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Major Tax Deadlines
For May 2008
* May 15 - Deadline for calendar-year exempt organizations to file 2007 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, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
* 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 scam warnings
The Justice Department’s Tax Division recently announced the creation of a national "tax defier" initiative to "investigate, pursue, and, where appropriate, prosecute those who take concrete action to defy and deny the fundamental validity of the tax laws." The IRS reminds taxpayers to be wary of scams and promises to avoid paying taxes that seem too good to be true, saying "There is no secret formula that can eliminate a person’s tax obligations."
Taxpayers also need to be alert to tax-related scams designed to steal their identity for fraudulent purposes.
You may be able to find tax-saving options in new 2008 rules
The tax law seems to change year-to-year. This year is certainly no exception. With careful planning, you can take advantage of new tax-saving opportunities in 2008 while avoiding potential pitfalls. Here's a summary of several key provisions.
* Capital gains and dividends
The maximum tax rate on net long-term gain and qualified dividends for taxpayers normally in the 10% or 15% regular income tax brackets is reduced from 5% to 0% for 2008. Under current law, the 0% rate will remain in effect through 2010.
This may be a good year to have your children sell securities that have appreciated in value. However, such sales may trigger "kiddie tax" complications.
This tax break isn't strictly limited to lower-income taxpayers. If you can push your taxable income for 2008 below the cut-off point for the regular 25% tax bracket - perhaps by increasing charitable gifts or 401(k) contributions - your long-term capital gains and dividend income could qualify for the 0% rate.
* Small business assets
Under the new economic stimulus law, your business can currently deduct up to $250,000 of business assets placed in service in 2008. Previously, the inflation-indexed amount for this "Section 179 deduction" was $128,000. In addition, a business may elect "bonus depreciation" in 2008 equal to 50% of the cost of qualified assets.
If handled correctly, your business can combine the enhanced Section 179 deduction with bonus depreciation. Regular depreciation deductions may be claimed for any remainder.
* Mortgage insurance
Congress previously approved a one-year deduction for mortgage insurance premiums in 2007. A full deduction was available for taxpayers with an AGI of $100,000 or less. Once income exceeded $100,000, the deduction was phased out.
The new mortgage relief law extends this tax break for three years through 2010. Therefore, you may qualify for a 2008 deduction for amounts paid or accrued this year.
* Kiddie tax
Under the kiddie tax, a child's investment income above an annual threshold ($1,800 for 2008) is taxed at the top tax rate of his or her parents. Prior to this year, the kiddie tax applied to children under age 18. But now the rules have changed.
Beginning in 2008, the kiddie tax generally applies to your children who are under age 19 or full-time students under age 24 if they can be claimed as your dependents.
To minimize the tax damage, try to keep investment income of children below or near the $1,800 threshold. For example, you might have a child switch funds into tax-deferred or tax-free investment vehicles.
* IRA contributions
If you contribute to an IRA, the contributions may be fully or partially deductible. Although deductions are generally not available to high-earning taxpayers if either spouse participates in an employer’s retirement plan, contributions may still grow on a tax-deferred basis until withdrawn. The contribution limit for the 2008 tax year increased from $4,000 to $5,000. Plus, if you’re age 50 or older, you can add a "catch-up contribution" of $1,000. The contribution deadline for 2008 is April 15, 2009, but you may earn more by contributing earlier.
Finally, a word about the new economic stimulus payments the IRS has been distributing: These rebates aren’t available until you’ve filed your 2007 return, so taxpayers with extensions have to wait. Certain individuals who normally aren’t required to file returns - such as those receiving social security benefits - may follow a simplified filing procedure.
Contact our office for details or guidance with your 2008 tax planning.
New Business
Vehicle depreciation limits
The IRS has issued the depreciation limits for business vehicles first placed in service in 2008. Recent legislation allows higher limits for new vehicles that will qualify for 50% bonus depreciation.
The first-year limit for new cars is $10,960; for used cars, it's $2,960. Depreciation limits for later years are the same for both new and used cars: $4,800 in year two, $2,850 in year three, and $1,775 in all following years.
The 2008 first-year depreciation limit for trucks and vans is $11,160 for new vehicles and $3,160 for used vehicles. Limits for both new and used vehicles in year two are $5,100, in year three $3,050, and in each succeeding year $1,875.
For details relating to your 2008 vehicle purchases, contact us.
What should you do to help your child get started in business?
Perhaps you’re thinking of helping one of your children get started in business. Since the failure rate for new businesses is high, you need to do whatever you can to increase your child's chances of success. That includes considering three M’s: motivation, money, and mentoring.
1. Motivation
To succeed, your child must be motivated. He or she may like the idea of self-employment but lose interest when confronted with the realities of planning and preparation.
Before involving yourself, find out how much time, thought, and effort your child has already devoted to the proposed business. If the enterprise is no more than an idea, you can suggest approaches to researching the market and determining the resources, knowledge, and skills that will be needed. However, your input should be limited to guidance and ideas. Your child should do the work.
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Once your child has completed the necessary groundwork, and if the project still seems reasonably feasible, you’ll be ready to consider the next steps.
2. Money
Whether you’re making a loan or buying an ownership interest, keep the following guidelines in mind:
* Never put up more money than you can comfortably afford to lose.
* Try not to be the sole source of capital. Risk is part of the business experience, and your child should have some personal assets at stake. Although loans from outside sources may also be part of the mix, they should be limited in order to keep the debt service from becoming overwhelming.
