Let’s face it, no one wants to owe money to the government but it can happen to any one of us at any time. Owing more taxes than you expect can occur in any number of ways such as excessive capital gains through stock sales, not paying enough taxes throughout the year, not filing tax returns at all or simply exaggerating your deductibles. Tax debt problems can happen but there are ways to reduce your tax liability without losing everything you own.

Personally, I innocently double-dipped on some taxes for a relocation payment I received. I thought taxes were already taken out of the check so I included the amount ($5,000) as taxes paid on my tax return. Unfortunately, I was wrong. Not only did I owe the 5k in taxes but also the amount I received as a refund because I added it to my return. Luckily for me, this was not a massive error in judgement but it could have been much worse. The best thing I did was to accept my mistake and take care of the problem.

Don’t ignore the problem - The worst thing you can do is pretend this is not happening to you and hope it all goes away. If you ignore the problem, it will, in fact, get much worse. Even before the IRS contacts you about a problem, they have already added penalties and interest to the amount you own.

For every week and month that goes by without a resolution, the penalties and interest will increase and the IRS may even impose liens on your property. Do the right thing and contact the IRS to understand the situation before it’s too late.

Assess your situation - Once you have spoken with the IRS and confirmed that you do indeed owe back taxes, you’ll have to decide whether you can manage to pay the debt with seeking outside assistance.

In order to reduce or eliminate fees that continue to accrue while the debt is owed, you’ll need to pay the amount in full. If you can only manage a payment plan, interest and penalties will continue to be added to the total, making your debt even larger. Depending on the amount you owe, it may be wise to seek professional assistance and have them work with the IRS for you.

Get professional help - If you are unable to pay your tax debt, professional tax debt experts can help you with your IRS problems. They can negotiate with the IRS on your behalf as well as agree on a settlement with an affordable payment plan. The benefit of this is that no more penalties or interest will be added while you are paying off the debt.

Professional tax debt experts can help you resolve and possibly reduce the amount you owe. You’ll be able to enjoy your life once more, no longer wondering if you’ll be able to pay off your debt or if your property will be seized by the IRS.

A tax franchise is a large company that allows small business entrepreneurs to buy into their system and start up a company with a method already in place. These may also be known as chain stores. This can be a wonderful opportunity for the small businessman to start a business that has a proven history and is a guaranteed money maker. Tax franchises don’t require that the operator have tax experience. When franchise owners start up a store, they are a part of a group that has much experience. Part of the definition of a franchise is that the operators follow a system that has already been set up. That means that they don’t have to have the expertise that would normally come along with opening up a business.

Entrepreneurs know that starting up a business is slow work. It means several years of building up trust in the community and establishing a clientele. With a franchise, this is already in place to a great degree. Small businessmen buy into a brand that is established. It has clients in place, brand recognition, and a history of good business that people trust. It is an ideal situation for an entrepreneur who starts up a tax franchise. All the hard work is done already.

A franchise shares not only a brand, but central management. This management ensures that each franchise operates in the same way. Each has a system set up for the owner of the franchise to follow. It is a method that has been in use for a long while. This is a great opportunity for small businessmen because they don’t have to experiment with the most effective way to run the business; that has already been taken care of. This can be a great teacher to a new business owner. New tax franchise owners are mentored and supported by their fellow franchise owners. They develop good business practice under the direction of the more experienced.

The greatest benefit of opening a tax franchise is that it is guaranteed work and money almost immediately. Small businesses take time to get going, many don’t make money at first. But a franchise is different. It already has set up many of the early parts of opening a business. Franchise owners get to skip a lot of marketing, brand recognition, trust issues, and clientele. Small business owners get to ride on the backs of someone else’s hard work and get a share of the profits.

1. Don’t Forget You Still Have UK Tax To Pay!

Arguably, this is more of a warning than a tip, but it is vital to remember that any UK resident individual buying property abroad is still exposed to UK tax on that property. This may include UK Income Tax on rental income, UK Capital Gains Tax on property sales and UK Inheritance Tax on any foreign properties you leave to your children.

The UK tax burden is often greater than any foreign tax liabilities, so it makes sense to undertake UK tax planning for your foreign property. Many of the same planning techniques that work well on UK property can be used equally on foreign property, although the overseas angle adds an extra dimension and brings both additional opportunities and additional pitfalls to be wary of.

