November 2001 Online Advisor
Major Tax Deadlines for November 2001
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
Expect new tax legislation before year-end
Congress is expected to pass some kind of economic stimulus legislation soon. Tax breaks under consideration include changes to capital gains, the corporate alternative minimum tax, business depreciation, and net operating losses. Other items being discussed are tax rebates for low-income workers and accelerating tax rate cuts scheduled for future years.
In addition, several tax proposals were introduced in Congress following the September 11 attacks, including tax relief for the victims of the attacks and for rescue workers.
Its impossible to predict what Congress will actually pass. Visit this
site frequently to stay informed about any last-minute legislation that could
affect your year-end tax planning.
There's still time for year-end tax planning
As we enter the gift-giving season, here's a present you can give yourself: a lower tax bill. Following are some tax-cutting ideas.
* Check your tax payments. To begin, estimate your 2001 taxes. Then fine-tune your withholding and estimated tax payments. Your goal is to pay the IRS enough to avoid a penalty, without making Uncle Sam an interest-free loan.
If it looks like you're headed for an overpayment, consider skipping your fourth quarter estimate, or ask your employer to withhold less from your remaining paychecks. If an underpayment seems likely, increase your withholding, or consider making a catch-up estimate.
* Review your income and deductions. Tax rates are scheduled to drop again next year. So consider pulling deductions into 2001 and postponing income until 2002. But consider the opposite strategy if you expect to be in a higher tax bracket next year, or if you're subject to the alternative minimum tax this year.
* Take full advantage of employee benefits. Flexible spending accounts and 401(k) plans at work are excellent tax shelters. Consider participating in these or other tax-advantaged benefits your employer offers.
* Review your portfolio. If you own stocks, bonds, or mutual funds that have declined in value, consider selling them for a loss and replacing them with similar securities. This is called a "swap." But be careful not to swap for an "identical" security within 30 days, or your loss will be disallowed under the "wash sale" rules.
A limited amount of net capital losses may be used to offset other income,
including salary, interest, and dividend income. If you want to take even larger
losses, consider selling some of your profitable holdings. You may use these
gains to offset your investment losses. And since gains aren't subject to the
wash-sale rules, you may immediately repurchase your winning positions.
Contact our office to discuss these and other year-end planning strategies
before it's too late to do anything to cut your 2001 taxes.
September 11 attacks prompt IRS to relax depreciation rules
Normally, companies can claim a half-year's worth of depreciation in the year they place equipment in service. But when businesses lump more than 40% of their equipment purchases into the fourth quarter of the year, the "mid-quarter convention" rules apply. That generally means a smaller first-year depreciation deduction.
Many businesses plan around these rules by carefully timing their purchases. However, the September 11 attacks prevented some businesses from buying equipment before they entered the fourth quarter. As a result, these businesses might be inclined to delay purchases until next year a move that could further weaken the economy.
To encourage businesses to proceed with their planned purchases, the IRS recently
relaxed the depreciation rules. Now businesses can elect to use the more favorable
half-year convention rules for all property purchased during 2001, regardless
of which quarter it was purchased. This election is available to all business
taxpayers whose third quarter includes September 11, 2001.
Starting your own business may be a dream that youve had for years, or it may be a relatively new idea. Either way, you can improve your chances for success by avoiding these common pitfalls.
* Lack of money. Youll probably need capital to start your business, plus a cash reserve until your business becomes self-sufficient. Plan your cash needs carefully and realistically, and provide a generous cushion for setbacks and unexpected expenses. Consider leasing equipment instead of buying. If you must buy, look into used equipment. If your business is going to need a start-up bank loan or other financing, obtain the money before you make any major commitments.
* People problems. Make sure that youll be able to hire and pay for the employees you need, especially if your business requires specialized skills. And since youre the most important employee of all, try to evaluate yourself honestly and objectively. Do you have both the financial and marketing skills that your business will need, or do you plan to hire someone who does? If youre used to working for a large company, or if you like having colleagues around, will you be able to adapt to a smaller office?
While were on the subject of people, be sure to line up qualified accounting and legal advisors, as well as any other experts you may need. Good advisors can mean the difference between success and failure, especially in the early days of your business.
* Insufficient planning. Research your industry and your competition in depth, and prepare a written business plan covering several years. Write a short mission statement for your company, identify your target market, and try to focus on both as closely as possible.
Building a successful business requires more than a good product. If we can assist you in getting off to a good start, please call us.
What's New in Financial Strategies
Don't get caught in the "deemed sale" trap
A change in the capital gains rules this year gave birth to a new tax scheme involving the "deemed sale" of your home. Promoters of this scheme would have you believe that, by coupling the home-sale exclusion rules with the new "deemed sale" election for capital gains, you can have your cake and eat it too. That is, you get a higher tax basis for your home without paying tax.
Heres how they say it works. By making the new "deemed sale" election for your home on your 2001 tax return and recognizing any gain, you receive a new tax basis for your home equal to its fair market value. But to the extent you can exclude this gain under the home-sale exclusion rules (up to $250,000 for individuals or $500,000 for joint filers if you meet certain tests), you wont actually end up paying any tax. Using your homes new basis, you can potentially shelter another $250,000 or $500,000 in additional appreciation when you actually sell your home in the future.
The problem with this scheme is that the "deemed sale" rules state
that all gains recognized under the "deemed sale" election are taxable
to you. Other tax provisions, such as the home sale exclusion, cannot offset
the gain. So if you make this election, youll have to pay tax on your
homes appreciation, even though you didn't actually sell your home. This
is one tax scheme no homeowner should fall for; it could prove to be a costly
Simplify your financial life
Are you frustrated by the amount of time you spend managing your financial affairs and by how complicated your finances have become? Maybe you need to simplify. Not only can simplifying save you time, it can reduce uncertainty and save you money.
A fundamental step to simplification is to focus on whats important. Decide what your financial goals are, and focus on achieving them. Here are some specific tips to help simplify your financial life:
* Reduce the amount of paper you handle. For example, if you have more than
one checking account, consider consolidating. Ditto for your brokerage accounts,
retirement accounts, and credit cards. If you have separate mutual fund accounts,
transfer them into a brokerage account. Besides reducing the amount of paper
you handle, consolidating allows you to more easily evaluate your financial
position. It can also save you time and money at tax time.
* Minimize the time required to monitor your investments. If you spend significant
time following the rise and fall of your individual stocks, consider keeping
more of your portfolio in mutual funds. If you spend too much time monitoring
your mutual funds, consider cutting back on the number of funds you own. However,
do continue to keep your investments diversified.
* Set up a simple filing system. Then use it to eliminate clutter and make documents easier to find. Consider using one of the popular computer programs to simplify bill paying, keep track of tax deductions and other expenses, and help evaluate your investment performance.
Take a few moments now to simplify your finances, then relax and enjoy the extra hours you have created for yourself. Call us if you need help designing a simplification plan that works for you.
Chuckle of the Month
Share the risk, share the pain
Today, millions of Americans own stocks. Does that make Wall Street a safer bet? Not necessarily. As one insider commented, "The market will always do whatever it has to do to embarrass the maximum number of people."