self-employed taxpayer with a growing business, this may mean using a higher tax rate, even on earlier, smaller earnings. A self-employed taxpayer whose income fluctuates seasonally–for example, a tax preparer whose business peaks between January and April–might use a lower tax rate during the busy season to offset lower earnings later in the year.
When taking a tax class, you will find examples for application of the gift tax. A possible scenario involves a gift of $25,000. The $12,000 amount over the annual exclusion is reportable on a gift tax return. However, it can be excluded from a tax assessment if part of the lifetime exclusion is applied.
Many self-employed persons work from home or use a personal vehicle, which leads to another area of frequent tax problems: home office and personal automobile deductions. A taxpayer may deduct as a business expense the pro-rated portion of their rent or mortgage payment, and utilities payments, which represents the area used for the home office. The home office, however, must be used exclusively for the business.
The gift tax is applicable to almost every type of gift. However, there are some exceptions. These include gifts to spouses, political organizations, amounts paid directly to providers of healthcare or education.
Finally, the self-employed should consult a tax professional familiar with both federal and state requirements in order to deal proactively with any potential tax issues.
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