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AUGUST 2007

 

Major Tax Deadlines

For August 2007

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: Charities and churches warned to stay out of politics

Though national elections are not until next year, the IRS is reminding charities, churches, and other nonprofit organizations to stay out of politics. A 2006 report on political activities showed a steep increase in the number of complaints about improper activities by these organizations. The tax-exempt status of nonprofit organizations is dependent on their refraining from engaging in partisan political activities.

In its attempt to increase compliance with the rules, the IRS has issued guidance on what constitutes legal and illegal activity. Details can be found in Revenue Ruling 2007-41 on the IRS's Web site www.irs.gov.

 

Manage "AGI" to keep tax breaks from disappearing

At tax time it pays to read the fine print. A variety of allowances, deductions, credits, and exemptions are phased out as income rises. If your income reaches these "phase-out" levels, you may lose tax benefits.

For example, let’s say you finally snag that big promotion. If the promotion causes this year’s income to climb into the phase-out zone, your deduction for college bond interest or child credits may be reduced. The result? You earn more money, but more of it is taxed. Your big promotion — after taxes — is now smaller.

Some items subject to phase-out income levels are the child tax credit (starts at $110,000 for joint filers), the Hope and Lifetime Learning credits ($94,000 to $114,000), Roth IRA eligibility ($156,000 to $166,000), and the college bond interest exclusion ($98,400 to $128,400). These phase-out levels are for "adjusted gross income" — also known as AGI — on 2007 joint returns.

Clearly, many middle-class families and small business owners reach these income levels. And these are just a few of the items affected by phase-outs. Others include personal exemption amounts, rental real estate passive loss allowances, exclusion of social security benefits, charitable deductions, and medical deductions.

How can you avoid losing all or part of these tax benefits as your income rises? One way is to manage your AGI, the main number used to determine your taxable income. The goal is to manage income levels so you won’t lose tax benefits for which you would otherwise qualify. Here are three suggestions.

Take more "above-the-line" deductions. These deductions are reported on your tax return above where the AGI is calculated. They include contributions to individual retirement accounts, self-employed retirement plans, and health savings accounts. Other "above-the-line" deductions are alimony payments, moving expenses, payments for student loan interest, and self-employed health insurance.

Reduce your business’s taxable income. Companies are taxed on their net income. To reduce this year’s taxable income you might consider sending out invoices in late December so you’ll receive payments after year-end. Bumping up year-end expenses — such as business equipment purchases, advertising, and repairs — is another strategy to keep your AGI below the phase-out levels.

Defer income. Even if you don’t own a business, you can sometimes push your income into the following year, thus lowering your AGI. For example, you might work out an arrangement with your boss to receive a bonus in January rather than December. Or you might wait to sell that hot stock until after year-end.

For assistance with the tax planning that will help you retain your tax benefits, give us a call.

New Business: Free IRS online workshop available to nonprofit organizations

The IRS now has an Internet version of its Exempt Organizations Workshop available on its Web site at www.irs.gov. The workshop, titled "Stay Exempt – Tax Basics for 501(c)(3)s," covers tax compliance issues faced by small and mid-sized tax-exempt organizations, including charities and churches.

The workshop has five interactive modules including the following:

  • Tax-Exempt Status — How can you keep your 501(c)(3) exempt?
  • Unrelated Business Income — Does your organization generate taxable income?
  • Employment Issues — How should you treat your workers for tax purposes?
  • Form 990 — Would you like to file an error-free return?
  • Required Disclosures — To whom do you have to show your records.

Is your worker an "employee" or an "independent contractor"?

There’s an ongoing debate that’s almost as old as the tax code itself. If you have people working for your business, should you classify them as employees or as independent contractors?

Classifying your workers as independent contractors generally saves you money. That’s because you avoid paying employment taxes and benefits on their behalf.

In most instances, however, very few of your workers actually qualify as independent contractors. If the IRS determines that you misclassified your employees as contractors, you could end up paying back all of the employment taxes and benefits that should have been paid over the years. Depending on the size of your workforce, the cost to you could be substantial, potentially bankrupting your business.

