January 2004 Online Advisor

Major Tax Deadlines

January 15 - Final 2003 individual estimated tax payment is due, unless 2003 tax return is filed and taxes are paid in full by February 2, 2004.

February 2* - Employers must provide 2003 W-2 statements to employees.

February 2* - Payors must provide 2003 Form 1099s to payees.

February 2* - Deadline for employers to file Form 941 for the fourth quarter of 2003 and pay any tax due.

February 2* - Employers must generally file 2003 federal unemployment tax returns and pay any tax due.

*These deadlines normally fall on January 31. Because January 31, 2004, is a Saturday, the deadlines are moved to the next business day, which is February 2.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.

Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to your business, contact our office.

What's New in Taxes

New Medicare law creates tax-favored savings accounts

On December 8, 2003, President Bush signed into law a Medicare prescription drug bill that included new health savings accounts for taxpayers under age 65. Similar to IRAs, these new accounts can be used to build tax-sheltered nest eggs that can pay out-of-pocket medical expenses tax-free.

To qualify for a health savings account (HSA), a taxpayer must meet two requirements:

1. The taxpayer must have a health insurance plan with a high deductible (defined as $1,000 for an individual and $2,000 for a family).

2. The taxpayer must be under 65 when opening the account.

Each year the taxpayer can make up to $2,600 of tax-deductible contributions to the account (up to $5,150 for families). Funds in the account are invested and grow tax-free as with IRAs, and withdrawals used for medical expenses are tax-free. Unlike funds set aside for medical expenses in flexible spending accounts, unspent funds in HSAs remain in the account to grow tax-free year after year. The law imposes few restrictions on how funds in these accounts can be invested. After age 65, withdrawals can be made and used for any purpose penalty-free but not income tax-free.

Health savings accounts can be established effective January 1, 2004. If you're interested in learning more about these accounts, give us a call.

How to decide what records to keep and what to toss

Deciding which records to keep and for how long can be a confusing process. A well-organized system will help you retain important paperwork and minimize the clutter. Use legal requirements and your common sense as guidelines for how long to hold on to records.

* Tax records. You should keep tax records for at least as long as it is possible for tax authorities to audit your return. Generally, the IRS has three years after the return is due or filed, whichever is later, to examine your return and assess additional tax. This is called the "statute of limitations."

If you've made a major error on your return (defined as omitting more than 25% of your gross income), the IRS has six years to examine your return. There is no statute of limitation for fraudulent filing or for returns that are not filed at all.

To be on the safe side, keep your tax records for seven years after a tax return is filed. The IRS does not require that you keep your records in any particular way. The only requirement is that your records allow you and the IRS to determine your correct tax liability. Keep checks, receipts, and other records that document the income and deductions you report on your tax return. Copies of tax returns themselves should be retained permanently.

* Home. Expenditures for your home fall into two categories: "repairs" (such as routine yard maintenance and painting) and "improvements" (usually big-ticket items such as room additions).

Discard repair receipts once the warranty period expires, but keep receipts for improvements indefinitely. Improvements add to the tax basis of your property. Despite the $250,000 capital gain exclusion amount ($500,000 for joint filers), substantial increases in market value could make you liable for capital gains tax when you sell your home. Complete records of your home's original cost plus improvements will help reduce any taxes due.

* Investment records. Investment records generally should be kept until the investment is totally liquidated, plus a period of seven years. Keep any records for taxable accounts that show reinvested dividends. You can usually toss monthly or quarterly investment statements if you receive a comprehensive annual statement.

* Investment real estate. Keep all documents relating to purchases of property, along with substantiation for improvements made to the property. Keep written appraisals and tax depreciation schedules.

* Individual retirement accounts. Keep copies of Forms 5498, 8606, and 1099R until all money has been withdrawn from your IRAs. Good records are necessary so that you aren't taxed on nontaxable withdrawals.

* Insurance. Keep your current policies and 12 months' worth of cancelled checks and statements. Ask your insurance agent about discarding expired policies. Your liability for prior years can vary.

