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Category: Financial Planning

20 Questions on Zakat: A quick and easy guide to understanding Zakat

Aug. 17 Community, Featured Posts, Financial Planning, Islamic Law 5 comments

zakat

 

Featured this month in Sharia Portfolio’s Newsletter, these are 20 Questions on Zakat which I wrote as a quick and easy guide to understanding Zakat.

Enjoy :)

 

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1. Who has to pay Zakat?
Zakat is due on the wealth of any Muslim, young or old, male or female, that is held in savings for one calendar year and is more than the Nisab.
Example: If both you and your children have separate savings of 1000 dollars or more for one year, you must pay the Zakat on both accounts, not just yours. $25 for your savings, and $25 for your childs.

2. What forms of wealth are liable for Zakat?
The following are liable for Zakat:

  1. Gold & Silver
  2. Paper currency held in cash or in the bank
  3. Tradable assets owned by your business
  4. Crops and herded animals.

3. How do I know when I have to pay Zakat?
Calculate your balance sheet, on-hand savings, various current accounts, and marketable securities. If the total is more than the Nisab for an entire year at any given month, you must pay Zakat on it.
Example: You see that your bank account shows a balance of 1500 USD from Ramadan of last year until Ramadan of this year. You pay 2.5% on 1500 = $37.50 USD.

4. How can I find out what the Nisab is so I know if I owe Zakat or not?
One of the best websites is called www.e-Nisab.com, check the Nisab for silver in USD. For calculating cash, savings, and tradable assets, the Nisab for SILVER is always used, not the one for gold.

5. So now that I know the Nisab and I know that I’ve had saving for a year more than that amount, how do I calculate my Zakat?
Follow these steps:

  1. You take your current savings, all cash in hand, any tradable business inventory you have, and the value of any active investments and mareketable securities you have and add them together. Let’s say that gives you 10,000 USD.
  2. Deduct any immediate liabilities such as this month’s mortgage payment, your other bills, payroll (if you have a business), insurance payments, etc. Let’s say that equals 3,000 USD.
  3. Subtract your immediate liabilities from your current assets, 10,000 – 3,000 = 7,000 USD.
  4. Calculate zakat: 2.5% x 7,000 USD = 175.00 USD is due for Zakat.

6. Someone owes me money do I have to pay Zakat on that amount?
If you can collect at any time (i.e. it is “good debt”) then yes you must calculate that into your zakat as above. If they are refusing to pay (i.e. it is “bad debt”) or are they are unable to pay you because of financial distress, then no you do not pay it at this time.

7. What do I do once I collect that debt?

  • If it is more that the Nisab and has been owed for more than a year, you pay zakat for one year only once you collect.
  • If it is less than the Nisab, then you add that money to your savings and what for the next time you pay zakat.

8. Do I have to pay Zakat on my 401k plan or my IRA?
You do not pay Zakat on your 401k, your IRA, or any account to which you do not have access until you cash out without penalty. At that time you pay Zakat for one year.

9. Do I have to pay Zakat on my personal assets such as my home and car? What about my capital assets like my copier machine, offices, company car, etc.?
You do not have to pay Zakat on any personal assets or capital assets. Zakat is only due on surplus wealth that is over the Nisab for a year or more.

10. Who can I pay my Zakat to?
Zakat is to be given to eight categories of people designated in the Surah Taubah 9:60: (1) The destitute, (2) The poor, (3) those collecting and distributing Zakat, (4) those whose hearts need softening, (5) in manumission, (6) in paying off debts, (7) in God’s path, (8) and helping the travelling who are stranded.

11. Can a man pay his Zakat to his wife? Can a wife pay her zakat to her husband? What about the rest of my relatives?
A man cannot pay zakat to his wife, because he is obligated to provide for your wife; anyone you are obligated to maintain financially then you may not give them your Zakat. This includes your wife, your children, and your parents. Your siblings, cousins, Uncles and aunts can receive your Zakat. Your wife however is not obligated to maintain you financially, she may give your from her Zakat ONLY if you are needy and included in one of the above eight categories.

12. Instead of paying my Zakat here in the United States, can I send my zakat overseas?
You may not send your Zakat anywhere outside your locality until you are certain that there is absolutely no need for it. You are obligated to give back to the locality you live in before you take that money elsewhere. The only exception to this is if you are sending money to your family members.

13. I have Gold and silver jewelry, do I have to pay Zakat on it?
Yes, you must pay Zakat on it, regardless of whether it is for adornment/decoration, you wear it or not, or if it was inherited. ANY gold or silver you have, if it more than Nisab, Zakat must be paid on it.

14. What is the Nisab for Gold and Silver?
If you have 95 grams of gold or more, then you are liable to pay Zakat on that gold. If you have 595 grams of silver or more, then you are liable to pay Zakat on that silver. Check www.e-Nisab.com for the cash value of the Nisab.