How can you ensure that you properly classify your workers? Start with the factors listed by the IRS to determine a worker’s classification. If you maintain control over your workers through hiring, training and supervision, scheduling the work to be done, and by providing them with tools and materials, your workers are most likely your employees. The same holds true if you pay your workers a set salary or an hourly wage and have the right to let them go at any time.

As a general rule, if you only have the right to control or direct the result of the work and not the means and methods of accomplishing the result, the individual may qualify as an independent contractor.

If your business employs independent contractors, take steps to protect yourself and your business. The IRS is currently focusing its audit efforts in this employment tax area. Be consistent with how you classify your workers, and follow how other businesses in your industry classify their workers. And don’t forget to send a Form 1099-MISC to any contractor who earns more than $600 from you during the year.

To find out more about properly classifying your workers, please give us a call.

 

What's New: What’s new on the home front?

Existing home sales fell to a four-year low in May, with the median home price declining for the 10th straight month.

According to the National Association of Realtors, the number of homes for sale is now the highest in 15 years. 

To add to the housing market's woes,  mortgage companies are tightening requirements for home loans.  Buyers are expected to have higher credit scores and to put down larger down payments.

 

 

Marriage? Divorce? Review your finances after a change in marital status

If you are getting married, divorced, or have recently lost your spouse, you certainly have a lot on your mind. While you may feel overwhelmed with all there is to do, it is important not to overlook financial matters when your marital status changes. Some actions you may want to consider include the following:

Will. Update your will and power of attorney if you have them. If you do not, hire a lawyer to draw them up for you.

Life insurance. Review your life insurance coverage. Given the recent events in your life, you may want to change your beneficiary and the amount of your coverage.

Beneficiaries. Review the beneficiaries you have named for your 401(k) and IRA plans. Make any changes that are appropriate given your new circumstances.

If you’re getting married, review your combined contributions to 401(k) plans to make sure you’re maximizing both employers’ matching contributions.

Withholding. Adjust your Form W-4 (income tax withholding form) for your change in marital status and any change in the number of your dependents.

If you’re getting married and both you and your spouse work, check to see if you will be affected by the marriage penalty. If so, you may need to adjust your payroll withholding.

Health insurance. Analyze your health insurance options. If you are getting married, you may be able to save money by joining your spouse’s plan or by having your spouse join your plan.

If you are divorcing or have lost a spouse and have relied on him or her for health insurance, you should investigate the COBRA laws, which may allow you to retain your insurance coverage for up to 18 months.

Disability insurance. Consider purchasing disability insurance if someone will be dependent on you for financial support.

Auto insurance. Talk to your automobile insurance agent. If you are getting married, you may save money by combining separate policies. You may also qualify for a marriage discount.

Prenup. Consider a prenuptial agreement if you’re getting married and you have children from a previous marriage or have substantial assets.

Name and address. Notify the Social Security Administration if you change your name. If you move, notify the IRS of your address change.

Getting your affairs in order after a change in marital status is an important step toward financial well-being. For any assistance you need, contact our office. We can help you sort through your options and find the right choices for your new situation.

 

A graying America:  Some statistics to ponder

The number of Americans over the age of 65 is projected to double by 2030 to 72 million.

The fastest growing category of Americans is the 85-and-older group.

The wealthiest 20% of older Americans have an average net worth of $328,432, not counting their homes.

14,000,000 seniors say they have health conditions such as heart disease, arthritis, or other chronic illnesses.

 

SEPTEMBER 2007

Major Tax Deadlines

For September 2007

 September 17 Due date for individuals to pay third quarter installment of 2007 estimated tax.
     
 September 17 Due date for filing 2006 tax returns for calendar-year corporations that had an extension of the March 15 filing deadline.
     
 October 1 Deadline for businesses to adopt a SIMPLE retirement plan for 2007.


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.
 
 
What's New: IRS launches audit program

Beginning next month, the IRS plans to audit about 13,000 individuals for tax year 2006 as part of a research project to update the Service's audit selection process. Audits will focus on those parts of the individual's tax return that cannot be verified through third-party information reports sent to the IRS.

