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Tax shelter is one of the returns associated with real estate investment that benefits income property ownership. Thanks to the tax shelter benefits provided by the tax code, a real estate investment can shelter some of its own income from taxation and occasionally shelter income received from other investment sources as well.

In this article, I want to introduce you to two allowable deductions for real estate investment properties that provide tax shelter.

The first of these deductions is for mortgage interest. The IRS allows you to deduct the interest you pay on the mortgage you obtained to acquire the income property. The benefit to real estate investors is that interest is really a cost associated with acquisition of property rather than operating it, and the argument can be made that tenants really pay the mortgage interest for the real estate investor.

The second source of tax shelter is through depreciation deduction, which the tax code now calls cost recovery, but we’ll continue to call depreciation for our purposes. In this case, the IRS allows you to assume that the buildings (not the land) are wearing out over time and becoming less valuable, and as such permit you to take a deduction for that presumed decline in the value of your asset.

Okay, now here’s what’s great about real estate depreciation.

Depreciation is a non-cash tax shelter deduction. In full compliance with the tax code, you get a deduction that is not an operating expense and therefore does not affect your cash flow. Moreover, depreciation can shield some or all of your property’s year-to-year income from taxation and in some cases when the depreciation deduction is large enough, it can even exceed the amount needed to shelter the property’s own income and provide tax shelter for other investment income as well.

Though you won’t find a simple formula for the tax shelter component of a real estate investment, here’s the idea.

Income less Operating Expenses = Net Operating Income

Then,

Net Operating Income less Mortgage Interest less Depreciation (Cost Recovery) = Taxable Income

Example: Let’s say you own an income-producing property that generates rental income of $48,000 and operating expenses of $19,200, leaving a net operating income of $28,800.

To calculate your taxable income, you would then deduct your mortgage interest and allowable depreciation from the net operating income.

Unless you have an interest-only loan, your mortgage payments are made up of both interest and principal. Only the interest portion is deductible, which we will say is $17,559.

The amount of depreciation depends on several factors: The useful life of the buildings as specified in the tax code, which is currently 27.5 years for residential property and 39 years for nonresidential property, and the percent of the investment real estate allocated to buildings and land. Only buildings can be depreciated, and for our purposes, we’ll say that the deductible amount for depreciation is $10,037.

Here’s the calculation: $28,800 – 17,559 – 10,037 = $1,204

In other words, you must pay Federal income tax on a taxable income of $1,204.

There are other components to tax shelter. For instance, you can typically depreciate capital additions over the same useful life, starting when they are placed in service. You are allowed to amortize closing costs associated with the acquisition of an investment property over the same useful life. And you can amortize loan points over the number of months of the loan term and write them off.

I kept it simple just to give you the idea of how tax shelter is associated with real estate investment and how it can benefit income property ownership. Hopefully, it helps. Here’s to your real estate investing success.

By: James Kobzeff

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Tax relief can also be beneficial through checks mailed to taxpayers by the federal or state tax authorities to reduce the burden on taxes. These checks can also be in the form of refund checks received from tax authorities for taxes paid beforehand when there are found to be excess taxes paid by the taxpayer after calculating the tax assessment for the current or previous assessment year.

Recently it was noticed that tax relief checks assumed prominence because of a major tax relief program in the nation. The legislation aims to lighten the burden shouldered by taxpayers by distributing the relief checks in advance. These checks have signaled the replacement of the old 15% tax rate to the 10% tax bracket. The primary purpose of the timely distribution of the checks based on the families’ income tax burden is to engage the highest priority to low- and moderate-income families.

The legislation for tax relief has also offered provisions to lessen the burden by permitting deductions for student loan interest, college tuition, and tax benefits from government bonds that are exclusively issued for the construction of public school buildings. While the disbursal of the checks has garnered acceptance and approval from the taxpayers, various segments of the population criticized this action as they believe that the money should have been utilized directly for education. Moreover, what people should understand about these tax relief checks is that they are not rebates or refunds from overpaid taxes in the past, but a refund in advance for the future taxes that are yet to be filed.

