Understand Your Investment and Income Tax

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In this article, we will discuss taxable incomes generated from your investments

I. Interest earn:
Interest earned on an investment is taxable. Interest can also be earned but not paid. This is known as accrual interest. Interest may be paid at various time, according to the terms of the investments. The interest paying period is referred to as the term. If the investment has a term of less than one year the interest does not need to be accrued at the end of the first calendar year and is taxable when paid. If the investment has a term greater than one year, interest must be accrued as of the anniversary date of its purchase.

a) Interest income received during the year is taxable income for the calendar year unless it was accrued and reported in a previous calendar year.
b) Interest earned, but not paid, during a bond year, must be accrued at the end of the bond year and reported as taxable income for the calendar year in which the bond year ends.

III. Corporate dividends
Dividends from taxable corporation are tax advantage due to method of calculating of tax by the government and dividends from foreign corporate investment are taxed at 100% of the amount received.


IV. Capital gain
Canadian investors are subject to tax on 50% of capital gains received from investment and allowed to deduct 50% of capital losses. In U.S. the tax rate on eligible dividends and long term capital gains is 0% for those in the 10% and 15% income tax brackets in 2008, 2009, and 2010. Other will pay will be taxed at the taxpayer's ordinary income tax rate. It is generally 20%.

V. Tax deferred plans
Tax deferred programs allow you to save for your retirement while providing you with a tax break. It allows you to select an amount by which the gross salary can be reduced and tax-sheltered.
In US
1. Thrift Plan (401K) and Deferred Compensation (457)
2. Tax-Sheltered Annuity (403B)
Income taxes are paid at the time funds are withdrawn or at annuitization. The maximum amount an employee can shelter in these programs is determined by the Internal Revenue Service
In Canada
1. Registered Pension Plans (RRP)
2. Registered Retirement Savings Plans (RRSP)
3. Registered Retirement Income Funds (RRIF)
Contributions to these plans are tax deductible and all earning are tax deferred and withdrawals are taxable including payments after maturity.

I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page:

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