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Houghton, MI 49931 USA
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Fax (906)482-9555


November  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"

* 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, 2000.

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.



"Act before December 31 to cut this year's taxes"

Time is running short for making moves that will minimize your taxes for 2000. If you haven't done your year-end planning yet, make time now before it's too late. Some strategies to consider:

* Shifting income and deductions between tax years is a common approach for delaying and sometimes permanently reducing taxes. If your income tax bracket will be about the same for this year and next, the best strategy might be to defer income until 2001 and accelerate deductions into 2000. On the other hand, if you expect your tax bracket to increase next year, simply reverse this plan.

* If you are close to the cutoff point between itemizing or taking the standard deduction, consider bunching your deductible expenses (medical expenses, state and local taxes, charitable contributions, mortgage and investment interest) into every other year. You can then alternate between itemizing one year and taking the standard deduction the next, saving tax dollars by doing so. Keep in mind that medical, charitable, and miscellaneous itemized deductions are limited to a percentage of your income, so they are best utilized in years when your income is lowest.

* Deciding which investments to sell, and when, can have a big impact on your taxes. Most investments must be held more than twelve months to receive the preferred, long-term capital gain tax rate. Make sure you meet the holding period, or you'll pay taxes at your higher ordinary tax rate.*  If you have capital gains from sales made earlier in the year, consider dumping under-performing investments at a loss to offset these gains. If losses exceed gains, you might want to create some taxable gains before year-end. Rules prevent taxpayers from receiving a current tax benefit from net losses in excess of $3,000. 

*  If you've decided to sell a mutual fund, consider doing so before dividend and capital gain distributions are made at the end of the year. Conversely, buying mutual funds at year-end may cause you to pay tax on distributions you don't generally benefit from. Remember that you must pay tax on dividends even if you reinvest them in additional shares of stock.

* Consider shifting income to children over 14 to take advantage of their lower tax bracket. If you gift shares in a mutual fund, for example, a child in the 15% bracket could sell shares and pay 10% on long-term capital gains. You would pay 20% tax on these gains if you are in a 28% or higher tax bracket. 

* Gifts can save both income and estate taxes. You can generally make gifts up to $10,000 per year, per person, free from gift tax. Annual gifts can be increased to $20,000 if your spouse joins in. Take advantage of this year's tax-free gifting allowance by completing your gifts before December 31.

* Consider donating certain appreciated stock to your favorite charity. You won't be taxed on the appreciation and will generally be able to deduct the fair market value of the stock as a charitable contribution.

* There's been a great deal of publicity about the marriage penalty. When people marry, they can end up paying more tax than they did as singles. Postponing a planned marriage until 2001 or finalizing an impending divorce in 2000 could save taxes. Your marital status on the last day of the tax year will determine your filing status.

* If you have dependent children entering college next year, your assessment for financial aid will be based on this year's tax return. Consider deferring income, fully funding all retirement accounts, accelerating investment losses, and postponing gains to hold down income.



"New Business"

Give your business a service check-up

As the Internet changes the way consumers shop, some businesses are concluding that finding the lowest price is the only thing customers care about. But consumers are making it clear that they value good customer service, and if they don't get it from you, they'll go elsewhere.

Give your business a "customer service check-up" to ensure that your customers will keep coming back again and again.

"Customer service" includes every element of the sales transaction between your business and a customer. Though you may consider customer service just a matter of being polite to customers, it actually involves many areas, including the following:

* Being truthful in advertising your product or service.

* Providing a product or service that meets or exceeds customer expectations.

* Being prompt in delivering your product or service.

* Letting customers know you appreciate their business.

* Handling customer complaints or other concerns promptly and politely.

* Being polite and cheerful in dealing with customers -- even when they're "just looking" instead of buying.



"Smart Business"

Maintain good travel and entertainment records

To deduct your business expenses for travel, entertainment, and use of a car, the IRS requires that you be able to substantiate them with "adequate records." At first glance, the requirements may seem complicated and burdensome, but they come down to capturing a few basic facts about each expense. The secret is to understand the requirements, put some simple recordkeeping systems in place, and keep them up-to-date.

