Timothy W. Tuttle & Associates
Volume 2 Edition 9 Please email comments to firstname.lastname@example.org September, 2006
Major Tax Deadlines
For September 2006
September 15 - Due date for individuals to pay third quarter installment of 2006 estimated tax.
September 15 - Due date for filing 2005 tax returns for calendar-year corporations that had an extension of the March 15 filing deadline.
October 2 - Deadline for businesses to adopt a SIMPLE retirement plan for 2006.
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
New pension law changes some tax rules
In early August, Congress passed a major new law on pension plans. But buried in the fine print were some unexpected tax provisions. Some could affect your ability to claim deductions for charitable contributions. And others change the tax rules for retirement savings.
If you make charitable contributions and claim them as itemized deductions, be aware of two changes:
* New rules apply to contributions you make by cash or check, regardless of the amount. Starting in 2007, you'll need either a formal receipt from the charity, or evidence such as a cancelled check or an entry in your bank records. Previously, for amounts up to $250, you could rely on your own written records provided they met certain standards.
* From now on you can claim a deduction for used clothing or household items only if they are in "good" condition. Unfortunately, the new law doesn't define "good." To back up your deduction, you might want to snap a photograph of the items using your digital camera or cell phone. Print it out and keep it with the receipt.
Other changes affect retirement saving. For example, if you change jobs, you might find yourself automatically enrolled in the new company's 401(k). You'll have the ability to opt out, of course, but it's part of a plan to encourage higher participation. The new law also extends the ability to make certain hardship withdrawals from 401(k) plans, and allows active-duty members of the Reserves to make penalty-free withdrawals from IRAs and other plans.
If you think these changes might affect you, please contact our office. We'll be happy to provide more information tailored to your specific situation.
Take action now to trim 2006 taxes
The end of the year will be here before you know it. That means you should put some tax planning on your agenda now. Here are some ideas you might consider to trim your 2006 taxes.
* Invest in dividend-paying stocks. Because of the favorable 5% and 15% tax rates on dividend income, holding stocks that pay dividends can reduce your taxes immediately. This might make such investments more attractive than interest-generating securities, such as bonds.
* Hold stocks long-term. Dividends aren’t the only type of income given favorable tax treatment. Long-term capital gains are also taxed at a maximum 15% tax rate. So when you decide to sell stocks, bonds, or other investments, remember that meeting the 12-month holding period for long-term gains provides significant tax savings.
* Save for your retirement. Make sure to take advantage of the more liberal contribution limits to tax-deferred retirement accounts. By contributing to your employer-sponsored retirement plan, such as a 401(k), 403(b), or 457 plan, you’ll reduce your taxable income, and you’ll defer taxes on the account until you take future distributions. With the 2006 contribution limits raised to $15,000 for most plans, you could slash your tax bill simply by saving for the future. And don’t forget: If you’re age 50 or older in 2006, you can make an additional $5,000 “catch-up” retirement contribution.
* Make your home energy-efficient. New in 2006, you may claim a lifetime credit of up to $500 for making qualifying energy-saving improvements to your home. Qualifying expenditures include installation of certain energy-efficient insulation materials, exterior windows and doors, electric heat pumps, and central air conditioning.
* Go solar. Also new for 2006, you may claim a 30% credit (with certain dollar limits) for installing solar water-heating, photovoltaic, or fuel-cell equipment in your home. No credit is allowed for equipment used to heat a swimming pool or hot tub.
* Buy an energy-efficient car. A tax credit is available for a variety of alternative fuel vehicles. New hybrid vehicles are eligible for a tax credit of up to $3,400, depending on the vehicle’s fuel-efficiency. However, this credit is limited to the first 60,000 vehicles sold this year per auto manufacturer.
These are just a few ideas that you should consider to cut your 2006 taxes. Contact our office for a review of tax-cutters to consider in your particular situation.
Roth IRA change important for your company's 40l(k) plan
A new rule in 2006 lets 40l(k) plans offer employees the option of designating plan contributions as Roth IRA contributions. The benefit of a Roth is that, though the contribution isn't tax-deductible, qualifying distributions are completely tax-free.
