Major Tax Deadlines
June 15 - Second quarter 2001 individual estimated tax is due.
June 15 - Expiration date for automatic two-month extension given to U.S. citizens and resident aliens living and working outside of U.S. and Puerto Rico to file 2000 income tax returns. File Form 4868 to request an additional two-month extension.
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
Congress passes $1.35 trillion tax cut
On June 7, 2001, President Bush signed The Economic Growth and Tax Relief Reconciliation Act of 2001 which is the largest tax cut in two decades. Some of the tax cuts take effect this year, while others will be phased in over the next ten years.
One provision calls for an immediate tax rebate. If you filed a 2000 tax return, you should receive your rebate check in the mail sometime between July 1 and October 1, 2001. The checks will be up to $600 for married couples, $500 for head-of-household filers, and $300 for single taxpayers. Your rebate check will be based on last year's filing status.
Each tax rate above the 15 percent bracket will drop one percent beginning July 1, 2001. Rates will continue to decrease through 2006. The IRS just released new federal tax withholding tables (Publication 15-T), effective for wages paid after June 30, 2001. The tables are available from the IRS Web site at http://ftp.fedworld.gov/pub/irs-pdf/p15t.pdf.
In addition to a drop in tax rates, the new law includes:
*An increase in the child tax credit
*Marriage penalty relief provisions
*Estate, gift, and generation-skipping tax provisions
*Pension and IRA provisions
*Alternative minimum tax relief
*A number of miscellaneous provisions
To make the most of the tax breaks in the new law, you should review your total financial plan, including income taxes. Give us a call for assistance. We are here to help you take advantage of all the income tax breaks for which you qualify.
A Look at Tax Planning Basics
With a new tax law that spans the next decade, it's a good idea to review some tax planning basics. Tax planning generally involves the following six basic tax reduction techniques:
1. Shifting income to years when your tax bracket is lower.
2. Shifting deductions to years which will give you the best tax savings.
3. Splitting income among family members to take advantage of lower tax rates.
4. Deferring the tax liability on gains until some later date.
5. Converting ordinary income into long-term gain to be taxed at a lower rate.
6. Choosing tax-exempt investments.
Before shifting income or tax deductions from one year to another, do an estimate of your current-year tax situation and a projection for at least two future years. Be sure to take the time value of money into consideration in your planning.
Splitting income among family members can be a little tricky. You want to maximize the use of the lower tax brackets with the best overall use of the family funds both now and in the future. The ages of your children and their knowledge of finances will enter into the equation.
There are several techniques for deferring gain until later tax years. You can invest in securities which grow in value but produce little, if any, current taxable income. Another technique is to arrange a tax-deferred exchange of investment or business property for other investment or business property.
Perhaps the most common example of converting ordinary gain (subject to regular tax rates) into long-term gain (taxed at 20% maximum) is holding onto an investment for more than the required 12 months.
Your current and projected tax brackets will be the best indicator of your need to invest in tax-exempt securities.
The new tax law contains many tax planning opportunities. Contact us if you would like assistance finding your best tax-cutting strategies.
Are you required to offer COBRA coverage to former employees?
The IRS recently finalized the rules that spell out when employers are required to offer COBRA coverage to former employees. COBRA refers to the 1985 federal employment law that guarantees certain ex-employees and their families the right to purchase continuation health coverage for at least 18 months after they leave your company.
Generally you must provide COBRA coverage if you offer group health coverage, and you employed the equivalent of 20 or more full-time employees on a typical day in the previous business year. While this test seems simple enough, the calculation is more complex if you employed part-time workers.
The new rules take a more lenient approach to the way part-time employees count toward this 20-employee test. Now it is easier for small employers to do some planning to keep themselves within the small employer exception.
Even with IRS clarification, the COBRA rules remain complex. For example, your company may be exempt from COBRA under federal law, but many states have adopted laws that are more restrictive than federal law. Employers that fail to comply with COBRA requirements face government penalties, as well as possible litigation from former employees.
If your company offers group health coverage to your employees, you
should be aware of the COBRA rules. Give us a call if you would like more
information about how COBRA may affect your business.
Breakeven analysis is an important business tool
Breakeven analysis can mean the difference between making money in your business or going broke. Breakeven is defined as the sales volume at which your revenue exactly covers the costs of running the business. When you are at breakeven, you are neither making money nor losing money.
