Timothy W. Tuttle & Associates
Volume 1 Edition 8 Please email comments to email@example.com July 2005
Major Tax Deadlines
For July 2005
July 15 - Deadline for filing extended 2004 calendar-year partnership returns.
July 15 - Deadline for filing extended 2004 income tax returns for calendar-year trusts.
August 1 - Due date for filing retirement or employee benefit plan returns (5500 series) for plans on a calendar year. (Deadline normally is July 31; however, July 31, 2005, is a Sunday, so the deadline moves to the next business day.)
NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.
Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.
Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.
Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.
For more information on tax deadlines that apply to your business, contact our office.
What's New in Taxes
Tax reform deadline extended
The President's Advisory Panel on Federal Tax Reform had a July 31, 2005, deadline for reporting its recommendations to the Treasury Department. The recommendations were then to be sent to Congress, supposedly to form the basis for tax reform legislation.
The July 31 deadline has been extended to September 30, 2005, giving the panel an additional two months to complete its work. The delay makes it unlikely that Congress will have time to consider major tax reform this year. September 30 is Congress's tentative date for adjourning for the year.
Among the tax reform ideas the panel has already discussed are a flat tax, a national sales tax, permanent estate tax repeal, and a consumption tax.
More taxpayers are getting the IRS red light
What are your chances of being audited? Nobody can say for sure. But it's certain that the IRS has stepped up its enforcement staff in an effort to collect more tax dollars. The difference between the amount taxpayers owe and the amount they actually pay (known as the "tax gap") runs over $300 billion per year. That's a staggering amount, and the IRS is aiming to reduce it.
* Audit statistics
According to IRS statistics, the number of individual audits has increased from 618,000 in 2000 to a little more than one million in 2004. That's an increase of over 60% in just a few short years and equates to a 1 in 130 chance of audit based upon total returns filed.
If your income is over the $100,000 threshold, your audit chances increase to about 1 in 70. If you're self-employed and file a Schedule C, your audit chances increase yet again.
As you might imagine, those taxpayers earning virtually all of their income in the form of wages reported on W-2 forms, with no unusual deductions or large losses on their returns, are much less likely to receive an audit notice.
In addition to full-scale audits, the IRS sends out millions of "correction notices" each year. These notices are computer-generated and are a result of a discrepancy between information reported to the IRS and the information reported on your tax return. While these correction letters are less imposing than an audit, they could still cost you additional taxes.
* IRS audit objectives
The IRS has identifiable audit objectives that include the self-employed and wealthy taxpayers who report big losses on their tax returns. Other areas that receive IRS scrutiny include worker classification issues (employee vs. independent contractors), travel and entertainment expenses, related-party transactions, unreported income, and tax shelters. The IRS tries to target tax returns that will return the greatest additional taxes to the Treasury in relation to the audit resources employed.
* Your audit defense
Should you be terrified that your return might be selected for audit? Certainly not. An accurately prepared return is the first line of defense should you be selected for audit, and well-maintained substantiation records are the ammunition for that defense.
Audit selection doesn't necessarily mean that additional taxes will be assessed. That's especially true if you receive one of the IRS computer-generated "correction notices." The IRS does make mistakes, especially with notices sent automatically by its computers. Don't stress about the possibility of an audit. Instead, make sure that you maintain good records and that you work with us to prepare complete and accurate tax returns.
If you have questions about IRS audits or any notices you receive from the IRS, please call us. We're here to help you with any of your tax concerns.
IRS reduces paperwork
In the past, employers had to send the IRS any Form W-4 (Employee Withholding Allowance Certificate) on which an employee claimed more than 10 exemptions or complete exemption from withholding when $200 or more in weekly wages was expected.
The IRS recently changed this requirement. Now employers must submit an employee's Form W-4 only when specifically asked to do so by the IRS. Having determined the old W-4 submission program to be ineffective, the IRS will use information reported on taxpayers' W-2 statements to identify withholding problems.
Should you incorporate your business?
There are many reasons why people feel they should incorporate their businesses. Very often these reasons are based on misinformation about the advantages of being a corporation.
There are a number of things that being a corporation will not do for you. It will not automatically make you more profitable. It will not necessarily limit your liability on all transactions. It will not necessarily reduce your overall tax bill; it may, in fact, increase it.
If you incorporate an existing business, you may find that your long established suppliers now require new financial statement information. They may also request that you sign a personal guarantee that you'll pay amounts owed if the corporation cannot. Most closely held corporations are required to give the personal guarantee of the major shareholders in securing a line of bank credit for corporation purposes. This guarantee has the effect of not limiting your liability in reference to those bank loans.
With a regular corporation, business profits may be taxed twice once at the corporate level and again at the shareholder level when paid out as dividends or a liquidation distribution. This double taxation that regular corporations face is generally avoided by making a special tax election know as a "Subchapter S" election. But not every corporation qualifies for S corporation status.
Incorporating your business can make a difference in the taxes you pay, the costs of doing business, and the amount of paperwork and red tape you'll have. Because of the many legal and tax considerations, anyone considering incorporating should discuss the matter with both their accountant and attorney. For assistance, call us.
What's New in Financial Strategies
Survey shows gender matters in investing
A survey done by Merrill Lynch Investment Managers produced some interesting results on how gender differences affect investing behavior. The telephone poll of 1,000 investors (half of them men, half women) asked questions about investment attitudes and actions.
According to the men, their biggest investment mistake was holding a losing investment too long, while women said failing to invest early enough was their biggest mistake.
The survey concluded that women make fewer investing mistakes, largely because they are more willing than men to ask questions and seek expert advice. Women are also less likely than men to repeat the mistakes they did make.
To read more about this survey, Google on Merrill Lynch Investment Managers Survey.
Are you looking for ways to help your grandchildren with college expenses?
If you have grandchildren, consider these tax-friendly ways to help fund their college education.
* Tax-advantaged education programs. The tax law provides two programs specifically intended to help with education expenses: Section 529 plans and Coverdell education savings accounts (formerly called education IRAs). Both provide the following advantages:
1. Earnings within the account are not taxed.
2.When the student withdraws the money, it's tax-free if used for qualified expenses, such as tuition, books, fees, supplies, or room and board.
3. If the beneficiary doesn't go to college, the funds can be rolled over for another family member's education.
Funds used outside either program's restrictions are subject to penalties.
All of the states (and D.C.) sponsor their own Section 529 plans, which are available through most institutes of higher learning. You're allowed to use any state's program, and the plans have no restrictions based on your income.
Most financial institutions offer Coverdell education savings accounts. Unlike 529s, Coverdells may be used for elementary and secondary school expenses as well as college costs. However, annual contributions to a Coverdell are limited to $2,000 for each beneficiary, and the $2,000 allowance phases out for joint filers earning over $190,000 annually or single filers earning over $95,000.
* Direct tuition payments. When you pay your grandchild's tuition directly to a college, the payment is exempt for gift tax purposes without being taxable income to the child. You might consider building a tuition fund for a grandchild by investing in tax-free municipal bonds issued by your state or local governments. A benefit of making direct payment of tuition is that you remain in control of the money yourself until tuition comes due.
You can always combine any of the above approaches. Call us for an appointment to discuss the best plan for you.
Did you know?
Do you know why we save money in a "piggy" bank?
In times past, Europeans used an orange clay called "pygg" to make dishes and cookware. When jars made from pygg were used to save coins, people called them "pygg banks." At some point, a potter mistook the name for "pig" and made a bank that looked like a pig. The name and design stuck and so we have today's piggy banks.
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Timothy W. Tuttle & Associates