Timothy W. Tuttle & Associates
Volume 2 Edition 10 Please email comments to firstname.lastname@example.org October 2006
Major Tax Deadlines
For October 2006
October 16 - Deadline for filing 2005 individual tax returns on automatic extension of the April 17 filing deadline.
October 16 - If you converted a regular IRA to a Roth IRA in 2005 and now want to switch back to a regular IRA, you have until October 16, 2006, to do so without penalty.
October 16 - Deadline for filing 2005 partnership and limited liability company returns on extension of the April 17 filing deadline.
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
What's New in Taxes
IRS begins using private collection agencies
A 2004 tax law authorized the Internal Revenue Service to use private collection agencies to assist with the collection of taxes due the government. By the end of this year the IRS will have turned over about 40,000 taxpayer files for such collection.
Despite safeguards, the IRS expects scam artists to jump on this chance to extract money from unwary taxpayers. You can expect to see bogus letters, telephone calls, and e-mails, all pretending to be official IRS collection efforts.
Here’s what you need to know to protect yourself:
* Your account will be turned over to one of the three private agencies only if you and the IRS have agreed that you have an unpaid tax liability.
* You will receive a letter from the IRS beforehand telling you that you’re in the program and naming the collection agency.
* You will then receive a letter from the agency confirming that they will be in touch with you to discuss payment.
* When you come to make payment, the collection agency will provide you with an official IRS payment coupon. Never make out your check to anyone except the U.S. Treasury.
* Warning signs of a scam include threats to place liens or seize your property. The private agencies are authorized only to discuss payment schedules and collect the debt.
* Other warning signs include requests for personal or banking information. The IRS never asks for your information, such as PINs or account passwords, and they already have your social security number in their files.
If you have doubts at any time, you should call the IRS at 1-800-829-1040, or check with the IRS Web site.
Know the rules for claiming dependents
You are allowed a tax deduction of $3,300 for each dependent this year. Therefore, knowing who qualifies as your dependent could cut your tax bill.
To be claimed as your dependent, an individual must meet five tests:
1. The dependent must be either a relative or a member of your household. Relatives who need not live with you include lineal descendants (children, grandchildren, etc.), lineal ancestors (parents, etc.), stepparents and stepchildren, siblings, in-laws, and (if related by blood) aunts, uncles, nieces, and nephews. People who aren't relatives must live with you all year, except when attending school, going on vacation, or recovering in a hospital.
2. The dependent's 2006 gross income must be under $3,300. However, your dependent children need not meet this test if at year-end they are either under age 19 or under age 24 and full-time students. Nontaxable income (such as social security benefits) is not considered "gross income" for this purpose. If you're supporting your father who receives $10,000 in social security benefits and taxable income of $3,000 in 2006, you may claim him — if he meets the other four tests.
3. You must provide more than half the dependent's support for the year or qualify to claim the exemption under a multiple support agreement. "Support" includes food, lodging, medical care, clothing, education, transportation, recreation, and entertainment. In the previous example, if your father spends $4,000 on his own support and invests the rest of his income, you would meet this test by providing support of at least $4,001.
What if you and your sisters support your mother, but nobody contributes over 50 percent? You can claim an exemption for your mother if you provide at least 10 percent of the support, and your sisters and you sign Form 2120, a "multiple support agreement," agreeing to give you the exemption for the year. (You and your sisters may take turns claiming the exemption for your mother, or simply allow the deduction to the individual in the highest tax bracket.)
4. The dependent must be a resident of the U.S., Canada, or Mexico, or be a U.S. citizen or national.
5. The dependent, if married, cannot file a joint return with his or her spouse, unless a joint return is filed just to get a refund for withheld taxes.
In divorce situations, the parent with custody of a child for the greater part of the year generally gets the exemption. However, a custodial parent may release the exemption to the other parent by executing Form 8332.
Even if you can claim a dependent, you may not get the deduction. Deductions for you and your dependents begin to be phased out when your adjusted gross income exceeds $150,500 if you're single or $225,750 if you are married filing a joint return.
Planning will enable you to maximize your dependency deductions. Contact our
office if you have questions or feel a review of your dependency exemptions
is in order.
Focus on healthy habits to cut health care costs
The rising cost of health care is a major concern to most businesses. As insurance premiums and the price tag for medical services increase every year, your company may want to pay more attention to your employees' fitness and eating habits.
Some companies are encouraging healthier eating by removing fatty, sugary snacks from vending machines and cafeterias and offering healthier, lower-calorie choices instead. One company subsidizes healthier lunches for its employees, but does not provide the subsidies for unhealthy meal choices.