* Set limits. Make it clear that you’ll lend or invest a specific amount and no more. You also may wish to set restrictions on the use of the funds within the business.
* Put everything in writing. Loans should be supported by signed notes that stipulate repayment terms and require interest at market rates. Investments should be supported by partnership agreements, shareholder agreements, or similar documents that describe operating arrangements, profit and loss sharing, buyout provisions, and closing contingencies.
* Don't forget tax planning. You probably will want to allocate any taxable income to your child, and you certainly will want to be able to write off your loss if the business goes bad. Proper documentation will be paramount, since the IRS closely scrutinizes family transactions
3. Mentoring
Remember that the primary objective is to give your child business experience. Explain the reasons behind each of your requirements, and make it clear that the child must consider your input as a condition of accepting your money. You should offer advice freely, but let your child make most of the business decisions. Mistakes are part of the learning process.
If you’re thinking about helping your child get started in a business, give us a call. We»ll be glad to offer guidelines to fit your particular circumstances.
What’s New in Finances
Put your tax refund or rebate check to good use
Will you receive a 2007 income tax refund or an economic stimulus tax rebate check? Here are some suggestions for how to put these funds to good use.
1. Pay off consumer debt. This is generally one of the best uses for extra cash. For example, if you typically carry a credit card balance and pay 16% interest, you’ll realize a 16% return if you pay off that debt. You probably won’t save quite as much by paying off other types of loans, but you should consider that as well.
2. Contribute to an individual retirement account (IRA). A contribution to an IRA is a good idea whether it’s tax-deductible or not because IRA earnings grow taxdeferred. If you’re self-employed and show a profit for the year, you can also make a tax-deductible contribution to a Keogh plan.
3. Start or add to an education fund. Consider investing your extra money in stock or bond mutual funds earmarked for your child’s education. We can help you decide whether your education fund should be held in your name, your child’s name, or in trust. We can also help with planning to avoid getting snared by the "kiddie tax."
4. Invest in yourself. While planning for your family’s education, don’t forget yourself. Have you put off training for new job responsibilities or a new career because you couldn’t afford it? Now that you have some extra cash, spending it on yourself may be the best investment of all. You also may be entitled to a tax deduction for education expenses that are required by your employer or that improve the skills required on your current job.
Don’t just spend a tax refund or rebate check; put it to work improving your financial well-being.
Are you prepared for a job loss?
In today’s economy, the job market is not secure. Companies are downsizing, reducing hours, or cutting salaries to remain competitive. Losing your job or having your pay cut can be financially devastating. But there are things you can do to protect yourself, whether your job is threatened or you're suddenly terminated.
If you feel your job is in danger
* Take stock of your finances. List all your debts and the monthly payments. Estimate what your monthly living expenses would be if you were not working.
* Line up sources of extra cash in case you need it. It’s easier to obtain credit while you’re still employed
* Consider an equity line of credit if you own a house. You can draw this down as you need it, tapping into the equity in your home. Check whether it would pay to refinance your mortgage.
* Start networking to get a feel for the job market. Investigate the opportunities for part-time or evening jobs.
* Set a budget. Force yourself to make changes in lifestyle to reduce expenses. Even if you don’t save much, the symbolic value is important.
If you lose your job -
* Start your job search immediately. Resist the temptation to take a vacation to "recover."
* Set yourself an aggressive budget and stick to it. It’s better to reduce spending now than regret it later.
* If you begin to have problems making loan payments, talk to the lenders before you fall into arrears, and try to work out a payment plan.
* Tap into retirement savings such as IRAs or 401(k)s only as a last resort.
Hopefully you’ll never find yourself in this situation. While you’re working, develop a regular savings habit. Try to build a reserve equal to six months of living expenses for job loss or other disasters. Then at least you’ll have a financial cushion if the worst should happen.
Take a Break
Question of the day
If "con" is the opposite of "pro," is Congress the opposite of progress?
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the ONLINE ADVISOR, or for assistance with any of your tax or business concerns, contact our office.
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Online Advisor - April 2008
Major Tax Deadlines For April 2008
* April 1 - Deadline for taking your first required IRA distribution if you turned 70-1/2 in 2007. 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 2007 are due.
* April 15 - 2007 calendar-year partnership returns are due.
* April 15 -2007 annual gift tax returns are due.
* April 15 - 2007 income tax returns for calendar-year trusts and estates are due.
* April 15 - Deadline for making 2007 IRA contributions.
* April 15 - Deadline for employers to make contributions to certain retirement plans.
* April 15 - First installment of 2008 individual estimated tax is due.
* April 15 - Deadline for amending 2004 individual tax returns (unless the 2004 return had a filing extension).
* April 15 - Deadline for original filing of 2004 individual income tax return to claim a refund of taxes. Each year some taxpayers have tax refunds due them for prior years, and unless a return is filed to claim the refund by the three-year statute of limitations, the refund is lost forever.
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, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
* 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
Filing a 2007 tax return is required to get rebate check
Next month, the IRS will begin sending out the tax rebate checks authorized by the Economic Stimulus Act of 2008. The only way to receive a stimulus payment in 2008 is to file a 2007 tax return. The IRS says the majority of taxpayers do not have to take any additional steps to receive their checks besides the routine filing of their 2007 tax return. No other action, extra form, or call is necessary.
However, some taxpayers would not normally be required to file a 2007 tax return (for example, low-income workers, social security recipients, and those receiving veterans’ disability benefits). These individuals may still be eligible to receive checks of $300 for individuals and $600 for couples if they had at least $3,000 of qualifying income. Qualifying income includes social security benefits, certain railroad retirement benefits, certain veterans’ benefits, and earned income (i.e., wages, salaries, tips, or self-employment income).