Breakeven works like this. Let's say that the only items your business
sells are widgets. You buy them for $2 each and sell them for $3. Your
total operating expenses are $50 per day. What is the daily sales volume
at which you neither make nor lose any money (your breakeven point)?
Sales (50) widgets $150
Cost of Goods Sold (variable costs—50 widgets @ $2) 100
Gross Profit $ 50
Less: Operating Expenses (fixed costs) 50
Net Profit -0-
Your breakeven point is 50 widgets or $150 in daily sales. Breakeven can be computed with a simple formula. First, compute your gross profit percentage (gross profit divided by sales). In our example, gross profit percentage is 33.3% ($50 ÷ $150). Then divide your fixed costs by your gross profit percentage to arrive at breakeven. That's $50 divided by 33.3% or $150, which is the breakeven point in our example.
Our example is oversimplified to illustrate our point, but the breakeven formula can be used in any business. It is necessary to properly identify "variable costs" (those that vary directly with sales volume) and "fixed costs" (those which do not vary with sales volume) to accurately compute your breakeven point.
If your business is losing money, knowing your breakeven point will
tell you how much sales must increase to eliminate the losses. If you are
making money, the analysis could help you increase profitability. Call
us; we would be happy to assist you with calculating your business's breakeven
point and evaluating your profit structure.
What's New in Financial Strategies
Consolidating college loans may save you money
The government is offering reduced interest rates to borrowers who consolidate their federal education loans by September 30, 2001. This incentive is designed to reduce the default rate on student loans.
Under the Direct Consolidation Loan program, your college loans are paid off and a new consolidation loan is created. You may choose from four different repayment plans, and you may switch plans at any time.
The new fixed-rate loan is based on the weighted average of the loans you are consolidating. However, the rate cannot exceed 8.25 percent. If you consolidate your college loans by the September 30 deadline, you’ll receive an interest reduction of .8 percent. If you pay electronically, the rate drops another .25 percent. Certain loans are eligible for an additional up-front interest rebate of 1.5 percent of the loan balance.
Consolidating different types of federal education loans into a single loan may make your debt more manageable for several reasons.
1. The interest rate may be lower.
2. You may be able to extend the repayment period.
3. The monthly payment amount may be lower.
4. You’ll have a single payment and a single lender (the Department of Education).
To find out more information about these loans and whether they might fit into your financial plan, give us a call or visit www.loanconsolidation.ed.gov.
Wedding Time May Also Be
Today, with half of all marriages ending in divorce and remarriage the rule rather than the exception, prenuptial agreements are being used by an increasing number of couples. Such agreements are intended to make the marriage work more smoothly and to keep a potential divorce, with its financial complications, as painless as possible.
While many couples marrying for the first time consider such agreements to be unromantic at best and pessimistic at worst, those marrying for a second or third time (or more) find it easier to combine business with romance in order to settle potential problems before the wedding.
The conventional prenuptial agreement typically involves a transfer of assets, now or in the future, in exchange for a release of claims against the richer one's property. Today's prenuptial agreement might include not only who gets what in case of divorce, but also who's responsible for what during the marriage. For example, some agreements specify the household duties of each spouse, the financial obligations of each, whether there will be children and how they will be brought up, and what religion the couple will practice.
Wide-ranging prenuptial agreements are relatively new, and the issues they bring up have not been sufficiently litigated to provide adequate guidance for what will hold up in court. Therefore, while couples enter into prenuptial agreements in the hopes that they have solved all disputes before they even arise, that is not necessarily the case. Prenuptial agreements can also be set aside for a number of reasons including such things as one party's failure to disclose all assets.
Anyone considering a prenuptial agreement should realize that personal relationships and the tax law seem to be two of the ever-changing aspects of life. The agreement that made sense under one set of rules may be unfair to one or both parties under revised tax law. Perhaps the wisest approach is a prenuptial agreement that runs for a specific time, at which point it either can be modified or allowed to lapse entirely.
Prenuptial agreements are not a do-it-yourself project; contact your
lawyer for assistance if you think one is appropriate in your situation.
Chuckle of the Month
Vacations can be taxing too . . .
Studies show that Americans use less vacation time than employees in
many other countries. Is that why they find it doubly hard to return to
work after taking time off? As one person explained it, "A vacation is
a succession of 2s. It consists of 2 weeks which are 2 short. Afterward,
you are 2 tired 2 return 2 work and 2 broke not 2!"
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 assstance with any of your tax, business, or financial strategy
concerns, contact our office.