If the program is extended for several years, as the IRS hopes, it will also provide information about the tax gap (the difference between taxes owed and taxes actually collected).

 

An HSA might be the right prescription now

Health Savings Accounts (HSAs) are tax-sheltered accounts that, when combined with a high-deductible health insurance plan, allow a tax deduction for contributions made to the HSA. HSAs have been around for some time, but new legislation passed at the end of 2006 makes them an even more powerful tool with which to pay medical bills.

Deductible contributions
Essentially, the contribution to an HSA is deductible annually up to $2,850 if you’re single and $5,650 if you’re married. An additional $800 can be contributed if you are 55 or older.

These deductions help to reduce your current income taxes. Funds with-drawn from the HSA to pay medical bills are not treated as taxable income to you. It’s the best of all possible worlds: you receive a deduction for the contribution to the HSA and don’t have to recognize income when qualified medical payments are made by the HSA.

Eligibility requirements
In order to qualify, you must participate in a high-deductible health policy (HDHP). This simply means that the deductible on your health policy can’t be less than $1,100 for self-only coverage and $2,200 for family coverage.

These are minimum deductible limits, and you’re free to participate in a health plan with higher limits and still qualify for an HSA. However, the maximum out-of-pocket expenses (including deductibles and co-payments, but not insurance premiums) can’t be more than $5,500 for self-only coverage or $11,000 for family coverage. All of the limits noted are for 2007; these limits will be adjusted for inflation in future years.

New rules
In addition to raising the HSA deduction limits, the 2006 legislation also changed two other rules.

You can now fund your HSA with IRA money. You can make a transfer of funds from an IRA to an HSA without realizing any income or penalties for such transfer.

Also, if your employer maintains a flexible spending account (FSA) or health reimbursement account (HRA), you can transfer these funds to an HSA. A transfer from an FSA could make a lot of sense when FSA contributions can’t be used up and would otherwise be lost.

In both cases, the transfer can’t exceed the annual contribution limits, and it can only be made once in your lifetime.

Many taxpayers will benefit from the changes in the HSA rules and should consider using an HSA to help control the cost of health care. If you need assistance in analyzing the use of an HSA in your situation, please call us.

 

New Business: How’s your customer service?

According to a recent survey, 48% of consumers say that customer service is the biggest factor in creating loyalty to a company. 37% said it was product quality; 13% said it was price. Brand name or the company’s reputation was cited by the remaining 2%.

Is your business paying enough attention to customer service? If you need further convincing, take a look at the following:

  • Satisfied customers tell five people about good service they receive. Dissatisfied customers tell ten people when they receive bad service.
  • For every unsatisfied customer who complains, there are 26 other unhappy customers who say nothing. Of those, 24 won’t come back.
  • The average company loses about 20% of its customers each year.
  • Of customers who take their business elsewhere —
    15% find cheaper products somewhere else.
    15% find better products somewhere else.
    65% leave because of poor customer service.

 

Make the right choice in deducting car expenses

Taxpayers generally may use one of two methods for computing business car expenses: the actual cost method or the standard rate method. The standard mileage rate may not be used in certain situations; the actual cost method may be used by any taxpayer.

Standard mileage
With the standard mileage method, you simply multiply your business miles driven during the year by the IRS’s standard rate. The rate, which is set by the IRS each year, is 48.5¢ per mile for 2007. If you use the standard mileage deduction, you can also deduct related tolls, parking fees, and the business portion of interest expense on your car loan. (Interest expense is not deductible by employees.)

Actual cost
With the actual cost method, you can deduct the actual expenses of operating the car for business. These expenses include gas, tolls, insurance, parking, repairs, maintenance, registration and license fees, loan interest (except employees), and depreciation.

Recordkeeping
Regardless of the method you select, you need records to support the deduction. You’ll need to keep track of your mileage under both methods, but the actual cost method requires more record-keeping than the standard mileage method.

Only the business portion of your total mileage is deductible. For example, if your business mileage is 15,000 and your total driving mileage is 20,000 this year, you can deduct 75% of your total automobile expenses if you choose the actual cost method. If you choose the standard mileage method, you multiply your 15,000 miles of business driving by 48.5¢ a mile and deduct $7,275.