The IRS is recommending Form 1040A to be used by these individuals to claim their tax rebate checks. They suggest writing "Stimulus Payment" across the top of the form. The IRS Web site (www.irs.gov) has this very brief form available, along with instructions for completing the form.
If you have family members whose income normally would not require filing a 2007 return, you may want to pass this information along to them. For any questions you have or filing assistance you need, please call our office.
Act fast or you’ll lose your refund
If you didn’t file a tax return for the year 2004, you’re not necessarily in trouble. In fact, you could be about to lose out on a nice refund check. The IRS reports that it is holding an astonishing $1.2 billion in refunds from the year 2004. Here’s how the situation arose.
Approximately 1.3 million filers, many of them students and retirees, had taxes withheld from their earnings that year but didn’t bother to file a return. That was quite legal if they didn’t earn enough to reach the minimum income for required filing. And in many cases they forgot that taxes had been withheld and that they were eligible for a refund. For example, a student might have worked at a summer job, gone back to school in the fall, and not given taxes a second thought.
If you think you are due a refund for 2004, it’s worth filing a return. The IRS estimates that around half those who are eligible would receive refunds of just over $500. In some cases, you could find you’re eligible for even more than the refund. If you were a low-income worker that year, you might also have qualified for the earned income tax credit. But you’ll need to act fast. Unless you file a year-2004 return by April 15, 2008, the statute of limitations will have run and you’ll be too late to claim your refund.
Be aware that the IRS won’t issue a 2004 refund check unless you’ve also filed returns for years 2005 and 2006. And if you owe taxes for those years, they’ll deduct that from the amount of the 2004 refund.
Worried about late-filing penalties? Here’s good news: They’re typically not assessed if you file a return showing a refund.
According to the IRS, over a million people are eligible to claim refunds for tax year 2004. If you’re one of them, or if you haven’t filed returns for other years, give us a call. Acting now can save your already-paid-in tax dollars.
New Business
Sleepy workers are a business problem
The nonprofit National Sleep Foundation recently conducted a survey that reveals many American workers suffer from lack of sleep. Almost a third of employees surveyed said they had become very sleepy or actually fallen asleep on the job during the past month. 12% of those surveyed said they came to work late in the past month. 36% said they have nodded off or fallen asleep while driving, with 26% reporting driving drowsy on the job.
Factors that apparently contribute to sleepy employees include longer work hours and technology that keeps people "on the job" even beyond the regular work day. According to the survey, 63% of workers just accept being sleepy, 32% use caffeinated drinks to try to cut sleepiness, and 54% try to catch up on sleep on weekends.
For more information revealed in the survey, go to http://www.sleepfoundation.org/.
Turn employees into productive team players
Do you wish your employees were more motivated and focused on driving productivity and profits for your company? Are there ways to improve participation and tap into the unused creativity and drive of your team? Here are a few suggestions that might help in that process.
* Give employees the big picture. Make sure each employee understands the company’s goals and how their role contributes to achieving them. They need to know they don't operate alone, that they are part of a broader team.
* Lead by example. If you want to inspire your employees to excel, you’ll need to demonstrate your commitment and passion to the process.
* Identify your key measures. Remember that you can’t effectively change what you don’t measure. Educate your team on what’s important and why and how you’ll track your progress. Is it sales per customer, gross profit percentage, monthly sales level, or some other measurable factor?
* Start small and build on an early success. Pick an area ripe for improvement and involve your best people. Then build on that early success with generous praise and credit.
* Make it highly visible. Track your measurements with colorful graphs where everyone can see them. Let the winners and achievers stand out.
* Be tolerant of mistakes. Treat them as a learning experience for your team and the entire organization.
* Change perspective. Have your team view the world from the perspective of your customers. Role playing can highlight what's working and what’s not working. Both are opportunities to improve performance and profitability.
* Learn what motivates your team members. Tailor your incentives to what drives your team members. Is it money, recognition, promotion, or time off?
Taking steps to increase the emotional and creative involvement of your employees is likely to result in a more profitable business.
What’s New in Finances
Check your deposit insurance
The recent failure of Bear Stearns, the fifth largest investment bank in the U.S., may have you wondering about the health of the banking system in general. Indeed, you may be wondering if your bank accounts are safe. Here’s a quick review of deposit insurance that may help put your mind at ease.
The sign at your savings and loan states that your accounts are insured up to $100,000. Knowing the rules of the Federal Deposit Insurance Corporation can help you extend your protection beyond this amount.
Generally, the FDIC insures only $100,000 per person per institution. Thus, if you have more than one account in a single bank, only $100,000 of the aggregate of your accounts is protected. Amounts over that are uninsured.
To increase your protection, you can simply spread your accounts over a number of different banks. Remember, however, that accounts in different branches of the same bank will be aggregated. Because joint accounts are insured apart from separate accounts, you can increase your protection by placing some funds into a joint account. If you and your spouse have a joint account and each of you has a separate account, the three accounts can be insured to a total of $400,000. As with personal accounts, however, all joint accounts held by the same persons will be aggregated.
Different types of accounts are also aggregated. Individual retirement accounts (IRAs), however, are separately insured to $250,000 if the underlying investments are insured.
For more information on deposit insurance, go to http://www.fdic.gov/ . You may also want to review your accounts with your banker to be sure you have the protection you need.
