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October  2000


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 ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.


Major Tax Deadlines

* October 16 - Filing deadline for 1999 individual tax returns on second extensions.

* October 16 - If you converted a regular IRA to a Roth IRA in 1999 and now want to switch back to a regular IRA, you have until October 16, 2000, to do so without penalty.


What's New in Taxes

Time is running out for 2000 tax cuts

Congress is pushing to make some tax law changes before it adjourns for fall election campaigning.

Previous bills which would have reduced the marriage penalty for working couples and gradually phased out the estate tax were vetoed by President Clinton.

There seems little hope for other tax changes Congress had hoped to make, including relief from the alternative minimum tax for middle-income taxpayers.

Congress and the President may still agree on legislation that would increase the contribution levels allowed for tax-advantaged retirement plans, such as IRAs and 401(k) plans. These changes would not go into effect until next year, however.


Taxes and college financial aid

Every parent knows how expensive a college education can be. But many have questions about the income tax treatment for different types of college financial aid. Here’s an overview:

* Scholarships, fellowships, and grants - These are not taxable to degree candidates to the extent that they are used to pay for qualified tuition and related course expenses. Payment for room, board, and incidental expenses are taxable, as are payments to nondegree candidates. Note that parents who furnish more than one-half of a student’s total support may be entitled to a dependency exemption on their income tax return. The amounts received in the form of a scholarship are not considered part of total support.

* Payment for services - Work-study arrangements often help pay for college. Generally, all payments for services are taxable as wages to the student who earns them, though some payments may not be subject to social security and Medicare taxes.

* Tuition reductions - Typically, this is a benefit for college employees, their spouses, and dependent children. Generally, a tuition reduction benefit is nontaxable if it is restricted to undergraduates, does not discriminate in favor of highly compensated employees, and is not a payment for services.

* Student loans - Proceeds from student loans are not taxable. When the loan is repaid, some or all of the interest paid may be tax deductible (subject to income limitations). The income tax laws regarding college financial aid are complex. For details about the rules that apply to your particular circumstances, please give us a call.


New Business

Cash method deadline November 13

Recent IRS regulations allow qualified businesses with annual receipts of $1 million or less to use the cash method of accounting, retroactive to 1999.

To change from accrual to cash method for 1999 returns already filed, taxpayers must file an amended 1999 return by November 13. Call us if you'd like details.


Smart Business

Take steps to reduce employee turnover

Attracting and retaining good employees is the number one issue facing most businesses today. The U.S. Department of Labor estimates that it costs a company one-third of a new hire’s annual salary to replace an employee.

While competitive salaries are important in a tight labor market, employees list other items as equally important: career development, flexible hours, and employee relations, to name a few. Consider the following tips for reducing turnover:

* Make your company one that employees are proud to work for. This might include giving your employees paid time off for community involvement, such as volunteering in a school, senior center, or community organization of their choice. The publicity will enhance your company’s reputation and add to your employees’ sense of accomplishment.

* Make your company family-friendly. In-house childcare or flexible work hours often reduce absenteeism and increase an employee’s productivity.

* Adopt a flexible benefits plan. Allow employees to choose what is most important to them from a menu of benefits.

* Establish a mentoring program for new employees. Team a seasoned employee with a new hire to help in learning needed skills and understanding the company culture.

* Offer technical, financial, wellness, and self-improvement seminars. If you don’t have the resources or space to accommodate this, contact your local community college or hospital.

* Create partnerships between employees and your company by setting common goals. Share profits through incentive bonuses.

* Finally, listen to your employees. Ask your employees what is collectively and individually important to them. Establish open communication and prove that management is interested in employee input by implementing and rewarding worthy suggestions.

Establishing a reputation as a company that cares for its people will help you attract and retain good employees.


New Financial Strategies

Capital gains tax rates will drop next year

Beginning in 2001, the capital gains tax rates drop for certain assets. For taxpayers in the 28% or higher regular tax brackets, the rate on certain capital gains will drop from the current 20% to 18%. And for those in the 15% regular tax bracket, the capital gains rate will drop from the current 10% to 8%.

* Here are the rules.

Generally, the new rates will apply to capital assets held more than five years. However, if the individual’s regular tax bracket is higher than 15%, the five-year period applies only to assets acquired after December 31, 2000.

Taxpayers in the 15% bracket can use the 8% rate on assets held more than five years and sold after December 31, 2000. The asset need not be acquired after 2000.

There is a special election that will allow higher bracket taxpayers to treat an asset acquired before January 1, 2001, as if it were acquired on January 1, 2001. Individuals making this election must treat the asset as if it were sold on January 1, 2001 (or the next business day), and pay any income tax due on this “sale.” The new 18% rate could then be used when the asset is actually sold five or more years later.

For assistance in planning to take advantage of the new, lower rates, give us a call.


Teach your children about money

Teaching your children about money is one of the best things you can do for them. Too often, youngsters are sent into the world without the necessary financial skills to survive. The result can be massive consumer debt, lost opportunities, bankruptcy, and even failed relationships. With proper guidance, your kids can develop sound financial habits that will serve them a lifetime.

Dealing with money is a natural part of life. Learning to live within a budget, regardless of age or income, is one of the most important lessons you can impart to your child. Introduce budgeting at an early age. An allowance can be an excellent way to teach kids about saving and spending money. Establish a scheduled pay date and avoid giving advances. This discipline should reinforce planning and discourage impulse buying. Encourage your children to save at least half of what they earn for purchasing big-ticket items.

Your children also need to understand the “hidden” costs of their purchases. The stated price of an item isn’t the only expense. For example, beyond the automobile sticker price, they need to budget for applicable sales and excise taxes. Then they face the ongoing costs of licensing, insurance, gas, and upkeep.

Finally, teach your children how to make their money work for them. Illustrate the power of compounding with the following example. If they save a dollar a day from age 12 until age 65, and earn an annual return of 6%, they will accumulate over $140,000. Invest that same amount at 10%, and the result will be over $725,000.

Create enthusiasm for investing by establishing specific family goals. Encourage each family member to contribute to a special investment account for a designated purpose, such as vacation. Your children will experience a sense of satisfaction as they watch their monthly investments grow toward that goal.

Instilling financial literacy at an early age is key to helping your child build a solid financial future.


Chuckle of the Month

Have you felt that the instructions and warning labels on products are getting increasingly ridiculous? Or is our society just getting more litigious? Some amusing examples:

On a hairdryer: Do not use while sleeping.

On a bag of snack food: You could be a winner! No purchase necessary. Details inside.

On a take-out dessert: Do not turn upside down. (Printed on bottom of the box.)

On a hotel-provided shower cap: Fits one head.

On a box of bread pudding: Product will be hot after heating.

On a bottle of children's cough medicine: Do not drive a car or operate machinery after use.

On a Japanese food processor: Not to be used for the other use.

On a Swedish chainsaw: Do not attempt to stop chain with your hands.

On a package of airline peanuts: Instructions: Open package, eat nuts.

On a child's Superman costume: Wearing of this garment does not enable you to fly.



ONLINE ADVISOR 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 ADVISOR, 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