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July 2000

Welcome to ONLINE ADVI$OR.

Our monthly online newsletter provides useful tax, business, and financial strategy information as part of our firm's commitment to total client service.

The information contained in this site 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 ADVI$OR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.



Major Tax Deadlines

* July 17 - Deadline for filing extended 1999 calendar-year partnership returns.

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

Note: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business. For information on the tax deadlines that apply to your business, contact our office.



What's New in Taxes

Death & Taxes: A legislative update

As the value of homes and retirement accounts grows, more and more middle class taxpayers are becoming concerned about estate taxes. Even with the exemption from estate taxes gradually increasing to $1 million by 2006, the number of estate tax returns showing a tax liability is rising. Between 1987 and 1998, the number of taxable estates has more than doubled.

Congress is debating changes in the estate tax, and though no bill currently under discussion is likely to become law, you should stay aware of developments in this area.

Republicans are proposing a phasing out of estate and gift taxes, leading to a full repeal in 2010. Democrats favor reducing current estate and gift tax rates 20% across the board, so that rates would start at 29.6% and run to 44%. Their proposal would increase the current $1.3 million exemption for family farms and businesses to $2 million, and it would immediately increase the general exemption amount to $1.1 million.

Your own estate planning should be done with the awareness that some changes in the law may occur this year or next.



When can you use your IRA funds penalty-free?

Individual retirement accounts have long provided taxpayers with an excellent vehicle for retirement savings. Even though the principal focus of IRAs is to fund retirement, tax rules allow penalty-free IRA withdrawals for several purposes other than retirement. Of course, "penalty-free" is not the same as "tax-free." Also, the tax rules are different for traditional IRAs and Roth IRAs.

Traditional IRAs have been available for many years, and many have been funded with annual tax-deductible contributions. Other traditional IRAs represent untaxed rollovers from retirement plans, such as 401(k) accounts. Traditional IRAs are designed to shelter funds from taxation until the account owner begins taking withdrawals. Roth IRAs, on the other hand, are funded with after-tax contributions, but earnings grow tax-free. Retirement withdrawals from Roth IRAs are tax-free.

IRAs were designed to be retirement accounts; therefore, "early withdrawals," which are generally defined as distributions taken before age 59-1/2, may be subject to a 10 percent tax penalty. (In the case of Roth IRAs, the account must also have been open for five years.) The penalty is in addition to income tax on previously untaxed balances. For traditional IRAs, an early withdrawal may trigger the 10 percent penalty plus regular income tax on the total amount of the withdrawal. An early withdrawal from a Roth IRA may trigger a penalty and regular income tax on the accumulated earnings in the account.

Tax rules define several circumstances in which early withdrawals are not subject to penalty, but still will be subject to regular tax. These rules apply to both traditional and Roth IRAs.

For example, taxpayers can avoid a penalty if they use IRA withdrawals to pay "qualified" higher education costs. These costs can be attributable to the taxpayer, the taxpayer’s spouse, children, or grandchildren. "Qualified" first-time homebuyers also may make penalty-free withdrawals to pay certain home acquisition costs.

Still other rules provide penalty-free withdrawals to pay deductible medical expenses. Unemployed individuals may make penalty-free withdrawals to purchase health insurance. Other penalty exceptions apply to "IRA annuities," which represent a planned sequence of withdrawals, and to withdrawals caused by the death or disability of an IRA owner.

As with all tax rules, those governing IRA withdrawals are complex and unforgiving. Be sure to give us a call before you tap into your IRAs for any reason.



New Business

Benefit plan returns revised; deadline extended

The annual returns that must be filed for employee benefit plans (Form 5500 series) have been completely revised in order to use computer scanning and electronic filing technologies.

Also, these forms will no longer be filed with the IRS; instead they are to be submitted to the Pension and Welfare Benefits Administration.

To make the changeover easier for filers, a two-and-a-half month "transition extension" of the filing deadline has been granted for certain filers. If Form 5500 would be due on or before July 31, 2000, the due date for filing has been extended to October 16, 2000.

Filers whose regular due date is after July 31 will be required to file Form 5558 if they wish to obtain an extension.



Smart Business

How to deal with overdue accounts receivable

Collecting overdue accounts receivable is more an art than a science. Half the problem can be alleviated with proper procedures up-front, such as customer screening, written proposals, and credit checks.