*Estate planning documents. In your home, keep a copy of your current will, any trusts, and any special directives. Give the originals to your attorney, and consult your attorney about destroying all out-of-date documents.

* Keep it simple. In most cases, you don't need an elaborate recordkeeping system to keep your affairs in order. File tax returns separately by year, and file investment records by broker. For expenses, even an accordion file tabbed by category works wonders.

If you have any questions or need assistance in setting up a recordkeeping system, give us a call.

New Business

Congress ended 2003 with unfinished business

Though Congress did pass a Medicare law that provides prescription drug benefits to seniors, it adjourned for 2003 without passing several other pending bills that may be of interest to your business.

One pending bill would have extended several tax breaks that expired at the end of 2003. Among the 19 tax provisions that expired on December 31, 2003, were the welfare-to-work tax credit, Archer medical savings accounts, and the work opportunity tax credit.

It's likely that Congress will take up tax extension legislation again this year. If any of these provisions are a matter of concern for your business, stay informed about legislative action. For information and assistance with your planning, contact our office.

Congress did manage to pass anti-spam legislation just prior to adjourning. The law authorizes the Federal Trade Commission to establish a "do not e-mail" registry similar to the recently established "do not call" registry.

It's been estimated that spam, or unsolicited commercial e-mail, costs U.S. businesses billions each year in lost productivity and for the purchase of filtering software and equipment. Spam accounts for about 40 percent of all e-mails, according to one computer security company.

The new anti-spam law overrides 35 state anti-spam laws, many of which were tougher on spam than the federal law.

Smart Business

How's your business recordkeeping?

The tax law requires all businesses to keep records to support the gross income, deductions, and credits claimed on their income tax returns.

What records? All businesses should have a permanent set of books which summarize individual deposits, disbursements, and items of adjustment. These records should be retained indefinitely. Permanent records also include those needed to prove the basis (cost) of depreciable assets.

Supporting documents may be needed to validate the journal entries if your returns are examined by the IRS. The general rule is that supporting documents should be retained at least until the statute of limitations for a tax year has passed.

The supporting documents the IRS reviews include bank statements, cancelled checks, payroll records, invoices, and the like. You should also retain documents supporting deposits which do not reflect income, such as loan documents.

A good recordkeeping system is essential for every business, not only for tax reporting purposes but also for the success of the business. The recordkeeping necessary for any business depends on the size and nature of the business. For details on exactly what business records you need and how long they should be kept, call us.

What's New in Financial Strategies

Baby boomers get bad news

Just a few years ago there were predictions that the baby boomers would inherit trillions of dollars from their well-to-do parents. Now it appears that these predictions failed to take into account such facts as today's longer life expectancies, skyrocketing health care costs, and long-term care expenses that reduce the amount parents leave to their children.

What this latest study makes clear is that today's middle-aged boomers cannot count on inherited money to fund their retirement. They need to get serious about saving enough for their own retirement.

What every estate plan should include

You work hard providing for your loved ones during your life. You can also provide for them when you are gone with a simple estate plan that legally conveys your desires to all your heirs. Here's a short list of some of the basic documents you should consider including in your estate plan.

* Information memo. Keep a list of your insurance policies, brokerage accounts, businesses you own, outstanding debt, credit cards, tax-related documents, and names and phone numbers of professional advisors in a single place that can be easily accessed. As time passes, review this document and update as necessary.

* A will. Your will is a written document that gives your heirs the blueprint of your wishes and intentions. In your will, you may bequeath assets to your heirs, appoint an executor to distribute your assets, and designate a guardian for your minor children.

* A durable power of attorney for finances. Designate in this document an individual or advisor to make financial decisions on your behalf if you become incapacitated. The individual can sign checks if necessary and can be given access to your checking and investment accounts.

* Medical directives. You name an individual to make health-care decisions for you in the event you become unable to make them yourself.

* Funeral instructions. Detail what you feel is best in your specific situation. Include a list of relatives, friends, and business associates to be notified by your immediate heirs.

The IRS imposes taxes when your estate reaches a certain value (currently $1.5 million). Your estate plan should include provisions to minimize taxes if your estate exceeds the taxable threshold. For assistance with your estate planning concerns, contact our office.

