Timothy W. Tuttle & Associates
Volume 2 Edition 4 Please email comments to firstname.lastname@example.org Apr, 2006
Major Tax Deadlines
For April 2006
April 3 - Deadline for taking your first required IRA distribution if you turned 70½ in 2005. Unless you're still working, this deadline also applies to your other retirement accounts (except for Roth IRAs).
April 17 - Individual income tax returns for 2005 are due.
April 17 - 2005 calendar-year partnership returns are due.
April 17 - 2005 annual gift tax returns are due.
April 17 - Deadline for making 2005 IRA contributions.
April 17 - Deadline for employers to make contributions to certain retirement plans.
April 17 - First installment of 2006 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, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
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:
Good news from the IRS
If you can’t meet the April 17 filing deadline for your 2005 tax return, you can get a six-month extension. That’s new this year.
Previously, automatic extensions gave you four extra months to file. You then had to give the IRS a reason if you needed two additional months.
The new automatic six-month extension gives you until October 16, 2006, to file your 2005 tax return. Though the extension gives you more time to file, it does not give you more time to pay taxes you still owe.
Parents: Your children can be the source of tax breaks
Let’s talk about your kids — specifically, about the opportunities and issues involving your children and taxes. You’ve probably heard of the “kiddie tax,” which kicks in when a child under age 14 has unearned income over a specified amount ($1,700 in 2006). Income such as interest and dividends in excess of this amount will be taxed not at your child’s tax rate, but at your highest rate.
Did you know there are strategies for reducing the impact of the kiddie tax? In addition, you may be able to take advantage of other tax breaks that can benefit you and your family.
* Give assets to children
For example, consider long-term capital gains. If your tax bracket is over 15% for 2006, you’ll generally pay 15% on gains from the sale of assets you’ve owned for more than a year. But if you give those assets to a child in the 10% or 15% income tax brackets, the capital gains rate on the sale drops to 5%. Your child could use the proceeds to pay for tuition or start a savings account.
* Shift interest income
Gifting assets that generate interest income works in a similar way, though the lowest tax rate on ordinary income is a less favorable 10%. Still, depending upon your own bracket, this strategy could trim your tax bill. During 2006, you can give up to $12,000 to each of your children ($24,000 for married couples) with no gift tax consequences.
Caution: Assess your eligibility for higher-education financial aid before gifting assets to your children.
Consider another idea for reducing taxes on interest income. Think about electing to report the interest on savings bonds held in your child’s name annually, instead of when the bonds mature or are cashed in. Your dependent, under-age-14 child can receive up to $850 of this type of income tax-free in 2006, plus another $850 that will be taxed at the child’s rate.
* Hire your children
Do you own your own business? Putting your child to work is a planning technique that can help minimize the impact of the kiddie tax. Here’s why. Earned income, such as wages paid for legitimate work duties, falls under more advantageous tax rules.
For instance, your child may be able to earn up to $5,150 this year tax-free, while your business gets a deduction for the wages you pay him or her. Also, depending upon the structure of your business, you might not have to pay social security, Medicare, or unemployment taxes on those wages if your child is under age 18.
One more advantage of this strategy: While working, your child can contribute to a Roth IRA, using the earnings or a gift from you. Roth funds can be withdrawn tax-free later on to help your child purchase a first home, or the account can be the start of a retirement nest egg for your child.
Another option open to your working child is to make tax-deductible contributions to a traditional IRA. Since the contribution limit for 2006 is $4,000, your child could earn a total of $9,150 tax-free this year.
To learn more about tax-saving opportunities involving your children, please
2005 inflation figures released
Inflation is a concern of every business, affecting both the costs of doing business and the prices the company charges for its products or services.
The Labor Department has released figures that indicate the 2005 rate of inflation was the highest in five years. The consumer price index rose 3.4% in 2005, up from a 3.3% gain in 2004.
Energy prices rose 17.1% in 2005, the largest jump since 1990. Housing prices rose 4%, health care costs went up 4.3%, and education costs rose 2.4%.
Is it time to change your business entity?