Do a financial review at tax time
As long as your tax and financial records are out for filing your 2007 tax return, why not take one more step and do something positive for your financial well-being? This is the ideal time to review your financial affairs and make any needed changes.
Here are some suggestions on how to get started.
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. Has your situation changed recently (marriage, divorce, births, deaths, move to another state, for example)? If so, 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.
Take a Break
Tease your brain
Can you solve this word riddle: What nine-letter word in the English language is still a word when each of the nine letters is removed one by one?
Give up?
The word is "startling."
Remove the "l" and the word becomes "starting."
Remove the second "t" and you have "staring."
Drop the "a" to get "string."
Drop the "r" for "sting."
Drop the "t" for "sing."
Drop the "g" for "sin."
Remove the "s" to get "in."
Finally, drop the "n" to get "I."
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Online Advisor - March 2008
Major Tax Deadlines For March 2008
* March 3 - Farmers and fishermen who did not make 2007 estimated tax payments must file 2007 tax returns and pay taxes in full. (Deadline is extended to March 10 if Form 4136, Credit for Federal Tax Paid on Fuels, is attached to tax return, and the tax return is electronically filed.)
* March 9 - Daylight Saving Time begins. (The energy bill passed back in 2005 extended Daylight Saving Time by one month. As a result, Daylight Saving Time starts the second Sunday in March and ends the first Sunday in November.)
* March 17 - 2007 calendar-year corporation income tax returns are due.
* March 17 - Deadline for calendar-year corporations to elect S corporation status for 2008.
* March 31 - Deadline for payers who file electronically to file 2007 information returns (such as 1099s) with the IRS.
* March 31 - Deadline for employers who file electronically to send copies of 2007 W-2s to the Social Security Administration.
For early April 2008
* April 1 - Deadline for taking your first required IRA distribution if you turned 70½ in 2007. 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, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
* 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 economic stimulus law passes
In an attempt to boost the economy, Congress hammered out a new economic stimulus package in mid-February. The centerpiece of the new legislation, of course, is the highly publicized tax rebate program. However, other tax incentives targeted at the business sector were also included in the law.
Here’s a brief look at the major provisions in the new Economic Stimulus Act of 2008.
* Individual tax rebates. Most single filers will be entitled to receive a one-time tax rebate of $600. The rebates are doubled to $1,200 for joint filers. However, these rebate amounts will begin to phase out for higher-income taxpayers. The phase-out begins at $75,000 of AGI for single filers and $150,000 for joint filers, based on 2007 tax returns. Rebate checks are expected to begin arriving in May.
A late addition to the new law also authorizes rebates for individuals who have no tax liability but received at least $3,000 of taxable income in 2007. This covers social security recipients and disabled veterans (or surviving spouses of disabled veterans).
Finally, you may receive an additional payment of $300 for each child under age 17. There is no limit on the number of rebates available for qualifying children.
* Business incentives. Under the new legislation, a business may benefit from the following two tax provisions:
1. Enhanced Section 179 deductions. The new law increases the write-off allowed for assets placed in service in 2008 from $128,000 to $250,000. In addition, the dollar limit for the maximum Section 179 deduction jumps from $510,000 to $800,000. Amounts over this threshold are reduced on a dollar-for-dollar basis.
2. Bonus depreciation deductions. A business may be entitled to a 50% "bonus"
depreciation deduction for new equipment placed in service in 2008. Any remainder that is left over after claiming the 50% deduction is still available for regular depreciation deductions.
Finally, the new law also raises loan limits for Fannie Mae, Freddie Mac, and the Federal Housing Authority (FHA). If you have any questions concerning the new tax breaks in the economic stimulus package, give us a call.
Tax recordkeeping: Some tips to make it easier
Are you sometimes overwhelmed and intimidated by the prospect of keeping records for federal tax purposes? Well, you are not alone. Here are some suggestions that should help you determine what to keep and for how long.
Normal statute of limitations. This is three years from the later of the due date or the actual filing date of the return. The statute period can be extended to six years if your income is understated by more than 25%. There is no statute of limitations if fraud is involved. Be safe and maintain the following records for seven years.
* W-2s, 1099s, annual brokerage statements, and other evidence to support taxable income.
* Receipts, cancelled checks, invoices, and other evidence to support tax deductions.
* IRA and other retirement plan contributions.
* Support for all charitable donations of any amount.
Other seven-year records. Some items build a history until they are reflected on your tax return. Once realized on your return, the suggested seven-year holding period applies.
* Net operating loss information. (Generally, net operating losses can be carried back two and forward twenty years.)
* Property purchases and improvements. (Keep for seven years following sale.)
* Investment related information. (Maintain investment purchase and sale information along with any dividends and stock splits.)
* Worthless securities. (Document basis and save evidence supporting the date on which the investment went bad.)
*Also keep information on your personal residence. Maintain documents supporting your basis along with improvements. Current tax laws give favorable treatment to your residence, but one Congressional act can change that. It's better to be prepared.
How to organize. Three-ring binders are a good collection device. They’re easy to organize and maintain. One can accommodate your old returns and any unrealized long-term tax information. Others can be used to maintain information on filed returns for the recommended seven years. Computerized records with scanned documents are another alternative. However some documents are difficult to scan and readability can be an issue. The three-ring binder might be the better choice.
Good tax documentation starts with a commitment to action. If you need more information to organize your tax recordkeeping, give us a call.