Chuckle of the Month

Here are some of the 2003 winners of the Washington Post's word play contest. Contestants were to make a minor change to any word and supply a new definition.

1. Intaxication: Euphoria at getting a tax refund, which lasts until you realize it was your money to start with.

2. Bozone(n.): The substance surrounding stupid people that stops bright ideas from penetrating. The bozone layer, unfortunately, shows little sign of breaking down in the near future.

3. Giraffiti: Vandalism spray-painted very, very high.

4. Sarchasm: The gulf between the author of sarcastic wit and the person who doesn't get it.

5. Inoculatte: To take coffee intravenously when you are running late.

6. Hipatitis: Terminal coolness.

7. Decafalon (n.): The grueling event of getting through the day consuming only things that are good for you.

8. Dopeler effect: The tendency of stupid ideas to seem smarter when they come at you rapidly.

9. Caterpallor (n.): The color you turn after finding half a grub in the fruit you're eating.

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. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

February 2004 Online Advisor

Major Tax Deadlines

February 2 - Employers must furnish W-2 statements to employees. 1099 information statements must be furnished by banks, brokers, and other payors.

February 2 - Employers must file 2003 federal unemployment tax returns and pay any tax due.

March 1 - Payors must file information returns (such as 1099s) with the IRS.*

March 1 - Employers must send W-2 copies to the Social Security Administration.*

* Deadline is extended to March 31 if filing electronically.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.

Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to your business, contact our office.

What's New in Taxes

IRS cautions taxpayers about donating vehicles

It's estimated that over 4,000 charities are aggressively soliciting contributions of vehicles. Concerned that taxpayers may be getting oversold on how much such contributions actually benefit a charity, the IRS recently issued a consumer alert. The IRS suggests that before donating a car to an organization, you check to be sure the group is a qualified charity. Then calculate the actual fair market value of the car. Only the current market value of the vehicle may be deducted, says the IRS, not the original purchase price or what you think your car is worth.

Military Tax Relief Act signed into law

Last November, President Bush signed the Military Family Tax Relief Act of 2003 providing a number of important tax breaks for those in the armed forces.

* Survivor benefits. The law doubled to $12,000 the benefit paid to survivors of those killed in military service and made the entire amount tax-free.

* Home sale exclusion. The law liberalized the home sale gain exclusion rules so those on extended duty in the armed services can still qualify when they sell their homes.

* Travel expense deductions. The new law provides an above-the-line tax deduction for the overnight travel expenses of National Guard and Reserve members.

* Retroactive provisions. Some provisions are retroactive and could provide tax refunds on amended returns. Contact us if you would like details.

New Business

Leap year creates payroll problem

If you pay your salaried employees weekly or biweekly on Thursday or Friday, you have a decision to make.

Because 2004 is a leap year, there are 53 Thursdays and Fridays in the year. This means that your employees could be getting an extra paycheck during the year. You must decide whether to decrease each salaried employee's paycheck or to allow each employee to receive extra pay for the year.

For example, an employee earning a salary of $52,000 per year would normally get $1,000 each week. In 2004, that same employee will get $53,000 unless you decrease each check to $981.13.

If you have not yet made provisions for this "leap year" payroll adjustment, you will need to recalculate the per paycheck amount accordingly. For example, if you wait until April to start your adjustment, you would need to make each check for $975 to make the annual salary total $52,000 (13 weeks already paid at $1,000 and 40 weeks at $975).

Business owners should determine whether their payroll software or outside payroll service has taken this special situation into account and is making the proper adjustments. For any assistance you need, give us a call.

Smart Business

Breakeven point is an important number for your business

Running a business is hard work. Making a profit is the reward. Wouldn't it be nice to have a tool that shows where the profits begin and how they will grow? Well, breakeven analysis is that tool.

As all business owners know, everyone else gets paid before the company makes a profit. Breakeven analysis shows the relationship between the costs of doing business and the revenues and profits of a business.

