KHUMS

A Worksheet Method To Calculate Khums

By: Ramzan A. Sabir ( Guidance Provided By Moulana Syed Rafiq Naqvi.)

What Is Khums?
Khums is an Islamic tax, paid at the rate of one-fifth or 20 percent of annual saving or surplus of income. The saving or surplus amount can be determined by subtracting yearly eligible expenses from annual income. According to The Holy Quran, every adult Muslim, man or woman, rich or poor, student or scholar, is obligated to pay Khums, see Chapter 8, Verse 41: And know ye (O believers ) that whatever a thing ye acquire a fifth of it is for God, and for the Apostle, and for the ( Apostles ) near relatives and the orphans and the needy and the wayfarer, if ye believe in God and that which We sent down unto Our servant ( Muhammad ), on the day of distinction, on the day when met the two parties; And verily God hath power over all things 8:41

Grand Ayatullah Sayyid Ali Husayni Sistani has discussed the topic in detail in Rulings 1760 through
1860, visit web site www.sistani.org. A review of those rulings is necessary by every Muslim so as to identify certain conditions, incomes, expenses, or circumstances under which either the Khums is binding or exempt.

Income Liable To Khums:

Ayatullah Uzma states in Ruling 1761: If a person earns by means of trade, or industry, or any other ways of
earning, like, if he earns some money by offering prayers and fasting on behalf of a dead person, and if it exceeds the annual expenses for maintaining himself and his family, he should pay Khums (i.e., 1/5 ) from the surplus . Ruling 1782 clarifies: If a person has a few sources of income, for example, he receives rent for his property and is also engaged in trade, if they are all considered as one business, he should pay Khums at the end of the year from what exceeds his expenses. And if he makes profit in one source and sustains loss in another, he can offset his loss of one with the profit of the other. But if he has two different businesses, like, if he is engaged in trade as well as farming, he can not, as an obligatory precaution, offset the loss in one with the profit made from the other. If a person receives a significant amount of money as gift, then Khums is liable on the remainder amount after meeting his annual expenses. Khums is exempt on income received by way of inheritance, prizes, loan money, or insurance money for any loss or injury. As regards Khums on capital gains, Moulana Sayyid Mohammed Rizvi of Toronto, Canada, has described in his book KHUMS (www.al-islam.org/beliefs/practices/khums) that if the goods are bought and sold for a business, then it is obligatory to pay Khums on the appreciated value at the end of the year. A long term investor who buys real estate properties to receive rental income, or invests in stocks or/and bonds for dividend income, Moulana Syed Rafiq Naqvi advised that he must pay Khums regularly on the annual income, and on the appreciated value when he sells them. If a person sells his residence to buy another, and he rolls over the entire proceeds to pay the purchase price, there is no Khums on the proceeds provided that the other residence was purchased within the same financial year, (see Ayatullah ul Uzma Khamenai response to Q 890, www.wilayah.ir/en/library/ajwibah/khums.php).

Eligible Deductions:
The expenses that are eligible for deduction from annual income are identified in Ruling 1784 which states: No khums is payable on what one spends from the profit during the year on food, dress, furniture, purchase of

house, marriage of son, dowry of daughter, Ziyarat etc., provided that it is not beyond his status, and he has not been extravagant. The other eligible deductions include government taxes, insurance premiums (except for life insurance), gifts given to relatives, mandatory retirement contributions, loan payments, and charity donations. If a non-mandatory retirement contribution ( i.e., IRA, 401k, etc.) is made for wife, as a gift to her, then it could also be considered as an eligible deduction.

How To Calculate Khums?

