Major Tax Deadlines For January 2005

Major Tax Deadlines For January 2005

* January 18 - Final 2004 individual estimated tax payment is due, unless 2004 tax return is filed and taxes are paid in full by January 31, 2005.

* January 31 - Employers must provide 2004 W-2 statements to employees.

* January 31 - Payors must provide 2004 Form 1099s to payees.

* January 31 - Employers must generally file Form 941 for the fourth quarter of 2004 and pay any tax due.

* January 31 - Employers must generally file 2004 federal unemployment tax returns and pay any tax 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

New tax numbers are released for 2005

The IRS adjusts many tax numbers for inflation each year. Other numbers change as a result of tax law revision. As you begin your tax planning for 2005, here are some of the changes you'll need to take into account.

* The maximum earnings subject to social security tax increases to $90,000 for 2005. As before, all earned income (wages and self-employment income) is subject to Medicare tax. The earnings limit for retirees under age 65 increases to $12,000. There is no earnings limit for those 65 and older.

* The top estate tax rate decreases to 47%, but the exemption amount stays at $1.5 million for 2005. The annual gift tax exclusion remains at $11,000 per donee.

* The nanny tax threshold remains at $1,400 for 2005. If you pay household workers more than this amount during the year, you're responsible for payroll taxes.

* The kiddie tax threshold remains at $1,600. If your child under age 14 has more than $1,600 of unearned income in 2005 (e.g., dividends and interest income), the excess will be taxed at your highest rate.

* The first-year business equipment expensing limit increases to $105,000. A new limit applies to sport utility vehicles: when purchased for business use, no more than $25,000 may be expensed in the first year.

* The standard mileage rate for business driving increases to 40.5¢ per mile, and the mileage rate for medical and moving expenses increases to 15¢ a mile. The rate for charitable driving remains at 14¢ a mile.

For details or for assistance with your tax planning, give our office a call.

You pay the bills, but can you claim a dependency deduction?

It used to be easy to determine the number of dependents you could claim on your tax return. Your children were your dependents until they moved out, and then they weren't. These days, it's not unusual for older children to live with, or be supported by, their parents. Because of this, determining your child's dependency status for tax purposes has become more complicated.

Here are some of the rules you must know.

* 50% support. Your child does not have to live with you to be your dependent, as long as you provide more than half of his or her support. Common support items include food and lodging, clothing, transportation, and medical, educational, and recreational expenses. If you buy a car for your child and it is registered in the child's name, the cost is a support item.

* Age and income. If at the end of the year your child is under age 19, or is a full-time student under age 24, the child's income is not a factor in determining your right to a dependency exemption. As long as you meet the support test, you may still claim the child. (A full-time student is one who attends school full time for at least five months of the tax year.) However, if your child doesn't meet the age or full-time student requirement, you can't claim a dependency exemption if the child has more than a certain amount of income for the year ($3,100 in 2004 and $3,200 in 2005).

* Married child. If you support a married child, you can't claim a dependency exemption if the child files a joint return with a spouse, unless the only purpose for filing is to obtain a refund of withheld taxes.

* Divorce. If you're divorced or separated, special rules apply in determining dependency exemptions for children. The general rule is that the custodial parent is entitled to the dependency exemption for the child unless that parent waives the right to the exemption in writing.

The parent who maintains a home for a dependent child for more than half of the year may still qualify for the earned income credit, the child care credit, and the head of household rate even if that parent has waived the dependency exemption to the noncustodial parent.

The parent who pays the child's medical expenses may claim them along with his or her own, regardless of which parent gets the dependency exemption.

For more information about the rules as they apply to your particular situation, please call us.


New Business

Survey shows rising health insurance costs

A recent survey of 3017 randomly selected public and private companies revealed that the cost of health insurance provided by employers rose 11.2% in 2004. Costs are expected to rise again in 2005, according to the survey conducted by the Kaiser Family Foundation.

The survey also found that employees contributed an average of $558 to the total annual insurance cost of $3,695 for single coverage and $2,661 to the $9,950 cost for family coverage.

Companies are trying to find ways to contain health insurance costs, including providing incentives to their workers to stay healthy. Wellness programs, financial rewards or prizes for exercising, eating right, and getting checkups are some of the methods employers use to keep workers healthier and health costs down.


Smart Business

A business partnership needs a written agreement

Say you're planning to start a business or expand an existing one. You don't want to go it alone, but you're not sure how to choose a business partner. A friend might seem like an ideal choice for partner, since you probably have similar personalities and interests. But the qualities that make for a good friendship don't always translate into a successful business partnership.

* Balance. A business partner should balance your skills and strengths. For example, if you're good with finances, your partner should be good at marketing. If you like to tackle ten different projects at once, a more methodical partner might be a good balance.

* Communication. A good partner should be willing to communicate freely and often. Friends often assume that they think alike, so they never get around to discussing important business issues. For example, if your prospective partner plans to retire before you do, what will happen to the business? What if you want to build a large company, but your partner wants to keep things small? Hammer out important issues like these before you get started, and document your understanding in a partnership agreement.

* The partnership agreement. The need for a partnership agreement can be summed up in two words: things change. You and your partner/s may agree about everything now, but disputes could arise later on. Or one of you could die unexpectedly, leaving the survivor/s to deal with the deceased partner's heirs.

What should a partnership agreement contain? Basic provisions include the parties to the agreement, the name, purpose, and location of the business, and the division of management responsibilities. The agreement should also indicate what initial capital contributions (or services instead of capital) will be made, when additional capital contributions will be required, and how profits and losses will be shared.

Beyond the basics, a partnership agreement should anticipate major business changes and spell out how to deal with them. For example, if one partner dies, what are the rights and obligations of the other partner/s? Under what circumstances can a partner leave, retire, or be expelled? What are the financial arrangements for departing partners? How long must an ex-partner wait before starting a competing business?

A partnership agreement can't address every possible contingency, so consider an arbitration clause to handle disputes that you and your partner/s can't resolve on your own. Without such a clause, your only alternative could be costly litigation.

Your business will run more smoothly with a carefully thought-out, written partnership agreement. See us and your attorney for assistance in getting it done right.


What's New in Financial Strategies

Don't let your gifts disappear

About $17 billion of gift cards were given as gifts this past holiday season, according to the National Retail Foundation. That very likely means you or someone in your family received a gift card.

Gift cards are convenient, and since you get to choose what you purchase, you get what you want without having to exchange a gift that didn't fit or that you didn't like. But be aware of the fine print that comes with some gift cards. Some have monthly fees that eat into the card's value if the card goes unused; others have expiration dates after which point the card is worth nothing.

To insure that you get full value for any gift card you received this past holiday season, check the fine print. Don't let ignorance of the requirements reduce your gift to nothing.

Give your children a good financial education

Schools teach children some financial lessons, but if you want your kids to pick up good money skills and become financially responsible adults, you should give them some training yourself. Consider the following suggestions.

* Set a good example. Children frequently do as you do, not as you say. Keep your own financial affairs in order, and your children will likely emulate your good habits.

* Talk about it. Three or four years is old enough for money lessons. Start with the names of coins and bills; then go on to how much each is worth. Let your child pay for things at the store.

* Give an allowance. An allowance teaches your child an important lesson for living in this country: work means money. A steady allowance for steady work is best. Extra pay is okay for extra work. Decrease the frequency (but increase the amount) for older children. Less frequent payments force your child to budget.

* Allow mistakes. At its most basic level, money is about making choices. Children who never feel the pain of their poor financial choices are less likely to learn how to avoid making them again. The cost of mistakes only goes up over time. If Junior wants to spend his whole wad on a video game, let him. It will be a while before he can afford another big purchase. That's a good lesson in deferring gratification.

* Encourage saving. Piggy banks are good for young children, but graduate them to a savings account as soon as their maturity allows. About the time they understand interest payments, they usually have enough money to meet the minimum deposit of a better-earning money market account.

* Teach money management. Specific lessons might range from how to compare interest rates on savings accounts to the pros and cons of mutual fund investing. But there should be one common element to all of your teaching in this area: money doesn't take care of itself.

* Talk with grown children, too. Many people feel uncomfortable discussing family finances with their children. However, sharing some information with your grown children can make things more comfortable for everyone.

Discuss your financial goals with your adult children, and let them know your plans for your retirement years. It's often a good idea to involve adult children in some or all aspects of your estate planning. Your particular family situation should dictate how much information you share and with whom.

If you would like assistance with your financial concerns or teaching finances to your children, please call. We're here to help.


Chuckle of the Month

The trouble with doing something right the first time is that nobody appreciates how difficult it was.

Major Tax Deadlines For February 2005

For February 2005

February 28 - Payors must file information returns (such as 1099s) with the IRS. (Electronic filers have until March 31 to file.)

February 28 - Employers must send W-2 copies to the Social Security Administration. (Electronic filers have until March 31 to file.)

For March 2005

March 1 - Farmers and fishermen who did not make 2004 estimated tax payments must file 2004 tax returns and pay taxes in full.

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

2005 donations for tsunami victims may be deductible in 2004

Americans are contributing generously to help victims affected by the tsunami disaster in Asia. The IRS issued a reminder to taxpayers about the deductibility of charitable contributions.

If you hope to deduct your contribution, note the following:

* Make sure that you are giving to a legitimate organization. Don't be fooled by names that sound impressive or are intended to sound like familiar charities. (Before making a contribution, you may want to find out how much of your contribution will go to victims and how much goes to the administration costs of the charity.)

* Be sure the organization is considered tax-exempt by the IRS. Contributions made to foreign charities may not qualify for deductibility.

* Only if you itemize deductions on your tax return will you be able to take a deduction for your contribution, and any gift of $250 or more requires a receipt from the charity. A cancelled check is not sufficient.

* Be aware that legislation signed last month allows you to deduct tsunami relief donations made by January 31, 2005, on your 2004 tax return. Normally, charitable contributions are deductible for the year in which they are made. Congress accelerated the deduction hoping it would encourage additional giving to the relief effort.

Add these items to your 2005 recordkeeping

Keeping good records helps you get every tax deduction to which you're entitled. This year there are some new rules; be sure your recordkeeping takes them into account.

* New rule #1. There's a new itemized deduction for state and local sales taxes on your federal income tax return. You can now choose to deduct sales taxes instead of state and local income taxes paid.