15. I know that my earnings and savings will be the same for the next couple of years can I pay my Zakat for next in advance?
Yes, you may pay your zakat for next year in advance along with this year. However, if your earnings and savings change so that you owe more, you will have to pay the difference later.

16. I have not paid Zakat for years, what do I do now?
You should look back to your balance statements and estimate your liability for the past years, then pay for those years.

17. I want to give my Zakat to an Islamic Center, what should I do?
It is recommended you give your Zakat to organizations that you are sure will spend it on the eight categories mentioned above. If you do give it to an Islamic Center, be sure that your local Islamic Center differentiates between general funds (or Sadaqah) and Zakat funds.

18. Can I give zakat for the building, for toilets, etc?
Zakat is only to be used for the eight categories listed above. All other projects should be paid for from generous donations not associated with Zakat.

19. What is Zakat-al-Fitr?
Zakat-al-Fitr is paid in expiation for the sins and mistakes we commit during Ramadan. It is paid as 2.5 kilos or 5 pounds of wheat, dates, rice, etc. You may pay the cash value of rice if you like. The cash value this year $10.00 is per person. Your Islamic Center will act as your agent in distributing to the poor.

20. I want to pay for Zakat-al-Fitr. Can I write a check to my local Islamic Center? How much do I pay?
Yes, if your local Islamic Center will act as your agent in distributing your Zakat al-Fitr locally.  When you write a check, specify “Zakat al-Fitr” in the memo.  You must pay for every member of your family.
Example: You, your spouse, and 3 children make 5 people. Multiply 5 x 10.00 = 50.00 zakat al fitr.

Do I have to pay Zakat on my stocks and shares?

Aug. 15 Financial Planning, Islamic Law 4 comments

zakat on stocks

Do I have to pay Zakat on my stocks and shares?

Answer:

If you own stock in a company (or shares as they are called) then to determine their liability for Zakat you should look at the investment strategy you are using.

  • If you are using them for a long term investment (something you plan to hold for a year or more) then you will pay Zakat on the dividends distributed by those stocks (shares) when paid, if they are more than Nisab.
  • If you are an active trader, or have an active portfolio in a mutual fund, then you will pay Zakat yearly on the market value of the stock (share) or the portfolio, as well as the dividends.
  • If you sell these stocks (shares) during the year, you will add the amount received from sale to your liquid assets and pay Zakat according to general rules of Zakat.

This is the method prescribed the Fiqh Academy of the OIC and is generally prescribed by most scholars who are specialists in the field.

Zakat on Pension and Retirement Plans

Aug. 14 Featured Posts, Financial Planning, Islamic Law 1 comment

pension and retirement plansYou may not have a 401k plan or an IRA, but instead a more traditional pension. If this is the case, you are not alone, and like many other people are asking yourself:

Do I have to pay Zakat on my pension or retirement plans?

The answer:

Investopedia defines a pension plan as:

A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement. Read more →

I only own the Nisab of gold and I have no other wealth, how will I pay my Zakat?

Jul. 31 Financial Planning, Islamic Law 3 comments

Question:

I only own the Nisab of gold and I have no other wealth, how will I pay my Zakat? If a woman only has gold the exact amount of the Nisab, and does not have any other wealth, what should she do? Is she obligated to sell her gold jewelry to pay her Zakat?

Answer:

In the highly improbable case that a woman only owns the exact amount of Nisab of Gold and no other wealth what so ever, then yes she is obligated to sell a part of her gold to pay her Zakat.This includes Gold and Silver jewelry.

If she chooses to pay from her gold itself, then she can pay 2.125 grams in Zakat. This would automatically reduce the gold she owns to below the Nisab, and it would then not be liable for Zakat the following year it is remains the same.

If a relative, friend, or 3rd party pay it for her, that is acceptable. If they loan her the money to, and she pays them back, that is acceptable as well.

If like most women she has some other form of wealth (cash or otherwise) she can valuate that form of wealth and pay the value of her Zakat from that other form of wealth.  For example, she can calculate her Zakat liability for the year, and start to pay off the Zakat early. So if the Nisab is 85 grams of gold and it equals $4838 USD this year, then 2.5% of that will be 120.95 USD, which she can pay off in 6 months by paying 20 dollars a month.

While some might say “But the gold has sentimental value” we should keep in mind that the pleasure of God is our utmost goal, and that this worldly life will fade away.

ما عِنْدَكُمْ يَنْفَدُ وَمَا عِنْدَ اللَّهِ بَاقٍ وَلَنَجْزِيَنَّ الَّذِينَ صَبَرُوا أَجْرَهُمْ بِأَحْسَنِ مَا كَانُوا يَعْمَلُونَ

What is with you will perish, and what is with God is eternal. We will reward those that were patient with the best of what they performed.