The basic requirements:

First, let's look at some basic requirements that are common to each type of expense. The IRS requires that you capture four pieces of information about each expense:

* The date of the expense.

* The place of the entertainment or travel.

* The amount of the expense.

* The business purpose of the expense, including the
   business relationship of people entertained.

You must keep records of this information in the form of a diary, trip report, expense book, or expense statement. The information must be recorded close to the time of the expense -- for example, on a weekly basis or at the end of a trip. The IRS also requires supporting documentation such as receipts, hotel bills, or credit card slips to corroborate your records for all expenses over $25 (except when a standard per diem allowance is used for meals or travel).

Recordkeeping suggestions

The easiest way to keep your records current is to use a standard expense record book, available from office supply stores, or to use the formatted pages provided in most day planners and appointment books. Develop the habit of filling in the details at the end of each day when you travel, or on the morning after a business dinner or other entertainment event.

If you have employees, a well-designed expense reimbursement form should capture the required information. Make sure your employees provide all the requested information and back it up with receipts.

You can claim expenses for business use of a car in two ways: by tracking your actual expenses for the year or by using a standard mileage rate (32.5 a mile in 2000). In either case, you must record the date, mileage, and business purpose for each trip and the total mileage for the year. If you track actual expenses, you must also keep records of all your expenses for gas, maintenance, insurance, and the initial cost of the car. Whichever method you use, the simplest way to keep records is to use a standard auto log and complete the information for every trip made.

Although recordkeeping requirements are relatively straightforward, the rules on what expenses you can deduct have grown more complex in recent years. Contact our office if you have questions on specific expenses.



"What's New Financial Strategies"

Social security taxes and benefits to increase in 2001

The Social Security Administration announced October 18 that both social security taxes and social security benefits will go up in 2001.

Effective January 1, 2001, the amount of wages subject to social security taxes will increase to $80,400. The maximum social security tax for employees will go from the 2000 maximum of $4,724 to $4,985 for 2001. The maximum for self-employed individuals will increase from the current $9,448 to $9,970. There is no change in the Medicare tax of 1.45% on all employee wages and 2.9% on all self-employment income.

Also starting in January, there will be a 3.5% inflationary adjustment to social security benefits.



"Who should own your life insurance policy?"

There may be good reasons why you shouldn't own your life insurance policy. If you die owning your life insurance, the proceeds from the policy will be included in your estate. If you leave your entire estate to your spouse, the insurance proceeds, along with the rest of your estate, won't be subject to estate tax. But the insurance money eventually could be taxed in your spouse's estate. If you don't leave your estate to a surviving spouse, the insurance proceeds could be subject to immediate estate tax.

One way to keep life insurance proceeds out of your estate is to put your insurance policy in an irrevocable trust while you're still alive. At your death, the policy proceeds would be paid to the trust, and your spouse could draw income from the trust for life. When your spouse passes away, the trust would dissolve and distribute its assets to your children or other heirs, free of estate tax.

Another way to keep life insurance proceeds out of your estate is to have another person own your life insurance – your spouse or your child, for example. However, having a trust or other individual own your life insurance policy means you lose the right to change beneficiaries, or to assign, cash in, or borrow against the policy.

If you currently own your policy, there could be gift tax consequences in changing the ownership. Consult us and your attorney for assistance in deciding the best strategy in your particular situation.



"Chuckle of the Month"

Winston Churchill was visiting another country. The first evening there, at the state dinner, he pointed to the chicken entree and said, "May I have some breast?"

The hostess raised her eyebrows and curtly responded, "Mr. Churchill, in this country we ask for white meat or dark meat."

"My apologies, Madam, I was not aware of your customs."

The following day, a large orchid was delivered to the party's hostess as a thank you gift. The following was written on the note: "I would be obliged if you would pin this on your white meat. -- W. Churchill"



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