103 E. Sharon Avenue
Houghton, MI 49931 USA
Phone (906) 482-1305
Fax (906)482-9555


December 1998

Welcome to ONLINE ADVI$OR.

Our monthly online newsletter provides useful tax, business, and financial planning 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 planning concerns, contact our office.


Major Tax Deadlines for December 1998

Before December 31 - Check the amount of 1998 tax you have prepaid through withholding and quarterly estimates. If you're underpaid, consider increasing your withholding before year-end. Withholding is considered to have been paid evenly throughout the year. This could prevent your being charged underpayment penalties for 1998.

December 31 - Last day to pay expenses you hope to deduct on your 1998 return - such as medical bills, property taxes, IRA administrative fees, and charitable contributions. Pay expenses with a credit card if you don't have the cash. You'll get the deduction in 1998 even though you pay the credit card bill in 1999.

December 31 - Last day to set up a Keogh plan for 1998. Deductible contributions for 1998 can be made any time up to the filing deadline for your 1998 tax return.

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

IRS limits Roth reconversions

The IRS recently closed a loophole in the rules governing the new Roth IRA.

The tax law allows a regular IRA to be converted to a Roth IRA. The value of the IRA at the time of conversion determines the income that must be reported for tax purposes.

The volatility of the stock market in recent months led some individuals to make multiple conversions in and out of Roth IRAs. If they had converted to a Roth when the market was high, they would convert back to a regular IRA when the market plummeted, and then immediately reconvert to a Roth. This strategy gave them a lower IRA value on which income taxes would be computed.

Now the IRS has issued temporary rules restricting the number of conversions a taxpayer can do. Between November 1 and December 31, 1998, individuals are limited to one Roth reconversion. In 1999, taxpayers will also be limited to one reconversion. There is no penalty for additional reconversions, but they will not count for tax purposes. Reconversions prior to November 1, 1998, will not be affected by this new ruling.

Note: These rules are not necessarily the final ones on this issue. If the final rules issued by the IRS are more restrictive, the final rules will apply only from the date of issue. They will not apply retroactively. In other words, until the IRS issues final rules, taxpayers can rely on the recently announced rules that allow one reconversion between November 1 and December 31 this year and one reconversion next year.


Time is running out on 1998 tax-cutting

As 1998 winds to a close, be sure that you've done everything you can to minimize your 1998 tax bill.

Some steps you should consider before time runs out on December 31 -

For other last minute tax-saving moves you could make, contact us for a review of your tax situation.


New Business

Social Security taxes will increase in 1999

The social security portion of FICA taxes will increase in 1999.

FICA is a combination of social security tax and Medicare tax. Both employers and employees pay FICA taxes on wages. Self-employed individuals pay a self-employment tax that is the equivalent of FICA tax. They pay both the employer and employee portion of the tax on net self-employment earnings.

The wage base to which social security tax will apply in 1999 increases from $68,400 to $72,600. The Medicare tax continues to apply to all wages and self-employment earnings.

Self-employed individuals are allowed a tax deduction for half the self-employment tax they pay. Wage earners receive no deduction for FICA taxes paid.


Smart Business

Business or hobby? What a tax difference a word makes

The IRS requires you to pay tax on all income that you earn. This includes business income and hobby income.

If you are engaged in a business, you can deduct all of your allowable expenses, even if these expenses exceed the amount of income generated by your business. However, if you are engaged in a hobby, you can only deduct expenses up to the amount of income you earn AND only if you itemize deductions.

Example: Ringo is a drummer and earned $7,500 this year from playing in a band. He also incurred $10,500 in expenses - new drum set, travel, etc. If Ringo is engaged in a business, he can deduct all of his $10,500 expenses. If he is engaged in a hobby, he can only deduct $7,500.

Are you engaged in a business or a hobby?

Sometimes it can be difficult to determine whether your activity is a business or a hobby. To help resolve the controversy, the IRS has developed a three-out-of-five-year test. If your activity shows a net profit for three out of five consecutive years, it is presumed to be a business. Conversely, if your activity shows a net loss for three out of five consecutive years, it is presumed to be a hobby. (In the case of horse-related activities, the test is two out of seven years.)

Overcoming the hobby presumption

If you are engaged in an activity and have net losses in three-out-of-five years, you still may be able to deduct all of your expenses, but you'll have to prove to the IRS that your activity is a bona fide business and not a hobby. The IRS will consider the following factors:

1. Total gross income - The more income generated by the activity, the less likely it will be deemed a hobby. Gross income of $10,000 or less supports a hobby classification.

2. Time devoted to activity - If you devote the majority of your working day (6-8 hours) to the activity, it tends to favor business classification.

3. Personal enjoyment derived - If your activity involves painting, golfing, playing a musical instrument, or a similar endeavor that can be associated with personal enjoyment, the IRS will be more likely to conclude it is a hobby.

4. Bank account and business license - If you maintain a separate checking account and have obtained a state, city, or local business license, this will help prove your activity is a business.

If you need assistance in determining whether your activity is a business or hobby, contact our office. We're here to help you.


What's New in Financial Planning

It may be time to refinance

Today's comparatively low interest rates make refinancing a home mortgage a good deal for many people.

You should consider refinancing if you'll be able to recover the refinancing costs (through lower monthly mortgage payments) before you're likely to sell the house. To calculate this, do the following:

1. Find out what it would cost you to refinance, including points and any fees you'd be charged.

2. Divide the total refinancing costs by the amount your monthly mortgage payment would go down. This will give you the number of months it would take to recover refinancing costs.

3. If you plan to own the home for a longer period than in Step #2 above, take a serious look at refinancing now.

For help in analyzing a refinancing of your mortgage, give us a call.


Holiday Alert: Be wary of charity scams

It's the season for giving, but unfortunately it's also the time of year when charity scams are everywhere. When you decide to make a contribution to a charity, remember that all charities are not "equal." Check out any charitable organization before you give.

Some "charities" have been formed primarily to provide income for the organizers, while leaving a minimal amount for charitable purposes. Occasionally, a newly established "charity" will try to benefit from the reputation and notoriety of an older, established charity by adopting a similar name and address.

Before making any contribution, find out about the charity. Ask questions.

Ask for written information about the charity and about how contributions are spent. For tax purposes, verify that the charity is a "qualified charitable organization."

Be especially cautious about giving in response to telephone solicitations. Don't let a caller pressure you into making a contribution. Be alert for anything that sounds suspicious. If you have any doubts about any organization, don't contribute until you're satisfied that the charity is legitimate and your money will be properly used.


Chuckle of the Month

Before going to Europe on business, a man drove his Rolls Royce to a downtown New York City bank and went in to ask for an immediate loan of $5,000.

The loan officer, taken aback, requested collateral. The man said, "Here are the keys to my Rolls Royce."

The loan officer had the car driven into the bank's underground parking garage for safekeeping and gave the man $5,000.

Two weeks later, the man walked through the bank's doors and asked to settle up his loan and get his car back. "That will be $5,000 in principal, and $15.40 in interest," the loan officer said. The man wrote out a check and started to walk away.

"Wait, sir," the loan officer said, "While you were gone, I found out you are a billionaire. Why in the world would you need to borrow $5,000?"

The man smiled, "Where else could I park my Rolls Royce in Manhattan for two weeks and pay only $15.40?"


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 planning tactics.

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 planning 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 planning strategies suited to your situation.


Copyright 1998 Richard C. Woodbury P.C. CPA