New Business
Cost of health insurance a major concern for businesses
The cost of health insurance is a major concern, both for employees and employers. A recent survey of approximately 3,000 companies revealed that among those with 200 or fewer employees, 61% offered health insurance in 2007. This represents a drop from 63% in 2006.
In 2007, about 5% of employees with health insurance had a high-deductible plan linked with a health savings account, up from 3% in 2006.
These plans became available in 2003 tax legislation. They are composed of two elements: a high-deductible medical insurance plan and an IRA-like employee savings account. Both employees and employers may contribute to the savings account, and those funds can be used tax-free to pay for medical expenses not paid for by insurance. Balances in the account can be invested and grow tax-free; money not used in any year can be carried over to future years.
Though 41% of larger companies offer such plans, only 7% of employers in smaller companies do. If you would like to discuss the pros and cons of these plans for your business, give us a call.
Know the tax rules for selling online
Selling items on eBay and other online auction Web sites has become a very popular way to get rid of unwanted household stuff, as well as a way to turn a little profit. Many users have even started full-time businesses auctioning merchandise on the Web. But like any business venture, selling items in the virtual world has tax implications that are all too real.
From a tax standpoint, casual selling on eBay is essentially the same as holding a garage sale. If you sell an item for less than you paid for it, you cannot deduct the "loss." When you sell something for a profit, however, you must report it on your tax return. Long-term gains on the sale of collectibles, such as artwork, antiques, or rare coins, are taxed by as much as 28%.
Profit is the difference between the selling price and your "basis" in the item. In most cases, basis is simply the amount you paid for it. Inherited items generally have a basis equal to their fair market value at the time of receipt. If the basis cannot be documented, it becomes zero, and you pay tax on the entire selling price.
Online selling activity can reach the point where it is deemed to be a business venture. Status as a for-profit eBay business versus a casual online seller is not clearly defined. Factors considered by the IRS include the amount of time you spend selling online and whether you conduct yourself like other self-employed business owners, such as keeping accounting records and advertising your services.
The good news is that if you are treated as a business, you can deduct expenses related to your selling activity. This can include Internet access fees and home office expenses. You may also be able to deduct travel expenses incurred in searching flea markets and other locations for items to sell. The downside to business status is that profits from selling online may be subject to self-employment tax. What's more, depending on where you live, you may be required to collect and report local and state sales taxes.
Taxpayers who operate like a business, but rarely show a profit, may be treated as a hobbyist and have their business losses denied. In this scenario, losses can only be deducted to the extent of gains. Generally, if you show a profit in most years, a few down years should not put you in danger of this label.
Whether you are an infrequent user of online auction sites, or an all-out eBay business owner, you cannot afford to ignore the tax implications of selling online. For the details you need to avoid tax problems, call our office today.
What’s New in Finances
Reverse mortgages
If you own your home and are age 62 or older, one option to increase your retirement income could be a reverse mortgage.
As the name implies, a reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage, you borrow a sum of money to purchase a home, then pay off the debt over time. With a reverse mortgage, you receive loan proceeds - as a lump-sum payout, an annuity, a line of credit, or a combination of all three - but make no payments as long as you reside in the property. The loan, with any accrued interest, comes due when you move out or pass away.
To qualify for a reverse mortgage, you need to be at least 62 years old and own the home outright (or have a balance that can be paid off with the loan proceeds). How much you can borrow depends on your age, the home's market value, and interest rates.
* The downside. Be aware that there is a downside to a reverse mortgage. Closing costs can be very steep, often over 5% of the home’s value. In addition, borrowers may have to purchase mortgage insurance, and they’re still on the hook for property taxes and homeowner's insurance.
Federal truth-in-lending laws require lenders to provide information about interest rates, payment terms, and other costs. If you’re interested, shop for a reverse mortgage as you would for any other loan. Make sure the basic terms of competing loans are comparable. Then go with the lowest price by comparing interest rates, upfront fees, and other charges. If you need help, give us a call.
Do you have these basic financial documents?
There are some basic financial arrangements that all individuals should consider making, no matter what their age or circumstances. But if you have a family, these basic documents become essential.
A will isn’t the only document you need in case of an unforeseen tragedy. To properly provide for your family, you also should have a power of attorney, a directive to physicians, and a financial inventory.
Will. As you know, a will lets you, rather than the state, control how your assets will be split among your heirs. More important, a will allows you to designate the guardian of your minor children. Properly written, it can even increase your heirs' inheritance by including simple tax-saving strategies.
Power of Attorney. A power of attorney is a document that names another individual as your agent. If you were to become disabled or seriously ill, a power of attorney would allow your agent to pay your bills, deposit your checks, and make decisions on your behalf. You can decide whether your power of attorney becomes effective immediately or only upon the occurrence of a disabling illness or injury.
Directive to Physicians. A directive to physicians (also called living will, health care directive, or some similar name) tells your doctor whether to take extreme measures to keep you alive should you become terminally ill or permanently unconscious. In addition to assisting your doctors, your directive to physicians will lessen the burden on your family by clearly describing your desires with respect to this situation.
Financial Inventory. You need a financial inventory. You should prepare a list of your bank accounts, other assets, income sources, insurance policies, mortgages, credit cards, and funeral arrangements. In addition, you should include the name and phone number of your accountant, lawyer, doctor, and insurance agent.
Take the time now to get your financial documents in order or to update the ones you already have.
Take a Break
Is opportunity knocking?
"Opportunity is missed by most people because it is dressed in overalls and looks like work."
- Thomas A. Edison
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the ONLINE ADVISOR, or for assistance with any of your tax or business concerns, contact our office.