And Allah knows best.

What is nisab? How much gold/silver is it?

Jul. 31 Financial Planning, Islamic Law, Uncategorized 3 comments

nisabAnswer:
Nisab is the legal term used to describe the minimum amount of constantly accessible surplus wealth that one must possess in order to be liable for Zakat.

In the Sunnah, it is designated as possession of either 20 gold Dinar or 200 gold dirhams. These amounts have been approximated in modern measurements as 84.9 grams of gold and 592.9 grams of silver. They are then multiplied by the current market value. This gives us the cash value of Nisab. You can easily do this by visiting this website.

Using this site, the nisab of gold for July 31st is equal to 4838.96 USD. For silver it is 539.34 USD. When calculating nisab for each metal separately, you use the respective nisab above. When calculating for cash and all marketable securities and surplus wealth, you use silver.

So if you own 539.34 or more in surplus wealth (including checking, savings, and investment accounts) then you will pay 2.5% of the sum total of that amount.

Zakat on Gold and Silver Jewelry

Jul. 31 Financial Planning, Islamic Law 7 comments

بسم الله الرحمن الرحيم

Najam asks:

Does one pay zakat on gold that is worn by a woman regularly?
I know we pay zakat for gold/silver that is locked up in a bank or something.

There are three popular opinions about paying Zakat on Jewelry. One that states it is never paid, another that differentiates between that worn for adornment versus that held for value, and the third that states any jewelry is liable for Zakat as long as it reaches Nisab.

The more correct of these three opinions is the third, that Zakat is always paid without exception on any gold or silver that is in possession for  one year or more. This is due to the generality of the hadith of Abu Hurairah found Sahih Muslim:

«مَا مِنْ صَاحِبِ ذَهَبٍ وَلَا فِضَّةٍ، لَا يُؤَدِّي مِنْهَا حَقَّهَا، إِلَّا إِذَا كَانَ يَوْمُ الْقِيَامَةِ، صُفِّحَتْ لَهُ صَفَائِحُ مِنْ نَارٍ، فَأُحْمِيَ عَلَيْهَا فِي نَارِ جَهَنَّمَ، فَيُكْوَى بِهَا جَنْبُهُ وَجَبِينُهُ وَظَهْرُهُ، كُلَّمَا بَرَدَتْ أُعِيدَتْ لَهُ، فِي يَوْمٍ كَانَ مِقْدَارُهُ خَمْسِينَ أَلْفَ سَنَةٍ، حَتَّى يُقْضَى بَيْنَ الْعِبَادِ، فَيَرَى سَبِيلَهُ، إِمَّا إِلَى الْجَنَّةِ، وَإِمَّا إِلَى النَّارِ»

Never does one who possesses gold or silver not pay the due on them, except that on the Day of Judgment it will be rendered into bars and heated in the fires of Hell, and will be scorch the sides, forehead and back of the person who owned it, every time it cools it will be reheated and reapplied, on a day the length of fifty thousand years, until God judges between the slaves, either to Paradise or to the Hellfire.

The generality of this categorical and authentic hadith indicates that every piece of gold and silver has a right over it. We know these rights to be specified by the Sunnah, namely that it should reach Nisab and be in possession for a year or more.

So what about the other two opinions? Well the first that no Zakat is due every would need specific evidence to exempt all jewelry, for which there is none. The second opinion introduces a ruling (namely to differentiate between two types of jewelry) which also obliges us to find a specific evidence to make that differentiation. Additionally, there are several hadith narrated in Abu Dawud and other collections that specifically oblige Zakat on jewelry. These hadith are the subject of debate amongst scholars, and their authenticity is challenged, but it seems that together they reach the level of being acceptable. As for hadith that negate Zakat from jewelry in toto, such as “There is no Zakat on jewelry” then as Ibn Hajr al-Asqalani stated it is “False and baseless.”

Let’s take a minute to analyze this second opinion practically. How much jewelry might the average women wear? Maybe a gold chain or two? A gold pendant or two? 3-4 rings? 3-4 sets of earrings? 3-4 Gold bangles?

Many women with a modest amount of personal jewelry would not end up paying Zakat due to it being below the Nisab. We can suppose most women have a mixture of different karats, pieces, etcetera which would take the amount below the Nisab. To remain on the safe side, any jewelry owned should be weighed to know if the Nisab has been reached. For women that own large amounts of Gold jewelry, then it is improbable that they wear it even once a year, and thus even according to the second opinion they would pay Zakat on it. The issue that we run in to here is the subjectivity of what is worn and what is not, in addition to the lack of clear textual evidence to say that gold or silver worn is any different than that which is stored. In the hadith of Umm Salamah in Abu Dawud, the Prophet said “That which is enough to be liable for Zakat, and Zakat was paid on it, then it is not a hoarded treasure.” When he saw Aishah wearing silver he asked her “Did you pay Zakat on it?” When she replied in the negative he said “It is more than enough of the hellfire for you.”