By: Rob L Daniel

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Do you need more time to prepare your personal tax return? Look no further than Form 4868. And if you need help completing Form 4868, look no further than this article. Here are five tips for completing the extension form without a glitch.

Tip 1: Relax. This form is one of the easiest tax forms on the planet.

Tip 2: Go to the IRS website to print out a copy of Form 4868. Or you can use your tax preparation software program to fill it out. Either way, have a copy of the form in front of you as you read the rest of this article.

Tip 3: Do you know your full name, address and social security number? That’s all there is to Part I. Put your name and address on Line 1, your social security number on Line 2, and your spouse’s social security number on Line 3 (if you are married and are filing jointly). On to Part II. (There are only two parts to this form. I told you this would be easy.)

Tip 4: For Part II, you must provide the following four numbers:

Line 4 – An estimate of your 2008 tax liability. For some folks, this is the only challenging part of the form. You may have to do some number crunching here to come up with a reasonably accurate amount. But remember this is only an estimate, and by definition an estimate need not be exact. If you are pressed for time, do the best you can and keep moving.

Line 5 – Total tax payments you made for 2008. The three most common sources of federal tax payments include: Form W-2 withholdings (go to your W-2 Box 2 to find that); Form 1099-R withholdings (if you received any retirement plan, pension plan or IRA distributions, you should have been sent a 1099-R by now. Check in Box 4 to see if any federal income tax was withheld); quarterly estimated tax payments made via Form 1040-ES (self-employed folks often make these payments, so look in your checkbook register to see if you made these payments; they were due on April 15, June 15, September 15 and January 15).

Line 6 – Balance due. Calculate this by subtracting Line 5 from Line 4. If Line 5 (your payments) is greater than Line 4 (your tax liability), you don’t have a balance due. Yeah! But if Line 5 is less than Line 4, you have a balance due and if at all possible, you should send a payment for that amount to the IRS with Form 4868.

Line 7 – Amount you are paying. If you have a balance due, pay as much of it as possible now. Ideally, you want to make the entire payment. Otherwise, you’ll eventually receive a bill from the IRS for late payment penalties and interest (assuming your tax return reports a similar tax liability to the Line 4 amount).

Tip 5: Be sure to send the form and, if applicable, the accompanying payment, to the IRS on or before April 15. Make your check payable to the U.S. Treasury and check the form instructions for the correct IRS mailing address. You can also pay by credit card or electronic funds withdrawal; check the form instructions for guidance on that. If you are using a tax preparation software program, you may be able to e-file the form.

By: Wayne Davies

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Even if you are still a student you may have to file a tax return in 2008. For example, if you were self-employed for some portion of the tax year and earned more than $400.00 during that self-employment, you will have to file a federal tax return and pay the necessary self-employment tax (Social Security/Medicare). You may be required to pay Medicare and Social Security tax on tips that you did not report to your employer or if you worked for a church or church-controlled organization that was exempt from those taxes.There are many forms of income that students sometimes receive that qualify as taxable income.

Some of this income may include:

Payment for services performed,
Money received through self-employment,
Money received through investments, and
Some scholarships and fellowships.

Allowances received through the Reserve Officers’ Training Corps are tax-exempt, but payments made over the summers qualify as taxable income.Foreign students who are resident aliens may be subject to some of the same tax laws as U.S. citizens.There are many credits available for students to offset the cost of education. The Hope Credit: This credit applies for the first two years of post-high school education, such as college or vocational school. You cannot take this credit for any years after the inital two.

You can claim up to $1,650 per eligible student, per year. The credit covers 100% of the first $1,100 of qualified tuition and related fees paid during the tax year, plus 50% of the next $1,100. Each student applying for the credit must have been enrolled in the education program at least half time during an academic period during the tax year.

The Lifetime Learning Credit – This credit applies to undergraduate, graduate, and professional degree courses, even courses that help improve your job skills. This credit equals 20% of the first $10,000 of post-high school tuition and fees you pay during the year, not to exceed $2,000. You may not apply for both credits for the same student in the same year. If you have graduated and started to pay back your student loan, you may be able to deduct some of the interest paid on your student loans (including the one time loan origination fee charged by your lender). Also, you may be able to claim a deduction for qualifying tuition and fees paid during the tax year for you, yourself, or a dependent.There are certain scholarships and grants that fall under the category of taxable income. The IRS warns that generally there is a 14%-30% withholding on taxable grants, fellowships, and scholarships.