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Online Advisor - February 2008
Major Tax Deadlines For February 2008
* February 28 - Payers must file 2007 information returns (such as 1099s) with the IRS. (Electronic filers have until March 31 to file.)
* February 29 - Employers must send 2007 W-2 copies to the Social Security Administration. (Electronic filers have until March 31 to file.)
For March 2008
* March 3 - Farmers and fishermen who did not make 2007 estimated tax payments must file 2007 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, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
* 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
Last-minute laws provide relief for taxpayers
Congress passed two new tax laws in a flurry of year-end 2007 activity. The laws, which include an alternative minimum tax (AMT) "patch" and mortgage relief for homeowners, will affect a wide range of taxpayers. But other proposed tax legislation was put on the shelf, at least temporarily. Here's a brief summary of the key changes in the two new laws.
* Tax Increase Prevention Act. Under this law, the AMT exemption amounts for 2007 are bumped up from their 2006 levels. Without this change, the amounts were scheduled to revert to low levels in effect back in 2001. The new law arrived in time to save 21 million taxpayers from the AMT (although it may cause refund delays). Of course, the latest AMT relief is only a temporary fix. This is likely to be a political hot potato as the Presidential election approaches.
* Mortgage Forgiveness Debt Relief Act. The new law carves out the following tax breaks for homeowners:
*Debt forgiveness. Prior to this law, the forgiveness of mortgage debt by a lender generally resulted in taxable income to the taxpayer. The new law allows homeowners to exclude up to $2 million of certain forgiven mortgage debt from federal taxable income. The exclusion is available for 2007, 2008, and 2009 and applies to foreclosures and renegotiations of qualified mortgages on primary residences. The amount of debt forgiven reduces the basis in the home.
* Mortgage insurance. For the first time, taxpayers were permitted a deduction for qualifying mortgage insurance premiums on 2007 returns. The new law extends this deduction for three years - 2008 through 2010.
* Home-sale exclusion. You can claim a tax exclusion on the first $250,000 of gain on the sale of a home you’ve owned and used as your principal residence for at least two out of the five prior years. The exclusion is $500,000 for joint filers. Under prior law, a surviving spouse could benefit from the full $500,000 exclusion only if he or she sold the home in the year a joint return was filed. Now for post-2007 sales, a surviving spouse may claim the $500,000 exclusion for sales occurring within two years of the other spouse's death.
Congress expects to revisit several tax issues in 2008. Stay tuned and informed about the changes that could affect you.
Reminders for filing your 2007 tax return
* Gather the tax documents needed for filing your 2007 tax return - the W-2s, 1099s, and other information forms you receive from your employer, broker, bank, etc. If you detect errors, notify the sender and ask for a corrected copy.
* Remember, you’ll need substantiation for all charitable contributions that you made last year. If you donated a vehicle, boat, or airplane to a charity, your deduction generally will be limited to what the charity sold your item for. The charity should give you Copy B and C of IRS Form 1098-C to substantiate your deduction.
* Check your children’s need to file a 2007 return. Generally, your child must file a 2007 tax return if he or she had wages of more than $5,350, self-employment earnings over $400, or investment income (such as interest, dividends, or capital gains) over $850. If your child had both earned and investment income, other thresholds apply. Also, if your child is due a refund, a return must be filed to get it.
* There is still time to make 2007 IRA contributions. If your 2007 IRA wasn’t fully funded by December 31, 2007, and you make any IRA contributions prior to April 15, 2008, designate to the bank or trustee that these 2008 contributions are for 2007 (up to the maximum allowed). You can then deduct these amounts on your 2007 return for a quicker tax benefit.
* Make your 2008 IRA contributions as early in the year as possible to maximize tax-deferred growth.
* Deduction reminders: (1) You may deduct mortgage insurance premiums in 2007 if you meet the income limits and other restrictions. (2) Itemizers may choose to deduct either sales taxes or state and local income taxes. (3) Educators may deduct up to $250 for classroom supplies purchased.
* Kiddie tax alert: For 2007 returns, the kiddie tax applies to children under age 18 who had investment earnings over $1,700. For 2008, the age limit increases to 19 (to 24 for full-time students), and the earnings limit increases to $1,800.
* If you’re among the many taxpayers who get a large tax refund this year, do yourself two favors: (1) invest the refund instead of spending it, and (2) adjust your withholding for 2008 so your money can be invested for you rather than the government.
* File business returns on time. The deadline for filing partnership returns is April 15, 2008. Calendar-year corporation tax returns are due by March 17, 2008.
New Business
Is it time to purchase business equipment?
As 2008 gets underway, you may be analyzing your company's need for new equipment. This may be a good year for business equipment purchases - at least from a tax standpoint.
Your company can elect to expense the cost of qualified business assets first placed in service this year. The expensing limit for 2008 is $128,000, an increase over the 2007 limit of $125,000. Keep in mind that if purchases in 2008 exceed $510,000, the amount that can be immediately expensed is reduced dollar-for-dollar by the excess. Special limits also apply to business vehicles.
There may be more good news on the horizon. The economic stimulus package being considered by Congress includes an increase in the amount of equipment purchases a business can expense this year. Offering a temporary "bonus depreciation" for business equipment purchases is also being considered. Stay tuned as Congress and President Bush hammer out the details of this plan to stimulate the economy.
Turn your hobby into a business for a lower tax bill
Turning your hobby into a business could lower your tax bill. If you have a hobby that takes up a lot of time and money, take a close look to see if it qualifies as a business. Why? Having a business instead of a hobby could mean a lower tax bill.