Khums obligation is calculated after determining the saving amount or surplus of income for a financial year which has just passed. The saving or surplus amount is derived by subtracting annual eligible expenses from the total income. Individuals who are residing in USA, may find, their completed US Federal Income Tax Form 1040, helpful in calculation of Khums. Based on the Tax Form 1040, two Worksheets are proposed, which can serve as a guide in determining the Khums obligation for any financial year. Worksheet No.1 is applicable to individuals who derive incomes from one or more sources (considering all to be a part of one business), and have been paying Khums regularly. Worksheet No. 2 is applicable to the individuals who have been paying Khums irregularly or randomly, or those individuals who have not paid any Khums in the past and want to pay now. Both the Worksheets are based on solar calendar year, and contain three hypothetical cases as examples to facilitate calculation of Khums. A blank column is provided in each Worksheet to enable the user to calculate Khums amount due for the past year. Additionally, Worksheet No.2 provides a review of the accumulated savings and investments (Assets) to determine if any Khums was due in prior years and remained outstanding. If Khums paid money were used to buy Assets then determine their values using cost price or current market value whichever is less, otherwise the basis to be whichever is the higher price. Since Khums depends upon earned income and incurred eligible expenses within the same financial year, every effort should be made to complete the Worksheets as carefully as possible, making sure that no income liable to Khums was left out intentionally, and the deductions included were in compliance with the Grand Ayatullahs rulings.

Disposal Of Khums:
Khums becomes due on the first day of a financial year on savings of income earned in the past year. Therefore, a determination of the past years income and expenses should be made as expeditiously as possible. A majority of individuals follow lunar year as the basis, and prefer to pay Khums during Islamic months. In this regard, Moulana Rafiq Naqvi has suggested that they can continue to do so provided they either complete their respective Khums calculations timely, or use the best estimate method for interim payments. Moulana Naqvi defined the best estimate as one prepared at beginning of the financial year and revised upward/downward as the year progressed. Khums once calculated should be split into two equal amounts, one for Sahm-e-Sadat, and other for Sahm-eImam. The Sahm-e-Sadat amount is to be given to desrving Sayyids who are poor, needy, or orphans. The Sahm-e-Imam amount is to be provided for construction of Mosque, Imam Bargah, Houza, etc. provided the recipient organization has obtained a permission to collect Khums from Marjae Aala. If any eligible recipient is not found, Khums should be remitted to Marjae Aala if possible, otherwise, given to an authorized representative who has obtained an Ijaza (written permission) from the Marjae Aala. At the time of paying Khums to an authorized representative, it is suggested, a polite request should be made for a receipt that has Marjae Aalas stamp on it. ------------------------------------------------------------------------------------------------------------------------------------The above text and Worksheets are completed under my guidance. Considering the complexities involved in sorting of incomes, expenses and assets, the Worksheet, in my opinion, provides a simplified method to calculate reasonably accurate Khums obligation. Moulana Syed Rafiq Naqvi
Note: To download Worksheets, visit web site: www.islamicinformationcenter.org

WORKSHEET NO. 1
For Regular Khums Payers
Insert Your Data: For Year -------------------$ 110,600 $

HYPOTHETICAL CASE #1
All Figures Are Assumed Figures. A. Annual Income: ( Say Year-2004) 1. 2. 2a. 2b. 2c. 2d. 2e. 2f. Add Income From All Sources or Use Adjusted Gross Income (Line 36, IRS Form 1040) Adjustments to AGI: Delete any income which is included in AGI but not liable to Khums. Add Tax Free Interest And Dividends (See IRS, Schedule B) Add Cash Proceeds From Sale of Residential Property (Less Amount Rolled Over To Buy Another Res. Prop. Only If Both In The Same Year). Add Any Non-Mandatory Retirement Contributions , IRA, 401k, (Except Roth IRA). Add Value of New Jewelry, Clothing, Household Items etc., Purchased but Never Used During The Year. Add Gifts, and Any Unaccounted Income Liable To Khums.