If you plan to purchase big ticket items this year, or if you are taxed in a state with no or low income tax, you should keep your sales tax receipts. Here's why: The IRS provides sales tax deduction tables which can be used instead of keeping receipts throughout the year, but you can add to the table amount sales taxes paid on big ticket items such as motor vehicles, airplanes, boats, homes, mobile homes, and home building materials. When you file your 2005 tax return, you can then choose to deduct either sales taxes or state and local income taxes, whichever gives you the bigger deduction.

* New rule #2. Teachers may deduct up to $250 for the classroom supplies they purchase with their own money. Again, keep receipts so you don't miss this tax break. It's a deduction that can be taken whether you itemize or take the standard deduction.

* New rule #3. If you donate a vehicle to a charity in 2005, you can no longer estimate the vehicle's fair market value to determine your deduction. You'll have to get the valuation amount from the charity, and if they sell your vehicle at auction (as most charities do), that amount is limited to the actual selling price of the vehicle.

New Business

FUTA deposit threshold increases in 2005

The IRS has good news for more than four million small businesses. Under regulations recently issued by the IRS, employers will be required to make quarterly deposits for federal unemployment taxes (FUTA) only if the accumulated tax exceeds $500. The deposit threshold prior to 2005 was $100.

Since the maximum tax per employee is $56 per year, the higher threshold eliminates the quarterly deposit requirement for employers with eight or fewer employees


Smart Business

Don't let loose credit policies sink your ship

There are many ways to make your business more profitable, and sound credit policies are high on the list. Take the time right now to reexamine your company's policies. Keep the following items in mind as you review your policies.

* Don't be so eager to sign on new customers that you neglect to check out their credit history. Take the time to check references, and obtain a credit report to see how they've handled other financial transactions.

* Establish collection policies and follow up promptly on delinquent accounts. The more overdue accounts become, the more likely they are to become uncollectable. That cuts into your profits.

* Calculate what it costs to carry credit for your customers. For example, if your business generates $1,000 per day in credit sales, and it takes you an average of 60 days to collect, your cost of providing credit to your customers is $6,000 per year. This example assumes 10% annual interest on the use of money. By speeding up the average collection to 30 days, you cut your carrying costs by half.

* To speed collections, invoice customers when you ship the goods, rather than waiting until the end of the month. Make sure your invoice clearly shows your payment terms, including penalties for late payment and the discount, if any, for prompt payment.

* Be aware of the payment cycles for your industry. For example, if contractors typically pay their bills by the 10th of the month, make sure your invoices arrive in plenty of time for them to process your payment.

Sound credit policies and adhering to those policies enhance your chances for business survival, especially in challenging economic times. Call us to review your policies or to set policies in place to help make your business more profitable.

What's New in Financial Strategies

You can put more in your medical and retirement accounts in 2005

* HSAs.
Health Savings Accounts (HSAs) allow taxpayers with high-deductible health insurance plans to set aside tax-deductible funds to pay for unreimbursed medical expenses. For 2005, the amount that an individual can put into an HSA increases to $2,650, and the amount for family coverage increases to $5,250. Those who are 55 or older can put an additional $600 into an HSA this year.

* IRAs.
Though the amount that taxpayers could put into other retirement plans has increased annually for the last several years, the annual IRA contribution limit remained at $3,000 ($3,500 for those 50 or older). That changes this year. In 2005 you can put up to $4,000 into an IRA (traditional, spousal, or Roth) if you're under age 50 and up to $4,500 if you're 50 or older.

Roth IRA conversion rules change in 2005

A little-known tax rule took effect on January 1, 2005. This new rule, which applies specifically to people over the age of 70½, will make it easier for seniors to convert their IRAs to a Roth IRA.

Roth IRAs were instituted as part of the 1997 Tax Act. Unlike traditional IRAs, Roth IRAs are tax-free, which means that you don't pay taxes on money withdrawn from your Roth as long as certain conditions are met.

Along with the introduction of these tax-free retirement savings accounts came the opportunity to convert your traditional IRAs to a Roth. Yes, you pay taxes on the money converted. But that money grows tax-free from that day forward.

Not everyone is eligible to convert their IRAs to a Roth IRA, however. To qualify, your adjusted gross income (AGI) can't exceed $100,000. That threshold applies to single individuals and to married couples alike.

* The new rule. Here's where the new rule helps seniors. Starting this year, your annual required minimum distribution (RMD) from your IRAs is excluded when determining if your income exceeds the $100,000 threshold. Let's say you'll turn 75 this year and your IRA accounts are worth $300,000. Based on your life expectancy as reflected in the Uniform Lifetime Table, your RMD for 2005 would be $13,100. While this distribution is taxable to you, it no longer counts when determining eligibility for a Roth conversion.

* To convert or not? Should you consider converting your IRAs? Perhaps you should if you think that the tax rates will be higher in the future and you have enough money set aside to pay the taxes due on the conversion without invading your new Roth account.

Another advantage is that you get to keep the money invested within a tax-advantaged account longer. That's because, unlike traditional IRAs, there are no required minimum distributions for Roths.

Converting to a Roth can also help you out with some basic estate planning. By paying all of the income taxes due on your IRAs right now, you'll deplete your estate by the taxes paid. Plus, you reduce the income taxes your heirs will ultimately pay since Roth distributions are tax-free to the beneficiaries of an inherited Roth as well.

The downside includes the potential of pushing yourself into a higher tax bracket, having your personal exemptions and itemized deductions phased out, and paying taxes on a higher percentage of your social security benefits.

To find out more about this tax law change, and whether converting your IRAs to a Roth might make sense for you, please give us a call.

Thought of the Month

Never be afraid to try something new. Remember that a lone amateur built the Ark. A large group of professionals built the Titanic.

Major Tax Deadlines for March 2005

March 1 - Farmers and fishermen who did not make 2004 estimated tax payments must file 2004 tax returns and pay taxes in full.

March 15 - 2004 calendar-year corporation income tax returns are due.

March 15 - Deadline for calendar-year corporations to elect S corporation status for 2005.

March 31 - Deadline for payors who file electronically to file 2004 information returns (such as 1099s) with the IRS.

March 31 - Deadline for employers who file electronically to send copies of 2004 W-2s to the Social Security Administration.

For April 2005

April 1 - Deadline for taking your first required IRA distribution if you turned 70½ in 2004. Unless you're still working, this deadline also applies to your other retirement accounts (except for Roth IRAs).

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

Review your children's tax filing requirements:

Children who have income may have to file income tax returns. Here are the filing requirements for 2004.

If your child had wage income only during 2004, a tax return is required if wages exceeded $4,850. If the child earned less than $4,850 but employers withheld taxes, a tax return must be filed if you want a refund.

If your child had net self-employment earnings of $400 or more in 2004, a return is required and a self-employment tax of 15.3% is due. Income tax could be due if earnings exceeded $4,850.

If a child had investment income only during 2004 (such as dividends and interest), filing is required if the total exceeded $800.

If your child had both earned and investment income, a return is required if the total was more than the larger of (a) $800 or (b) $250 plus up to $4,600 of earned income.

A job change creates tax issues

Taxes may be the last thing on your mind when you're changing jobs, but overlooking their impact could mean missed tax-saving opportunities. Issues to consider include:

Your retirement plan. Distributions from retirement plans are generally taxable and may also be subject to an early withdrawal penalty. The penalty would also apply to amounts withheld for income taxes. When you leave a company, any unpaid 401(k) loan is also considered a taxable distribution if you don't repay the loan according to the terms of your plan.

Planning Tip: Have the money in your retirement account transferred directly into another qualified plan or an IRA. A direct rollover avoids automatic income tax withholding and income taxes.

Job-hunting expenses. You can deduct the costs of looking for a new job in your present line of work, even if you don't get the job. Typical expenses include travel to job interviews, resume costs, and employment agency fees. You must itemize your deductions, and your total miscellaneous deductions must exceed 2% of your adjusted gross income.

Moving expenses. If you meet two tests, you can deduct the costs to move your household and personal effects, including your in-transit travel expenses and storage expenses.

First, the distance from your old home to your new workplace must be at least 50 miles farther than the distance from your old home to your old workplace.

Second, you must work full time in your new location for at least 39 weeks during the 12 months following your move. The time test doesn't apply if you're laid off from your new job or later transferred for your employer's benefit.

Residence sale. You can exclude from taxation up to $250,000 of gain ($500,000 for joint filers) if you own and occupy a home as your principal residence for at least two of the five years preceding its sale. If you sell your home due to a change in employment, you can still exclude part of the gain even though you don't meet the ownership and use tests.

To discuss the tax issues relating to a job change, call us. We are here to help.

New Business

New study reveals employee preferences

A recent employee-benefits study conducted by MetLife Inc. revealed some interesting information about employee preferences and behavior.

Of the full-time employees surveyed, 64% said they preferred paid vacation days over other employer-provided benefits such as pension plans, disability insurance, life insurance, and long-term-care insurance.

Younger employees (21 to 30 years of age) valued sick leave and flexible work schedules more than pension and savings plans.

Though about half of the survey respondents worried that they wouldn't have enough set aside for retirement, one-third revealed that they haven't even started saving for retirement.

 

Smart Business

Take steps now to benefit from 2004 tax laws

Last October, President Bush signed two substantial tax bills into law. Like other recent tax law changes, some provisions are permanent, but most are temporary. What steps can you take to maximize the new tax breaks for your business?

* New deduction. There's good news for many businesses that can now claim a "manufacturer's deduction" of up to 3% of their taxable income in 2005 and 2006, 6% for the following three years, and 9% starting in 2010. Regulations will define what qualifies as manufacturing, but it appears that the definition will be quite broad. Construction, engineering, and computer software companies are among those that will qualify.

* S corporation. The new rules also make it easier for your business to qualify as an S corporation by increasing the maximum number of shareholders from 75 to 100, and allowing members of the same family to elect to be treated as one shareholder.

* Start-up costs. Up to $5,000 of business start-up expenses are now deductible in the year the business begins operations. Previously, you'd amortize start-up expenses over 60 months.

* Depreciation and expensing. Though 50% bonus depreciation for business equipment purchases is no longer available, first-year expensing is increased to $105,000 for 2005. Also, you can depreciate 2005 leasehold improvements made to our commercial space or restaurant property over 15 years. Next year, you'll once again deduct the cost of these improvements over 39 years.

For more information and assistance with your 2005 tax planning, please give us a call.

What's New In Financial Strategies

Important IRA deadlines coming up.

The rules governing IRAs are complex, and making mistakes can be costly. Here are some important deadlines and reminders —

* You have until April 15, 2005, to establish and contribute to an individual retirement account (IRA) for 2004.