As you review your business taxes for last year, there's one other issue to consider. That's your choice of business entity. Should you be doing business as a sole proprietorship, a partnership, or some form of corporation? It's a decision that you should revisit periodically.
In the past, the choice often came down to a trade-off between liability protection and taxes. To limit your personal liability, you could set up your business as a corporation. That limits your liability to the capital contributed to the corporation, with a few exceptions. But the disadvantage is double taxation. Profits earned in a traditional C corporation are taxed twice. First the corporation pays taxes on its profits. Then the shareholders pay taxes again when those profits are distributed as dividends.
The S corporation provides one solution. It offers the liability protection of a corporation, but allows profits to flow straight through to the individual owners. But S corporations have limitations, such as a restriction on the number of shareholders. In recent years, new forms of "hybrid" companies have emerged. These are limited liability companies (LLCs) or limited liability partnerships (LLPs). They generally provide the same advantages as S corporations but with greater flexibility.
* No "right" choice for all
There's no single "right" choice for every business at every stage of its life. Each option has its pros and cons when it comes to the number of owners, sharing of profits or losses, retirement and fringe benefits, tax treatment of mergers and acquisitions, regulatory compliance, and cost of annual reporting.
The best option may change as the business matures. For example, in the early years of a company's development, owners may prefer a flow-through entity so they can share in the losses. Later they may want to allow profits to accumulate in a C corporation rather than flow through immediately to their personal tax returns.
That's why it's a good idea to review your business's legal form periodically
and make sure you're still using the best form for your business.
What's New in Finances:
Don't neglect estate tax planning
Whether the estate tax - often referred to as the "death tax" - will actually be eliminated or not remains an unanswered question. Under current law, the tax will end in 2010, but only for that one year. Unless Congress acts before 2011, it will return that year at its 2001 exemption level and tax rates.
There is interest in Congress in permanently killing the tax, but with the current federal deficits, that seems very unlikely. What may be proposed instead is increasing the exemption amount to between $3.5 million and $5 million and lowering the top tax rate.
While Congress mulls the issue, you should not neglect necessary updating to your estate plan - or setting up a plan if you have none currently. Remember for 2006, the estate exemption increased from last year's $1.5 million to $2 million, and the top tax rate dropped from 47% to 46%. For help with your estate plan updating, give us a call.
Dig for answers to these questions before you invest your money
Studies have reported that the average investor spends more time planning a vacation than investigating the stock that he is about to purchase. While that might sound foolish, it's more fun to page through a brochure for beachfront hotels in Aruba than to study an annual report. But not all of the research has to take considerable time or effort. In fact, many of the questions that you should ask are relatively simple. Here are just a few.
What does the company do, and how does it make money? If you don't know what the company does, you begin at a distinct disadvantage. If you're familiar with the company and how it actually generates income, you'll have a better understanding of potential risks.
* Is the company growing? The stock you select will have a better chance of increasing in value if the company is expanding. Look for some indication that company profits are on the rise.
* How will this investment make you money? It isn't solely a function of stock price. The company may also pay dividends that will give you an immediate return on your investment should the stock price lag, and will provide for an even greater return should the stock price rise.
* How is the company doing relative to its competition? Compare the revenues and expenses of your company with others in the industry in order to benchmark performance.
* Is cash flowing in or out of the company? The company might be playing fast and loose with its earnings, but it's more difficult to finagle bank balances. Many companies that post positive earnings are actually losing money when you count the cash.
* Is the company mired in debt? When interest rates increase, higher debt costs will cut into future earnings. Too much debt is risky and greatly decreases the company's margin for error.
If you take the time to answer these important questions before buying, your
investment decisions will be more firmly grounded.
Take a Break
Tax Freedom Day: Then and now
Tax Freedom Day marks the day each year when the average American taxpayer has paid all his or her tax obligations for the year.
In 1900, Tax Freedom Day was January 22, and the percentage of income that went to taxes was 5.9%.
In 2005, Tax Freedom Day was April 17, and the percentage of income that went to taxes was 29.1%.
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Timothy W. Tuttle & Associates