How to compute breakeven

"Dynamic Dolls" is a regional toy company that sells a variety of action dolls. Each of the action dolls sells for $10, and each costs the company $6 to produce. The other monthly costs of doing business (rent, insurance, etc.) are $50,000. How many dolls must the company sell before it makes a profit?

The company makes $4 on each doll it sells ($10 minus $6). Let us assume that for every doll sold the company throws $4 in a large bucket that has a $50,000 capacity. How many times must it throw $4 in the bucket to fill it? If we divide $50,000 by $4, we get 12,500 times. At that point the bucket is full, and we have enough to pay the monthly costs of doing business. The company has broken even. It hasn't made money, but it hasn't lost money either.

Once the bucket is full, the next $4 causes the bucket to overflow. The bucket has "runneth over," and each $4 falls to the floor as profit. If the company sells 20,000 dolls, it will make a profit of $30,000 ($4 for each of the additional 7,500 dolls past the 12,500 breakeven point).

Breakeven analysis can help you plan and manage your business. For assistance in using breakeven analysis to improve your profits, give us a call.

What's New in Financial Strategies

Take steps to make 2004 a good year

Make 2004 a better year than last by tidying up your financial and tax house. Here are some tips to get you started.

* Identify your tax opportunities for 2004. There are many credits and deductions available to you in such areas as retirement, education, home ownership, and child care. Identify those that will reduce your taxes, and make sure to qualify for all of the deductions and credits that are available to you.

* Plan your portfolio for 2004. Because of the lower tax rates on both dividends and long-term capital gains, think about restructuring your portfolio in 2004 to take advantage of the lower taxes provided by that income.

* Rid yourself of "stuff" you don't use. Are you paying for a cell phone you rarely use? A magazine you never read? A mail-order video service you forgot about? An extra cable box for that basement TV you never watch? A membership to a gym you rarely attend? If so, now is the time to dump those wasted services and pocket the cash.

* Plan for your retirement. Did you know that you could put more money into a retirement account than ever before? If you're age 50 or older, you can even make additional catch-up contributions. And all of these retirement programs allow you to put this money away while reducing your current taxes. Does your employer match some of your 401(k) contributions? Then consider making at least that much of a contribution in order to maximize the benefit of your 401(k) plan.

* Get a grip on your debt. Take a look at your current debt, especially your credit card debt. If you have good credit, and you have greater than a 12% rate on any of your cards, ask the credit card company for an interest rate reduction. Or consider transferring that balance to a lower interest credit card. Remember that personal interest isn't deductible (such as credit card interest and auto loan interest), so consider paying off that debt with a lower rate deductible home-equity loan.

* Get that new filing system started now. Purge your 2003 files. Destroy documents that you don't need. Create new files for your 2004 documents. Keep a tax and financial calendar that shows all deadlines for making payments and filing returns. And if you don't have a filing system, create one in order to organize and locate your tax and financial records.

If you need help with your tax and financial affairs, give us a call.

Don't cash out the equity in your home just because it's there

With today's low interest rates, homeowners have been flocking to refinance their mortgages. But instead of reducing their payment by the maximum amount, many have increased the size of their mortgage to tap into the home's equity. Part of the new loan pays off the old mortgage, and the remainder is paid in cash.

Although instant cash is always tempting, you should think carefully before cashing out the equity in your home. Whether it's a good or bad idea depends on your financial situation and how you intend to use the cash. For example, using the cash to pay off high-interest credit card balances might seem like a good idea. But first you should look carefully at your personal economic situation. If you can't make the loan payments, you stand to lose your home.

The economy seems to be recovering, but there's still high unemployment and more job cuts being announced every month. Even though interest rates have fallen, mortgage foreclosures are still high. Many individuals are stretched well beyond their financial means. This is not the climate to casually take on extra debt.

Before you increase the size of your mortgage, consider your financial situation. Is your job secure, or is there a possibility of losing your job? If you lose your job, how are you positioned to meet your monthly payments? How quickly could you find another job? What if you need to relocate, but you can't sell your home for enough to cover the mortgage? Do you have a cash reserve for unexpected financial emergencies?