* If your 2004 IRA isn't yet fully funded ($3,000 if you're under age 50; $3,500 if you're 50 or older), designate your 2005 contributions as being for 2004 until you reach that limit or the April 15 deadline passes. You can then deduct these amounts on your 2004 tax return for an earlier tax benefit.

* If you turned 70½ in 2004, you must start taking required minimum distributions (RMDs) from your IRAs (except for Roth IRAs). If you haven't yet taken your 2004 RMD, you must take it by April 1, 2005, or face a 50% penalty.

* Be aware that the financial institutions that hold your retirement accounts could make errors in following your instructions and create unexpected tax consequences and penalties. Give the financial institution adequate time to meet deadlines and follow your directions. And follow up to be sure that no mistakes are made.

Don't let neglect derail your plans:

Although life's only certainties may be death and taxes, we rarely enjoyplanning for them. But without planning, your assets can go to unintended recipients — including the government.

* Keep track of documents:

Naming your beneficiaries is only the first step. It's just as important to periodically review the beneficiaries designated by your will, insurance policies, investment accounts, retirement plans, and similar documents. Examine each document carefully, because some assets may pass to the beneficiaries named in the governing document, regardless of the terms of your will.

Example: You name your husband as sole beneficiary in your will, on your life insurance policy, and in your 401(k) plan. After a few years, you divorce and remarry. You remove your ex-husband from your will and name your new husband as the insurance beneficiary, but you forget about the 401(k) plan. The result: When you die, your exhusband probably will inherit the plan assets.

Events that might require changing beneficiaries include marriage, birth, divorce, death (e.g., of a beneficiary), increases or decreases in your wealth, changes in tax law, or simple changes of heart. Even in the absence of a triggering event, it's wise to review your designations regularly. A beneficiary may have fallen out of favor. A once-needy beneficiary may have become wealthy, enabling you to divert your assets elsewhere. Ongoing changes to estate tax law may mandate different approaches to beneficiary selection.

* Begin a thorough review:

When reviewing your beneficiary designations, start by listing the relevant documents. In addition to your will, personal life insurance, and active retirement plan, include employer-provided life insurance and life insurance associated withservices such as credit cards, medical plans, and trade associations. You'll also need to look at stock purchase plans, stock option plans, and similar benefit programs.

If you haven't reviewed your beneficiary designations lately, think about doing it soon.

For assistance in your review, give us a call.

Chuckle of the Month


If you're a movie-goer, you're fortunate. You are learning things you otherwise would never know. For example -

* When they are alone, all foreigners prefer to speak English to each other.

* All telephone numbers in America begin with the digits 555.

* The ventilation system of any building is the perfect hiding place. No one would ever think of looking for you there, and you can travel to any other part of the building without difficulty.

* Creepy music coming from a cemetery should always be investigated more closely - especially if you are alone.

* If you find yourself caught up in a misunderstanding that would be cleared up quickly with a simple explanation, for goodness sake, keep your mouth shut.

Major Tax Deadlines for March 2005

April 1 - Deadline for taking your first required IRA distribution if you turned 70½ in 2004. 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 2004 are due.

April 15 - 2004 calendar-year partnership returns are due.

April 15 - 2004 annual gift tax returns are due.

April 15 - Deadline for making 2004 IRA contributions.

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

April 15 - First installment of 2005 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


A big refund may be bad for your financial health

Too many taxpayers overlook the fact that getting a big tax refund every year may not be a good thing. Will you be among the thousands of taxpayers who get a big tax refund this year? While most Americans happily accept their tax refund checks, smart taxpayers understand that refunds actually cost them money. Here's why:

* The government pays no interest on refunds. Kept in your hands, those dollars could have been productive. For example, you could have invested the money or used it to pay off your debt during the year. If the money had been added to a 401(k) plan, tax would have been deferred on both the investment and its earnings. Even better, your employer might have matched all or part of your investment, adding to your retirement savings.

* Refunded cash is not available for use until actually received. Even though most taxpayers get their checks promptly, circumstances or errors can delay (or stop) a refund.

To prevent losing money on tax refunds, consider reducing your withholding or estimated tax payments. For most taxpayers, withholding must equal either the prior year's tax or 90 percent of the current year's liability. If your annual income changes little, it's relatively easy to avoid overwithholding. You should consider filing a revised Form W-4 withholding statement with your employer if you're having too much withheld.

For taxpayers with fluctuating income or multiple sources of income, the problem is more complex. The IRS provides a worksheet with Form W-4, but many people find the form complicated. If you'd like assistance adjusting your withholding, contact our office.

 

How to benefit from the 2004 tax laws with early 2005 planning

Two laws were passed late in 2004. Some provisions are permanent, but many are temporary. Here are some steps you can take to maximize the tax breaks contained in these two tax laws.

* Sales tax. For the first time since 1986, you can deduct sales taxes. On your 2004 and 2005 tax returns, you can choose between deducting sales taxes or state and local income taxes paid during the year. Consider setting up a file to save your receipts reflecting your sales taxes paid, especially for big-ticket items such as cars and boats.

* Hybrids. If purchasing a hybrid automobile is in your plans, 2005 is the year to make that purchase. That's because the "clean-fuel" deduction is slated to decrease from $2,000 this year to $500 in 2006.

* Donations. Thinking about donating your car or boat? Under the new rules, you're required to limit your deduction to the gross proceeds received by the charity for selling your car or boat. However, if the charity uses your vehicle or makes substantial improvements before selling it, the charity is to give you the value that determines your deduction.

* AMT. When planning ahead for 2005 and beyond, watch out for the alternative minimum tax (AMT). Effective for 2006, the AMT exclusion is scheduled to fall from $58,000 to $45,000 ($40,250 to $33,750 for single individuals), increasing your chances of getting hit by this tax.

For more information, please give us a call.

New Business

Vehicle deductions for 2005 announced by IRS

The IRS has issued the depreciation limits for business cars first placed in service in 2005. For passenger cars, the limits are ?

* $2,960 for 2005
* $4,700 for 2006
* $2,850 for 2007
* $1,675 for each year thereafter.

For trucks and vans first placed in service in 2005, the limits are $3,260 for 2005, $5,200 for 2006, $3,150 for 2007, and $1,875 for each year thereafter. Electric vehicles first placed into business use this year have the following depreciation limits: $8,880 for 2005, $14,200 for 2006, $8,450 for 2007, and $5,125 for each year thereafter.

First-year depreciation limits for 2005 are considerably lower than last year's limits because 50% bonus depreciation for new business equipment purchases is no longer allowed.

Smart Business

Cell phone expenses: Are they deductible?

If you use a cell phone for business calls, you need to know what cell phone expenses are tax-deductible. According to the IRS, cell phones are subject to strict substantiation requirements for deductions to be allowed. The business use of the phone needs to be supported by maintaining a written record of:

* Amount of the expense.
* Time and place of the expense.
* Business purpose of the expense.
* Business relationship to the taxpayer of the other party.

Unfortunately, copies of phone bills that are simply "claimed" as business-related expenses will not be considered deductible items. A recent case denied a taxpayer any phone deductions for lack of supporting evidence. The taxpayer tried to meet the substantiation requirements with cancelled check copies.

* Keep detailed records. For outbound cell phone calls, always obtain a detailed list of calls from your provider. Then make notations distinguishing between personal and business-related calls. Or consider maintaining a diary explaining each call, and reconcile it with all the phone bills you receive. Once the business usage is determined, the cell phone expense can be calculated for deduction purposes.

If you are an employer who provides cell phones for your employees, require them to maintain records for business use of their phones. If they fail to do so, it is possible to lose deductions, and the employees may have to report the full value of the phone as taxable income.

When the business-use percentage on a cell phone is 50% or less, depreciation is calculated using the straight-line method over a period of ten years. No first-year expensing is permitted.

For details or assistance with any of your business concerns, please contact our offi

What's New In Financial Strategies

Tax time's a good time

Right now is the ideal time to review your financial affairs. You pull together your financial information to prepare your income tax return at this time of year. Why not take one more step and do something positive for your overall financial well-being?

The following suggestions will get you started on your financial review:

Hold a discussion with your family. Spouses and children need to share and prioritize their financial aspirations.

* Write down your financial goals. How much money will you need to meet each goal? When will you need the money, and how will you get it?

* Do a net worth statement (a list of your assets and debts), and compare it to last year's statement. Are you gaining or losing ground?

* With your goals (and the effects of inflation) in mind, review the performance of your investments.

Take steps to protect what you already have. Goals may become instantly unobtainable if you lose your present assets or your income potential.

* Do you have adequate disability insurance coverage to replace take-home pay if you become incapacitated?

* Do you have enough life insurance if you or your spouse should die?

* Do you have replacement value property insurance on your home?

* Do you have adequate insurance for calamities such as automobile accidents or lawsuits?

Note: Make sure that you need all of the insurance that you have. Do not duplicate employer-provided coverage. Review your coverage annually; do not just automatically renew policies. Review your will and your estate plan. Did your situation change during the past year (marriage, divorce, births, deaths, move to another state, for example)? This year, the top estate tax rate is 47%, a decrease from last year's top rate of 48%. Make appropriate changes to your will and estate plan.

Review your credit use. Keep your credit card bills current. If you're finding that hard to do, it's probably time to cut up some of those credit cards and get your debt under control.

Organize your records. If you had trouble assembling data for your financial review, you need a better system. Set one up.

For help with any aspect of your review, call us. We're here to assist you in any way we can.

Use an investment ladder to spread out investment risks

With today's jittery stock market, you might be considering fixed-rate investments such as bonds or bank CDs. These investments are not without their own risks, however. With bonds, there's the risk that your bond could go down in value when interest rates increase. So if you need to sell a bond before it matures, the value might be lower than your purchase price. If all your bonds or CDs mature around the same time, you could be in the position of having to reinvest when rates are unfavorably low. One strategy to help deal with these risks is called an investment ladder.

* Stagger investment maturities. To construct an investment ladder, you stagger the maturities of your fixed-rate investments so that approximately equal amounts of bonds or CDs mature over several years. Because the maturities are equally spaced, they're like the rungs in a ladder. For example, if you have $50,000 to invest you might buy five $10,000 bonds with staggered maturities over the next ten years.

* Guarantee liquidity. With an investment ladder, you're sure of having certain amounts of cash at various future dates. For example, you might build a four-year ladder for a college savings fund so that the maturities match your annual tuition bills. Or you could build a ten-year ladder to cover the first decade of your retirement.