Many employers have been reluctant to revise their 40l(k) plans to permit Roth contributions by employees because Roth IRAs were scheduled to end after 2010.
Pension legislation signed by President Bush on August 17 made Roth IRAs permanently available. So if your company offers a 40l(k) to employees but you haven't added the Roth option, you might want to reconsider. The new law means Roth 401(k)s are here to stay.
What benefits does your company offer?
To motivate or reward your employees, consider giving them a tax-free benefit. The cost of certain benefits can be nontaxable to employees and tax-deductible to your business. Offering as many tax-free benefits as your business can afford might also help you hire and retain the workers you need.
Start with the traditional benefit of health insurance. Consider adding term-life insurance coverage, which is tax-free to employees up to $50,000 of coverage, and long-term disability insurance.
Another option is to provide flexible spending accounts (FSAs), which allow employees to set aside pre-tax dollars to pay for unreimbursed medical expenses or child care expenses.
* Retirement plan
Even small businesses should consider offering some form of retirement plan. Some plans require employer contributions, but not all of them do. Choose the plan that fits your company. It’s important to provide a vehicle for employees that both reduces their taxable income and builds tax-deferred savings.
* Other benefits
A number of other fringe benefits offer tax advantages or are tax-free to employees. For example, you can now offer your employees a salary reduction option to pay for transportation benefits such as parking or bus passes, within certain limits. Employees benefit from lower taxable income and lower payroll taxes. Other fringes, such as education assistance, job training, dependent care assistance, or adoption assistance, can be tax-free to employees if offered as part of a properly structured program.
Most of these benefits must be provided equally among all your employees. If you discriminate in favor of certain key or highly compensated employees, the benefits could be taxable to them.
For a review of the fringe benefits you might want to offer your employees,
give us a call.
What's New in Finance
No estate tax change yet
The latest attempt to modify the law on estate taxes failed to pass Congress last month. In an effort to make the bill more acceptable, Congress had included an increase in the minimum wage and extension of several expired and expiring tax breaks. Despite these "sweeteners," the bill failed to attract the needed votes.
That leaves a confused outlook for estate taxes over the next few years. Currently up to $2 million of any individual's estate is exempt from tax. Above that amount, a top tax rate of 46% applies. The exemption will increase to $3.5 million in 2009, and in 2010 there will be no estate tax. But only for that year. Beginning in 2011, rates and exemptions are scheduled to return to more onerous 2001 levels.
Nobody thinks Congress will let that happen. Expect another attempt to pass estate tax legislation in the months ahead. For example, the recent proposal called for increasing the exemption amount to $5 million for an individual, or $10 million for a married couple. Above that exclusion amount, estates up to $25 million would be taxed at the capital gains rate (currently 15%). These numbers may change in any new proposal.
Meanwhile, don't ignore estate planning completely. Even if your estate is small, you still need certain basic estate planning documents. These include a will or trust, medical directives, and guardianship directives for your minor children. Make sure these items are up to date and let Congress worry about the tax rates.
Are you too invested in your company?
It seems that the recent failure of Enron and other corporations did not teach workers the primary rule of investing: diversify your investments. A recent study revealed that workers still hold too much of their company's stock in their retirement accounts.
As a general rule, you should avoid being too heavily invested in any one company's stock. When that company is also your employer, your risk of loss increases. A downturn for your company will not only diminish your portfolio, it could adversely affect your next raise or bonus. It might even cost you your job.
You may believe the additional risk is okay, because you know your company and its industry. Or you think you'll see problems coming before it's too late. Unfortunately, there's no guarantee that you will detect problems sooner than anyone else.
Your company may provide incentives for you to acquire its stock, such as purchase discounts, matching, or stock options. You may feel these incentives are too good to pass up, but keep them in perspective. For example, even a hefty stock discount can quickly disappear in a market downturn, and a discount or other incentive may not be worth the risk of overweighting your portfolio with company stock.
If more than 10% of your total investment portfolio is in your company's stock, you may want to reduce your holdings or take other measures to diversify. Don't risk your financial future by putting too many of your "eggs" in your company's "basket."
Take a Break
Carrying a grudge
From Buddy Hackett. . ."Don't carry a grudge. While you're carrying a grudge, the other guy's out dancing."
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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