By: Angela Stringfellow

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A tax-deferred annuity allows individuals to save for their retirement with pre-tax contributions. The contributions to a tax-deferred annuity are usually taken directly from employees’ salaries, thereby reducing current taxable income. Investors do not pay taxes on their contributions or their earnings until they funds are withdrawn at retirement.

A tax-deferred annuity is a long-term investment plan in which assets increase over time, and a steady income is ultimately provided. Taxes are imposed on funds only when they are withdrawn, usually upon retirement. Monies taken out of the plans before age 59.5 years are subject to federal income tax penalties and ordinary income taxes.

Tax deferred annuities guarantee the principal and interest rate for a set period of time that is established by an insurance company. There are two main types of tax-deferred annuities: fixed and variable.

Fixed Tax Deferred Annuities

These products provide a guaranteed rate of interest over a specific time period. Earnings increase without being taxed until the income is withdrawn by the annuity’s owner, also known as the annuitant. It is important to purchase fixed tax deferred annuities from a stable company that expects to stay in the market for a long time.

Variable Tax Deferred Annuities

This type of tax-deferred annuity offers both choice and flexibility. Monies allocated for variable funding options are subject to the ups and downs of the marketplace, which means that their account balances could be higher or lower than the original value at the time money is actually withdrawn or surrendered.

Variable tax deferred annuities are popular with individuals who want high interest and tax relief on their savings. These products are issued by life insurance companies and represent a good option for those who want safe, predictable investments coupled with a high interest rate and favorable tax treatment.

Features of a Tax Deferred Annuity

One of the major features of tax-deferred annuities is that when yearly interest compounds, it remains tax-free. Other benefits of tax deferred annuities include control over tax payments via the timing of distributions, the option to have a guaranteed income for life, and the provision of a death benefit that can be handed down to beneficiaries, potentially avoiding probate.

While tax deferred annuities are considered to be long-term investments, it is still possible to access the funds in the accounts if necessary. Distributions from the accounts can be made as lump sums or as monthly payments over a lifetime. Insurance companies may impose surrender charges in such cases, however.

Lump sum payments provide the complete value of the annuity contract, but this may be the least attractive option in terms of taxation. Tax liability is incurred for all earnings received in a single year, so a higher tax bracket may result if lump sums are taken.

With the lifetime annuity option, payments are taxed on the basis of the exclusion ratio, with each payment including a partial interest amount (subject to regular income tax) and a tax-free, partial payment of principal until the entire principal is returned.

By: Steven Hart

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If you have already divorced and are required to pay alimony, it is deductible. You do not have to have other itemized deductions greater than the standard deduction as it is treated as a direct deduction from gross income.

If you are going through a divorce, now is an opportunity for some sound tax planning. While alimony can be deducted from your gross income for tax purposes, child support cannot. Of course, the trade off is that the spouse who receives alimony must recognize it as income – but often it is the case that the parties are better off from a tax stand point if alimony is paid instead of child support because the person paying the alimony is in a higher bracket than the person receiving it.

If you would be ordered to pay $500 per month ($6,000 per year) in child support but no alimony, it may serve everyone well if you agreed to pay even $625 per month ($7,500 per year) in alimony with no child support Then, if your federal and state taxes combine to take 40% of your income, you would end up saving $1,500 per year, and your ex-spouse could net more than the $6,000 that would have been paid otherwise. How?

A $7,500 deduction for alimony would reduce your tax liability by $3,000 ($7,500 * 40%), leaving your net costs at $7,500-$3,000=$4,500. If you had child support instead, it would have cost you $6,000 – with no tax deduction. If your ex-spouse is in a lower tax bracket, she may end up receiving more than the $6,000 she would have received in child support.

There is one important risk in this idea though – alimony is not usually reduced because of a drop in income while child support normally is.

There are many new tax questions a divorce presents.

By: Frank W Ellis

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