* Even out fluctuating interest rates. As you reinvest the maturing bonds or CDs, you tend to compensate for fluctuating interest rates. If interest rates rise, you can reinvest the funds maturing to take advantage of the higher rates. If interest rates drop, your return is protected because you've locked into the higher rates on your longer-term issues.

The benefits of an investment ladder are twofold: guaranteed liquidity at predetermined dates and protection from fluctuating interest rates. If you'd like more information about constructing an investment ladder suited to your situation, contact our office.

Chuckle of the Month


"Eventually you reach a point when you stop lying about your age and start bragging about it."

— Will Rogers

Major Tax Deadlines for May 2005

May 16 - Deadline for calendar-year exempt organizations to file 2004 information returns.

May 31 - Deadline for IRA, SEP, SIMPLE, Roth IRA, MSA, and education savings account trustees to file annual statements (Form 5498) with the IRS, with copies to participants.

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 raises its interest rates

The IRS will charge 6% interest on individual and corporate tax underpayments for the second quarter of 2005 (April 1 through June 30). Large corporate underpayments will be assessed interest at 8%.

On tax overpayments, the IRS will pay individuals 6% and corporations 5%. The interest paid on corporate overpayments exceeding $10,000 will be 3.5%.

All of the rates are one percentage point higher than rates for the first quarter of 2005.

How to help your child buy a home

In today's market, young people often cannot afford to buy their first home. If you're considering helping your son or daughter buy a home, you can choose to make an outright gift, provide or co-sign a loan, or become a part owner. Each choice has its own tax consequences, so select the option that best suits your overall tax and financial needs.

* Make a gift. If you want to make a gift to your child, you can give up to $11,000 per year, per person completely tax-free. You don't need to file a gift tax return, and your child won't have to report the gift on his return. (Gifts are generally not taxable for income tax purposes.)

If you are married and your spouse joins in the gift, you can effectively pass up to $44,000 each year to your married child and his or her spouse. (Consult with us before making gifts exceeding $11,000 per person.)

* Cosign a loan. If you're not in a position to make an outright gift to your child, consider helping with a loan. If your child's income is too low to qualify for a home loan, you can cosign the mortgage. There may be gift tax consequences to co-signing, and you will be responsible to the mortgage company if your child can't make the payments. To maintain your credit rating, ask the mortgage company to send you a copy of any late-payment notices.

* Lend the money. Another option is to lend money directly to your child. If the loan is to carry interest, it should be recorded as a lien on the property to preserve the interest deductions for your child. Be careful about low- or no-interest loans. The IRS will treat the parents as having received interest income if the loan is over $100,000, or if the loan is between $10,000 and $100,000 and the borrower has investment income exceeding $1,000 per year. If your loan is under $10,000, the IRS shouldn't tax you on uncollected interest.

* Consider co-ownership. Yet another option is to co-own the property with your child. Typically, the parent makes the down payment and the child pays the mortgage payment, utilities, taxes, and other ongoing expenses. The home is jointly owned, and the family agrees on a split (often 50/50) of the appreciation in value when the home is sold.

If the child makes all the mortgage and tax payments, there should not be current tax consequences to the parent. When the home is sold, the child may qualify for the home-sale exclusion for gain on his ownership portion, and the parent would be taxed on the gain on his share of ownership.

If you would like to discuss this topic in greater detail, give us a call.

New Business

New rules could make an S corporation good for your business

The S corporation is alive and well, and this form of business operation remains appropriate for many business owners. With the changes made by the recent passage of the American Jobs Creation Act of 2004, even more business owners might consider this form of corporation. Here are the recent changes:

* An increase, from 75 to 100, in the number of shareholders allowed.

* The allowance of family members (within six generations of one another) to be counted as only one shareholder.

* The allowance for prior suspended losses to be transferred along with the corporation shares to a former spouse in divorce.

* The allowance of IRA accounts (including Roth IRAs) to own S corporation bank stock under certain circumstances.

The S corporation as a business entity should not be overlooked, but the decision to elect S status can be complicated. We are available to answer your questions and help you select the legal form that is best for you and your business.

Smart Business

What's the best way to build customer loyalty?

As a business owner, you know how much effort goes into attracting new customers. So once you've found a new customer, you want to keep that customer as long as possible. Many factors contribute to keeping your customers happy, but underlying many of them is a single issue — good communication. Your goal is to make the customer feel known, understood, and appreciated. It applies at every stage of the relationship — before the sale, while you're reaching a deal, and after you've concluded the sale.

* Before the sale. Good communication should start long before a sale is made. It's important to get to know the customer and his or her needs, and to explain what products or services you offer. In a retail setting it could be as simpleas greeting customers by name and learning their preferences. Train your employees to offer help, answer questions readily, and suggest new or alternative products. In other businesses, you might make regular calls or visits to a prospective customer, even if no sale is imminent. Use the opportunity to build a relationship, learn about the customer's needs, and describe how your products or services might help.

* Making the sale. Honest communication while you're making a sale can be key to keeping a customer loyal and happy. Be completely forthright about the terms and conditions. Don't over-promise; it will just lead to disappointment down the road. Make sure you and the customer both have the same expectations. Don't hesitate to steer customers away from one product to another that better fits their needs, even if it's less profitable for you. This can be one of the
most effective ways to earn their trust.

* After the sale. If you really want to keep customers happy, always contact them after the sale. Make a follow-up call to ask if they're satisfied with their purchase. Communication at this point serves two purposes. It shows customers that they're appreciated, and it's a great chance to bring any complaints or dissatisfaction to light.

If there is a problem, your response can determine whether you lose a customer. Don't think of a complaint as a problem. Instead, it's an opportunity to turn an angry customer into a loyal one. Treat a complaining customer with respect. Listen carefully, understand the problem, and deal with the situation fairly. You don't have to accommodate every complaint. Just behaving and communicating well is a big part of the solution.

Obviously in a retail business, you can't follow up after every sale. But even here, you can train your staff to treat customers as important individuals. Customers thrive on being recognized and acknowledged.

In your business, think through every opportunity you have to communicate with your customers. Identify how you can make the most of each opportunity, and follow through. It's a sure way to build a loyal and appreciative customer base.

What's New In Financial Strategies

New Supreme Court ruling protects IRAs in bankruptcies

The U.S. Supreme Court issued a unanimous decision in April that will protect individual retirement accounts (IRAs) from creditors in bankruptcy proceedings. Until this decision, company pensions and 401(k) plans were protected under federal law, but IRAs were not.

The Supreme Court reversed a lower court's decision which had held that IRAs were not protected because individuals could withdraw money from their IRAs at any time. The Supreme Court ruled that the 10% early withdrawal penalty serves
as a substantial deterrent that keeps taxpayers from accessing IRA funds before age 59½. Therefore, IRAs are in the same category as other retirement plans and should be protected from creditors when bankruptcy is filed.

Who owns your life insurance policy?

Life insurance is a valuable tool for estate planning. By having adequate life insurance to pay estate taxes, you can leave more to the next generation. The pitfall is that if you have any "incidents of ownership" in the policy, proceeds from your life insurance will be included in your estate and could be subject to estate taxes. "Incidents of ownership" include the right to cancel or assign a policy, revoke an assignment, use the policy as collateral for a loan, borrow the cash value, or change a beneficiary.

* Who should own your policy? Life insurance policies can be owned in many forms: directly by you, by your spouse, by your children, or by a trust. Setting up an irrevocable life insurance trust during your lifetime to own the policy, or having a family member other than you own the policy, can prevent having the proceeds included in your taxable estate.

Removing life insurance from your estate means your heirs could save taxes of up to 47% on the proceeds of the life insurance.

* Can you transfer ownership? If you transfer an existing policy to a trust or an individual, the proceeds will still be included in your taxable estate if the transfer has taken place within three years prior to your death. Depending on the value of the policy and other factors, the transfer may escape gift tax (and the generation-skipping tax).

The drawback to transferring ownership of your life insurance policy is that you no longer have control over the policy, including the ability to change beneficiaries.

* Smart planning will save taxes. Proper planning for the ownership of your life insurance is essential. Keeping life insurance out of your gross estate will leave more to your beneficiaries if your estate is large enough to be taxable. Contact us if you would like details about this and other strategies that could reduce taxes on your estate.

Chuckle of the Month

A large company, feeling it was time for a shakeup, hired a new CEO.

This new boss was determined to rid the company of all slackers. On a tour of the facilities, the CEO noticed a guy leaning on a wall. The room was full of workers and he wanted to let them know that he meant business!

The new CEO walked up to the guy leaning against the wall and asked, "How much money do you make a week?"

A little surprised, the young fellow looked at him and replied, "I make $300 a week. Why?"

The CEO then handed the guy $1,200 in cash and screamed, "Here's four weeks' pay. Now GET OUT and don't come back."

Feeling pretty good about himself, the CEO looked around the room and asked, "Does anyone want to tell me what that goof-off did here?"

From across the room came a voice, "Pizza delivery guy from Domino's."

- Anonymous

Major Tax Deadlines for June 2005

June 15 - Second quarter 2005 individual estimated tax is due.

June 15 - Expiration date for automatic two-month extension given to U.S. citizens and resident aliens living and working outside of the U.S. and Puerto Rico to file 2004 income tax returns. File Form 4868 to request an additional two-month extension.

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 certifies hybrid cars for $2,000 tax deduction

If you're planning to purchase a new car this year, be aware that buying a clean-fuel vehicle could give you a tax deduction of up to $2,000.

Among the vehicles the IRS recently certified for the deduction are the 2005 models of the Honda Insight, Honda Civic Hybrid, Honda Accord Hybrid, Ford Escape Hybrid, and Toyota Prius. The 2006 Lexus RX 400h was also certified for the deduction.

You must be the car's original owner, and you're allowed this deduction even if you don't itemize deductions on your return.

Wedding bells bring tax concerns

June is the traditional month for weddings. We associate marriage with love, roses, and wedding cake. But if you're walking down the aisle this summer, don't wait too long after the wedding to spend a little time on tax matters. Here's a checklist of things to consider:

* If you've taken your spouse's last name or hyphenated your last name, you need to notify the Social Security Administration. The agency will link your new name to your social security number and issue a new social security card.

* If you move to a new home, send a change of address to the IRS, the financial institutions where you've had accounts this year, and current-year employers. Then your W-2s, year-end tax forms, and IRS notices will find their way to you.