The unequivocal nature of the hadith from Sahih Muslim above indicates that Zakat is due on all gold and silver without exception. Until we have a specific evidence to specify, the general ruling remains applicable. When researching these issues, we must remember what Allah says to his Prophet:

فلا وربك لا يؤمنون حتى يحكموك فيما شجر بينهم ثم لا يجدوا في أنفسهم حرجاً مما قضيت ويسلموا تسليماً

No, by their Lord, they do not believe until they return to you for a verdict in everything they differ on, then they find no hardship in their hearts towards your decision, and they submit fully.

May Allah bless us to give precedence to what he gave precedence to, and to submit fully without disdain. Ameen.

Do I pay Zakat on 401k and IRA? Is it 2.5% or 10%?

Jul. 28 Financial Planning, Islamic Law 14 comments

M Babu asks:

As Salamualikum. Ramadan ul Mubarak. I need to understand zakat on retirement funds contributed by both employer and employee. As a teacher, I have a TIAA-CREF retirement account where I contribute and my employer contributes a matching percentage of the salary. All my investment is in stocks since other options are interest bearing.  I can not receive the cash until it vest when I reach retirement age. Do I have to pay zakat on the amount of this retirement fund that has been accumulated?

Another Questioner asks:

I am looking for clarification on rules for zakat on stocks and zakat on 401K.

1) Below excerpt from _____ fund web page says zakat of 10% is due on INCREASE of asset and not on the base asset. I was under the impression zakath is due on the whole capital.  I want to do the right thing. What is the correct basis?

2) The 401K is a fund that is joint contribution by employer and me. It is not yet tapped into as I have not retired. Although I could take withdrawal from it as I am over 59.5 yrs. Is zakth due on 401K (these are in stock fund).

 

Answer:

Retirement funds and similar are something many people ask about it.

Let’s look at the issues at hand above based on the two questions presented:

1-      How much Zakat is paid on business partnerships and investments?

2-      Is my retirement account (such as 401k, IRA, or similar) liable for Zakat?

If you are looking for more information on how to pay Zakat on Mutual Funds and Stocks/shares NOT part of your retirement fund, click on the previous link.

How much Zakat is paid on business partnerships and investments?

Business partnerships and investments are due 2.5% when paying Zakat on them. Mutual Funds, which invest in a portfolio of stocks (shares) are business partnerships and are treated as such when calculating profits and zakat. To make them analogous to agricultural projects is incorrect for several reasons most of which cannot be mentioned in a single post. Those interested can look for module five of my Zakat course entitled “Advance Topics in Zakat Law.”

Is my retirement account (such as 401k or IRA) liable for Zakat?

Modern scholars differed as to when to pay zakat on retirement accounts such as 401k, IRA’S,  and other similar investment vehicles wherein a person does not actively have control over and cannot access without penalty the funds therein until a threshold or time period is met.

The more correct of these 2 opinions is that Zakat is not due on your retirement account (401k, IRA, or similar) until it is time to cash out without penalty.

  • If the conditions of that account state that after a person reaches a certain age (say 55 or older) then he or she may withdraw without penalty then Zakat is paid on that amount when you reach that age. Each subsequent year, if Nisaab still exists in the account, you would pay on that account.
  • If you cannot access the funds in that account, or you are penalized for early withdrawal, then you are not liable to pay Zakat on that account.
    • Zakat is only due on unhindered, fully accessible wealth which is actively managed by the investor.
    • Any wealth which is lost, inaccessible, held in an illiquid state, or cannot be accessed freely without penalty is not liable for Zakat.
  • If the wealth in the retirement fund is designated for the employee then he must pay 2.5 percent of that amount only when he cashes out without penalty at the time those funds are made available to him.
  • If he or she chooses to cash out early and pay the penalty then they must still pay Zakat on the amount withdrawn immediately at the time of availability regardless of the matching funds contributed by his employer or not.
  • If he is not allowed to cash out, but instead is forced to take a loan from the 401k fund and pay it back with interest, then he or she will not pay Zakat on this amount until it remains in possession for one year after receiving it from the 401k fund.
  • You pay 2.5% on the amount available to you at the time the money is made available to you without penalty. You do not compound 2.5% for the entire tenure of the investment; you only pay 2.5% for one year on the amount made available at cashout without penalty.

If you need confidential advice on how to calculate and pay your Zakat, please contact me through this site.