Major Tax Deadlines For December 2002
* December 31 - Last day to set up a Keogh or 401(k) retirement plan for 2002. Deductible contributions for 2002 can be made any time up to the filing deadline for your 2002 return.
* December 31 - Deadline for taking required minimum distributions from IRAs and other retirement accounts.
* December 31 - Deadline to complete 2002 tax-free gifts of up to $11,000 per recipient.
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, or if you owe $2,500 or less for the calendar quarter.
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
Should you drain your IRA for a tax loss?
After a dismal year in the stock market, you may be looking for ways to recoup any market losses you might have. Perhaps you've even read that you can deduct IRA losses. Before you rush to cash out your IRAs, you should understand what's involved.
You could have a deductible loss if you close all your traditional IRAs, and the amount you receive is less than your total nondeductible contributions. Likewise, if you close all your Roth IRAs and the amount you receive is less than your Roth contributions, you might have a deductible loss.
IRA losses are a miscellaneous itemized deduction subject to an income limitation. You can deduct losses only to the extent your total miscellaneous deductions, including IRA losses, exceed 2% of your income. Before you close your IRAs, it's important to estimate how much of your IRA loss will be limited by the 2% income threshold. Also keep in mind that, depending on how you reinvest the money, you could lose the opportunity to shelter any future earnings from tax.
The rules in this area are complex, and planning is essential to get the best tax results. Contact our office for assistance.
Act now to cut your 2002 income taxes
Time is running short for year-end tax planning, yet making some last minute tax moves can make a big difference in the taxes you'll owe next April. Consider these possibilities.
* Deductions. To squeeze itemized deductions into 2002, pay any outstanding property tax bills, make charitable contributions, and schedule and pay for elective medical treatment by December 31. Make your January 2003 mortgage payment in December to get the deduction for the interest portion in 2002.
* Retirement accounts. You can reduce your taxable income by contributing to a retirement plan at work or to a deductible IRA. The law allows higher retirement contributions this year. If you're self-employed, you may find a Keogh or individual 401(k) plan to be an excellent tax shelter. These plans must be set up by December 31, 2002, but you can make 2002 employer contributions until the due date of your tax return. Your business may also be eligible for up to a $500 tax credit to help offset the plan's start-up costs.
* Education tax breaks. Take advantage of tax deductions and credits available to help offset your education expenses. For example, you may be able to deduct up to $3,000 of college expenses and up to $2,500 of college loan interest. You might also qualify for the Hope credit or lifetime learning credit. To take full advantage of these benefits, you may need to adjust year-end payments and the timing of year-end income.
* Debt. With interest rates so low, it may be a good time to refinance your home mortgage at a lower rate. You can deduct loan points over the life of the new loan. If you're refinancing for a second time, and in doing so pay off your first refinancing, you can write off the balance of prior points not yet deducted.
* Investments. Selling investments at a loss can reduce your tax bill. You can use losses to offset capital gains plus $3,000 of other income. If you've racked up excess losses this year, consider selling some winners before year-end to offset the losses. If you have net capital gains, consider weeding out some underperformers by December 31.
If you'd like to schedule a year-end tax planning session, please call us.
IRS extends deadline to amend retirement plans
If your business sponsors a retirement plan for your employees, you must amend your plan to comply with various tax law changes that have taken place since 1994. This includes 401(k)s, pension plans, and profit-sharing plans. The IRS recently extended the amendment deadline from December 31, 2002, to September 30, 2003.
If your retirement plan's language doesn't comply with the law by the deadline, the IRS could disqualify your plan. This could result in the taxation of plan earnings, a retroactive loss of deductions for your plan contributions, and the loss of tax-favored treatment for your employees.
Even though the IRS has extended the amendment deadline, there is a compelling reason to amend your plan by December 31, 2002. Last year's tax law and new IRS rules contain favorable changes, including higher contribution limits. But until you amend your plan to incorporate these changes, you and your employees cannot take advantage of the changes.
Contact the company that administers your plan if you haven't received the documents to amend your plan.
Seven ideas for operating your business more profitably
Smart business owners are always on the lookout for ways to keep business costs in line and operate their businesses more efficiently. Here are a few suggestions to help improve your business profits.
* Fight the urge to make across-the-board cuts. It's tempting to cut everything by ten percent, but don't. Study your costs and be selective. You may be cutting muscle (costs that directly contribute to revenue) instead of fat. Attack causes, not symptoms.
* Stay in touch with your finances. Financial statements can serve as an early warning signal to problems or opportunities that need your attention. If you currently calculate profit and loss quarterly, or even monthly, you may want to calculate profit and loss more often - just to know where you stand financially.
* Evaluate overhead. Do you really need to own your vehicles or offices, or could you lease for less? How much computer power do you really need? Are you paying for a luxury car when a less expensive one would serve just as well?
* Be careful when borrowing. Shop around and compare loan rates. With a little planning, you can often take advantage of bank rates, which tend to be lower than either credit cards or lines of credit.
* Check with industry groups. Discounts are often available for such items as group health plans and long distance phone calls.
* Get into a buying alliance. To compete with large merchandisers on price, you need to buy at lower prices. Consider joining with a few other businesses so that you can buy in large quantity.
*Keep track of your inventory. Identify suppliers that can ship quickly to reduce the amount of inventory you carry.
A thorough business and tax review may reveal tax-cutting opportunities and other steps you can take to operate your business more profitably. If you'd like help analyzing costs and finding ways to control them, give us a call.
What's New in Financial Strategies
Higher brokerage fees cut into investment returns
Many brokers and mutual fund companies have changed their fee structure to help compensate for a lower trading volume. For example, some have added order handling fees, increased trading fees, or added account service charges. If you haven't done so recently, read the fine print on your next monthly statement.
Higher fees cut into your investment returns. How can you minimize your fees? Consider these suggestions:
* If your accounts are spread among different brokers or mutual fund companies, consider consolidating the accounts in one place. By doing so, your combined account balance might be high enough to escape monthly or quarterly service charges.
* Some brokers waive fees if you deposit a minimum monthly amount into your account. Check with your broker to see if this is an option.
* Consider a buy and hold strategy. A high turnover in your investment portfolio may increase fees, hurt your overall return, and increase your taxes.
If you have questions about the costs associated with investing, give us a call.
Chuckle of the Month
Do your children follow your advice? According to one famous father, President Harry Truman, the best way to give advice to your children is to find out what they want, and then advise them to do it.