* Your marital status for tax filing is determined by your status on the last day of the year. Calculate the impact of the marriage penalty to see whether you need to change your income tax withholding. File a new Form W-4 with your employer's payroll department to notify them of your name change and any withholding change.

Update your will and other estate planning documents. Don't forget to review the beneficiaries on your IRAs, 401(k) plan, and life insurance policies. You'll want to make sure your documents are updated and taxes are minimized in the event of your disability or death.

Many of these suggestions don't apply just to marriage. Divorce or the birth of a child are similar major life events that will affect your taxes. For assistance with your tax planning relating to any of these events, give us a call.

New Business

Age discrimination ruling could have major consequences

Company policies that are intended to discriminate against older workers are illegal under the Age Discrimination in Employment Act. Now a new ruling handed down by the Supreme Court will allow discrimination claims when an employer's actions or policies disproportionately affect older workers even when there is no intent to discriminate.

This decision will let workers over age 40 sue for alleged age discrimination without having to prove that the employer's actions were intended to discriminate.

The ruling said that an employer's action will not be considered illegal if reasonable factors other than age are responsible for the disproportionate negative impact on older workers. In light of the court decision, businesses should review employee compensation, benefits, and policies to determine if they have a disproportionately negative impact on workers over 40, even though that is not the company's intent.

Smart Business

Your business can flourish, even when the "big boys" come to town

Many local businesses fold when a large retailer comes to their town. Is it possible to compete with these giants? You also have increasing competition from the Internet and mail order sales. What should you do?

Most locally owned businesses have a strong local following. You should capitalize on this. Go the extra mile in solving customer problems. If you don't have an item your customer is looking for, help locate it. If customers show up five minutes before or after closing time, accommodate them as best you can. If the till is "closed out," accept almost-exact change, or send them an invoice. Customers may have battled heavy traffic to get to your door. They will appreciate your extra courtesy. Better still, they will tell their friends.

It is important that customer service be supported from the top down. Every employee from the manager to the cleaning staff should know the company's customer service philosophy and practice it. It is imperative that new employees be schooled on customer service before they have customer contact.

It does little good to talk good customer service only to find that your customers are being let down. Unless you are getting unsolicited compliments from your customers, your customer service probably needs some improvement. Remember, it costs about five times as much to acquire a new customer as it does to keep a current customer happy.

What local businesses do you enjoy dealing with the most? Analyze what they do that makes you want to deal with them. Maybe you can employ elements of their customer service in your business.

If we can be of assistance, please call us. We are here to help your business be as profitable as possible.

What's New In Financial Strategies

Flexible spending account "use it or lose it" rule changes

Flexible spending accounts (FSAs) let workers set aside pre-tax dollars to pay for medical expenses and child care costs. The rule, up until now, has been that any money left in these accounts at the end of the year was forfeited - a "use it or lose it" rule that could leave employees with planning headaches in trying to match actual expenses for the year with set-aside funds.

Now the IRS is making things a bit easier for those with FSAs. In a new ruling, the IRS is letting employers modify their FSAs to extend the reimbursement deadline for a given year by two-and-a-half months. So if your employer changes the company's plan to allow for this grace period, you should be able to avoid the end of year scramble to use up remaining dollars in your flexible spending account.

No, you're probably not saving enough

How much money did you save last year? If you didn't save at least 10% of your earnings, you didn't save enough. If your savings in 2004 fell short, the only solution is to take charge of your financial future right now and start saving more money.

Saving money doesn't have to be hard work. In fact, many successful savers have found simple ways to cut spending and increase their savings. Here are some tips to help you get started and stay on track.

* Set goals. To give your savings purpose, set specific financial goals. For example, it's advisable to have an emergency fund of approximately six months' worth of living expenses to cover any cash outlays that may catch you by surprise. Nothing can derail your financial plans faster than a series of mishaps that force you to take drastic financial measures. Other saving goals may include a college savings fund, vacation fund, or a fund for major purchases.

* Treat your savings as your most important monthly bill. Write a check to savings first, or have your savings automatically deducted from your checking account or paycheck.

* Tax-deferred retirement accounts offer a smart way for you to save money for retirement. If your employer offers a 401(k) or SIMPLE retirement plan, contribute the maximum amount allowed. If your employer offers no plan, contribute to an individual retirement account (IRA). The money you contribute to a retirement account can reduce your taxable income and grow tax-free until withdrawn.

* Another way to maximize savings is to track your expenses for a few months. This is a great way to spot unnecessary or wasteful spending; it doesn't take much work to see potential cutbacks.

* When it comes to saving, think "control." For example, control the use of your credit cards. The amount you pay each month in finance charges could go to savings instead. Also, control the use of your ATM card. Get in the habit of giving yourself a regular cash allowance, and try to live with it.

You should be saving at least 10% of your earnings. Seem impossible? If you took a new job at 10% less pay, you would get by. For help in setting financial goals and developing a savings plan, call us.

Chuckle of the Month

"If you can smile when things go wrong, then you have someone in mind to blame."
- Anonymous

July 15 - Deadline for filing extended 2004 income tax returns for calendar-year trusts.

August 1 - Due date for filing retirement or employee benefit plan returns (5500 series) for plans on a calendar year. (Deadline normally is July 31; however, July 31, 2005, is a Sunday, so the deadline moves to the next business day.)

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

Tax reform deadline extended

The President's Advisory Panel on Federal Tax Reform had a July 31, 2005, deadline for reporting its recommendations to the Treasury Department. The recommendations were then to be sent to Congress, supposedly to form the basis for tax reform legislation.

The July 31 deadline has been extended to September 30, 2005, giving the panel an additional two months to complete its work. The delay makes it unlikely that Congress will have time to consider major tax reform this year. September 30 is Congress's tentative date for adjourning for the year.

Among the tax reform ideas the panel has already discussed are a flat tax, a national sales tax, permanent estate tax repeal, and a consumption tax.

More taxpayers are getting the IRS red light

What are your chances of being audited? Nobody can say for sure. But it's certain that the IRS has stepped up its enforcement staff in an effort to collect more tax dollars. The difference between the amount taxpayers owe and the amount they actually pay (known as the "tax gap") runs over $300 billion per year. That's a staggering amount, and the IRS is aiming to reduce it.

* Audit statistics

According to IRS statistics, the number of individual audits has increased from 618,000 in 2000 to a little more than one million in 2004. That's an increase of over 60% in just a few short years and equates to a 1 in 130 chance of audit based upon total returns filed.

If your income is over the $100,000 threshold, your audit chances increase to about 1 in 70. If you're self-employed and file a Schedule C, your audit chances increase yet again.

As you might imagine, those taxpayers earning virtually all of their income in the form of wages reported on W-2 forms, with no unusual deductions or large losses on their returns, are much less likely to receive an audit notice.

In addition to full-scale audits, the IRS sends out millions of "correction notices" each year. These notices are computer-generated and are a result of a discrepancy between information reported to the IRS and the information reported on your tax return. While these correction letters are less imposing than an audit, they could still cost you additional taxes.

* IRS audit objectives

The IRS has identifiable audit objectives that include the self-employed and wealthy taxpayers who report big losses on their tax returns. Other areas that receive IRS scrutiny include worker classification issues (employee vs. independent contractors), travel and entertainment expenses, related-party transactions, unreported income, and tax shelters. The IRS tries to target tax returns that will return the greatest additional taxes to the Treasury in relation to the audit resources employed.

* Your audit defense

Should you be terrified that your return might be selected for audit? Certainly not. An accurately prepared return is the first line of defense should you be selected for audit, and well-maintained substantiation records are the ammunition for that defense.

Audit selection doesn't necessarily mean that additional taxes will be assessed. That's especially true if you receive one of the IRS computer-generated "correction notices." The IRS does make mistakes, especially with notices sent automatically by its computers. Don't stress about the possibility of an audit. Instead, make sure that you maintain good records and that you work with us to prepare complete and accurate tax returns.

If you have questions about IRS audits or any notices you receive from the IRS, please call us. We're here to help you with any of your tax concerns.

New Business

IRS reduces paperwork

In the past, employers had to send the IRS any Form W-4 (Employee Withholding Allowance Certificate) on which an employee claimed more than 10 exemptions or complete exemption from withholding when $200 or more in weekly wages was expected.

The IRS recently changed this requirement. Now employers must submit an employee's Form W-4 only when specifically asked to do so by the IRS. Having determined the old W-4 submission program to be ineffective, the IRS will use information reported on taxpayers' W-2 statements to identify withholding problems.

Smart Business

Should you incorporate your business?

There are many reasons why people feel they should incorporate their businesses. Very often these reasons are based on misinformation about the advantages of being a corporation.

There are a number of things that being a corporation will not do for you. It will not automatically make you more profitable. It will not necessarily limit your liability on all transactions. It will not necessarily reduce your overall tax bill; it may, in fact, increase it.

If you incorporate an existing business, you may find that your long established suppliers now require new financial statement information. They may also request that you sign a personal guarantee that you'll pay amounts owed if the corporation cannot. Most closely held corporations are required to give the personal guarantee of the major shareholders in securing a line of bank credit for corporation purposes. This guarantee has the effect of not limiting your liability in reference to those bank loans.

With a regular corporation, business profits may be taxed twice — once at the corporate level and again at the shareholder level when paid out as dividends or a liquidation distribution. This double taxation that regular corporations face is generally avoided by making a special tax election know as a "Subchapter S" election. But not every corporation qualifies for S corporation status.

Incorporating your business can make a difference in the taxes you pay, the costs of doing business, and the amount of paperwork and red tape you'll have. Because of the many legal and tax considerations, anyone considering incorporating should discuss the matter with both their accountant and attorney. For assistance, call us.

A survey done by Merrill Lynch Investment Managers produced some interesting results on how gender differences affect investing behavior. The telephone poll of 1,000 investors (half of them men, half women) asked questions about investment attitudes and actions.

According to the men, their biggest investment mistake was holding a losing investment too long, while women said failing to invest early enough was their biggest mistake.

The survey concluded that women make fewer investing mistakes, largely because they are more willing than men to ask questions and seek expert advice. Women are also less likely than men to repeat the mistakes they did make.

To read more about this survey, Google on Merrill Lynch Investment Managers Survey.

Are you looking for ways to help your grandchildren with college expenses?

If you have grandchildren, consider these tax-friendly ways to help fund their college education.

