Online Advisor
Timothy W. Tuttle & Associates

Volume 2 Edition 7           Please email comments to            July, 2006

Major Tax Deadlines

For July 2006

July 31 - Due date for filing retirement or employee benefit plan returns (5500 series) for plans on a calendar year.

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

Combat pay counts for IRA contribution

On May 29, 2006, President Bush signed the Heroes Earned Retirement Opportunities Act, a new law that will permit combat pay, which is usually nontaxable, to count as taxable income for purposes of calculating IRA contributions. The new law is expected to give military personnel an estimated $167 million in tax benefits over a ten-year period.

Manage your income to maximize tax benefits

What do the following have in common: itemized deductions, personal exemptions, child tax credits, student loan interest deductions, and Roth IRA contributions? The answer is that theyíre all reduced or eliminated when your adjusted gross income (AGI) reaches certain levels. For example, this year couples begin to lose the full benefit for child tax credits when their AGI reaches $110,000. Other deductions and credits begin to phase out at even lower levels.

There are many deductions, credits, and other tax breaks that depend on your AGI level. When you begin to lose these deductions and credits as your AGI increases, youíre effectively increasing your tax rate.

Deductions affected by AGI include those for medical expenses, casualty losses, job expenses, IRA contributions, student loan interest, and total itemized deductions. Credits affected include the adoption credit, dependent care credit, child tax credit, earned income credit, and various education credits.

An important part of tax planning is managing income to minimize the loss of these tax breaks. Thereís still time for 2006 planning to preserve tax deductions and credits. Here are some suggestions.

* Contribute the maximum to employer-provided retirement plans. If you are self-employed, consider establishing a plan. Contributions reduce your adjusted gross income, and plan earnings arenít taxable until they are withdrawn.

* Consider replacing interest-bearing accounts with tax-free investments. In the highest tax brackets, returns are often comparable, but donít increase your taxable income.

* Invest in tax-efficient mutual funds instead of funds that usually distribute large gains.

* In 2006, business owners may deduct up to $108,000 worth of equipment purchases that normally would be capitalized and depreciated over several years. However, to receive the full benefit, total assets purchased canít exceed $430,000 for the year.

To find out more about minimizing your AGI and maximizing the tax deductions and credits youíre allowed to claim, please give us a call.

New Business

Cell phones: A business benefit or liability?

Cell phones have made it easier for business people to communicate, but they are not always a plus in the work environment.

A recent survey by Randstad USA, a staffing company, revealed that about a third of employees considered ringing cell phones at work to be their number one pet peeve.

Cell phones are becoming enough of a drain on productivity that more and more employers are banning them at work. Even more of a concern to employers is the liability issue connected with cell phones. There is the potential for exposure when employees cause traffic accidents while driving and talking on cell phones.

Map out a plan before opening for business

Taking a trip without a map may get you lost, and trying to run a business without a plan is likely to have the same result.

A business plan is a map, your companyís written guide into the future. Not only does a good plan let you know where you are and where youíre headed, it provides potential lenders and investors with a portrait of your company.

For new businesses, the written business plan helps in the start-up process. It provides a clearer understanding of the business and its goals. Often, businesses spend a lot of time and money on product development, equipment, and marketing ó without analyzing the feasibility of the basic business idea. Writing a business plan gives you a better understanding of your ideas. It allows input from others before wasting time and resources. Each plan will differ, but certain items are essential.

* First, you must define your market niche and identify the competition. How does your product or service differ from theirs?

* Next, determine your product and delivery costs; then look at your product pricing.

* Do you need new equipment or skills to compete now and in the future?

* What is your marketing scheme?

* How will you get the capital you need for your plans?

* Examine your key operating ratios, and determine projected profits for years covered by the plan.

Most business plans fail because they lack detail. A well-developed plan gives a new company immediate respect in the eyes of lenders, not only because it shows you to be thorough and far-sighted, but because lenders rarely see good business plans.

Wayne Gretzky, when asked the reason for his success said, ďSome people skate to where the puck is. I skate to where the puck is going to be.Ē A good plan should help you do the same for your business.

What's New in Finances

50-year mortgages? Thatís a l-o-n-g time

The high price of homes and rising interest rates have brought a new financing option to the marketplace - the 50-year mortgage. Available currently from only a few lenders, the 50-year mortgage is intended to help those who otherwise could not afford to buy a home because of high monthly payments.

While such financing options as a 50-year mortgage or an interest-only loan may get people into a new home with payments they can afford, there is definitely a down side. An interest-only loan does not reduce the debt, so the home buyer could end up owing more than the market value of the home. With a 50-year loan, equity is built very slowly, and if the loan rate is adjustable, the home buyer's monthly payments could increase when the interest rate is raised.

Will mistakes reduce your nest egg to small change?

There are a number of pitfalls that youíll need to avoid in order to enjoy a financially comfortable retirement. Some of these mistakes take place while youíre planning for retirement, and some take place after you actually retire. Here are seven of the most common mistakes.

1. Ignoring your companyís 401(k) plan
If youíre planning on retiring well, you should make every effort to maximize contributions to your 401(k) account. The total amount that you can contribute is substantial ($15,000 for 2006; up to $20,000 if youíre 50 or older). In many cases, your employer matches a portion of your contributions. These funds avoid current income taxation and are allowed to grow tax-deferred.

2. Allowing your personal savings to lag
Many people believe that if they max out their company retirement account, nothing else need be done. Thatís simply not true. Itís also the time to rev up your personal savings. Properly invested, these savings can grow using preferred tax rates, adding substantially to your retirement funds.

3. Mismanaging your investment mix
The investments that you hold need to change as your situation changes and as you get closer to retirement. The proper asset allocation for people in their twenties is different for those in their fifties. Donít just blindly allow your investment holdings to remain unchanged in the hope youíre doing the right thing.

4. Outliving your money
That simply means that as you come to the end of your earning years and certainly during retirement, you must ensure that your lifestyle doesnít outpace your income. There are many things leading up to and during retirement that you canít control. But modifying your lifestyle to fit your income is one thing you can control.

5. Paying too little attention to your debt
Avoid piling up new debt in the years leading up to retirement. You might have to make difficult choices during this time, but falling deeper into debt can sabotage your retirement plans. Remember that once youíve reached retirement, itís not as easy to pay off any additional debt that you might incur.

6. Underestimating health care costs
A recent study found that retirees who are not covered by their former employerís health plan might spend 20% to 40% of their retirement income on health care. Sure, Medicare will pick up some of the slack once you reach age 65, but for many early retirees, the cost of health care can be staggering.

7. Retiring too soon
Picking the right time to retire takes careful analysis. Start by creating a retirement budget. Will you be able to cover fixed expenses, daily living costs, and the one-time splurges of retirement? Will there be uninsured medical expenses? If your financial situation is less than secure, you may want to postpone your retirement. Working longer can increase your pension or retirement assets when you do eventually retire. Having a larger retirement fund will give you more choices to finance your desired retirement lifestyle.

Avoiding these mistakes wonít necessarily guarantee you a financially secure retirement, but it will certainly improve your chances. If we can help you with your retirement planning, give us a call.

Take a Break

Good ideasÖ

"People will accept your ideas much more readily if you tell them Benjamin Franklin said it first."
- David H. Comins

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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