2. Main Residence Relief for Foreign Holiday Homes

There is nothing in the UK tax legislation to say that a foreign holiday home cannot be a UK resident individual’s main residence for Capital Gains Tax purposes.

A holiday home can be treated as your main residence by making an election to that effect, generally within two years of buying the property.

The foreign property must be your own holiday home for at least part of the time but, by making the election, you will be able to exempt some or all of the capital gain on your foreign home from UK Capital Gains Tax.

Beware, however, that you’re only allowed one main residence and, if you’re married or in a civil partnership, you’re only allowed one between you, so electing to treat your holiday home as your main residence could backfire if you sell your main house back in the UK.

You can get the best of both worlds though, if you only elect to treat your foreign property as your main residence for a short period, say a week. How does this help? Well, since every main residence is also exempt for the last three years of ownership, that week buys you three years. In other words, you lose one week’s worth of exemption on your main house but gain three years (and a week) of exemption on your foreign holiday home.

3. Travel at the Treasury’s Expense

If you’re renting out foreign property, you have a foreign rental business. Like any other business, you’re entitled to claim tax relief for your business expenses. That includes any travel costs which you incur for business purposes.

Furthermore, all foreign property rentals are treated as one business. Hence, for example, you could claim the cost of going to Dubai to look for a possible new rental property against the rental income from a villa which you already have in Spain.

4. Understand the Local Taxes

Most countries will tax foreigners on any property they own in the country. Local taxes often apply to property purchases and sales and to rental income. Furthermore, you will often have to pay annual taxes on foreign property, even if you do not rent it out, and many countries also have gift and death taxes.

You will get double tax relief in the UK for any foreign tax on the same income or capital gains when the UK accepts that the foreign tax is broadly equivalent to the UK tax you are paying.

Beware, however, that every country has a different tax regime and not all of them are compatible with the UK tax system. If you suffer a foreign tax which is different in character to any UK tax, or which arises when no UK tax is due, you may not get any relief for it in the UK.

So, a foreign tax at 30% which is deductible from your UK tax liability on the same income may actually cost you less than a foreign tax at 10% for which no double tax relief is available. All these factors need to be considered before you invest in foreign property.

5. Do You Want Double Tax Relief?

As a general rule it is usually worth claiming double tax relief for any foreign taxes whenever you can. By claiming double tax relief, you deduct the amount of foreign tax paid from your UK tax liability.

However, you cannot get any repayment of foreign tax through a double tax relief claim and the best you can ever do is to reduce your UK tax liability to nil.

Sometimes, the foreign tax may actually exceed the amount of the taxable income or capital gain for UK tax purposes. In these situations, it is better to claim the foreign tax as an expense rather than to claim double tax relief.

Where you claim foreign tax as an expense, it reduces the amount of the taxable income or capital gain and can even create a loss. This loss can be carried forward to give you future tax relief and hence, in some situations, can actually give you better value for your foreign tax than a double tax relief claim.

6. Reduce Your Foreign Exchange Tax Risk

All UK tax calculations for individual taxpayers are carried out in pounds sterling. This creates some particular problems when it comes to capital gains on foreign property. You may make very little gain in the local currency, but when you translate your purchase and sale costs back into sterling, you may have a big Capital Gains Tax exposure in the UK.

Let’s say you buy a property in Utopia for 100,000 Utopian Dollars at a time when the exchange rate is two Utopian Dollars to the pound. That means you have a purchase cost of £50,000.

Later, you sell the property for 120,000 Utopian Dollars. In local terms, you have a modest gain of 20,000 Utopian Dollars. However, let us suppose that the exchange rate is now 1.2 Dollars to the pound. This means that your sale proceeds for UK Capital Gains Tax purposes are £100,000 and you have a taxable gain of £50,000.

Maybe that’s fair: after all, if you bring the money back to the UK, you will have made a profit of £50,000 on your investment.

Beware, however, that if you hang on to your Utopian Dollars, they will become a new chargeable asset for UK Capital Gains Tax purposes and may give rise to a capital gain or capital loss when you eventually spend them or exchange them into sterling or any other currency.

The real problem to watch is that if you make a capital loss on your foreign currency in a later UK tax year (year ended 5 th April), you will not be able to set that loss off against the earlier capital gain on your foreign property.