* Tax-advantaged education programs. The tax law provides two programs specifically intended to help with education expenses: Section 529 plans and Coverdell education savings accounts (formerly called education IRAs). Both provide the following advantages:

1. Earnings within the account are not taxed.

2. When the student withdraws the money, it's tax-free if used for qualified expenses, such as tuition, books, fees, supplies, or room and board.

3. If the beneficiary doesn't go to college, the funds can be rolled over for another family member's education.

Funds used outside either program's restrictions are subject to penalties.

All of the states (and D.C.) sponsor their own Section 529 plans, which are available through most institutes of higher learning. You're allowed to use any state's program, and the plans have no restrictions based on your income.

Most financial institutions offer Coverdell education savings accounts. Unlike 529s, Coverdells may be used for elementary and secondary school expenses as well as college costs. However, annual contributions to a Coverdell are limited to $2,000 for each beneficiary, and the $2,000 allowance phases out for joint filers earning over $190,000 annually or single filers earning over $95,000.

* Direct tuition payments. When you pay your grandchild's tuition directly to a college, the payment is exempt for gift tax purposes without being taxable income to the child. You might consider building a tuition fund for a grandchild by investing in tax-free municipal bonds issued by your state or local governments. A benefit of making direct payment of tuition is that you remain in control of the money yourself until tuition comes due.

You can always combine any of the above approaches. Call us for an appointment to discuss the best plan for you.

Chuckle of the Month

Do you know why we save money in a "piggy" bank?

In times past, Europeans used an orange clay called "pygg" to make dishes and cookware. When jars made from pygg were used to save coins, people called them "pygg banks." At some point, a potter mistook the name for "pig" and made a bank that looked like a pig. The name and design stuck…and so we have today's piggy banks.

Major Tax Deadlines for August 2005

August 1 - Due date for filing retirement or employee benefit plan returns (5500 series) for plans on a calendar year.

August 15 - Due date for filing 2004 individual income tax returns that received an automatic extension of the April filing deadline. If a second extension is required, Form 2688 must be filed with the IRS explaining why additional time is needed.

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 clarifies rules for donating vehicles to charity

Last year's tax law changed the rules for determining the amount of a tax deduction for giving a car, boat, or airplane to a charitable organization. No longer can individuals deduct the fair market value of the vehicle. The deduction is limited to the amount for which the charity actually sells the vehicle.

The IRS recently issued clarification of the law's exceptions to this general rule. Fair market value can be claimed when the charity uses the vehicle instead of selling it — for example, using the car to deliver meals to elderly shut-ins. If the charity gives or sells the vehicle at below market price to a poor person in need of transportation, fair market value can be claimed. Also, if the charity makes significant improvements to the vehicle which increase the car's value, a tax deduction for the original fair market value can be taken. Major repairs qualify, but such things as cleaning or painting the car do not.

Substantiation in the form of written acknowledgment from the charity is required for all vehicle donations.

* Audit statistics

According to IRS statistics, the number of individual audits has increased from 618,000 in 2000 to a little more than one million in 2004. That's an increase of over 60% in just a few short years and equates to a 1 in 130 chance of audit based upon total returns filed.

If your income is over the $100,000 threshold, your audit chances increase to about 1 in 70. If you're self-employed and file a Schedule C, your audit chances increase yet again.

As you might imagine, those taxpayers earning virtually all of their income in the form of wages reported on W-2 forms, with no unusual deductions or large losses on their returns, are much less likely to receive an audit notice.

In addition to full-scale audits, the IRS sends out millions of "correction notices" each year. These notices are computer-generated and are a result of a discrepancy between information reported to the IRS and the information reported on your tax return. While these correction letters are less imposing than an audit, they could still cost you additional taxes.

An exchange can save taxes

Sitting on a piece of investment property that you would like to sell? By structuring the transaction as a tax-deferred exchange, you can delay paying taxes on the full amount of the gain realized.

Also known as a "like-kind exchange" or a "1031 exchange," these transactions are only available for investment or business assets. Certain types of assets don't qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.

Keep in mind that the like-kind exchange rules only defer the tax. Any gain will be recognized upon a taxable disposition of the replacement property.

* Strict requirements

Specific steps must be followed for a deferred exchange to be successful. Start by finding a qualified intermediary, such as an escrow agent or a title company, to facilitate this transaction.

You then have 45 days from the date you relinquish your property to the qualified intermediary to name as many as three possible replacement properties. You must generally take title to the replacement property within 180 days.

The rules state that you must replace real property with real property and personal property with personal property. Replacing an apartment building with commercial space, a strip mall, or even undeveloped land all qualify.

While deferred exchanges can save you a significant amount of taxes, following the specific rules can be tricky. For more information about these tax-advantaged transactions, please give us a call.

New Business

Businesses must now shred employee information

A new rule has just gone into effect that hopes to prevent "dumpster diving" identity theft. Criminals go through the discarded refuse of businesses, looking for personal information that will give them what they need to steal identities for financial gain.

The new requirement, part of the Fair and Accurate Credit Transaction Act (FACTA) passed in December 2003, makes it mandatory for businesses to shred or otherwise destroy personal information obtained from a credit report before discarding it.

Credit reports include information such as social security numbers, phone numbers, and addresses — all information that must now be destroyed before being discarded. Even if you have only one employee or hire only a nanny or a housekeeper, you must comply with these new information shredding rules. Fines for noncompliance are steep, so don't ignore the FACTA rules.

Smart Business

Turn employee reviews into constructive dialogs

The annual employee performance review — usually it's dreaded by both supervisor and employee. The employee knows he'll have to hear about those mistakes from months ago, and the supervisor will finally have to discuss those issues he's been avoiding all year. Too often, the result is discomfort and embarrassment all around. Usually both parties fudge a little and are glad that it's over for another year. Too bad, because another chance for open communication and feedback has been lost.

To improve the process, consider holding performance appraisals more frequently, perhaps even quarterly. This can help make the appraisal less of a "special event" and more of a routine exchange of information. It also means your feedback is more directly related to your employee's recent performance, rather than coming months later.

Of course, even quarterly appraisals don't substitute for immediate feedback. If an employee does something wrong, or something good, tell him or her immediately. Point out the problem, make sure the employee acknowledges it, and make clear what you expect in the future. And if it's something good, the employee will appreciate receiving a pat on the back. With immediate feedback, there should never be any surprises at an appraisal.

At the end of every appraisal, summarize the discussion and put the highlights in writing. Make sure your employee gets a copy. Before the next appraisal, ask your employee to review the copy and prepare his thoughts on his most recent performance. Ask him to present his opinions to start the discussion. If there are areas needing improvement, agree on an action plan and put that in writing too.

Don't limit the appraisal to a scorecard on the employee's achievements. If appropriate, use it to discuss career planning, cross-training, or job enrichment. Solicit ideas from the employee. It can all help turn a judgmental meeting into a constructive exchange of ideas.

What's New in Financial Strategies

Put your savings on automatic pilot

Even with the increased fear that social security will not be there when they retire, young people are not overly concerned with saving for retirement. Fortunately, many companies are now automatically enrolling workers in their 401(k) plans. Workers must then actively opt out of the plan if they decide not to participate. Companies are finding that 90% of workers who are automatically enrolled stick with the plan.

It's never too early to start saving for retirement, and the earlier you start, the easier it will be to save enough for a comfortable lifestyle in retirement. If your employer doesn't automatically enroll you in the company plan, do yourself a favor and sign up. If your employer doesn't offer a retirement plan, establish your own — an IRA, for example. Then set up a system for making regular contributions — in effect, putting your savings on automatic pilot.

Think it over before you pay off your home mortgage early

Is it wise to pay off your mortgage early? As with most financial decisions, this one depends on several factors including your current mortgage rate, tax bracket, balances on credit card and consumer debt, near-term expenses, retirement dates, and potential alternative investments.

* Pay it off

Mortgage prepayment can certainly offer advantages. For example, you'll pay less interest in the long run. Let's say you have a 30-year fixed rate mortgage at 7% with a balance of $180,000. By paying an extra $75 per month toward the principal balance, you'll save about $49,000 in interest and the mortgage will be paid off five years early. Generally, the longer the mortgage term and the higher the interest rate, the more savings you realize by prepaying. Also, because you're paying off a debt you already owe, the return on mortgage prepayment is risk-free. In addition, with the mortgage out of the way, cash will be available for other things. That's especially important for those heading into retirement.

* Not always smart

But prepaying your mortgage isn't always the best idea. Do you have large balances on credit cards or high-interest consumer loans? It's probably a good idea to use those extra funds to pay off those debts first, before focusing on your mortgage. Non-mortgage debt generally carries a higher interest rate, and the interest isn't tax-deductible.

If your employer matches contributions to your 401(k) retirement account, be sure you're investing up to the matching limit before putting extra cash into your mortgage. You may net a higher return on your retirement account than by mortgage prepayment.

Consider also whether you'll need those extra funds for near-term expenses. Money locked up in your home mortgage is much less liquid than in a savings account. It's harder to get at for college tuition, medical bills, or emergencies. Of course, you can open a home equity line of credit or take out a home loan for such expenses, but that just increases your mortgage balance.

You may also consider putting that extra monthly payment into other types of investments. Over the long-term the stock market has generated about a 10% return. If you have a 6% mortgage and a long time horizon, you may be better advised to put those extra funds into a mutual fund.

For many people, prepaying a mortgage is a good idea. Just be sure you've considered all the relevant factors. If you need help, give us a call.

Chuckle of the Month

"Age does not diminish the extreme disappointment of having a scoop of ice cream fall from the cone." - Jim Fiebig

For September 2005

September 15 - Due date for individuals to pay third quarter installment of 2005 estimated tax.

September 15 - Due date for filing 2004 tax returns for calendar-year corporations that had an automatic extension of the March 15 filing deadline.

October 3 - Deadline for businesses to adopt a SIMPLE retirement plan for 2005.

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.

Chuckle of the Month
Human trivia:

• You use an average of 17 muscles for a smile.
• You use an average of 43 muscles for a frown.
• Every two thousand frowns creates one wrinkle.
• The average human blinks his eyes 6,205,000 times each year.
• The average human's heart will beat 3,000,000,000 times in a lifetime.

Online Advisor - October 2005

Major Tax Deadlines

For October 2005*

October 17 - Deadline for filing 2004 individual tax returns on second extensions.

October 17 - If you converted a regular IRA to a Roth IRA in 2004 and now want to switch back to a regular IRA, you have until October 17, 2005, to do so without penalty.

October 17 - Deadline for filing 2004 partnership and limited liability company returns on second extensions.