Offering incentives for employees to exercise is another way some companies are trying to combat high health care costs. Even small businesses are finding inexpensive ways to encourage healthier behavior in their employees. Some examples: letting employees attend weight-loss meetings on company premises, paying all or part of fees charged for exercise activities, such as swimming or aerobics, providing on-site health screenings, such as blood pressure and cholesterol checks, and organizing company walks during lunch or organizing team sports, such as softball or bowling.
Is your business paying phony invoices?
Businesses are cheated out of millions of dollars every year with invoices for goods or services that were never delivered. Phony invoices once paid often will be followed by additional billings for publications, services, or supplies not delivered. Such schemes are successful because many businesses have slipshod procedures for approving and paying bills.
Here are some techniques that should reduce the chances that your company will fall prey to a billing scam.
* Inform your staff that they are never to give equipment model or serial numbers to callers. If the vendor is legitimate, he will already have the necessary numbers.
* Payments should be made only when supporting documents, such as invoices, receiving reports, purchase orders, and packing slips, have been reviewed and approved.
* Always pay on the original invoice only; do not pay on copies or duplicates. Payments should not be made on monthly statements that can include prior-paid items. Also, monthly statements seldom have the detail necessary to determine legitimate charges.
* Mark on the face of the invoice the date of payment and the check number.
You might want to review your company’s purchasing and paying policies
to make your company less of a target. For any assistance you need, please contact
What's New In Finances
New pension law eases rules on inherited retirement plans
If you inherit a retirement account from someone other than your spouse, you will soon be able to roll over the account to an IRA, an option that can save significant taxes. Prior to the recently enacted Pension Protection Act of 2006, rollovers of inherited retirement funds were permitted only for spouses.
The new rule becomes effective in 2007. It's an important change to know about for children, siblings, and other nonspouse beneficiaries of retirement accounts. The law still has strict requirements for these rollovers, so if you need details, be sure to give us a call.
Invest with an eye on inflation
Like the boy who cried "wolf," experts' warnings of inflation have been largely ignored over the last decade. Inflation, even at modest levels, can seriously reduce real investment return. Is your portfolio structured to succeed in periods of inflation? Consider these fresh ways to combat an old foe.
* TIPS. A popular investment vehicle used to battle inflation has actually been around since 1997. Treasury Inflation Protected Securities (TIPS) are U.S. government bonds that adjust payout rates in accordance with rises in the Consumer Price Index (CPI). So if you have a low tolerance for risk, but seek protection from rising interest rates, this might be the bond for you.
* Corporate bonds. Another option is the inflation-indexed corporate bond. Patterned after the popular TIPS program, these bonds also offer rates that move in tandem with the CPI. The interest rates are higher than TIPS, but they carry the credit risk of the company that issues them.
* Tax issues. There are tax issues to consider as well. Inflation-indexed corporate bonds are fully taxable. TIPS, on the other hand, are exempt from state and local tax. Corporate bonds hold a slight edge in that interest rate increases are reflected immediately in the monthly payment. TIPS, instead, reflect rate increases in the principal balance received at maturity. What's more, these increases are immediately taxable, even though you have to wait until redemption to reap the extra earnings. This timing difference could make TIPS better suited for your IRA or 401(k), where interest is not taxed until withdrawn.
* I bonds. If your portfolio is in a taxable account, you might consider I bonds instead of TIPS. I bonds are U.S. savings bonds with inflation protection. Like TIPS, I bonds are exempt from state and local income tax. But, unlike TIPS, federal income tax can be deferred until the bond is redeemed.
* CDs. Even an old standby, the bank certificate of deposit, is getting into the inflation protection game. Some banks now offer CDs with a fluctuating interest rate. Keep in mind that these investments are fully taxable, and they offer an initial interest rate that is lower than a conventional CD. But during periods of swelling interest rates, these CDs will return higher overall income.
* Laddering. Even if your bank does not offer flexible CDs, you can still protect
yourself by laddering your CD portfolio with a range of maturity dates. Then,
if interest rates climb dramatically, you won't be tied up with one low-yielding
Take a Break
A penny saved? What is a penny worth these days?
Do you pick up a penny when you see it lying on the ground? Or do you, like many, consider pennies a nuisance and think they ought to be discontinued?
It now costs 1.23 cents to produce a penny, according to the U.S. Mint. High metal costs, combined with production expenses, transportation, and labor, have resulted in penny minting costs rising 27% in the past year.
So what's a penny made of? From 1793 to 1837, a penny was pure copper. Then
it was switched to bronze and various other metals down through the years. The
latest change occurred in 1982 with the penny being made of 97.5% zinc and 2.5%
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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