Tax Tip of the Week
900 N. Kings Highway, Cherry Hill, New Jersey 08034
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Fax: 856.667.3652
For the week of
October 23, 2000
There is a real difference between "tax-deferred" and "tax-free"
Some tax transactions are referred to as tax-free when, in
fact, they are tax-deferred. The difference between tax-deferred and tax-free can mean a significant difference
in the taxes you pay.
What all of us would like to have is tax-free income. That means that we pay no tax on the transaction, not now,
and not in the future. Tax-deferred income, on the other hand, usually has a day of reckoning.
If you invest in a traditional IRA, you get a deduction for your contribution, and the earnings and your contribution
are not subject to tax until they are withdrawn. You are getting tax-deferral. If you invest in a Roth IRA, you
get no deduction for your annual contribution, but the earnings within the Roth are not taxed at withdrawal time.
Your have tax-free income.
When you sell your personal residence, your gain is tax-free up to $250,000 ($500,000 for qualifying couples).
That is truly tax-free income. You are not required to reinvest, nor will you be taxed on any of that gain at a
later date.
When you arrange a qualified exchange of business or investment property for other qualified business or investment
property, you can defer paying the tax until the newly acquired property is later disposed of. This is a tax-deferral,
but it is often referred to as a "tax-free exchange." Yes, it is tax-free at the time of the exchange,
but the gain is ultimately subject to tax in most cases.
If you have tax questions, please give us a
call. We would like to hear from you.
Click here to view previous tax tips.
"Tax Tips" are published weekly to
provide useful tax information. Return to this site every week for helpful tax-cutting suggestions, tax reminders,
and current tax information.
The information contained in this site is of a general nature and should not be acted upon in your specific situation
without further details and/or professional assistance.
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