Tax impact
You might be inclined to choose the standard mileage rate to simplify your recordkeeping, but before you opt for this method, consider the potential impact of each method on your tax bill. The price for using the mileage rate’s simplicity may be lost deductions. If you drive often or long distances for business, or if your car expenses are high, the alternative actual cost method may be better.

If it’s advantageous, you can switch to the actual cost method even if you started with the standard mileage rate. Be aware, however, that once you begin using the actual cost method on a vehicle, you can’t switch to the standard mileage deduction for that vehicle. In making your decision, you should consider how long you’ll keep the car and the estimated total tax savings under each method.

The rules governing business car deductions are full of exceptions and limitations. To be certain you use the method that’s right for you — and that maximizes tax savings — give us a call. We can review your situation and your options with you.

 

 

What's New: Have you gone too paperless?

It can be convenient to cut out "paperwork" by conducting your financial activities online. But if you do your banking and your investing through online bank and brokerage services, your heirs may have trouble sorting through your finances once you’re gone.

Putting some information on paper — even in a world trying to go paperless — is probably a good idea. At least record basic information about your assets, the names of advisers, and the location of your estate planning documents. Include any other information your heirs will need in order to locate various things and to be able to follow your wishes concerning the disposition of your estate.What’s more important — saving for children’s college or your retirement?

A college education. Retirement. What do these major life events have in common? One shared characteristic is that each comes with a price tag. Here’s another: If you have school-age kids, you might be facing the challenge of having to decide which goal to save for. They’re both important. So how do you make the choice?

Here are some suggestions that can help you reach a sensible solution.

Eliminate excuses for not making a decision. Procrastination can be costly. For example, to accumulate $100,000 in five years, you’d have to deposit a little over $1,500 every month in an account that earns 4%. But with a ten-year time horizon, assuming the same return, you can build up $100,000 by socking away less than half that amount, or approximately $700 per month.

What you need to know: Estimate the total amount required for both goals, how much time you have, and how much cash you’ll need to set aside on a regular basis.

Expand your resource horizon. Once you’ve computed the expense side of the equation, figure out how much you can afford to save. You may find that, with one pool of income and two goals, there’s not enough money to fully fund both goals.

But who says you have to pay for everything yourself? Turn an obstacle into an opportunity by searching out alternatives. For instance, while your income in retirement may be dependent in large part on your savings, there are plenty of options for paying college tuition.

Where to look: Investigate the possibility of advanced placement credits while your child is still in high school. Other potential sources of help include scholarship prospects, federal work/study programs, and summer internships.

Adopt a flexible approach. Broadly speaking, you have three alternatives for divvying up your available savings between the two goals. You can save for retirement only, save for college only, or opt to do both.

Yet within each alternative are creative strategies. As an illustration, you could start out by saving strictly for retirement, shift toward saving for college when your child reaches a certain age, then switch back after graduation.

Caution: Be careful of falling into the deadline trap. It’s likely your kids will attend college before you retire. Since the tuition deadline is closer, you might be tempted to reduce or eliminate retirement plan contributions in the early years of your savings plan in order to focus on education savings.

But consider this: A typical retirement will generally last longer and cost more than your child’s education. By putting college tuition first, you could end up with less than you need in your retirement nest egg. Instead, take your overall time horizon into account.

For assistance with the numbers, give us a call.

 

 

Looking back 100 years

Compare the following statistics for 1907 with today. What a difference 100 years makes!

  • The average life expectancy in the U.S. was 47 years.
  • A three-minute call from Denver to New York City cost $11.
  • There were only 8,000 cars in the U.S. and only 144 miles of paved roads.
  • Alabama, Mississippi, Iowa, and Tennessee were each more heavily populated than California.
  • The average U.S. wage was 22 cents an hour.
  • 90% of all U.S. doctors had no college education.
  • The American flag had 45 stars. Arizona, Oklahoma, New Mexico, Hawaii, and Alaska hadn’t become states yet.
  • The population of Las Vegas was 30.
  • There was no Mother’s Day or Father’s Day.