Online Advisor
Timothy W. Tuttle & Associates

Volume 2 Edition 6           Please email comments to            June, 2006

Major Tax Deadlines

For June 2006

June 15 - Second quarter 2006 individual estimated tax is due.

June 15 - Due date for calendar-year corporations to pay second installment of 2006 estimated tax.

June 15 - Due date for calendar-year trusts and estates to pay second installment of 2006 estimated tax.

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

“Buyer beware” warnings are issued by the IRS

A 2005 law requires anyone filing for bankruptcy to first seek counseling from a credit counseling agency.

Recent audits of a number of these tax-exempt organizations has revealed that many of them are “primarily sellers of debt-reduction plans, motivated by profit, and offering little or no counseling or education.” The IRS plans to expand its examinations of credit counseling organizations with the intention of revoking tax-exempt status of those agencies whose main goal is “to get taxpayers into high-fee debt management programs with no concern for the client’s eventual financial well-being.”

As part of its program to halt abuses within the credit counseling industry, the IRS is alerting both the industry and the general public to problems in this sector.

$70 billion tax cut signed by Bush

Congress finally passed a bill that provides for $70 billion in tax relief for American taxpayers. President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 on May 17, 2006.

The centerpiece of the law is the two-year extension of the lower tax rates for dividends and capital gains, but the law contains a number of other provisions of significance to individuals and businesses. Here’s an overview of what the law contains.

* In a 2003 tax law, the maximum tax rates for dividend income and long-term capital gains were cut to 15% through 2008. The rate for taxpayers in the two lowest brackets for ordinary income was cut to 5% through 2007 and to 0% in 2008. The new law extends the lower rates through December 31, 2010.

* The alternative minimum tax (AMT), a separate tax calculation intended to keep wealthy taxpayers from using tax breaks to eliminate their tax liability, has caught millions of middle-income taxpayers in recent years. To keep an additional 15 million taxpayers from having to pay the AMT this year, the new law provides higher exemption amounts. The AMT exemption for married couples filing jointly in 2006 is $62,550, and the exemption for singles is $42,500.

* The new law also extends through 2006 the benefit of certain personal tax credits in calculating the alternative minimum tax.

* The expensing election that allows small businesses to write off equipment costs in the year of purchase was scheduled to drop from the current $108,000 to $25,000 after 2007. The new law extends the higher expensing allowance through December 31, 2009.

* Effective beginning in 2010, the new law ends the income limit for converting a traditional IRA to a Roth IRA. Higher-income taxpayers will be permitted to convert to Roths.

* Under previous law, the unearned income of children under age 14 was taxed at the parents’ highest rate if it exceeded a certain amount. The new law raises this “kiddie tax” threshold to age 18.

* The law makes several changes to the payment dates and required amounts for the tax estimates of large corporations.

* The law contains many other tax provisions. Among them are changes in the tax treatment of self-created musical works, the foreign earned income exclusion, and the domestic manufacturing deduction.

Contact our office if you need details on this latest piece of tax legislation.

New Business

Sample plan amendment for Roth 401(k)s now available

This year employers can offer a Roth option within their 40l(k) plans. The IRS recently issued a sample plan amendment providing language employers can use to amend their existing 40l(k)s to allow employees to designate their contributions as Roth contributions.

Why offer the Roth option in your company’s 401(k)? The big advantage to a Roth is that, though contributions are not tax-deductible, qualifying distributions are completely tax-free. Regular 40l(k) contributions are deductible, but distributions are subject to tax as ordinary income. A Roth 40l(k) has an advantage over a Roth IRA, too: the contribution limit is much higher - $15,000 for the Roth 40l(k) compared to $4,000 for the Roth IRA ($20,000 and $5,000 for those aged 50 or older).

If you would like to discuss offering this retirement savings option to your employees, give us a call.

Starting a business? Follow these tips to grow a profitable company

Are you feeling stuck in your current job and looking for a change? Starting a new business could be your dream come true. But what might begin as an idealistic vision can turn into a costly reality check. If entrepreneurship is your goal, there are certain things you need to know.