Once an account becomes delinquent, you have some decisions to make. Some customers should be handled differently from others. A long-time client who suddenly stops paying may have a problem which can be worked out while maintaining your relationship. Conversely, a new client who turns delinquent may require action, which could jeopardize your relationship.

Collection steps should include demand letters and follow-up telephone calls. Document the results of each step. This will prove beneficial in the event legal action becomes necessary.

If your collection efforts fail, you have the option of writing off the account or using a collection agency or an attorney. There are pros and cons to each option.

Collection Agency. A collection agency should have a good reputation. The agency should provide you with references, have adequate bond protection, and maintain a separate trust account for each of its clients. An appropriate fee could range from twenty to twenty-five percent of the funds collected. A lower fee may indicate the agency is only interested in collecting easier accounts.

Your Attorney. Larger accounts may be turned over to your attorney. An experienced attorney may be able to collect even the most difficult accounts or be able to collect them more quickly. Many firms work on a contingent fee basis but may require a down payment for out-of-pocket costs.

Some accounts you simply will not collect. Know when to write them off and move on. You may even get some tax benefit from the write-off.



New Financial Strategies

Social security benefit deadline is July 31

July 31, 2000, is an important deadline that could affect you if you're over 65 and still working.

In April, President Clinton signed a bill repealing the social security earnings limit for individuals aged 65 through 69. The repeal was retroactive to January 1, 2000. Those whose 2000 social security benefits were reduced under the prior earnings limit automatically received checks giving them full benefits back to the first of the year.

If you qualified for social security in 2000 but didn't apply because of the earnings limit, you won't receive retroactive benefits unless you apply for social security by July 31, 2000.

For more details or assistance, contact your local Social Security Administration office.



Beware of online stock scams

Stock scam artists are slithering out of boiler rooms and onto the Internet in increasing numbers. Once in cyberspace, they can reach huge pools of potential victims at a relatively low cost.

One of the most common Internet stocks frauds is a tactic called "pump and dump." In the scheme's simplest form, con artists buy a block of cheap or worthless stock and hype it on the Internet with lies and misrepresentations. The hype starts a buying frenzy, which inflates the stock's price far beyond its value. The promoters sell their shares at the peak of the frenzy, making a handsome profit. As the price recedes to normal, the investors are left holding stock worth next to nothing.

Bad investments can be hyped on the Internet in any of the following ways:

* Promoters buy e-mail address lists (often for less than one-tenth of a cent per name) and send fraudulent sale pitches to everyone on the lists.

* Using various aliases, promoters tell grandiose lies about their stocks in chat rooms and post phony tips on message boards.

* Some schemers create promotional web pages, complete with fake press releases. The pages may include links to legitimate web sites to provide an aura of credibility.

* Con artists may even create their own online newsletters, or pay other online newsletters to publish glowing reports about the stock.

Although the Securities and Exchange Commission (SEC) and other regulators are policing the Net more closely, most of their efforts are concentrated during the day. Many online hustlers simply work later to avoid unwanted attention. With the extension of electronic trading hours, a stock can be pumped and dumped in the course of an evening.

Although pump and dump is the most popular Internet stock fraud, it's not the only one. Sometimes a stock being hyped may not exist at all. In exchange for their money, investors receive worthless pieces of paper -- or absolutely nothing.

For safety's sake, get more information before acting on any "hot" stock tip. Seek a second opinion or take time to do additional research. If the promoter insists there's no time  to investigate, walk away. You've almost surely uncovered a scam.



Chuckle of the Month


You hear many complaints these days about poor customer service, which brings to mind this story:

A shoe repair shop got a call from a customer who said, "I found a repair ticket in an old jacket. It's six years old, so I'm calling to ask if you still have my shoes."

The cobbler asked for the ticket number and went to check his records. He came back on the line and said, "Brown wingtips needing new heels?"

Rather surprised, the customer answered, "Why, yes. Can I pick them up?"

"No problem, " said the cobbler. "They'll be ready next Friday."



ONLINE ADVI$OR is issued monthly to provide useful information. Return to this site every month for helpful tax-cutting suggestions, business information, and financial strategies.

The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

If you would like more information on anything in ONLINE ADVI$OR, or if you'd like to be on our mailing list to receive other tax, business, or financial strategy information from time to time, please contact our office. We're here to help you minimize your taxes, manage your business more profitably, and identify financial strategies suited to your situation.


Copyright 1998 Richard C. Woodbury P.C. CPA