Memo The Managing Director Types of Taxation Reduction Vehicles The following is an outline of the various forms of vehiclesthat can be used to minimize income, capital gains and estate taxes. Vehicles to Minimize Income Tax Tax Deductions: this is the amount of money that can be legally deducted from one’s taxable income. Some of these deductions include: donations to recognized organizations, investment losses, interest payments for mortgages and student loans, state income taxes as well as self employment tax (Rosenberg, 2005, p. 46). Tax Credits: there are various expenses which attract tax credit, hence lowering tax liability for the whole income.
These credits are applicable if the taxpayer is supporting children, dependants and disabled persons. There are also some education expenses which attract tax deductions on income (p. 53). Exemptions: tax exemptions exist to lower income tax depending on the number of dependants that one has. The more the dependants, the more the exemptions one is able to get from tax (Stern and Brittain, 2008, p. 42). Vehicles to Minimize Capital Gains Tax Capital Losses: in most instances, capital losses do reduce dollar for dollar gains.
This allows one to use capital losses to reduce other income, which in turn helps reduce tax on capital gins. Loss utilization of this kind is normally up to a maximum of $3,000. However if it is in the excess of this amount, the extra losses can be carried forward to the next financial year (Stern and Brittain, 2008, p. 54). Tax Deferred Investments; these kinds of investments are not taxable on their capital gains. The only taxation occurs when money is withdrawn from the tax deferred accounts opened under the investments’ name.
The invested funds can accumulate under tax-deferred rules (Rosenberg, 2005, p. 55). Capital Gains Tax Reliefs: there are two types of reliefs that can be used to minimize capital gains tax: roll-over and hold-over reliefs. Roll-over reliefs allow tax liability for old assets to be rolled over into the new non-wasting assets. The deferred taxes are retained for as long as the new asset is not sold. Hold over relief on the other hand is applicable for wasting assets and it lasts for ten years (Stern and Brittain, 2008, p. 60).
Long-Term Capital Gains Tax Rates: the tax rates for long term investments are considerably lower as compared to the tax rates for other assets held for short periods of time (p. 61). Vehicles to Minimize Estate Tax Unlimited Marital Deduction: this vehicle allows individuals to distribute their estates to the surviving spouse, so long as the souse is a citizen if the U. S (Rosenberg, 2005, p. 95). Charitable Gratuitous Transfers: in many cases, assets donated to charity are never gift taxed. Charitable gratuitous transfers are also good tools to use to reduce taxation since there is a certain tax reduction that comes with estates which are donated for charitable reasons (Stern and Brittain, 2008, p.
69). Valuation Discounts: when there is a transfer of assets, there is normally a tax that is applied to the asset’s fair market value. However if this value is difficult to determine, there are variation discounts that can reduce the value taxable from the assets being transferred. Valuation discounts normally reduce the estate’s taxable basis, thus ensuring that the total taxes payable are also reduced (Rosenberg, 2005, p. 105).
References Rosenberg, E. (2005). Small Business Taxes Made Easy: How to Increase Your Deductions, Reduce What you Owe and Boost Your Profits. New York: McGraw-Hill. Stern, W.R. and Brittain, C.A. (2008). Tax Planning for your Business. Toronto: Entrepreneur Media, Inc.