* July 1 - New federal withholding tables (Publication 15-T) are effective for wages paid after June 30, 2001. Employers can access the new tables on the IRS Web site at http://ftp.fedworld.gov/pub/irs-pdf/p15t.pdf.
* July 16 - Deadline for filing extended 2000 calendar-year partnership returns.
* July 31 - Due date for filing retirement or employee benefit plan returns (5500 series) for plans on a calendar year.
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
What's New in Taxes
IRS will mail rebate checks beginning in July
Soon millions of American taxpayers will receive an advance 2001 tax refund as a result of the new tax law. In mid-July, the IRS will send taxpayers a letter explaining the amount of their rebate check and when it will be sent. Keep the IRS letter with your 2001 tax records.
The IRS plans to mail approximately 11 million checks per week beginning the week of July 23 and ending the last week of September. The Service will process the checks in the order of the last two digits of social security numbers, from lowest (00) to highest (99). If you haven’t filed your 2000 return, you won’t receive a rebate until the IRS processes your return.
Although the rebate is for 2001, it is based on your 2000 return. Taxpayers will receive up to a maximum amount of $300 for singles, $500 for heads of household, and $600 for joint filers. Some taxpayers will receive less than the full rebate amount, and others won’t receive a refund at all. If you don't receive a full rebate check, you may be eligible for up to a 5% tax credit when you file your 2001 return.
If you’ve moved since you filed your 2000 return, send a change of address
(Form 8822) to the IRS as soon as possible to ensure that your letter and
your check go to the correct address.
New law cuts taxes this year
On June 7, 2001, President Bush signed the largest tax cut legislation in 20 years. The new law will be phased in and phased out over a decade. Before the ink had a chance to dry, Congress began making plans to change some of the provisions in the newly signed law. Here are some highlights of the new law as it stands today.
Changes for 2001
* Tax rates. The law creates a new 10% income tax rate retroactive to January 1, 2001. The 10% rate applies to a portion of income previously taxed at 15%: $6,000 for singles, $10,000 for heads of households, and $12,000 for married couples filing joint returns. In an effort to stimulate the economy, the tax cut resulting from this new lower rate will be sent to taxpayers in the form of refund checks (tax rebates), beginning in July 2001.
In addition to the new 10% bracket, the law gradually lowers all tax
rates except for the 15% bracket. On July 1, 2001, all rates above the
15% bracket will drop by 1%. The rates will fall another 1% in 2004, and
again in 2006. (The top rate drops to 35% in 2006.)
* Child tax credit. This year, the child tax credit for dependent children under age 17 increases from $500 to $600. More taxpayers will be eligible for a refundable child tax credit, and the credit will be protected from the alternative minimum tax. The tax credit gradually increases to $1,000 by 2010.
The next nine years
Many of the $1.35 trillion in tax cuts will be phased in and phased out between 2002 and 2010. Over 60% of the tax cuts take place in the last five years. In addition, the law contains a sunset provision under which none of the provisions of this law apply after 2010 unless a future Congress acts to extend them.
Here are some of the provisions that go into effect after 2001.
* Families. Beginning next year, the amount of dependent care expenses eligible for the tax credit increases, as does the maximum rate of the credit. The adoption tax credit is made permanent, and it increases from the current $5,000 to $10,000 per child next year. The 2001 Act provides relief from the marriage penalty by eventually increasing the standard deduction and the 15% tax bracket for married couples to double those for single taxpayers, beginning in 2005.
* Education. Several new and expanded education tax breaks take effect next year. The student loan interest deduction becomes available to more people because the income eligibility limits increase. Also, the rule that limits the interest deduction to the first 60 months of the loan repayment period is repealed.
The maximum education IRA contribution increases from $500 to $2,000. The law expands education IRAs to include school expenses for elementary and secondary education, including those for public, private, and religious schools. The law also creates a new above-the-line deduction for college expenses.
Another change allows tax-free withdrawals from state-run Section 529
plans for qualified higher-education expenses. The income exclusion for
employer-provided education assistance is made permanent, and the exclusion
is expanded to include graduate education.
* Individual retirement accounts (IRAs) and pension plans. The 2001 Act makes extensive changes to IRAs and qualified pension plans that will be gradually phased in beginning in 2002. The law increases the maximum contributions for both IRAs and pensions plans, such as 401(k)s. For the first time, the law allows "catch-up" retirement contributions for individuals age 50 and older. Beginning in 2006, employees can choose between making a pre-tax contribution and a Roth-type contribution to their 401(k) plan.
* Estate and gift taxes. Over the next eight years, estate and gift tax rates will be gradually reduced, and the exemption amount will be increased. The estate tax will be repealed in 2010, but the gift tax will be retained with a $1 million lifetime gift exclusion. After 2009, the maximum gift tax rate will be the top individual tax rate, 35%.