The tax tip here, therefore, is to make sure that you dispose of your foreign currency sale proceeds in the same UK tax year as you dispose of the foreign property itself.

7. Get VAT back with leaseback

In the UK, we are accustomed to the idea that any purchase of residential property is exempt from VAT. This is not the case in every country, however, and many European countries charge VAT, at rates of up to 20%, on new residential property purchases.

One way to recover the VAT on such a purchase is to enter into a ‘leaseback’ scheme. Under these schemes you, the owner, lease the property back to a hotel operator. This means that your property becomes a business property and you are able to recover the VAT. Typically, you are allowed a few weeks of personal use of the property each year and, eventually, after a suitable number of years, it is yours outright again.

The scheme only works for certain types of property, such as hotel rooms and apartments, and may carry disadvantages for other foreign taxes, such as higher Income Tax rates; so it’s one to investigate carefully before you sign up.

8. Borrow to Save

Many countries impose Wealth Tax, Inheritance Tax, or both, on foreigners owning property in their country.

Wealth Tax is usually an annual charge on the property owner’s net wealth in the country.

Foreign Inheritance Tax also usually applies only to a foreigner’s net assets in the country.

In most cases, you can reduce your net wealth in the foreign country for tax purposes by taking out a mortgage on your foreign property. In this way, it will usually be just your net equity in the property which attracts foreign tax.

If you don’t actually need a mortgage, you can invest the borrowed funds somewhere else outside the country where your property is located.

9. Avoid Evasion

When you buy property in a foreign country, you will usually also be acquiring tax obligations in that country. In fact, many countries require prospective foreign property purchasers to register themselves with the local tax authority before they can complete their purchase.

If you want to sleep at night, you need to make sure that you fulfil your local tax obligations in the country where your property is situated. Many foreign tax authorities have the power to seize property where taxes are unpaid.

Naturally enough, the local tax authority will write to you in their own language. Do not ignore this correspondence just because you don’t understand it: this is no defence. You will need local help and advice to make sure that you deal with the local tax authority appropriately and meet all of your obligations as a taxpayer in the country.

10. Expect the Unexpected

If the UK tax system is all Greek to you, or seems like Double Dutch, why should you expect foreign taxes to be any different? Every country has its own tax and legal system and, when you buy property abroad, you must abandon all of your preconceptions.

Assume nothing until you have investigated the local tax system thoroughly. Your destination country will have different taxes, different tax rates, a different tax year and a whole different set of rules, regulations, reliefs and exemptions.

Local property law and succession law is likely to be different too and a UK investor who overlooks this fact may suffer a great deal more than just tax!

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Your tax allowances are added up (in most cases this will just be your personal allowance and any
blind person’s allowance, in some cases it may include certain job expenses).

Step two

Income you’ve not paid tax on (for example untaxed interest or part-time earnings) and any taxable employment benefits are added up.

Step three

The total amount of income you’ve not paid any tax on (called ‘deductions’) is taken away from the total amount of tax allowances (worked out as above). The amount you are left with is the total of taxfree income you are allowed in a year.

Step four

To arrive at your tax code the amount of tax-free income you are left with is divided by 10 and added to the letter which fits your circumstances.

Example: The tax code 117L means that you are entitled to a personal allowance of £1,170 and therefore, any amounts earned above this threshold in the current tax year will be subject to income tax.

How the ‘K code’ works

If your deductions (untaxed income on which tax is still due) are more than your allowances you’ll be given a K code, to ensure you pay tax on the excess.

The excess tax due is divided by 10 and added to the letter K. So, whereas with other tax codes the number indicates the amount of income you can have tax-free, the number in a K code indicates how much must be added to your taxable income.

K code example

K497 means:

your untaxed income was £4,970 greater than your tax-free allowances as a result, £4,970 must be added to your total taxable income to ensure the right amount of tax
is collected.

If you’re employed or between jobs

Your tax code is written on your P45 (given to you by your employer when you stop working for them). This is why it’s very important to give this to your new employer when you change jobs. If you’ve lost your P45 and want to find out your tax code contact your tax office and give them your National Insurance number and tax reference number.

If you’re starting your first job

If you’re starting your first job and don’t have a P45, your employer will give you a P46 to fill in and sign Your employer will allocate a tax (depending on your circumstances) code and work out the tax due.