*These and other tax deadlines are extended to February 28, 2006, for businesses and individuals located in the Hurricane Katrina and Hurricane Rita disaster areas and for relief workers providing assistance in these areas. For details on who qualifies for extensions, contact our office.

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: Congress passes tax relief for hurricane victims

On September 21, Congress passed the Katrina Emergency Tax Relief Act of 2005 to provide immediate assistance to individuals and businesses hit by Hurricane Katrina.

Among the tax relief provided in this legislation:

* Taxpayers affected by Hurricane Katrina will be allowed to borrow from qualified plans and to take penalty-free distributions from their retirement plans.

* Distributions from retirement plans can be averaged into income over a period of three years, and if amounts are recontributed to the plans within three years, amended returns can be filed to claim a refund of taxes paid on the distributions.

* Employers who hire workers displaced by Katrina may be eligible for the work opportunity credit of up to $2,400 per worker. Those employers who continue to pay workers, even though the business is not operating due to the disaster, may qualify for the employee retention credit of 40% of up to $6,000 in wages paid to each employee before year-end.

* To encourage charitable giving, the new law temporarily suspends certain limits on the amount of charitable deductions a taxpayer can take, and it provides enhanced deductions for contributions of food and books. It also increases the deduction for charitable driving to 70% of the rate allowed for business driving.

* Those who provide housing for displaced victims of Katrina may qualify for an additional $500 personal exemption, with a four person or $2,000 additional exemption limit. The additional exemption cannot be taken for family members.

* Tax filing and tax payment deadlines are extended for those affected by the disaster.

For details on these and other provisions in the Katrina Emergency Tax Relief Act, give us a call.

The gift tax exclusion – use it or lose it!

Did you know that this year you can give gifts of up to $11,000 to as many individuals as you want without being liable for gift tax? Normally, any gift you make counts towards your lifetime exemption from gift and estate taxes. That's so you don't just give away your estate shortly before death to avoid estate taxes.

But each year you can make an unlimited number of gifts free of tax, provided they're below a certain amount. The limit for 2005 is $11,000 per gift. A husband and wife each have their own separate limit, so they can jointly give up to $22,000 to any one person.

You can put the gift exclusion to good use in several situations. For example, you could use a multi-year gift program to decrease the size of your estate and reduce estate taxes. A married couple giving to each of their three children could reduce their estate by a total of $66,000 every year, for example.

You could also use the gift exclusion in an income-shifting strategy. You could make gifts of income-generating assets to your child, who is in a lower tax bracket. If done carefully to avoid the “kiddie tax,” the result can be a lower overall tax bill for the family unit.

Two types of gifts are exempt from the $11,000 limit. You can make unlimited gifts for tuition expenses or medical expenses paid on behalf of any person, provided you make the payments directly to the educational institution or health care provider.

Contact our office for advice on how the 2005 gift exclusion could work for you.

New Business: IRS increases standard mileage rates

On September 9, the IRS announced an increase in the optional standard mileage rates for the last four months of 2005. For business miles driven between September 1 and December 31, 2005, the rate increases to 48.5 cents a mile, up from 40.5 cents a mile for the previous eight months of 2005.

The new four-month rate for medical and moving expenses is 22 cents a mile, up from 15 cents for the previous eight months.

The rate for driving connected with charitable activities remains unchanged at 14 cents a mile since that rate is set by law and not adjusted by the IRS as vehicle operating costs fluctuate. However, the recent Hurricane Katrina relief legislation increased the mileage rate for charitable driving done for hurricane relief activities to 70% of the business mileage rate.

Business relocation requires some planning

Many businesses face the prospect of relocating their operations at some point. Making the move go smoothly requires careful planning. Some factors to consider include the timing of the move, the expense, employee relocations, and minimizing downtime and lost production.

Simplify the process by choosing a moving team a few months before the relocation. Their duties might include preparing a moving budget, lining up a moving company, and setting up telecommunications and technology at the new location.

Preparing for a move is a good time to clean house. To reduce your moving costs, destroy old records and get rid of equipment and inventory you don't need anymore. Determine if your budget can support buying new furniture and equipment or if it would be less expensive to move and refurbish existing assets. If you plan to upgrade your computer network and telephone system, make sure your new facility will accommodate the necessary installation.

Use tax breaks to cut your costs. The cost of moving your company's records, machinery, equipment, and inventory to the new location is tax-deductible. When you move, you can deduct the cost of abandoned leasehold improvements not previously depreciated. You can also depreciate the cost of new equipment and leasehold improvements.

If you have questions, please call us.

What's New: Treasury will start selling 30-year bonds again

The Treasury Department announced that it will begin selling 30-year Treasury bonds again in 2006. Absent from the scene for the past four years, the 30-year bond will again be sold twice a year according to a schedule to be released by the Treasury Department next month.

The long bonds are advantageous to the government because the current low interest rates will let it lock in these low rates for decades on current borrowing. Institutional investors also like the guaranteed rate on long bonds that allows them to plan for obligations that will come due decades from now.

Since interest rates over such a long period are very hard to predict, 30-year bonds are less attractive to individual investors who may suffer very low returns if market interest rates increase significantly during this period.

Check your credit information: Annual reports are free

It's a good idea to review your credit information periodically. You might spot credit inquiries or applications that you didn't make — a sign that you could be a victim of identity theft. Or you might find errors in your personal data or payment history, errors that could cause lenders to deny you credit or charge you a higher interest rate.

As of last month, all consumers can now request one free copy of their credit report each year. The three major credit agencies have set up a centralized site to handle requests by phone, mail, and over the Internet. Access to this site started in Western states last year and was gradually rolled out across the country.

When you apply for a free copy of your credit report, you'll often be offered the chance to receive your credit score, for a fee. It's important to know the difference between the two.

Your credit report shows personal data and a record of your credit applications and credit usage, including your payment history. In summary, it shows how often you've applied for credit, how much you owe, and whether you make payments on time. Each of the three major agencies will have its own report on you.

Your credit score is a single number, usually ranging from around 300 to over 800. The number is based on various factors in your credit history. Generally, the higher the number, the better your credit. You might receive a different score from each agency, depending on the model they use.

If you're checking for fraud or mistakes, you need to see your credit report. This provides the details of your credit history and enables you to spot mistakes. On the other hand, knowing your credit score may not tell you much, other than whether it's high or low. The score can change from day to day, depending on how you use credit. Each agency might assign you a different score. And a lender considering you for credit may use a completely different model, producing yet another number.

So, before you pay to see your credit score, consider whether you'd find a free copy of your credit report more useful.

Take a Break

A few humorous words to the wise

* Always read stuff that will make you look good if you die in the middle of it.

* When everything's coming your way, you're in the wrong lane.

* Birthdays are good for you. The more you have, the longer you live.

 

Online Advisor - November 2005

Major Tax Deadlines

For November 2005

During November: It's wise to estimate your 2005 income tax liability and review your options for minimizing your 2005 taxes. Call us if you would like to schedule a tax-planning session.

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: IRS announces changes

* New form for vehicle contributions. The IRS has created Form 1098-C, a new form that is to be used by charities to report taxpayer contributions of vehicles, boats, and airplanes. Copy B or C of the form can be used to provide the taxpayer with substantiation of his donation to the charity.

* IRS interest rates increase. For the final quarter of 2005, IRS interest rates will be 1% higher than third-quarter rates. Interest charged on individual underpayments of tax and paid by the IRS on tax overpayments will be 7%. Interest on corporate underpayments will also be 7%, though underpayments in excess of $100,000 will be charged 9%. The interest rate on corporate overpayments is 6%; if the overpayment exceeds $10,000, the interest rate paid is 4.5%.

Consider the tax issues in caring for elderly parents

As the population in the U.S. continues to age, more and more people will find themselves caring for their parents. Here are some of the tax breaks that caregivers should consider.

If you provide more than half of your parent's support, you may be able to claim your parent as a dependent on your tax return. To be eligible, your parent can't earn more than $3,200 (in 2005), excluding their nontaxable social security and disability income.

What if you and your siblings all pitch in to support a parent? Anyone who contributes at least 10% of the total support can be the one to claim the $3,200 exemption if all of you agree in a multiple support agreement.

Even if a parent's income exceeds $3,200 this year, you can still deduct the medical expenses paid on the parent's behalf, as long as you provide more than half of his or her support. Don't forget to include health and long-term care insurance, nursing care, and certain medical related home improvements.

If you hire someone to take care of your parent while you work, you might qualify for a tax credit. Your parent must be physically or mentally incapable of caring for himself.

Unmarried individuals who support a parent can file their tax returns as “head of household.” To qualify, your parent doesn't need to live with you. Instead, as long as you pay more than half of the cost of maintaining your parent's main home, including a rest home or nursing facility, you qualify for this preferential tax treatment.

For more information about the tax issues affecting caregivers and their parents, please give us a call.

New Business: New per diem rates issued

New per diem rates have been released, effective for business travel on or after October 1, 2005.

The new rate for high-cost localities increased from $204 per day to $226, and the rate for all other U.S. localities increased from $129 to $141. The meal and incidental expense rates increased to $58 for high-cost areas and to $45 for other areas.

Be prepared: How to lessen the blow of a disaster

When recent hurricanes slammed into the Gulf Coast, many families and businesses found themselves woefully unprepared. Apart from the tragic loss of life, the hurricanes' impact on individuals was also financial: lost personal and real property, lost records, lost funds. In addition, businesses couldn't gain access to administrative offices and manufacturing facilities, inventories, computer files, or customer records.

How can you financially prepare your family or business for disaster? Here are some tips.

For businesses

* Establish an emergency plan. Use the plan to evaluate areas of risk and prioritize business operations. What are the key functions that must continue to take place for the business to operate without interruption? The plan should also describe recovery strategies that will allow the business to operate if disaster strikes. Such strategies should address loss of premises, software and hardware, communications, machinery, and vital information. Finally, the plan should be periodically tested and reviewed. This could involve simulating disaster situations and talking with employees about how the plan should be implemented.

* Backup your day-to-day operational data. This can be done via computer tapes that are taken offsite, nightly backups sent to an Internet company, real-time backups while employees work, or any combination of these. The goal is to make sure your vital business information is protected and secure.

* Maintain commercial insurance. Visit your insurance agent periodically to ensure that your business has adequate coverage and can get needed funds in the event of disaster.

For individuals

* Keep a small amount of cash on hand. If a disaster strikes, ATM machines may not be usable and businesses may not accept credit cards, so you'll want to have enough currency to purchase necessities for a few days.

