Monthly Archives: August 2010

Sales Tax vs. VAT

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People with opposing political beliefs and philosophies support different taxation systems. Two tax concepts that are opposing are the sales tax and the value-added tax or the VAT. These two systems directly compete with each other since they both concern the taxation of consumer goods rather than other areas like income or property.

Sales Tax

What is a sales tax? A sales tax is the one that consumers pay when purchasing an item. When the customers take the items to be purchases to the cashier, he/she adds up the prices of all items and adds a percentage of the total. Most stores include the sales tax to the price stated. Meaning, the real price of the item itself is lower.

VAT

Value-added tax is also a tax on consumer items, but instead of charging it to the consumers, it is charged to the producers. This is why it is sometimes called a goods and services tax. For each step in the production process, producers have to pay tax. Based on a VAT policy, consumers are not taxed directly on sales. However, they still shoulder the costs due to higher production costs.

Difference Between Sales Tax and VAT

The main difference between the two types of taxes is that sales tax is a direct tax, while VAT is indirect. When purchasing something, the consumer easily detects the sales tax. When the receipt is examined, there is a line separating the cost of the item and the sales tax on it. On the other hand, VAT is less transparent when buying products since the effects are wrapped up in the product’s purchase price.

Politics in Taxes

As of the year 2010, over 130 countries had been applying VAT policies. During the same year, President Barack Obama proposed a national VAT in the US. This was welcomed with a lot of opposition, who said that it was a way to channel money to the federal government. They believed that tax is unnecessary. Most of the liberals questioned the policy as well since it would affect the poor more than the rich.

Ways of Filing your Taxes

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Even if the Federal Income Tax laws plague individuals and businesses, these are only allotted to the federal government and not the state in which you reside. This is why you still have to pay state taxes. The tax rate you pay is based on your gross income. However, state taxes are not uniform for all states. For example, the states of Washington, Nevada, Alaska, Florida, Texas, South Dakota and Wyoming don’t have state taxes at all.

Other states base their tax rates on different kinds of income. The state tax system is generally progressive in the majority of states. This means that the higher your gross income, the higher your tax is.  Here’s a comparative example: the highest tax rate is in Vermont with 9.5%, while the lowest state income tax is Illinois flat tax at 3%. You don’t have to worry if it seems complicated for you. You only need to learn a few simple steps to be able to file your state taxes.

With the advent of technology and the Internet, it has become so much easier to pay your taxes. The IRS and and state tax administration agencies have collaborated to make life easier for tax payers by making it possible to file taxes online from the comforts of your home (as long as you have a computer with Internet connection).

Through the Federal/State e-file, you can file both your Federal and State income taxes at the same time. A software program classifies the data for Federal and State returns into two different packages and then sends them to the IRS, making it more convenient and time-efficient.

Filing your state taxes online is more beneficial than doing it manually. You’ll be immediately given a receipt of refund, and the filing process is more accurate, therefore eliminating most errors and glitches in the system. Most importantly, you’ll have proof of filing so you won’t be tricked into paying your taxes twice.

You can also choose to file state taxes directly. You can opt for getting a tax professional to handle your taxes or you can do it yourself through computer software or the tedious task of manually filling out your task forms.

 

Avoiding Capital Gains Tax On Real Estate

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Real estate investments have been rising over the last five years, with investors becoming attracted to their value but also preferring to avoid the increasing problems that come with real estate specific taxes. Capital gains tax is among them. With corporate stocks, it is possible to sell the shares over a period to spread out the tax on the gains, but this is not applicable to real estate properties – the entire amount must be claimed on the taxes in the year the property was sold. One of the most prominent ways to avoid capital gains tax on the sale of real estate is the Internal Revenue Code Section 1031 exchange.

One of the main downsides of a real estate investment is that they are not liquid assets. It can take a year or more to settle a deal and selling it while the value is high can result in a significantly larger tax value than the potential profit. The easiest way to mitigate this problem is to control the year in which the title and formal possession of the property. This allows people to set the year of the transfer of ownership to one which is more likely to have a lower tax burden. This does not completely mitigate the capital gains tax, but the right timing can significantly reduce the amount that needs to be paid. However, if paying a large tax on the gains seems inevitable, a 1031 exchange is still a valid option.

The 1031 exchange allows investors to trade real estate held for the purpose of investment for other investment real estate and incur no immediate tax liabilities. Under Section 2031, those who exchange property used for investment or business purposes solely for business or investment property of a similar kind will not be subjected to capital gains tax, as there is no legally recognized gain or loss until the new property is sold. Note, however, that Section 1031 is limited and does not apply to the exchange of inventories, stocks, bonds, notes, evidence of indebtedness and other types of assets.

There are certain conditions that must be met to achieve a full tax-free exchange under the rules of Section 1031. The properties must first be of “like kind” – this means that they must be of the same nature or purpose, even if there is a difference in grade or quality. The properties must also be related to business or investment, and must be held or used for the production or purpose of such. The properties must also be traded for the same use.
The time interval for the transfers is also limited. The property that is to be received must be identified within 45 days of the first transfer. This must be identified in writing during the given 45-day window. The transfer itself must be received within the 180-day period following the property transfer or by the tax return due date for the year in which it was to be transferred, depending on which comes sooner.

Note that there are certain restrictions on the applications of a Section 1031 exchange. It does not cover exchanges between property in the US with one from another country. Property involving personal purposes, such as rental property or a personal residence, will not be included under the limitations of a 1031 exchange.