Timothy W. Tuttle & Associates
Volume 1 Edition 5 Please email comments to firstname.lastname@example.org April 2005
Major Tax Deadlines
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).
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 over-withholding. 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.
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.
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 office.
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."
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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 ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.
Timothy W. Tuttle & Associates