Please feel free to read our client newsletter. It is provided to keep you up to date on the latest tax and accounting news.
What's the 'Use'?
Understanding the "Use Tax" Push
Over the past four or five years a new tax item has popped up in most state income tax forms and instructions.This item is the "use tax". Defining Use Tax. A use tax is a tax imposed by your state of residence on taxable purchases you make in other states.For example, say you live in Michigan and purchase a computer from an internet site that has its business in Texas.The Texas company does not charge you sales tax since you live in Michigan, but Michigan wants their sales tax revenue. The use tax is meant to ensure that your state collects taxes on all purchases, whether made locally or outside of your state of residence. It's Complicated. Using the example above, what do you do if Texas DID charge you sales tax on your computer?Most states give you credit for this sales tax payment, but you could still owe money if the tax rates are different.But that's not the only complication: |  |
 | Shipping and Handling: Some states tax it, some don't. |  | County, city and school district sales tax: Some states charge it, while others do not.If you pay it will your home state give you credit? |  | Is the item taxable? Each state is different; some tax food and clothing - others do not.Some states tax haircuts while others don't. You'll need to keep track of these differences. |  | What if you reside in more than one state? In theory, use tax is only owed if you intend on using the purchased item in your home state.But it gets complicated if you live in Michigan in the summer and Florida in the winter. |  | Is there a cushion? Some states give you a credit for use taxes. In this case you do not have to pay use tax until your external purchases exceed a certain dollar amount. |
|
Here's what you need to know  | Most states are adding sales and use tax audit staff.Why?Because tax collections from these auditors far exceed their added cost. |  | Much of this added staff is currently focusing on business sales and use tax audits.Why?Because it pays, and most businesses are required to keep the necessary records to make an audit practical. |  | It's probably only a matter of time before individuals are targeted for use tax audits.This is because many states' "pre-programmed" spending is causing significant budget deficits. |  |
Higher income taxpayers first?It only makes sense that higher income taxpayers will be audited first because they tend to spend more. |  | Besides being politically unpopular, effectively auditing your purchases to see if you owe use tax is very difficult unless states target credit card transactions. |
In the meantime, individual states are also going after large internet companies to get them to pay sales and use taxes to their state.But that is another story... |
Tax-Free Income
| Yes, that's correct, some income you receive may be tax-free.Here is a list of 10 common sources of tax-free income: |  |
| Gifts. Gifts you receive are not taxable income to you.In fact, they are not taxable to the person giving the gift as long as the gifts received in one year from one person do not exceed $13,000. |
| Rental Income. If you rent your home or vacation cottage for up to 14 days, that rental income does not need to be reported.Homeowners often can earn some tax-free income by renting out a home while a large sporting event (Superbowl, Golf tournaments, etc.) is in town. |
| Child's Income. Up to the standard deduction amount ($5,800 - 2011) in earned income (wages) and $950 in unearned income (interest) for children is not taxed.Excess earnings above these amounts could be taxed at the parent's tax rate. |
| Inheritance. Beneficiaries typically do not pay tax on the value of what they inherit.When inherited property is sold by the beneficiary, however, there may be a capital gains tax obligation. |
| Roth IRA earnings. As long as you meet this retirement account type's rules, earnings in a Roth IRA are not taxed. |
| Life Insurance Received. The full value of life insurance received is not taxable income.However, the proceeds may be taxable within the estate of the deceased policy holder. |
| Child Support Revenue. Income you receive as child support is not deemed to be taxable income. On the other hand alimony received IS taxable income. |
| Home Sales Gains. Up to $250,000 ($500,000 for married filing jointly) in gains on the sale of a qualified principal residence is not taxable. |
| Scholarships/Fellowships. Money received to cover tuition, fees, and books for degree candidates is not generally taxable. |
| Refunds. Federal refunds (technically you've already accounted for this income) and most State refunds for non-itemizers are also tax-free. |
This is by no means a complete list of tax-free income, but it's nice to know that some areas of tax law still benefit taxpayers.