Month: May 2010

Paying Taxes when Forex Trading

Paying Taxes when Forex Trading

It might have taken you months or years to make your first profits trading the foreign exchange markets or FOREX. Hopefully you have records of all your loses as you will need them to now offset the profits you have made trading. That is it, Uncle Sam and the IRS will tax your FOREX winnings as soon as you begin to profit. FOREX traders in the United States have two options to claim their profits from foreign exchange trading, either using IRC Section 1256 dealing with contracts or IRC Section 988 for foreign currency transactions.

With the first IRC section code, 1256, you can file your profits on form 6781 and split them 60/40. 60% of the profits will be taxed as capital gains which is a nice 15% at this time and the other 40% are taxed as ordinary income. The ordinary income tax rate depends on your income level and tax situation. With code section 988 your earnings are taxed as interest income which is the same as ordinary income for the most part. Keep a record that you want to opt-out of section 988 before you start trading to avoid this difficult tax classification.

At the end of the tax year you should receive a 1099 from your FOREX broker. This form is also filed with the IRS which makes it impossible to avoid paying tax on the profits from your trading account. So keep track of all your loses and all your expenses and look into the rules for running a home-based business if you do all your trading from home. There are many deductions you can take as a home-based business that will help cushion the tax bill. Also try to pay estimated taxes throughout the year if you know you will owe when you file your return next April. You can avoid penalties this way and not have to scramble to find the funds to pay the IRS when it is time to report.

Ten Tax Tips for Year End

Ten Tax Tips for Year End

Trimming your tax expenses is very important today as many are struggling in this economy to pay their bills and afford some luxuries. That is why doing these 10 things before the end of the tax year is very important. Don’t wait until it is time to prepare your taxes to start thinking about reducing your tax liability, start planning and preparing well in advance.

New Tax Breaks: Make sure to check the tax code when it becomes available in fall for new tax changes that may affect you and follow any new federal tax laws that are passed this year that provide new ways to save on your taxes.

Accelerate Deductions: If you pay estimated tax payments during the year, pay your first payment for next year this year. This will give you the tax advantage in the current year. You can even pay the estimated taxes with credit and quickly pay it off after you receive your refund.

Delay Income: If you are self-employed or run a small business on the side, wait until January to bill your clients. That way the income becomes taxable next year instead of being taxable in the current tax year.

File your Taxes on Time: Avoid penalties and interest by filing your return on time. An extension only delays the filing of the return, the taxes due are due on April 15th regardless of filing a tax extension. You will need to estimate the taxes you owe when you file the extension and send the IRS a check.

Pay Medical Expenses This Year: By grouping your medical expenses into the same you may qualify for the medical expense deduction. This has a 7.5% floor that you must get over to qualify. So if you have one procedure early in the tax year, try to have another needed procedure during the same tax year to get the deduction.

Make an Extra Mortgage Payment: Pay January’s mortgage payment in December to get the interest deduction this year. Of course you will be light when it comes to interest paid next year, but getting the deduction a year early is worth it.

Offset Investment gains with Losses: If you cashed out investment gains in a taxable account this year, make sure to cash out some losing investments before the year ends so your net income on the sales is close to zero.

Property Taxes: Like your mortgage payments, you can pay your property taxes early and get the deduction in this tax year. These two early payments can make a big difference in your tax return when you file next year.

Gift Giving: You can make charitable gifts to organizations and churches before the end of the year and get a nice deduction. Also consider giving gifts within the gifting limits prior to the end of the year to children and grandchild.

Retirement Contributions: This tip can be completed after the end of the year as long as all contributions are made by April 13th. Plan ahead into what kinds of retirement accounts you will make contributions to get the maximum tax benefit this year and when you withdrawal the money in retirement.

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