Timothy W. Tuttle & Associates
Volume 1 Edition 13 Please email comments to firstname.lastname@example.org Dec, 2005
Major Tax Deadlines
For December 2005
December 31 - Last day to set up a Keogh retirement plan for 2005. Deductible contributions for 2005 can be made any time up to the filing deadline for your 2005 return.
December 31 - Deadline for taking required minimum distributions from IRAs and other retirement accounts.
December 31 - Deadline to complete 2005 tax-free gifts of up to $11,000 per recipient.
December 31 - Deadline for paying expenses you want to be able to deduct on your 2005 income tax return.
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.
More vehicles certified for clean-fuel deduction
The 2006 Ford Escape Hybrid and the 2006 Mercury Mariner Hybrid are the latest vehicles to be certified by the IRS for the clean-fuel deduction. Taxpayers who are the original purchasers of a clean-fuel vehicle are entitled to a tax deduction of up to $2,000 on their 2005 tax returns. The deduction is an above-the-line deduction, which means that it can be taken even by those who don’t itemize their other deductions.
The IRS has published the following listing of vehicles certified for the deduction:
* 2006 Ford Escape Hybrid
* 2006 Mercury Mariner Hybrid
* 2006 Lexus RX 400h
* 2006 Toyota Highlander Hybrid
* 2005 Ford Escape Hybrid
* 2005 Honda Accord Hybrid
* 2003 and 2005 Honda Civic Hybrid
* 2001 through 2005 Toyota Prius
* 2000 through 2005 Honda Insight
The clean-fuel deduction expires after this year and is replaced by a tax credit of up to $3,400 for the purchase of a clean-fuel vehicle.
Seven year-end moves to cut your taxes
Time is running out on tax decisions and actions you can take to reduce your 2005 tax bill. Here are some year-end tax-cutting moves to consider.
1. If you think you might be hit with a penalty for underpaying 2005 taxes, have your employer withhold extra taxes from your last few paychecks. The IRS treats wage withholding as being spread evenly over the year.
2. Max out your 401(k) at work. For 2005, you can contribute up to $14,000. Anyone 50 or older by December 31 can contribute an extra $4,000.
3. Sell your losers. You can deduct investment losses realized in your taxable accounts against your gains. Plus, you can claim up to $3,000 in additional losses against your wages and other income.
4. Make gifts before year-end to utilize your tax-free $11,000 gifting allowance for 2005. You can give this amount to as many individuals as you like.
5. Think about sales taxes. You might want to purchase certain big-ticket items before the end of the year. This year, instead of deducting your state and local income taxes, you can instead claim sales taxes paid during the year, including taxes paid on vehicles, boats, motorcycles, RVs, and home-building materials.
6. Evaluate the benefits of the new Roth 401(k). Effective January 1, 2006, most 401(k) retirement plans will give you the option of contributing to a Roth 401(k). Yes, you lose out on the current tax deduction for your contribution, but future qualifying withdrawals will be completely tax-free.
7. Update your estate plan for any 2005 changes in your life. Letting your estate documents become outdated could expose you to higher taxes.
Surveys show health care costs a major business concern
A recent survey conducted by the nonpartisan Kaiser Family Foundation revealed that the number of employers offering health insurance coverage to employees is declining. This year 60% of employers offered coverage, compared with 69% five years ago.
Small companies are less likely to provide insurance, while 98% of employers with more than 200 employees offer coverage.
According to the survey, insurance for a family averages an annual $10,880. Employers pay an average of 74% of the cost; workers pay the rest.
Employers agree that rising health care costs are a major expense for their companies. To illustrate this fact, Starbucks Chairman Howard Schultz told state legislators that his company will spend more on health insurance this year than on coffee.
Is paying zero tax a good idea for your corporation?
When you run your business as a regular C corporation, it can make sense to pay a little tax this year to avoid large estimated tax payments next year.