If your activities constitute a business, then your expenses, including depreciation, may be tax deductible. As a hobby, these expenses are subject to limitations. Business losses are tax deductible and can be used to offset other taxable income. Hobby losses cannot.
The IRS defines a hobby as an activity not engaged in for profit. Here are some of the determining factors.
* Look at your history. If your activity shows a profit in three of the most recent five years (two out of seven years for horse-related activities), it is more likely a business than a hobby.
* Examine your conduct. Even if your business loses money, you may be able to deduct the losses if you can show that you were engaged in this activity with the intent of making a profit.
* Keep good books. You must keep accurate books and records, and conduct the activity as a business. If your recordkeeping is haphazard, it will probably be difficult for you to demonstrate that your activity was a business rather than a hobby.
* Watch the clock. Document the time you invest in this activity. The amount of time you spend in relation to other activities will, in part, determine whether this activity qualifies as a business.
* Experience counts. Past experience with similar activities, especially if they were profitable, may be an indicator that this activity is more than a hobby.
* Fun is bad. If the activity has elements of personal pleasure or recreation, it may be more heavily scrutinized by the IRS.
If you hope to deduct any losses resulting from a sideline business, be certain that you are doing all that is necessary to meet the requirements of running the activity in a business-like manner. Call us if you would like more information.
"What’s New in Finances
HSA limits increase for 2008
Health Savings Accounts (HSAs) allow taxpayers with high-deductible health insurance to set aside tax-deductible dollars that can be used tax-free to pay unreimbursed medical expenses. The amount that can be contributed each year to an HSA is adjusted annually for inflation.
The HSA contribution limits announced by the IRS for 2008 are $2,900 for an individual and $5,800 for a family. Those aged 55 and older may contribute an additional $900 for 2008.
Take a Break
Word Trivia
*"Stewardesses" is the longest word typed with only the left hand."Lollipop" is the longest word typed with only the right hand.
* There is no word in the English language that rhymes with "month," "orange," "silver,"or "purple"
* The sentence "The quick brown fox jumps over the lazy dog" uses every letter of the alphabet.
* The words "racecar,""kayak," and"level"are the same whether read left to right or right to left.
* Two words in the English language have all five vowels used in order (a, e, i, o, u):"abstemious" and "facetious."
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the ONLINE ADVISOR, or for assistance with any of your tax or business concerns, contact our office.
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Online Advisor - January 2008
Major Tax Deadlines For January 2008
* January 15 - Final 2007 individual estimated tax payment is due, unless 2007 tax return is filed and taxes are paid in full by January 31, 2008.
* January 31 - Employers must provide 2007 W-2 statements to employees.
* January 31 - Payers must provide 2007 Form 1099s to payees.
* January 31 - Employers must generally file Form 941 for the fourth quarter of 2007 and pay any tax due.
* January 31 - Employers must generally file 2007 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, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
* 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 has $110 million in undeliverable refunds
Are you still waiting for your tax refund? If so, you may be one of the 115,478 taxpayers to whom the IRS has been unable to deliver a refund check. The refunds total about $110 million.
Every year there are taxpayers who don’t update the IRS or the U.S. Postal Service when they move or change their mailing address. Checks are mailed to the last known address for taxpayers, and when the address isn’t current, the checks are returned as undeliverable.
To check on a missing refund, you can go to the IRS Web site at www.irs.gov and type "Where’s My Refund?" in the search box. To check on a refund by phone, call 1-800-829-1954.
Include taxes in your New Year’s resolutions
Expand your list of New Year resolutions to include the following:
- Review and adjust your withholding.
If you receive a big tax refund for 2007, resolve to file a new Form W-4 to adjust your withholding and reduce your refund to a reasonable size. It’s comforting to receive a small refund, but remember that a refund means you’re making an interest-free loan to the government - money you could be investing or using for your own benefit.
- Maximize your tax-advantaged retirement savings.
Resolve to contribute at least enough to your 401(k) plan to earn your employer's match. Otherwise you're giving up "free" money. If you can afford to contribute more to your retirement plan or to an IRA, do so. At retirement time, you’ll be glad you did.
- Review your investments quarterly.
Resolve to review your investments regularly. Decide on investments to keep or sell, and rebalance your portfolio.
- Set up an education plan.
If you have children or grandchildren, resolve to meet with your tax advisor and establish a tax-advantaged plan to fund their education.
- Keep better records.
One secret of good tax planning is good recordkeeping. Resolve to set up a simple system to maintain essential records.
- Update your estate plan.
Resolve to update your estate plan this year. You’ll be surprised how quickly changes can occur. And remember that good estate planning includes more than just a will or living trust.
- Take your tax preparer to lunch.
Some time after April 15, go to lunch with your tax preparer. Take a copy of your income tax return and review it line by line, discussing ideas for additional tax savings in 2008.
Please call our office if you have questions or if you would like to set up that after-tax-season lunch appointment.
New Business
New mileage rates issued for 2008
The IRS has issued the 2008 standard mileage rate that businesses can use to calculate the deductible costs of driving an automobile for business.
Beginning January 1, 2008, the standard mileage rate for business driving will be 50.5 cents a mile. This represents an increase in the mileage rate from the 48.5 cents a mile allowed in 2007. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating a vehicle.
If you have questions about deducting vehicle expenses in your business, give us a call.