HMRC will process your P46 and, where necessary, revise your tax code. If you’ve paid too much tax, your employer will make the necessary repayment. (If the tax year has ended before this is worked out, then HMRC will make the repayment.) If you haven’t paid enough tax your tax code can be amended to collect the underpaid tax (K code).

If you get a company or personal pension

You’ll find your tax code on your ‘notice of coding’ sent to you by your tax office after the start of each tax year (and at other times if your tax code changes). You’ll also find your tax code on notices and payslips from your pension provider.

Changes that might affect your tax code

You must keep us informed of any change in your circumstances, for example if:
you get married, form a civil partnership or separate or either of you was born before 6 April 1935 you start to receive a second income the amount of untaxed income you get increases or reduces.

If you do not do this you could end up paying the wrong amount of tax. If your tax code is changed, you should receive a ‘notice of coding’ from your tax office. Keep all notice of coding letters for reference in case you have any questions or need to check you are paying the right level of tax.

As a tax professional, I prepare hundreds of tax returns every year. When I first started out, I used to think that the best way I could help people was to prepare a return as accurately and as quickly as possible. You know, provide great customer service.

And it is very important that your return be done “right” –all the numbers on the right lines, using the right forms, etc.

But no matter how good a job I did preparing tax returns, every year I would hear the same complaint over and over again from my clients:

“I pay way too much tax. The government is getting way too much of my money. What can I do to pay less tax? How can I lower my tax bill — legally?”

Sound familiar? I’d bet a lot of money that you’ve felt this way, too. Most people feel this way. And I know that most small business owners feel this way.

And most people really don’t know what to do about it. I mean, what can you, the typical self-employed person, do to lower your taxes?

I’m here to tell that there is plenty you can do. So let’s get started. Here are 4 simple steps you can take to drastically reduce your taxes:

STEP #1: Understand How Serious Your Tax Problem Is

I’m a numbers guy. So here’s a few numbers that will simply amaze you, startle you, probably (and hopefully) even shock you.

Are you aware of just how much in taxes you are paying? Sure, when you look at your tax return each year, you see the numbers, right there in black and white. But I rarely meet someone who truly understands the significance of your annual tax bill.

Well here are the numbers. And it ain’t pretty. The following is a chart that tells how much the average family spends on various consumer categories — as a percentage of income. It’s not just how much you spend on taxes that is important, it’s how much you spend on taxes as compared to all other major categories of spending.

Consumer Spending: How Do You Spend Your Hard-Earned Dollars?

Taxes 32.0%
Housing 16.7%
Medical Care 11.5%
Food 8.2%
Transportation 7.9%
Recreation 5.7%
Clothing 4.1%
Savings 1.4%
Other 12.5%
TOTAL 100.0%

So there you have it. If you think you are being nailed by the government, you are absolutely right. You spend more on taxes than any other category of consumer spending. In fact, you spend more on taxes than on food, clothing, and housing combined. (Run the numbers: Food-8.2% + Clothing-4.1% + Housing-16.7% = 29% vs. Taxes-32.0%)

Think about it — the Average American spends 32% of his/her income on taxes. And it’s not just federal income taxes we’re talking about here. There’s also state income taxes and local income taxes (like your city or county).

Oh, we’re not done. That 32% also includes “Payroll Taxes” — for employees, that’s the 7.65% of your gross wage that goes to fund Social Security and Medicare programs; for business owners and self-employed people, Payroll Taxes are double that amount — 15.3% of your wages or self-employment income.

And if that’s not enough, there is also Sales Tax, Excise Tax, and Property Tax.

Finally, we should include Corporate Income Tax. Why do I include that? Well, where do corporations get the money to pay their corporate income tax? From consumers like you and me, that’s where! When you buy groceries, part of the price is going to be used by the grocery store to pay the store’s income tax. The grocery store just passed his tax bill on to you.

Here’s another way to look at it. Each year economists do a calculation to determine “Tax Freedom Day”. What is “Tax Freedom Day”? It’s a way to graphically depict that we spend 32% of our money on taxes. In Year 2008, Tax Freedom Day was April 23. That means that from January 1 through April 22, all the money you made went to taxes. Finally, on April 23, you now get to keep what you make for the rest of the year.