($ $ $ $ $ $

0) 400 0 2,000 1,000 10,000

($ $ $ $ $ $

3. B. Annual Expenses. (Year-2004) 4. 4a. 4b. 4c. 4d. 4e. 5. 5a. 5b. 6. 7. 7a. 7b. 7c. 8. 9.

Total Annual Income A

$ 124,000

Taxes, Social Security, Health Insurance: Federal Income Taxes paid ( Line 60, IRS Form 1040). State and Local Income Taxes Paid Social Security Contributions Made ( See W2s). Health Insurance Premium All other Mandatory W-2 Withholdings Mortgage Payments: Mortgage Payments (PITI) Home Equity Loan Payments if Non-Business Related. Personal and Family Expenses including Food, Clothing, House Rent, Education, Medical, Automobile Installments, Credit Card Payments, Travel, etc. but Excluding any Extravagant Expenses. Other Expenses: Education Funds Set Aside per Plan 529. Gifts to Children or Relatives Charitable Donations. Total Annual Expenses B KHUMS DUE FOR 2004 (OR ESTIMATE FOR 2005): = (1/5) x (A-B) = 0.2x 17000 ESTIMATED KHUMS PAID IN 2004: KHUMS BALANCE FOR YEAR 2004: $3,400 - $3,000 (Payable Promptly in 2005)

$ 12,800 $ 5,600 $ 7,600 $ 3,100 $ 400 $ 14,500 $ 5,000 $ 52,500 $ 1,000 $ 1,300 $ 3,200 $107,000 3,400 $3,000 $400

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $

10. 11.

Worksheet No. 2
Part I: For Individuals Who Pay Khums Irregularly
Hypothetical Case #2
All Figures Are Assumed Figures 1. ESTIMATED KHUMS FOR CURRENT YEAR: ( Complete Worksheet No. 1 , Enter Amount Of Line 9) KHUMS PAYMENTS MADE IN PRIOR YEARS: i) ii) 3. 3a. 3b. 3c. 3d. 3e. Prior Khums Payments Lifetime (As of 12/31/2004 )Approx Lifetime Cumulative Sahm-e-Imam$9,600 Lifetime Cumulative Sahm-e-Sadat....$8,400 $18,000 $ $3,400 Insert Your Data: For Year------$

2.

ACCUMULATED SAVINGS AND INVESTMENTS (ASSETS) ( Include All Major Expenses and Investments As of 12/31/2004) Cash plus Deposits in Savings Account - $ 15,000 Amount Invested in Stocks, Bonds, Mutual Funds, IRA, 401k,....$ 25,000 Business Ownership - Actual Amount Invested $ 30,000 Real Estate Equity, Autos, Furnitures,.....................................$ 30,000 Other Miscellaneous Expenses Like Marriage, Travel, Gifts,............$ 20,000 $120,00 0 $ % $ $ KHUMS PAID ASSETS : 18,000 x 4 / 120,000 = 60% KHUMS OUTSTANDING ON ASSETS: = (1/5)x (0.40x120,000) TOTAL KHUMS DUE: $3,400 + $9, 600 = $13,000

5. 6. 7.

60% $9,600 $13,000 *

Part II: For Individuals Who Have Not Paid Khums

Hypothetical Case #3
All Figures Are Assumed Figures 8. ESTIMATED KHUMS FOR CURRENT YEAR: ( Complete Worksheet No. 1 , Enter Amount Of Line 9) KHUMS DONATIONS MADE IN PRIOR YEARS: ACCUMULATED SAVINGS AND INVESTMENTS ( ASSETS) (Approx. Market Value As of 12/31/2004) Cash plus Deposits in Savings Account - Actual Balance.. $ Stocks, Bonds, Mutual Funds, IRA, 401k,..Actual Balance.$ Business Ownership - Market Value.,,,.$ Real Estate Equity Plus Autos, Furnitures, Jewelry, $ Other Miscellaneous Expenses, Like Marriage, Travel, Gifts... ..$ KHUMS DUE ON ASSETS: (1/5) x 160,000 = $32,000 TOTAL KHUMS DUE: $3,400 + $32,000 $3,400 $0 $160,00 0 Insert Your Data: For Year------$ $ $

9. 10. 10a. 10b. 10c. 10d. 10e. 11. 12.

10,000 40,000 30,000 60,000 20,000

$32,000 $35,400 *

$ $

If one lump sum payment is difficult, a Representative of Marjae Aala can grant suitable instalments upon request.