How to prevent a partnership failure
Just as marriages don’t always work out, there is no guarantee that a business partnership will be successful. Before you enter into a partnership, here are some questions you should ask yourself.
- Why do I want a partner? Maybe there are alternative ways to solve your problems. For example, if you’re feeling overworked, can you hire an employee to share your duties and responsibilities? Perhaps better time management is the answer.
- How well do I know my potential partner? Consider his/her personality, health, age, family status, lifestyle, and anything else that may affect your partnership. A period of internship with your company might allow you both to get to know each other better and evaluate how well you work together.
- Has my potential partner ever been in a partnership? Find out about previous business relationships your partner has had. Why did they end?
- Do we have compatible business goals? For example, do you agree on the amount of debt your business should carry? Are you in agreement about cash distributions from the partnership?
- What is my potential partner’s work ethic? If you are a workaholic and your partner believes in extended business lunches, you may be setting yourself up for problems. Again, a trial period may bring to light problems you never even imagined.
If you are considering adding a partner, we can act as your sounding board. Give us a call.
What’s New in Finances
Check scams on the increase
Check scams have become so prevalent that the U.S. Postal Service has undertaken its largest ever anti-fraud campaign to warn consumers. According to the National Consumers League, counterfeit checks rank #2 as the most common Internet fraud and #1 as the most common telemarketing fraud. The average loss to victims is $3,000 to $4,000 per incident.
In one typical check scam, the con artist contacts an individual who has posted an ad on a online auction site. The thief says he/she wants to buy the item and says a check will be sent for more than the sale price. The seller is asked to wire the excess amount to a third party to cover shipping of the item being purchased. But the check is counterfeit, and by the time the seller finds that out, the money has been transferred out of the country and the seller is on the hook for the loss.
Don't fall for one of these scams. Trust your instincts and apply a healthy dose of skepticism to out-of-the-ordinary requests when you’re dealing with people you don’t personally know.
Retirement funds: What you need to know about required withdrawals
Do you own a traditional IRA, SEP-IRA, SIMPLE IRA, Keogh plan, 401(k) plan, or 403(b) plan? If so, you’ll have to start taking distributions when you reach age 70½. If you don’t, you’ll forfeit 50% of the amount you should have taken but did not.
For example, if your required minimum distribution (RMD) in 2007 was $10,000, but you only withdrew $4,000, your penalty would be 50% of the $6,000 you did not withdraw, or $3,000.
The RMD rules apply to the plans mentioned above, but not to Roth IRAs.
Here are the requirements.
- You may take your first distribution any time before April 1 of the year following the year in which you reached age 70½. However, a first distribution taken after the year you turned 70½ still will be credited to the year you actually reached the required age. You’ll then have to take another distribution by December 31 of the current year, forcing you to pay income tax on two distributions in the same year.
- You must take each subsequent distribution by December 31 of the applicable year. To avoid the 50% penalty, give your plan administrator enough time to process the distribution and get it to you by year-end.
- The amount of your RMD is computed using Uniform Lifetime Tables issued by the IRS. These tables provide percentages that are applied to the value of your retirement account as of December 31 of the year preceding your distribution. Beginning at age 70½, for example, most people must withdraw at least 3.6% of the value of their accounts. At age 75, the percentage increases to 4.4%. If your spouse is ten or more years younger than you, different rates will apply.
- If you’re still employed at age 70½, you may be able to delay withdrawing from your current employer’s plan until you actually retire.
- You and your spouse may not take distributions from one another’s accounts to make up your RMDs. However, if you individually own more than one IRA, you may compute a combined RMD and withdraw it from one or any combination of the accounts. RMDs from non-IRA plans, such as Keogh or 401(k) plans, must be computed for and withdrawn from each separate account.
- You may take distributions in monthly, quarterly, semi-annual, annual, or irregular increments, as long as you reach your required total each year.
- Since RMDs are taxable, consider making quarterly income tax estimates to cover your liability, or instruct your administrator to withhold taxes from each distribution.
Call us to set up a time to develop further tax-saving strategies for handling your retirement funds.
Take a Break
Beautiful numbers
Though some people are intimidated by math, numbers can be a beautiful thing. Check out the math below and see for yourself.
1 x 8 + 1 = 9
12 x 8 + 2 = 98
123 x 8 + 3 = 987
1234 x 8 + 4 = 9876
12345 x 8 + 5 = 98765
123456 x 8 + 6 = 987654
1234567 x 8 + 7 = 9876543
12345678 x 8 + 8 = 98765432
123456789 x 8 + 9 = 987654321
1 x 9 + 2 = 11
12 x 9 + 3 = 111
123 x 9 + 4 = 1111
1234 x 9 + 5 = 11111
12345 x 9 + 6 = 111111
123456 x 9 + 7 = 1111111
1234567 x 9 + 8 = 11111111
12345678 x 9 + 9 = 111111111
123456789 x 9 +10= 1111111111
9 x 9 + 7 = 88
98 x 9 + 6 = 888
987 x 9 + 5 = 8888
9876 x 9 + 4 = 88888
98765 x 9 + 3 = 888888
987654 x 9 + 2 = 8888888
9876543 x 9 + 1 = 88888888
98765432 x 9 + 0 = 888888888
1 x 1 = 1
11 x 11 = 121
111 x 111 = 12321
1111 x 1111 = 1234321
11111 x 11111 = 123454321
111111 x 111111 = 12345654321
1111111 x 1111111 = 1234567654321
11111111 x 11111111 = 123456787654321
111111111 x 111111111=12345678987654321 |
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.
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