By the way, the April 23 date is a national average. Your actual Tax Freedom Day may actually be a few days sooner or later than April 23, depending on which state you live in. That’s because state and local taxes vary considerably. For example, Washington, DC residents do not get to celebrate Tax Freedom Day until May 3. Connecticut’s Tax Freedom Day is May 8 (the latest of any state.) The earliest state to celebrate Tax Freedom Day is Alaska – March 29.

Maybe you already knew “intuitively” that your Tax Bill is outrageously high. If not, the picture I’ve just painted should thoroughly convince you that you pay too much tax, period.

STEP #2: Get The Right Attitude About Your Taxes

What do I mean by this? Well, you simply must have a certain “mental attitude” toward this whole idea of paying taxes. I’ll get right to the point — you must have an attitude about taxes that says, “Enough is enough. I’m paying way too much tax and I don’t like it! And it’s about time I did something about it.”

After reading those numbers above — paying 32% of your income to the government — how do you feel? Doesn’t that just make you furious? If so, great, then you are on your way to solving this problem.

If you saw those numbers above and said, “Big deal. So I work until April 23 for the government. So what? So does everybody else in this country” — well, I’m sorry, but you might as well just throw this article in the trash and forget about it. You will continue to pay way too much tax because you really don’t care about it.

To reduce your taxes, you must have a desire for paying less tax. You must get focused on doing something about it. Right now, or before the day is over, go get last year’s personal income tax return (Form 1040) and look at how much tax you paid for last year.

Now, when you have Form 1040 in front of you, do you realize where the most important number is on this form?

NO, it’s not Line 73 — which tells you how much of a refund you got (if any!).

NO, it’s not Line 76 — which tells you how much you still owed, the balance due with the return.

The most important number on Form 1040 is Line 63. Read it. It says: This is your TOTAL TAX. That is how much federal tax you paid for all of last year. When it comes to reducing your taxes, it doesn’t matter whether you got a refund or whether you had a balance due.

What matters is — what was your total tax liability for the year. That’s the “magic number” that should just make your blood boil and your heart beat so fast that you can hardly stand it.

Now that I’ve got you all “riled up” about paying so much tax, let’s move on to Step #3.

STEP #3: Realize That Reducing Taxes Is the Easiest Path Possible to Putting Hundreds of Thousands of Dollars in Your Pocket

Consider this simple fact: Reducing your taxes by just $4,000 per year is the easiest way possible to becoming a millionaire.

Let me elaborate.

First, let me “run the numbers” for you. Let’s say you implement some new tax-saving strategies that reduce your taxes by $4,000 each year. Now, if you take that $4,000 per year in tax savings and invest it over the next 30 years, assuming you earn 5.25% on your investment, you end up with $310,584 at the end of the 30 years.

And here’s the best part about this scenario: Where did you get the $4,000/year to invest? Well, you got it from money that would have gone to Uncle Sam. It’s money that you used to spend on taxes, part of the 32% of your income that goes to taxes each year.

In effect, it’s free money. It’s money that was always there — you just didn’t realize it.

Is this a good deal or what? In effect, by taking advantage of the tax reduction strategies you’ll read about shortly, the government will finance a huge chunk of your retirement nest egg.

And let’s say your tax situation is such that you save $2,000/year instead of $4,000/year. Same assumptions: you invest the $2,000 each year at 5.25% for 30 years. End result: $155,292. Not too shabby, eh?

So all you have to do is come up with the tax-saving strategies that will put $2,000 or $4,000 in your pocket each and every year. Which brings us to Step #4.

STEP #4: Get Hold Of The Tax-Saving Strategies That Will Make You Rich

You know, it doesn’t really take much information to save a lot of money in taxes. It is true: just a little bit of tax knowledge can save you thousands of dollars every year.

Useful tax information is freely available. On the internet, at your local library, and through your local tax professional.

The question is: Are you willing to spend some time this year learning about effective tax strategies that can save you literally thousands of dollars?

Here’s a simple goal to set for yourself: Over the next 10 weeks, set aside just an hour a week to read up on tax-reduction strategies. That’s all, just 10 hours.

Chances are you’ll find 2 or 3 strategies that reduce your tax bill by $1,000 this year.

So you spend 10 hours and, in effect, pay yourself an extra $1,000 for your time. Not a bad hourly rate, eh?

That’s all it takes to pay less tax.