While refinancing might make sense to lower your interest rate or shorten your loan's term, exercise caution when it comes to cashing out your home's equity. Call us if you want to discuss whether refinancing makes sense in your situation.

Chuckle of the Month

Truths adults have learned —

* Raising teenagers is like trying to nail Jell-O to a tree.

* Middle age is when you choose cereal for the fiber, not the toy.

* If you can remain calm, you don't have all the facts.

*You're getting old when you stoop to tie your shoes and wonder what else you can do while you're down there.

*You appreciate the fact that wrinkles don't hurt.

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. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

March 2004 Online Advisor

Major Tax Deadlines

March 1 - Payors must file information returns (such as 1099s) with the IRS.*

March 1 - Employers must send W-2 copies to the Social Security Administration.*

March 1 - Farmers and fishermen who did not make 2003 estimated tax payments must file 2003 tax returns and pay taxes in full.

March 15 - 2003 calendar-year corporation income tax returns are due.

March 15 - Deadline for calendar-year corporations to elect S corporation status for 2004.

April 1 - Deadline for taking your first required IRA distribution if you turned 70½ in 2003. Unless you're still working, this deadline also applies to your other retirement accounts (except for Roth IRAs).

* Deadline is extended to March 31 if filing electronically.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.

* Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

* Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to your business, contact our office.

What's New in Taxes

#1 Taxpayer problem identified

The Taxpayer Advocate Service, an independent organization within the IRS, said in its annual report to Congress that the number one problem facing taxpayers is the alternative minimum tax. Originally designed to keep wealthy taxpayers from using deductions and credits to completely eliminate their income tax liability, the AMT now hits more and more middle-income taxpayers. The report recommended that Congress repeal the AMT. If the law is not changed, it's estimated that 30% of all taxpayers will be hit by the AMT by 2010.

Your dependents can cut your tax bill

There are many ways that you can slash your taxes by making the maximum use of your dependents. Here are a few strategies to consider.

* Put them to work. If you're an unincorporated business owner, consider hiring your kids and putting them on the payroll. This allows you a double-dip tax savings of both income and self-employment taxes. Your kids won't have to pay any social security/Medicare (FICA) taxes on their wages if they're under age 18, and they won't be subject to federal unemployment (FUTA) taxes if they're under age 21. With the 2004 standard deduction for single taxpayers at $4,850, you can pay that amount to your child with no income tax consequences — up to $7,850 if the child fully invests in a deductible IRA. If you're in the 25% tax bracket, the income and self-employment tax savings for your family unit can be as much as $3,160! Even if your business is incorporated, in which case the kids are subject to FICA and FUTA taxes, you'll still have a substantial income tax savings.

* Give appreciated property. Even with the new, lower 15% tax rate on long-term capital gains, giving appreciated property (such as stock) to that college bound student or your low-income parents can save tax dollars. It's likely that your child/parent will be able to sell the asset and pay tax at a maximum rate of 5%. Since you gifted the property to them, you'll have no income tax consequences whatsoever when they sell the property.

* Don't claim the dependent. Many of you with college age children are barred from taking the Hope scholarship credit or the lifetime learning credit because your income is above the allowable limits. So consider not claiming that child as a dependent. If you forgo taking the dependency exemption, the child is allowed to claim the credit on his or her return. It doesn't matter that you're still paying the education expenses, or even if the child is still a dependent. But this strategy works only when the child has taxable income — which is yet another reason to hire your child in your business.

* Have grandparents fund an education savings account for your child. Is your income too high to permit a $2,000 contribution to your child's education savings account? Perhaps your parents' income is low enough to allow them to make the contribution. This is true even if you give the money to your parents to be used to make the contribution.

These are just a few of the many ways you can use your dependents to minimize your taxes. There are others. Call us if you would like to discuss options that will save taxes for your family.

New Business

Popular loan program is discontinued

The Small Business Administration was forced to temporarily discontinue one of its loan programs that helped provide capital to start-up businesses. The 7(a) loan guarantee program provided financing to companies that couldn't get conventional bank loans because they were too new to have established credit histories. The SBA would guarantee up to 85% of a bank's loan to such businesses.

