Timothy W. Tuttle & Associates
Volume 2 Edition 1 Please email comments to firstname.lastname@example.org Jan, 2006
Major Tax Deadlines
For January 2006
January 17 - Final 2005 individual estimated tax payment is due, unless 2005 tax return is filed and taxes are paid in full by January 31, 2006.
January 31 - Employers must provide 2005 W-2 statements to employees.
January 31 - Payors must provide 2005 Form 1099s to payees.
January 31 - Employers must generally file Form 941 for the fourth quarter of 2005 and pay any tax due.
January 31 - Employers must generally file 2005 federal unemployment tax returns and pay any tax 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
Use new tax numbers for your 2006 tax planning
The IRS adjusts many tax numbers for inflation each year. Other numbers change as a result of tax law revision. As you begin your tax planning for 2006, here are some of the changes you’ll need to take into account.
* The maximum earnings subject to social security tax increases to $94,200 for 2006. As before, all earned income (wages and self-employment income) is subject to Medicare tax. The earnings limit for retirees under age 65 increases to $12,480. There is no earnings limit for those 65 and older.
* The top estate tax rate decreases to 46% and the exemption amount increases to $2 million for 2006. The annual gift tax exclusion increases to $12,000 per donee.
* The nanny tax threshold increases to $1,500 for 2006. If you pay household workers more than this amount during the year, you’re responsible for payroll taxes. The kiddie tax threshold increases to $1,700. If your child has more than $1,700 of unearned income in 2006 (e.g., dividends and interest income), the excess could be taxed at your highest rate.
* The first-year equipment expensing limit increases to $108,000. A special limit applies to sport utility vehicles: when purchased for business use, no more than $25,000 may be expensed in the first year.
* The standard mileage rate for business driving in 2006 will be 44.5¢ per mile, and the mileage rate for medical and moving expenses will be 18¢ a mile. The rate for charitable driving remains at 14¢ a mile except for driving related to hurricane recovery charitable work. The 2006 mileage rate for charitable driving related to the 2005 hurricanes is 32¢ a mile for deduction purposes and 44.5¢ a mile for reimbursement purposes.
* The adoption credit increases to $10,960 for 2006 adoptions.
* There are some changes to the retirement plan contribution limits for 2006. The maximum contribution for an IRA remains at $4,000 for those under age 50, but it increases to $5,000 for those 50 and older. The SIMPLE plan limit remains at $10,000 for individuals under age 50, but those 50 and older can set aside up to $12,500 for 2006, or $500 more than last year. The 401(k) limit increases to $15,000; those 50 and older can contribute up to $20,000.
For details or for assistance with your tax planning, give our office a
Medical sticker shock? Consider a health savings account
If health care costs are starting to give you sticker shock, you might want to consider creating a health savings account in 2006.
Think of a health savings account (HSA) as an IRA for medical costs instead of retirement. Intended to be used in conjunction with high-deductible insurance plans, HSAs are designed to help pay your medical expenses until your insurance policy begins picking up expenses.
To set up an HSA, you must meet two basic requirements: you must have a health insurance plan with a high deductible (defined as $1,050 for an individual and $2,100 for a family), and you must be under age 65.
An HSA can be funded with pre-tax contributions made by your employer, tax-deductible contributions made directly by you, or with rollover funds from certain other tax-favored medical accounts.
For 2006, contributions of up to $2,700 for individuals and $5,450 for families can be made. An additional $700 can be contributed if you’ll be 55 by the end of 2006.
* HSA funds can be invested
The big difference between an HSA and other tax-favored medical savings accounts is that the funds in an HSA can be invested, and the earnings grow tax-free. Withdrawals used for medical expenses are not subject to income tax. Also, unlike funds set aside for medical expenses in flexible spending accounts, unspent funds in HSAs remain in the account to grow tax-free year after year. After age 65, withdrawals can be made and used for any purpose penalty-free but not income tax-free.
While these accounts will not be the best choice for everyone, they certainly
should be considered a tax-saving opportunity worth exploring. If you’re
interested in finding out more about health savings accounts, give us a
New energy tax breaks available this year
Every business should be aware of the new energy tax credits and deductions that are available this year. President Bush signed the Energy Policy Act of 2005 last August, but the tax breaks in the new law just went into effect in January 2006.
