Timothy W. Tuttle & Associates
Volume 1 Edition 9 Please email comments to email@example.com August 2005
Major Tax Deadlines
For August 2005
August 1 - Due date for filing retirement or employee benefit plan returns (5500 series) for plans on a calendar year.
August 15 - Due date for filing 2004 individual income tax returns that received an automatic extension of the April filing deadline. If a second extension is required, Form 2688 must be filed with the IRS explaining why additional time is needed.
NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.
Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.
Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.
Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.
For more information on tax deadlines that apply to your business, contact our office.
What's New in Taxes
IRS clarifies rules for donating vehicles to charity
Last year's tax law changed the rules for determining the amount of a tax deduction for giving a car, boat, or airplane to a charitable organization. No longer can individuals deduct the fair market value of the vehicle. The deduction is limited to the amount for which the charity actually sells the vehicle.
The IRS recently issued clarification of the law's exceptions to this general rule. Fair market value can be claimed when the charity uses the vehicle instead of selling it for example, using the car to deliver meals to elderly shut-ins. If the charity gives or sells the vehicle at below market price to a poor person in need of transportation, fair market value can be claimed. Also, if the charity makes significant improvements to the vehicle which increase the car's value, a tax deduction for the original fair market value can be taken. Major repairs qualify, but such things as cleaning or painting the car do not.
Substantiation in the form of written acknowledgment from the charity is required for all vehicle donations.
An exchange can save taxes
Sitting on a piece of investment property that you would like to sell? By structuring the transaction as a tax-deferred exchange, you can delay paying taxes on the full amount of the gain realized.
Also known as a "like-kind exchange" or a "1031 exchange," these transactions are only available for investment or business assets. Certain types of assets don't qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.
Keep in mind that the like-kind exchange rules only defer the tax. Any gain will be recognized upon a taxable disposition of the replacement property.
* Strict requirements
Specific steps must be followed for a deferred exchange to be successful. Start by finding a qualified intermediary, such as an escrow agent or a title company, to facilitate this transaction.
You then have 45 days from the date you relinquish your property to the qualified intermediary to name as many as three possible replacement properties. You must generally take title to the replacement property within 180 days.
The rules state that you must replace real property with real property and personal property with personal property. Replacing an apartment building with commercial space, a strip mall, or even undeveloped land all qualify.
While deferred exchanges can save you a significant amount of taxes, following the specific rules can be tricky. For more information about these tax-advantaged transactions, please give us a call.
Businesses must now shred employee information.
A new rule has just gone into effect that hopes to prevent "dumpster diving" identity theft. Criminals go through the discarded refuse of businesses, looking for personal information that will give them what they need to steal identities for financial gain.
The new requirement, part of the Fair and Accurate Credit Transaction Act (FACTA) passed in December 2003, makes it mandatory for businesses to shred or otherwise destroy personal information obtained from a credit report before discarding it.
Credit reports include information such as social security numbers, phone numbers, and addresses all information that must now be destroyed before being discarded. Even if you have only one employee or hire only a nanny or a housekeeper, you must comply with these new information shredding rules. Fines for noncompliance are steep, so don't ignore the FACTA rules.
Turn employee reviews into constructive dialogs.
The annual employee performance review usually it's dreaded by both supervisor and employee. The employee knows he'll have to hear about those mistakes from months ago, and the supervisor will finally have to discuss those issues he's been avoiding all year. Too often, the result is discomfort and embarrassment all around. Usually both parties fudge a little and are glad that it's over for another year. Too bad, because another chance for open communication and feedback has been lost.
To improve the process, consider holding performance appraisals more frequently, perhaps even quarterly. This can help make the appraisal less of a "special event" and more of a routine exchange of information. It also means your feedback is more directly related to your employee's recent performance, rather than coming months later.
Of course, even quarterly appraisals don't substitute for immediate feedback. If an employee does something wrong, or something good, tell him or her immediately. Point out the problem, make sure the employee acknowledges it, and make clear what you expect in the future. And if it's something good, the employee will appreciate receiving a pat on the back. With immediate feedback, there should never be any surprises at an appraisal.
At the end of every appraisal, summarize the discussion and put the highlights in writing. Make sure your employee gets a copy. Before the next appraisal, ask your employee to review the copy and prepare his thoughts on his most recent performance. Ask him to present his opinions to start the discussion. If there are areas needing improvement, agree on an action plan and put that in writing too.
Don't limit the appraisal to a scorecard on the employee's achievements. If appropriate, use it to discuss career planning, cross-training, or job enrichment. Solicit ideas from the employee. It can all help turn a judgmental meeting into a constructive exchange of ideas.
What's New in Financial Strategies
Put your savings on automatic pilot.
Even with the increased fear that social security will not be there when they retire, young people are not overly concerned with saving for retirement. Fortunately, many companies are now automatically enrolling workers in their 401(k) plans. Workers must then actively opt out of the plan if they decide not to participate. Companies are finding that 90% of workers who are automatically enrolled stick with the plan.
It's never too early to start saving for retirement, and the earlier you start, the easier it will be to save enough for a comfortable lifestyle in retirement. If your employer doesn't automatically enroll you in the company plan, do yourself a favor and sign up. If your employer doesn't offer a retirement plan, establish your own an IRA, for example. Then set up a system for making regular contributions in effect, putting your savings on automatic pilot.
Think it over before you pay off your home mortgage early.
Is it wise to pay off your mortgage early? As with most financial decisions, this one depends on several factors including your current mortgage rate, tax bracket, balances on credit card and consumer debt, near-term expenses, retirement dates, and potential alternative investments.
* Pay it off
Mortgage prepayment can certainly offer advantages. For example, you'll pay less interest in the long run. Let's say you have a 30-year fixed rate mortgage at 7% with a balance of $180,000. By paying an extra $75 per month toward the principal balance, you'll save about $49,000 in interest and the mortgage will be paid off five years early. Generally, the longer the mortgage term and the higher the interest rate, the more savings you realize by prepaying. Also, because you're paying off a debt you already owe, the return on mortgage prepayment is risk-free. In addition, with the mortgage out of the way, cash will be available for other things. That's especially important for those heading into retirement.
* Not always smart
But prepaying your mortgage isn't always the best idea. Do you have large balances on credit cards or high-interest consumer loans? It's probably a good idea to use those extra funds to pay off those debts first, before focusing on your mortgage. Non-mortgage debt generally carries a higher interest rate, and the interest isn't tax-deductible.
If your employer matches contributions to your 401(k) retirement account, be sure you're investing up to the matching limit before putting extra cash into your mortgage. You may net a higher return on your retirement account than by mortgage prepayment.
Consider also whether you'll need those extra funds for near-term expenses. Money locked up in your home mortgage is much less liquid than in a savings account. It's harder to get at for college tuition, medical bills, or emergencies. Of course, you can open a home equity line of credit or take out a home loan for such expenses, but that just increases your mortgage balance.
You may also consider putting that extra monthly payment into other types of investments. Over the long-term the stock market has generated about a 10% return. If you have a 6% mortgage and a long time horizon, you may be better advised to put those extra funds into a mutual fund.
For many people, prepaying a mortgage is a good idea. Just be sure you've considered all the relevant factors. If you need help, give us a call.
Chuckle of the Month
"Age does not diminish the extreme disappointment of having a scoop of ice cream fall from the cone."
- Jim Fiebig
You are receiving this eNewsletter because you have a business relationship with The Tuttle Firm, or have expressed an interest in our services. If this is not the case, and you wish to be deleted from our newsletter email list, please send an email to firstname.lastname@example.org and state "Remove Me" in the subject line.
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