* Keep important documents in a safe and easily accessible place. Consider keeping important documents - including legal papers, insurance policies, birth certificates, and vehicle titles - in a small fireproof safe near your home's most likely exit.

* Keep an up-to-date inventory of your household possessions. You can easily create such an inventory by walking through your house with a video camera and describing each item that comes into view. Such an inventory record will prove invaluable for insurance recovery.

* Keep backups of important documents and records. These could be paper copies or scanned electronic copies and should include financial data files. These records should be kept away from your home in a safety deposit box or other secure location.

As recent events have shown, advance preparation for disasters can make the difference between inconvenience and financial failure. If you need help preparing a disaster plan, give us a call.

What's New: Survey shows college costs increasing

The annual survey of college costs conducted by the College Board shows tuition and fees increased in the last year at twice the rate of inflation.

Tuition and fees at four-year public universities increased 7.1%, putting the average cost now at $5,491. With room and board added in, the cost of attending a public university averages $12,127 for one year.

Education at a private school averages $21,235 for one year's tuition and fees, a 5.9% increase over the previous year. Room and board brings the private school average cost to an annual $29,026.

Don't put all your eggs in one basket

Even if you're not an investment expert, you're probably familiar with the term “diversification.” It means not putting all your eggs in one basket. Diversification calls for choosing the right mix of investments to keep a balance between risk and return.

* Choose the right investment mix. While there is no single asset mix appropriate for all investors, most people should have some combination of stocks, bonds, and cash in their portfolio. The right investment mix for you depends on your age, income, family responsibilities, and your tolerance for risk.

* Take a look at your mutual funds. Many mutual fund investors believe that they are well-diversified, even though they aren't. For example, it's possible that different mutual funds own many of the same stocks or similar stocks in the same industries. Whether you're thinking about buying a fund for the first time or you already own several of them, it pays to do a little digging. All mutual funds are required to publish a list of their complete holdings at least twice a year. Get the most recent portfolio list for your funds and compare them for overlapping investments.

* Consider the big picture. When you review your portfolio for diversity, consider the investments both inside and outside your retirement accounts. They are parts of the same picture. Doubling up on the same investment in both types of accounts may decrease your diversification and increase your risk.

* Keep an eye on your 401(k). As a general rule, you should avoid being too heavily invested in any one company's stock, including that of the company for which you work. If your employer matches your 401(k) contribution with company stock, consider other investments for your own 401(k) contributions and for the money you invest outside your 401(k) plan. When you're allowed to do so, consider selling enough company stock to rebalance your 401(k).

Don't risk your financial future by putting too many eggs in one basket. If we can help evaluate your situation, give us a call.

Take a break

Pay taxes with a smile

“It would be nice if we could all pay our taxes with a smile, but normally cash is required.”
Anonymous

Online Advisor - December 2005

Major Tax Deadlines

For December 2005

December 31 - Last day to set up a Keogh retirement plan for 2005. Deductible contributions for 2005 can be made any time up to the filing deadline for your 2005 return.

December 31 - Deadline for taking required minimum distributions from IRAs and other retirement accounts.

December 31 - Deadline to complete 2005 tax-free gifts of up to $11,000 per recipient.

December 31 - Deadline for paying expenses you want to be able to deduct on your 2005 income tax return.

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:
More vehicles certified for clean-fuel deduction.

The 2006 Ford Escape Hybrid and the 2006 Mercury Mariner Hybrid are the latest vehicles to be certified by the IRS for the clean-fuel deduction. Taxpayers who are the original purchasers of a clean-fuel vehicle are entitled to a tax deduction of up to $2,000 on their 2005 tax returns. The deduction is an above-the-line deduction, which means that it can be taken even by those who don’t itemize their other deductions.

The IRS has published the following listing of vehicles certified for the deduction:

* 2006 Ford Escape Hybrid
* 2006 Mercury Mariner Hybrid
* 2006 Lexus RX 400h
* 2006 Toyota Highlander Hybrid
* 2005 Ford Escape Hybrid
* 2005 Honda Accord Hybrid
* 2003 and 2005 Honda Civic Hybrid
* 2001 through 2005 Toyota Prius
* 2000 through 2005 Honda Insight

The clean-fuel deduction expires after this year and is replaced by a tax credit of up to $3,400 for the purchase of a clean-fuel vehicle.

Seven year-end moves to cut your taxes

Time is running out on tax decisions and actions you can take to reduce your 2005 tax bill. Here are some year-end tax-cutting moves to consider.

1. If you think you might be hit with a penalty for underpaying 2005 taxes, have your employer withhold extra taxes from your last few paychecks. The IRS treats wage withholding as being spread evenly over the year.

2. Max out your 401(k) at work. For 2005, you can contribute up to $14,000. Anyone 50 or older by December 31 can contribute an extra $4,000.

3. Sell your losers. You can deduct investment losses realized in your taxable accounts against your gains. Plus, you can claim up to $3,000 in additional losses against your wages and other income.

4. Make gifts before year-end to utilize your tax-free $11,000 gifting allowance for 2005. You can give this amount to as many individuals as you like.

5. Think about sales taxes. You might want to purchase certain big-ticket items before the end of the year. This year, instead of deducting your state and local income taxes, you can instead claim sales taxes paid during the year, including taxes paid on vehicles, boats, motorcycles, RVs, and home-building materials.

6. Evaluate the benefits of the new Roth 401(k). Effective January 1, 2006, most 401(k) retirement plans will give you the option of contributing to a Roth 401(k). Yes, you lose out on the current tax deduction for your contribution, but future qualifying withdrawals will be completely tax-free.

7. Update your estate plan for any 2005 changes in your life. Letting your estate documents become outdated could expose you to higher taxes.

New Business:
Surveys show health care costs a major business concern.

A recent survey conducted by the nonpartisan Kaiser Family Foundation revealed that the number of employers offering health insurance coverage to employees is declining. This year 60% of employers offered coverage, compared with 69% five years ago.

Small companies are less likely to provide insurance, while 98% of employers with more than 200 employees offer coverage.

According to the survey, insurance for a family averages an annual $10,880. Employers pay an average of 74% of the cost; workers pay the rest.

Employers agree that rising health care costs are a major expense for their companies. To illustrate this fact, Starbucks Chairman Howard Schultz told state legislators that his company will spend more on health insurance this year than on coffee.

Is paying zero tax a good idea for your corporation?

When you run your business as a regular C corporation, it can make sense to pay a little tax this year to avoid large estimated tax payments next year.

According to the general rule for corporate estimated taxes, the IRS won’t charge a penalty as long as a company pays current-year estimated tax of at least the amount that was owed on the preceding year’s return. However, this “safe harbor” is available only when at least some tax was owed for the prior year. If a company shows zero tax liability in a given year, the next year’s estimated payments must equal 100% of the expected tax liability for that year. As a result of this quirk in the law, you might want to plan corporate income and deductions so that you always show at least some taxable income and some tax liability.

Example. Your corporation will incur a small operating loss this year. Next year is likely to be more profitable, with the company projected to owe about $100,000 in federal income tax. If you do no planning, you may be required to pay next year’s tax bill in full via quarterly installments of $25,000 each, creating a potential cash flow crunch just when your company might need liquidity.

However, if your company were to report (say) $10,000 of taxable income this year (perhaps by delaying deductible expenditures or selling an appreciated asset), this year’s tax bill would be $1,500 (15% of $10,000). Next year, you would be required to prepay a total of only $1,500, reducing your quarterly installments to $375 each. The remainder of your tax bill would be due on the filing date for next year’s return, but in the meantime, you have the use of your cash.

Warning: If this planning strategy might apply in your situation, be aware that the safe harbor exception is only available to corporations with taxable income of less than $1 million for the preceding three years.

What's New:

Yield on I Bonds jumps to 6.73%

The Treasury has increased the yield on its I Bond savings bonds to 6.73% on bonds purchased from November 2005 through April 2006. The previous rate had been 4.8%.

The rate for I Bonds is in two parts, one part that is fixed for the life of the bond and one part that is adjusted for inflation every six months.

The fixed rate for I Bonds was cut to 1% from 1.2%; this rate will stay the same for as long as the investor holds the bond. The inflation component will next be adjusted on May 1, 2006. Investors must hold bonds for at least twelve months and will be subject to a penalty if the bonds are cashed before five years.

Got mutual funds? Pay attention to year-end tax issues

If you’re among the millions of Americans who invest in mutual funds, you need to be aware of the year-end issues that could affect your 2005 tax bill.

* Year-end distributions. One key fact to be aware of is that mutual funds are usually required to distribute their income annually to shareholders. If you purchase a mutual fund just before a distribution date, you will receive the distribution and be required to include it in your taxable income. Since the price of the fund shares before and after a dividend distribution reflect the amount of the dividend, you are actually paying income tax on part of your own purchase price.

* Your tax basis. Your taxable gain on sales you’ve made during the year will generally be the sales price minus your tax basis. Note that transactions such as check redemptions and exchanges are usually treated just like sales.

Your tax basis is generally the purchase price plus any related transaction costs, such as sales charges and brokerage fees. Your basis also includes reinvested dividends.

The IRS allows several different ways of determining basis when you’ve bought your shares at different times and don’t sell them all at once. Mutual fund companies will often report your average cost basis, which divides the total cost of all your shares by the number of shares you own. A second option is the first-in, first-out method which assumes the shares sold were the earliest ones purchased. The specific identification method lets you choose which group of shares you’re selling. Before selling, check to see which method will provide you with the lowest tax bill.

* Where to hold your funds. Of course, if you’re holding mutual funds in a retirement account, your investment gains shouldn’t trigger any immediate tax. Just be aware that when distributions are made (other than from a Roth IRA), they’ll be taxed at ordinary income rates. If you anticipate significant appreciation, you may want to own those mutual funds outside of a retirement plan so any future gains would be eligible for the preferential capital gains rates.

* Tax planning. Please call us so we can help you do the planning that will minimize the income taxes on your mutual fund investments.

Take a break

Check these interesting facts:

* Scientists say that if you go back 30 generations or so, everyone on earth is related to everyone else.

* The names of all the continents begin and end with the same letter (Africa, Asia, Europe, etc.).

* A blue moon isn’t blue. It’s another name for the second full moon in the same month — something that occurs about once every 30 months.

* A trillion is a very big number. At the rate of one number per second, it would take 31,688 years to count to one trillion.