These are just some of the highlights of the new law. The provisions
of this latest tax law are far-reaching. Long-term planning will be required
if you want to make the most of these tax cuts, especially in the areas
of education, retirement, and estate planning. Give us a call if you would
like details about the new law and its effect on your situation.
This oversight can be expensive
When a business pays $600 or more to a service provider who is not an employee, it must generally report those payments to the IRS and to the service provider on Form 1099. This includes payments to sole proprietorships, partnerships, and limited liability companies. It generally does not apply to payments made to corporations.
For every Form 1099 you overlook, the IRS can impose a $50 penalty. If you intentionally ignore the rules, the penalty increases to $100 per form.
Even worse, as a recent court decision illustrates, you can be held liable for backup income tax withholding equal to 31% of the payment amount if you fail to obtain a tax identification number from the service provider. Form 1099 cannot be properly completed without this number.
If you failed to file the required Form 1099s last year, you can reduce
the potential penalty by filing them before August 1, 2001. Call us for
details about complying with this reporting requirement so you can avoid
unnecessary penalties being imposed upon your business.
A few business ideas
Managers of small businesses can benefit from what other small businesses
have been through. The following ideas are generated, in part, by the mistakes
other businesses have made.
One day you or your heirs may want to sell your business. The documents that should be coordinated to provide for a sale include -
1. Your will.
2. A sales agreement to transfer the business.
3. An insurance policy to fund a buy-sell.
4. A trust if minor children are involved.
If you solicit investment money from outsiders without registering with the proper authorities, you could be in violation of investment laws. Check with your attorney.
Avoid having a partner if possible. If you can't hire the expertise you need, or borrow the money you need, perhaps a partnership is unavoidable. Keep in mind that all partnerships terminate sooner or later; death, disability, retirement, or disgruntlement will end the partnership. A written partnership agreement should describe what happens when that occurs.
Have your insurance agent meet with you at least annually to discuss all necessary insurance coverage changes.
Formal employee pension plans for small companies can be very expensive to administer. As an alternative, consider establishing an IRA for each staff member. At 6% earnings, a thirty-year-old person can accumulate over $220,000 in his or her IRA by age 65.
Let us help you keep accounting fees at a minimum. We will work with
you to plan your recordkeeping system and to train your staff to do tasks
which you might normally pay us to do.
What's New in Financial Strategies
How do falling interest rates affect your credit card?
When the Federal Reserve drops interest rates, it generally causes the prime interest rate to fall. Currently, the prime interest rate is at its lowest point in seven years.
More than half the credit cards issued have a variable interest rate that is tied to the prime interest rate. When the prime rate falls, the interest charged on those cards should drop. However, many credit card companies set limits on how low the rates can fall. For example, a credit card company might charge the prime interest rate plus 5%, but not less than 14%.
To avoid high credit card rates, many Americans are refinancing their mortgages at a lower rate, and at the same time, consolidating consumer debt into the new loan. Combining consumer debt with your house debt could prove to be an expensive and risky move. Studies show that more and more Americans are falling behind in their mortgage payments. Some of them will end up losing their homes. In addition, the cost of a $100 meal refinanced over 30 years at 7% will end up costing you over $815. You could end up paying more interest than you would have on the higher rate card.
Before you sign up for a new card or take on debt of any kind, make
sure you understand the long-term consequences. For assistance, give us
Consider dollar-cost averaging
The volatile stock market has many investors questioning their investment strategy and others wondering whether they should be in the market at all. Dollar-cost averaging is one investment strategy that makes sense both in a booming market and when the market slows down.
Dollar-cost averaging requires consistency. This simple plan involves investing a set amount of money on a regular basis, typically in a mutual fund. When the market is down, your money will buy more shares. When the market is up, your money buys fewer shares.
Example: Say you invest $200 per month in a mutual fund, as follows:
Your average cost is $25 per share ($800 ÷ 32 shares). However, the average market price for these four months is $30 per share ($15+$25+$50+$30 divided by four months). Your cost per share is $5 less than the average market price.
Dollar-cost averaging encourages discipline. Because the amount you invest remains constant, you can more easily budget for it. Consider setting up an automatic withdrawal from your bank account to keep on track. If money is not in your personal account to use, you'll tend to adjust your spending habits accordingly.
Dollar-cost averaging eliminates emotional decisions. "Buy low and sell high" may be the perfect investment strategy. However, investors often do just the opposite. They buy a stock or fund when it's moving higher and stop buying it when it begins to fall in value. Dollar-cost averaging takes the emotional factor out of your purchase decisions.
Dollar-cost averaging is simply an investment strategy. You still need to review your investments periodically to make sure that they continue to meet your expectations and your risk tolerance.
Accumulating wealth requires a long-term plan. For assistance, call
Chuckle of the Month
Stars and stripes
A visitor from Holland was chatting with his American friend and was explaining why the Dutch flag was red, white and blue.
“Our flag symbolizes our taxes,” he said. “We get red when we talk about them, white when we get our tax bill, and blue after we pay them.”
“That's the same with us,” the American said, “only we see stars too.”