Home building contractors can benefit from a credit for building energy-efficient homes. New residential construction using products designed to reduce energy consumption generally qualifies for the credit of up to $2,000 per dwelling unit.
Businesses that manufacture energy-efficient appliances may also qualify for a new credit. Appliances such as energy-efficient dishwashers, clothes washers, and refrigerators qualify.
Your business might also benefit from a new deduction for energy-saving improvements to commercial property. Instead of having to depreciate these improvements over a number of years, you may be able to take an immediate deduction of up to $1.80 per square foot.
For details about the energy tax breaks that may apply to your business this
year, contact us.
Keep those payroll taxes paid
With rising energy prices, many business owners are facing increasing costs and deteriorating cash flows. Make sure you avoid the temptation to borrow from the government. The IRS is a tough lender. Interest, penalties, and other punitive measures can be severe and even threaten the very existence of your business.
Keep in mind that payroll taxes are different from other obligations. As a business owner you have the responsibility of a trustee to remit payroll taxes. The money is not yours; it belongs to the government.
* Litigation proceedings and expense. If you fail to remit taxes, dealing with the IRS can be difficult. Legal and accounting fees can be substantial, and time diverted from other business matters could prove damaging. The courts can even assess criminal penalties including prison time.
* Punitive penalties. The IRS has the authority to levy a 100% civil penalty for failure to deposit payroll taxes. If you are a “responsible person” within your organization, you can be personally liable for this penalty. The IRS can decide to collect directly from you.
* Other collection powers. The IRS can attach your bank accounts, file liens on your property, and seize your assets to satisfy payroll tax obligations.
How to protect yourself
* Educate your staff. Inform all employees who handle payroll taxes about the seriousness of this responsibility. Make compliance a high priority issue.
* Document your compliance. Track due dates and your compliance with them. A good tip is to assign one person the responsibility to remit the taxes and another person the responsibility to verify the tax deposit. Have them both notify you in writing that the taxes have been paid on time. Keep this documentation.
* Plan for all occasions. Make sure compliance occurs during employee vacations, staff illnesses, and staff changes.
Take your payroll tax deposit requirements seriously. For any assistance you
need, contact our office.
A new retirement option debuts this year – the Roth 401(k)
Contributing to a 401(k) plan at work is a great way to build up your retirement nest egg. Setting aside money in a Roth IRA is another option for building a retirement fund. Combine these two popular retirement savings opportunities, and you end up with the new Roth 401(k).
Created as part of the Tax Act of 2001, Roth 401(k)s finally became available on January 1, 2006. Not all employers will offer these accounts, however, since amending an existing 401(k) plan to include Roths is optional.
With a regular 401(k), your elective salary deferrals reduce your taxable income and grow tax-deferred – meaning you’ll owe income taxes on distributions taken from these accounts down the road. Contribute to a Roth 401(k) instead, and you lose out on the current deduction for your salary deferrals, but your contributions grow tax-free and can be withdrawn tax-free, provided certain conditions are met.
Should you consider contributing to a Roth 401(k) if your employer’s plan offers them? Yes, if you’re in a low tax bracket or anticipate that tax rates will jump substantially by the time you retire, and you plan to keep the money invested for a long time.
High-income individuals might favor the Roth 401(k) as well, since anyone whose annual income has consistently exceeded $110,000 ($160,000 if married) has been excluded from contributing to a Roth IRA. Choosing the Roth 401(k) might also reduce the estate and income taxes ultimately paid by your heirs, since you forgo a tax savings today in exchange for tax-free growth.
Please give us a call if you have any questions about this new tax-free
retirement savings opportunity.
Do a financial review at tax time
Now is an ideal time to review your financial affairs. You have to gather information to prepare your tax return at this time. Why not take one more step and do something positive for your 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 2005 (marriage, divorce, births, deaths, move to another state, for example)? Make appropriate changes to your will and estate plan. Also, consider any changes that are needed as a result of the 2006 drop in the top estate tax rate (from last year's 47% to 46%) and the increase in the exclusion amount (from last year's $1.5 million to $2 million).
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.
More Interesting Facts
* The brightest man-made place that can be seen from space is Las Vegas, Nevada.
* One-third of all ice cream sold is vanilla. One-third of all potatoes sold are French fries. One-third of all U.S. land is owned by the government.
* There were originally eight Crayola Crayon colors. Today there are 120.
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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