* Choose a form of business

You must choose a form of legal entity for your business. The most basic form is the sole proprietorship, where business income is taxed on your personal tax return. However, this form does not provide you protection against legal claims on your personal assets.

If you want legal separation between your business and personal assets, the corporate form might be better. Losses and claims are usually limited to the assets of the corporation. The downside is that income is taxed twice, once at the corporate level, and again when income is distributed to you as shareholder dividends. This is why many newly formed corporations are structured as S corporations. S corporations provide liability protection, but income is taxed on the shareholders’ individual tax returns, avoiding the double taxation a regular corporation faces.

You might also consider operating as a limited liability company (LLC), which also protects against liability and avoids double taxation. Which is better, the S corporation or the LLC? The answer depends on the number of partners involved and the level of flexibility you desire.

* Maintain good records

Whichever legal entity you choose, you will need accurate, detailed accounting records. Here’s a tip: Open a new bank account and use it exclusively for business transactions. Then religiously track every check and deposit. Sloppy bookkeeping in the start-up phase will come back to haunt you at tax time.

* Raise sufficient capital

Of course, starting a new business will remain only a dream without sufficient capital. Raising capital is normally the single biggest obstacle for a new company. Where will your start-up funds come from? Savings and investments are the best sources. Using retirement funds to start a business is often tempting, but you might pay a hefty tax and penalty for early distribution. And if the business fails, you will be left without a retirement nest egg to boot. Bank financing is always an option, but you might consider borrowing from family members or offering shares in your business to keep your bank debt load as small as possible.

* Count on advisors

With your business entity determined, and all necessary capital in place, you will still need one more thing: a support team. Key players should include an attorney, an accountant, an insurance professional, and a banker. Teammates could also be people within your industry network or even a seasoned mentor well acquainted with your line of business.

It has been said that every journey begins with a single step. If you’re thinking of starting a new business, may we suggest that your first step be a call to our office. We know business and can help you get off to an informed start.

What's New in Finances

Retirement accounts now insured up to $250,000

Federal Deposit Insurance Corporation (FDIC) insures a certain amount of bank deposits made by an individual. If a bank fails, deposits up to $100,000 are insured by the federal government.

On April 1, 2006, FDIC coverage of individual retirement accounts and certain other retirement accounts increased to $250,000. To qualify for coverage, the retirement account must be in bank deposits, such as CDs. Not included in the coverage: stocks, mutual funds, bonds, and annuities – even though they were purchased through a bank.

FDIC insurance coverage of non-retirement bank accounts remains at $100,000.

Help your children financially by teaching self-reliance

Today’s rising costs and stagnant earnings are especially hard on young people. Many recent college graduates can’t even afford to leave home. Some are overburdened with student loan payments, car payments, and credit card debt. When you factor in current housing costs, it’s easy to see why so many young adults need help from their parents.

However, there’s a fine line between helping your kids get started and enabling them to stay dependent. If your children live at home, you should expect them to contribute to the household. Even full-time students can share household chores and hold down part-time jobs to help pay for room and board. If practical, you can employ your children in your business, but if you do, they should be expected to earn their wages.

Near-adult children often drive the best cars in their households. Children excel at convincing their parents that autos are necessities and new cars are “safer” than used cars. Since new cars are unaffordable for most young adults, their parents end up footing the bill.

Before helping your child buy a car, determine whether the purchase is really necessary. Are work and/or school within reasonable walking distance? Is public transportation available? Is using a bicycle feasible? If none of these alternatives will work, enlist your child’s aid in finding and buying an affordable but reliable used car. The child should pay at least part of the purchase price and be responsible for insurance and operating expenses. Alternatively, consider replacing your own vehicle and selling your old car to your child at its trade-in value.

Self-reliance is one of the greatest gifts you can offer your children. Through teaching and setting a good example, you can help your children become financially responsible and independent adults.

Take a Break

A penny for your thoughts - well, maybe 1.23 cents

Rising metal prices and increased production and shipping costs have been bad news for the U.S. Mint. For the current fiscal year, the estimated cost to make a penny is 1.23 cents, and the cost to produce a nickel is 5.73 cents. Congress has indicated it probably won’t make any changes to coin production since the Mint makes money on the other coins it makes.

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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