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September 2001 Online Advisor

Major Tax Deadlines for September 2001

September 17 - Due date for individuals to pay third quarter installment of 2001 estimated tax.

September 17 - Due date for filing 2000 tax returns for calendar-year corporations that had an automatic extension of the March 15 filing deadline.

October 1 - Deadline for corporate estimated tax payments previously due on September 17, 2001.

October 1 - Deadline for businesses to adopt a SIMPLE retirement plan for 2001.

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

Wealthy taxpayers pay the largest share of nation's taxes

Many people believe the rich are escaping their fair share of taxes. But according to a recent report released by the Joint Committee on Taxation, upper-income taxpayers foot the largest share of the nation's tax bill. Here's how the figures stack up:
% Income

% Tax Burden 

Highest 1% of taxpayers (those with incomes of $340,306 or more)
Highest 5% of taxpayers (those with incomes of $145,199 or more)
Highest 10% of taxpayers (those with incomes of $107,455 or more)


The Committee included both taxable income and nontaxable income, such as tax-exempt interest, nontaxable social security, nontaxable foreign earned income, and life insurance proceeds in its calculations. Included in the tax burden column are federal income taxes, excise taxes, and employment taxes.

Congress expands education IRAs and gives them a new name

Education IRAs were recently renamed "Coverdell education savings accounts," which may be a more suitable title. That's because an education individual retirement account (IRA) is not a retirement account at all. It is a custodial savings account created to pay for a child's school expenses at any accredited college, university, or vocational school.

The rules allow anyone, not just parents, to contribute to an account for any child under age 18. Contributions are nondeductible, and the total contributions made for a child cannot exceed $500 per year. To contribute the full amount, your income must be under $95,000 ($150,000 on a joint return). The earnings in the account are never taxed, as long as the money is used to pay for qualifying expenses, such as tuition, fees, books, supplies, and certain room and board expenses.

The 2001 Tax Relief Act expands education savings accounts, beginning in 2002. The maximum contribution limit increases to $2,000 per year. Starting next year, the funds can also be used for elementary and secondary (K-12) school expenses at public, private, or religious schools. Depending on how your state defines a "school," home school expenses may also qualify. Currently only seventeen states define home schools as "private" schools.

To discuss education savings accounts in more detail, please contact us.

New Business

Check the facts before you hire

An increase in "resume fudging" may be the result of recent layoffs and the slowing economy. Studies indicate that approximately eighty percent of job applications contain inaccurate information. According to one employee search firm, applicants lie most often about these items in the following order:

1. Education
2. Salary level
3. Job title
4. Scope of duties
5. Criminal record

After you've narrowed your job candidates down to the final few, do your best to make sure a candidate is as good in real life as he or she is on paper. Here are some suggestions:

* Check references and credentials.
* Review resumes for inconsistencies such as overlapping start and stop dates.
* Compare application forms with resumes looking for discrepancies.
* Conduct more than one interview or have more than one person interview the candidate, then compare the responses.
* Request phone numbers for past employers and supervisors. Follow up with a call.
* If the applicant was self-employed, ask permission to contact former clients or customers.
* If you are uncomfortable with checking references, you can hire a firm to do it for you. Look in the phone book under "preemployment checking agencies."

Putting in this extra effort may improve your chances of making successful hiring decisions. That could save your company considerable time and money.

Smart Business

SIMPLE Solution?

If you own a business, you probably know that a company retirement plan can be an excellent tax shelter. But you also might have heard that retirement plans can be complex and costly. If you are still undecided about a retirement plan, or even if your company already has one, you might be interested in a SIMPLE plan (Savings Incentives Match Plan for Employees).

SIMPLE plans are generally available to self-employed individuals and to businesses that have 100 or fewer employees. The plans can be in the form of employee IRAs or a 401(k) plan.

Under a SIMPLE plan, an employee may contribute a percentage of compensation, with a maximum contribution of $6,500 for 2001. An employer is required to match employee contributions (up to 3% of compensation) or contribute 2% of all eligible employee's wages.

SIMPLE plans are considerably easier to administer than traditional company retirement plans, and that's their main attraction for business owners. For example, SIMPLE plans don't require discrimination or coverage testing, and employers aren't involved on the investment side.

If you want to adopt a SIMPLE for 2001, you'll have to act soon. The deadline to establish a plan for this year is October 1, 2001.

Before you make any decision about a SIMPLE plan, make sure that you thoroughly understand your potential obligations, as well as the benefits and drawbacks. This is especially important if you have an existing retirement plan and you are considering a SIMPLE plan as a replacement. Call us for assistance.

What's New in Financial Strategies

New IRA rules present new opportunities, but use caution

Earlier this year, the IRS announced new rules that give individuals the opportunity to leave IRA funds invested longer, potentially stretching out the benefits of tax-deferred earnings over several generations.

These so-called "stretch" IRAs work as follows. You take only the minimum required amount from your IRA, and let the balance grow tax-deferred. Upon your death, your beneficiary recalculates the required distributions using his or her longer life expectancy. Again, only the required distribution is withdrawn each year to allow for maximum tax-deferred growth. Naming a younger beneficiary (your grandchild, for example) creates a longer potential tax-deferral period.

The National Association of Securities Dealers (NASD) cautions individuals to be wary of promoters promising huge payoffs based on this extended tax deferral because the assumptions they use might be flawed. For example, any of the following assumptions could produce an unrealistic projection:

* You won't need the IRA money during your lifetime.
* Only the smallest required distribution will be taken each year.
* Your beneficiaries will die early, and the money they haven't received will pass to the next generation.
* The rate of return doesn't fluctuate.
* There will be no change in the tax laws during the life of the IRA.
* There will be no inflation.

NASD warns investors to understand the assumptions used in a sales presentation and to make sure they are reasonable and appropriate for your situation. Otherwise, you could invest in something that won't measure up to your expectations.

Are there gaps in your insurance coverage?

If you own a home or an automobile, chances are you have an insurance policy to cover you against the risk of loss. But you may have gaps in your coverage under these policies, and you may need other types of insurance as well. Here are some things you should consider.

Market vs. replacement cost. Before you purchased your policy, you may have shopped for rates, but did you also shop for coverage? Not all policies are created equal. For example, some homeowner policies provide for "market value" coverage of your home's contents while other policies provide for "replacement cost" reimbursement. Since items generally decline in value as soon as they are used, a market value policy may not pay you enough to replace your damaged, destroyed, or stolen property.

Liability insurance. One of the risks facing automobile drivers is the possibility of causing an accident and being sued for damages. While most automobile policies provide liability coverage, they typically set a maximum dollar limit per accident. Are your limits adequate?

Life insurance. It is important to periodically review your life insurance needs, especially when faced with major life-altering events (e.g., marriage and birth of children). A 20-year-old single man may not need a $1,000,000 life insurance policy. But a 45-year-old father who supports a family of four has to consider the financial devastation his family could suffer in the event he dies without adequate coverage.

Disability insurance. Accidents can happen to anyone. Disability income insurance can protect you and your family from financial hardship, providing a steady monthly income in the event of disability or long-term illness.

It's impossible to insure against every contingency. However, you should evaluate your situation and ensure that your critical insurance needs are covered. You should also review your insurance policies carefully to understand their coverages and limitations. Contact us; we will work with you and your insurance agent.

Chuckle of the Month

Cost-cutting idea

With the slowing economy, many companies are scrambling to cut costs. Did you hear about the company that offered $50 for each money-saving idea submitted by its employees? The first prize went to the employee who suggested the award be cut to $25.

  Copyright 1998 Richard C. Woodbury P.C. CPA