The recovering economy created a surge in demand for SBA loan guarantees, forcing the agency to shut down the program until additional funds are available.

Smart Business

Corporate minutes have tax importance

To preserve the legal benefits of incorporation, corporations should hold regular director/ shareholder meetings. By keeping clear and appropriate records of these meetings in the form of corporate minutes, firms can save taxes and avoid business problems.

Properly documented transactions are more assured of getting favorable tax treatment. For example, compensation to an employee-stockholder is tax-deductible only if it's necessary and reasonable for business operations. When setting corporate officer compensation, consider recording comparable industry salaries, the officer's scope of responsibility, job qualifications and experience, and current economic conditions. Documenting all these factors will show that the compensation was reasonable and, therefore, tax-deductible.

Other business matters with potential tax consequences should also be carefully recorded in the minutes. These include dividends, bonuses, deferred compensation arrangements, and loans, leases, or other transactions between officers/shareholders and the company. Your goal should be to clearly document the business intent behind each decision.

Keeping complete and accurate minutes of your corporate meetings may seem like a bothersome task. But the time spent now can save your corporation a great deal of money later on.

Get with your attorney and bring your corporate minutes up to date.

What's New in Financial Strategies

Car loans add to heavy debt load

It appears that cars are partly responsible for the ever-increasing debt load American households are taking on. Consumers are making smaller down payments and stretching car loans out for longer periods.

The average down payment on a new car is currently in the 3% to 5% range compared to 15% in 1995. Today's average loan term is 63 months compared with 48 months in 1999. Some of today's car loans even stretch out to 80 months. According to the Consumer Bankers Association, last year banks financed an average 101% of a new vehicle's cost compared to 89% in 1997. The reason? Consumers were taking loans that covered not only the new car but also the amount still owed on the old car.

The unfortunate trend today is to trade in a car owing more on it than the car is worth. Resisting the urge to take on more personal debt just to have a new car can be one of the wisest financial choices an individual can make.

Consider the tax issues in real estate investing

Historically low interest rates have led to a boom in home buying — and a corresponding leap in home prices — in many markets throughout the country. As a result, many people are considering real estate as a possible investment alternative. But before you decide to become a landlord, consider the tax implications.

* Tax breaks. Property owners can deduct certain expenses directly related to the maintenance of rental property. These include advertising, legal fees, and the salary of a caretaker. As a landlord, you can also deduct the value of the building itself over a 27.5 year period, via depreciation. When you're ready to sell the rental property, you can swap it using a "like-kind" or Section 1031 exchange. In a like-kind exchange, the IRS allows you to roll the gains from one investment property to another similar property without a current tax bill. Be careful, however. For this type of transaction, you definitely need to follow the IRS rules to the letter.

* Tax pitfalls. Real estate investing does carry some potential risks. Besides the headaches involved in being a landlord (finding tenants, collecting rents, repairing buildings), the tax rules are not always favorable. When you sell the property, the depreciation portion of your capital gain, for example, will be taxed at a higher rate than the balance of the gain. In addition, if you sell within a year of purchasing a rental property, you could face higher short-term capital gain tax rates. Also, losses on real estate rentals could be considered passive losses. If so, they would only be offset on your tax return against gains from other passive activities.

* Another option. For many people, investing in a real estate investment trust (REIT) presents a better option. With a REIT you get the advantages of a portfolio of real estate, without the added work of being a landlord. However, REITs focus on one sector of the economy (real estate), so they tend to be less diversified than more broad-based mutual funds. In addition, owning a REIT also carries some tax consequences. REITs are required to pay out 90% of their income in the form of dividends or return of capital, so a portion of any distribution may be taxable.

As with any investment, it's prudent to consider the risks and tax implications before you invest in rental real estate. If you need help assessing the tax issues, give us a call.

Chuckle of the Month

Was something lost in translation or mangled in these messages?

* In a New York restaurant: We reserve the right to serve refuse to anyone.

* On a bakery delivery truck: Cakes 66 cents. Upsidedown cakes 99 cents.

* In a Nebraska diner: Customers who consider our wait staff rude should see the manager.

