Question

Give short definition and example for these terms

1. Back Withholding

2. Estimate tax payment

3. Withholding

4. Depletion

5. Non refundable and refundable

6. Control of assets

7. Avoid probate

8. Assets protection

9. Gift splitting

10. Gift tax

11. Fiducicary

12. Flow thro

13. Annual gift tax

14. Marginal. Rate of tax

15. Estimated tax payment

Answer 1

1- BACKUP WITHOLDING-

It is a tax that is levied on the investment income at a predefined tax rate. It helps to ensure that the government is generating its revenues from the income earned by the investors.

for example- if the investor sends away all his dividend income before the due date of the payment of taxes such that he does not have any income to pay the taxes, the government will apply this backup tax on him to recover the tax on the dividend income he earned and tax on which has not been paid.

2- ESTIMATE TAX PAYMENT -  Estimated tax is a method of paying tax on income that is not subject to withholding tax. This can include income from self-employment, business earnings, interest, rent, dividends and other sources. To determine how much you have to pay for estimated tax, you must compile your income, deductions, credits, and paid taxes — much like filing a yearly tax return. For the purpose of estimated tax, the year is divided into 4 payment periods. Each period has a specific payment deadline, and failing to pay on time can result in penalties.

for example-   If your tax liability is $2,500 or more for the year, you are expected to make estimated tax payments. A threshold limit is set above which the person has to pay the estimated income tax in four installments in the financial year.

This tax is calculated as a percentage on the given income less of TDS, REBATE, DEDUCTIONS ETC.

3- WITHHOLDING-  Withholding tax is essentially income tax that is withheld from your wages and sent directly to the IRS by your employer. In other words, it’s like a credit against the income taxes that you must pay for the year. By subtracting this money from each paycheck that you receive, the IRS is basically withholding your anticipated tax payment as you earn it.

FOR EXAMPLE-  

Suppose the income of the person is $ 50000 and he has to pay 10% tax on his income. Then the employer will withhold that 10% of his income which comes out to be $5000 and rest $45000 will be paid to the employee by his employer and later this tax will be paid to the tax authorities by the employer.

4- DEPLETION -

Depletion, for both accounting purposes and United States tax purposes, is a method of recording the gradual expense or use of natural resources over time. Depletion is the using up of natural resources by mining, quarrying, drilling, or felling.

It is similar to depreciation in that it is a cost recovery system for accounting and tax reporting.The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. It is of 2 types-

1- percentage depletion

2- cost depletion

for example-

If producer A has capitalized costs on property A of $80,000, originally consisting of the lease bonus, capitalized exploration costs, and some capitalized carrying costs, and the lease has been producing for several years and during this time, A has claimed $10,000 of allowable depletion. In 2010, X's share of production sold was 40,000 barrels and an engineer's report indicated that 160,000 barrels could be recovered after December 31, 2010

The calculation of cost depletion for this lease would be as follows:

Cost depletion = S/(R+S) × AB or AB/(R+S) × S

CD = 80,000/(40,000 + 160,000) × ($80,000 − $10,000)

= 80,000/200,000 × $70,000

= $ 28000