According to the general rule for corporate estimated taxes, the IRS won’t charge a penalty as long as a company pays current-year estimated tax of at least the amount that was owed on the preceding year’s return. However, this “safe harbor” is available only when at least some tax was owed for the prior year. If a company shows zero tax liability in a given year, the next year’s estimated payments must equal 100% of the expected tax liability for that year. As a result of this quirk in the law, you might want to plan corporate income and deductions so that you always show at least some taxable income and some tax liability.
Example. Your corporation will incur a small operating loss this year. Next year is likely to be more profitable, with the company projected to owe about $100,000 in federal income tax. If you do no planning, you may be required to pay next year’s tax bill in full via quarterly installments of $25,000 each, creating a potential cash flow crunch just when your company might need liquidity.
However, if your company were to report (say) $10,000 of taxable income this year (perhaps by delaying deductible expenditures or selling an appreciated asset), this year’s tax bill would be $1,500 (15% of $10,000). Next year, you would be required to prepay a total of only $1,500, reducing your quarterly installments to $375 each. The remainder of your tax bill would be due on the filing date for next year’s return, but in the meantime, you have the use of your cash.
Warning: If this planning strategy might apply in your situation, be aware that the safe harbor exception is only available to corporations with taxable income of less than $1 million for the preceding three years.
Yield on I Bonds jumps to 6.73%
The Treasury has increased the yield on its I Bond savings bonds to 6.73% on bonds purchased from November 2005 through April 2006. The previous rate had been 4.8%.
The rate for I Bonds is in two parts, one part that is fixed for the life of the bond and one part that is adjusted for inflation every six months.
The fixed rate for I Bonds was cut to 1% from 1.2%; this rate will stay the same for as long as the investor holds the bond. The inflation component will next be adjusted on May 1, 2006. Investors must hold bonds for at least twelve months and will be subject to a penalty if the bonds are cashed before five years.
Got mutual funds? Pay attention to year-end tax issues
If you’re among the millions of Americans who invest in mutual funds, you need to be aware of the year-end issues that could affect your 2005 tax bill.
* Year-end distributions. One key fact to be aware of is that mutual funds are usually required to distribute their income annually to shareholders. If you purchase a mutual fund just before a distribution date, you will receive the distribution and be required to include it in your taxable income. Since the price of the fund shares before and after a dividend distribution reflect the amount of the dividend, you are actually paying income tax on part of your own purchase price.
* Your tax basis. Your taxable gain on sales you’ve made during the year will generally be the sales price minus your tax basis. Note that transactions such as check redemptions and exchanges are usually treated just like sales.
Your tax basis is generally the purchase price plus any related transaction costs, such as sales charges and brokerage fees. Your basis also includes reinvested dividends.
The IRS allows several different ways of determining basis when you’ve bought your shares at different times and don’t sell them all at once. Mutual fund companies will often report your average cost basis, which divides the total cost of all your shares by the number of shares you own. A second option is the first-in, first-out method which assumes the shares sold were the earliest ones purchased. The specific identification method lets you choose which group of shares you’re selling. Before selling, check to see which method will provide you with the lowest tax bill.
* Where to hold your funds. Of course, if you’re holding mutual funds in a retirement account, your investment gains shouldn’t trigger any immediate tax. Just be aware that when distributions are made (other than from a Roth IRA), they’ll be taxed at ordinary income rates. If you anticipate significant appreciation, you may want to own those mutual funds outside of a retirement plan so any future gains would be eligible for the preferential capital gains rates.
* Tax planning. Please call us so we can help you do the planning that will minimize the income taxes on your mutual fund investments.
Take a break
Check these interesting facts:
* Scientists say that if you go back 30 generations or so, everyone on earth is related to everyone else.
* The names of all the continents begin and end with the same letter (Africa, Asia, Europe, etc.).
* A blue moon isn’t blue. It’s another name for the second full moon in the same month — something that occurs about once every 30 months.
* A trillion is a very big number. At the rate of one number per second, it
would take 31,688 years to count to one trillion.
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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