* At a Maine restaurant: Open seven days a week except Sundays.

* On a New Orleans door: Our air conditioner is broken. Please bare with us.

* From a tourist brochure: To start the feast, inhabitants cut the head off the biggest bore.

* In an Acapulco hotel: The manager has personally passed all water here.

The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

April 2004 Online Advisor

Major Tax Deadlines For April 2004

April 1 - Deadline for taking your first required IRA distribution if you turned 70½ in 2003. Unless you're still working, this deadline also applies to your other retirement accounts (except for Roth IRAs).

April 15 - Individual income tax returns for 2003 are due.

April 15 - 2003 calendar-year partnership returns are due.

April 15 - 2003 annual gift tax returns are due.

April 15 - Deadline for making 2003 IRA contributions.

April 15 - Deadline for employers to make contributions to certain retirement plans.

April 15 - First installment of 2004 individual estimated tax is due.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.

Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to your business, contact our office.

What's New in Taxes

Unclaimed refunds are lost after three years

The IRS says that about two million taxpayers will lose $2.5 billion dollars in tax refunds that they failed to claim for the year 2000. The three-year statute of limitations for filing or amending tax returns for 2000 ends on April 15, 2004.

Many students, retirees, and others didn't earn enough to be required to file a 2000 return, yet they had income tax withheld from part time jobs or from jobs held only part of the year. To get the refunds due them, taxpayers must file a 2000 tax return.

This situation serves as a reminder to taxpayers: File a tax return for any year where taxes were withheld but your total income for the year fell below the filing requirement amount. If you don't file within the three-year statute of limitations, your refund will be lost forever.

Don't overlook tax planning in a divorce

In the midst of a divorce, the last thing you may want to think about is taxes. But if you don't negotiate your divorce settlement with taxes in mind, you may regret it in years to come. Here are some things to consider.

Alimony. Often one spouse agrees to support the other spouse or their dependent children. Whether that support is called "alimony" or "child support" makes a huge tax difference to both spouses. Alimony is tax-deductible by the payer and taxable income to the recipient. On the other hand, child support is neither deductible nor taxable.

Children. The dependency exemption is a valuable tax break, and parents can negotiate who gets to claim it. The 2004 exemption deduction is $3,100. Even in the 15% tax bracket, claiming a dependent could reduce your taxes by $465. Other tax breaks also hinge on who claims the exemption, including the child tax credit and education tax credits.

Property. In many cases, splitting your assets 50-50 may appear to be a fair distribution, but not all assets are created equal under the tax law. You should always consider what will remain after taxes when the property is eventually sold. For example, assume one spouse accepts $500,000 in cash and the other spouse accepts $500,000 in stock as a fair division of the marital property. Let's further assume the stock has a capital gain of $400,000 that will be taxed at 15% when it's sold, resulting in a $60,000 tax bill. One spouse will end up with $500,000 while the other is left with only $440,000.

Retirement accounts. There is a right way and a wrong way to split up IRAs and other retirement accounts in a divorce. Unless you divide them the right way, you could get hit with unnecessary taxes and penalties.

If you're considering a divorce, call us early in the process. We can work with your attorney to help you make informed choices that take taxes into account.

New Business

Appeals court upholds legality of Do Not Call list

Millions of consumers added their phone numbers to the national "do not call" registry after it opened last July. However, court challenges to the registry left businesses and consumers uncertain about the enforcement of the list.

In February 2004, the U.S. Court of Appeals for the 10th Circuit upheld the constitutionality of the list, finally resolving the legal issue. Those challenging the law were undecided as to whether they would ask for a review of the court's decision or appeal the decision to the Supreme Court. So for now, businesses should become familiar with the new rules and take whatever steps are necessary to bring their practices into full compliance. Penalties for noncompliance are steep, up to $11,000 per illegal call.

Smart Business

Take time to understand your financial statements

To accountants, the relationship of financial statements (balance sheet and income statement) is very specific. To the average business owner, these statements can be very confusing.

One will get more useful information from the statements when the relationship between them is understood. Maybe this comparison will help you see the connection. The balance sheet (the listing of your assets and debts) is like a still photograph. The income statement is a moving picture.

The balance sheet will state "as of" a date; the income statement will state "for the period ended." Look at this nonaccounting example:

On the last day of the month, we take a picture of you sitting in your office chair. Then, at the end of next month, the still photo shows you sitting across the room. This is the balance sheet (your position statement). We know for a fact that you have moved from position one to position two. What we don't know is how you got there. Did you just walk straight across the room, or did you travel around the building or maybe even across town before stopping there? The income statement is the moving picture that gives us the details of how and where you traveled from position one to position two.

The numbers on the balance sheet can all be verified for a given date. You can reconcile the bank balance and verify the accounts receivable to the penny. You can confirm your liabilities with your creditors. When you subtract all the debt from the total assets, you get your equity. If your equity has increased $10,000 for the month, what did it take to produce it? Were sales $30,000 and expenses $20,000, leaving $10,000 profit? Or were sales $100,000 with expenses of $90,000? This story is told in the income statement.

By comparing the income statements for several periods and analyzing the various income and expense accounts, you can determine if and where changes need to be made in your business.

If you would like assistance in using your financial statements or other business reports, call us; we are here to help you.

What's New in Financial Strategies

U.S. Treasury announces an end to HH bonds

After August 31, 2004, Series HH savings bonds will no longer be issued, according to an announcement by the Treasury Department. Since 1980, Series E and EE savings bonds could be exchanged for Series HH bonds, deferring the tax on the E bonds until the HH bonds matured.

The Treasury reports that $13.3 billion of the $204 billion in outstanding savings bonds are HH bonds. Discontinuing the HH bonds is part of the Treasury's program to save money and to promote a paperless savings bond program.

You have many options for IRA investments

Do the assets in your individual retirement account complement your overall financial strategy? If not, it may be time to take a look at what's available.

Traditional investments that can fit your needs — and fit into your IRA — include the following:

Stocks and American Depository Receipts (ADRs). You can purchase individual stocks and ADRs through a self-directed IRA account. ADRs provide an acceptable way to diversify into foreign stocks.

Bonds. Treasuries can generate a current income stream within your IRA and help preserve principal. Junk bonds and zero-coupon bonds offer more risk — and perhaps more return. All are permissible IRA investments.

Mutual funds and unit investment trusts. Mutual funds permit easy diversification and the ability to spread your annual IRA contribution over several installments.

Real estate investment trusts (REITs). This investment provides the opportunity to own real estate through the purchase of securities that trade on established markets.

Less common investments that might have a place in your IRA include:

Real estate. Your IRA can own rental properties, trust deeds, and mortgage notes. Holding a mortgage for yourself or a relative is not permitted in an IRA.

Gold, silver, platinum, or palladium bullion. To be part of your IRA, precious metals must meet specific fineness standards and be held in the physical possession of your trustee.

Coins. An IRA can own certain gold, silver, and platinum coins, generally those minted by the Treasury Department or issued by states. Coins that have been made into jewelry may not meet the criteria of an acceptable investment.

When making new contributions or rebalancing your IRA, you have a wide range of options. Just remember that some investments are specifically prohibited. For example, an IRA cannot own a life insurance policy or collectibles (art works, rugs, antiques, metals, gems, stamps, alcoholic beverages, and some coins). For details or assistance in this area, give us a call.

Chuckle of the Month

Age — is it in the eye of the beholder?

Have you been guilty of looking at others your own age and thinking. . .surely I cannot look that old? You may enjoy this short story which could be true. . .

While waiting for my first appointment in the reception room of a new dentist, I noticed his certificate, which bore his full name. Suddenly, I remembered that a tall, handsome boy with the same name had been in my high school class some 30 years ago. Upon seeing him, however, I quickly discarded any such thought. This balding, gray-haired man with the deeply lined face was way too old to have been my classmate.

After he had examined my teeth, I asked him if he had attended the local high school. "Yes," he replied. "When did you graduate?" I asked.

He answered "In 1971. Why?"

"You were in my class!" I exclaimed.

He looked at me closely and then asked, "What did you teach?"

The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.