Major Tax Deadlines for December 2001
Early in December - Check the amount of 2001 tax you have prepaid through withholding and quarterly estimates. If you're underpaid, consider increasing your withholding before year-end. Withholding is considered to have been paid evenly throughout the year. This could prevent your being charged underpayment penalties for 2001.
December 31 - Last day to pay expenses you hope to deduct on your 2001 return - such as medical bills, property taxes, IRA administrative fees, and charitable contributions. Pay expenses with a credit card if you don't have the cash. You'll get the deduction in 2001 even though you pay the credit card bill in 2002.
December 31 - Last day to set up a Keogh plan for 2001. Deductible contributions for 2001 can be made any time up to the filing deadline for your 2001 return.
December 31 - Last day to take 2001 required minimum distributions from IRAs and other retirement accounts. If you fail to take the required amount on time, you could be subject to a 50% penalty on the amount that should have been withdrawn. (If you turned 70 ½ this year, you can postpone your first withdrawal until April 1, 2002.)
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
Social security taxes and benefits to increase in 2002
You may soon be paying more in social security taxes. Effective January 1, 2002, the amount of wages subject to social security tax will increase from $80,400 to $84,900. The maximum social security tax for employees will go from the 2001 maximum of $4,985 to $5,264 for 2002. The maximum for self-employed individuals will increase from the current $9,970 to $10,528. There is no change in the Medicare tax of 1.45% on all employee wages and 2.9% on all self-employment income.
If you receive social security benefits, you'll get a raise in 2002. Starting
in January, there will be a 2.6% inflationary adjustment to social security
Audit numbers don't tell the full story
For about six years now, the number of IRS audits has been declining. In 1995, for example, the IRS examined approximately 1.9 million individual returns. In 2000, that number fell to about 620,000. Today, the chances that an individual return will be audited are, on average, about one-half of one percent (one in every 200 returns filed).
Why have rates declined? The IRS cites three main reasons for declining audit rates. First, the number of IRS revenue agents and tax auditors has dropped by more than 20% since 1995. Second, many IRS employees are now being used for customer service duties rather than reviews and audits. Third, the IRS Restructuring and Reform Act of 1998 gave the IRS some new responsibilities, and IRS agents had to be reassigned to deal with them.
Are the statistics misleading? Don't let the declining audit rates mislead you. According to the IRS commissioner, declining audit rates don't tell the whole story. The audit rate numbers exclude the IRS's routine use of computer matching techniques to find tax return errors. By one estimate, if you take computer matching and other error detection techniques into account, the audit rates are closer to one in every 16 returns.
Who's most likely to be audited? Some types of returns are audited more frequently than others. For example, your audit risk is higher if you participate in certain tax shelters, if your deductions are disproportionate to your income, if you live in certain targeted areas of the country, if you own a small business, if you deduct casualty losses, or if you participate in tax scams.
Remember also that each return you file is open to IRS examination for at least three years after you file it. The period is extended to six years if you omit more than 25% of your income from a return.
What's next for the IRS? Earlier this year, the IRS published its plans for compliance and audit efforts for the next several years. And Congress recently gave the IRS a healthy budget increase to help it achieve its goals. Among the areas that will receive increased IRS attention are the following:
Underreported income from partnerships, S corporations, and trusts.
Abusive trusts and corporate tax shelters.
Fraudulent claims for the earned income credit.
Unpaid payroll taxes withheld by employers.
Claims for innocent spouse relief.
Honest, careful, and timely preparation of your tax return is always good practice, and you won't need to be concerned if the IRS comes knocking.
IRS announces estimated tax relief for businesses
The general downturn in the economy and the disruption in business following the terrorist attacks may have left some companies with overpaid 2001 estimated taxes. The IRS recently announced that these businesses can ask the IRS to use the excess to pay employment taxes. By doing so, your business won't have to come up with the cash for payroll tax deposits while you await your 2001 income tax refund.
This option only applies to businesses who've overpaid their income taxes. If you move your payments to cover employment taxes and end up underpaying your 2001 income taxes, you could be subject to an underpayment penalty.
Another option: Corporations can request a quick refund for overpaid estimated taxes before they file their income tax return. To qualify, you must have overpaid your income taxes by $500 or more, and you must wait until after your tax year ends to file your refund claim.
If you'd like more information about these and other ways to access much-needed cash, please call our office.
Act at year-end to cut your 2001 tax bill
The end of the year still presents opportunities to cut your company's tax bill. The financial position of your business should be clear enough by this time to identify tax-saving strategies that fit your company's situation. Some year-end strategies to consider:
*Make equipment acquisitions. A certain amount of 2001 equipment purchases can be immediately deducted, rather than depreciated over several years. If you're looking for more business deductions in 2001, accelerate your planned equipment purchases to fully utilize the expensing option available this year.
*Establish a retirement plan. There are several types of retirement plans that can be established by year-end or even until your 2001 tax return filing deadline. If you are a business owner who is significantly older than other company employees, certain plans will allow you to contribute more for yourself than for your employees.
*Review your benefits package. Fringe benefits can help you attract and retain good employees and cut your taxes. While adding a new benefit this late in the year may not significantly reduce your 2001 tax bill, you can get a jump on next year's taxes by establishing a plan now.
For example, a medical reimbursement plan allows employees to use pre-tax dollars to pay for items not covered by insurance. Amounts spent through this type of reimbursement plan are not subject to FICA tax, which reduces the company's payroll taxes.
*Review meal and entertainment expenses. Generally, business meals and entertainment costs are only 50% deductible, so many businesses simply combine these expenses into one account and deduct half. But some of these expenses are 100% deductible, including meals provided to employees at company picnics and holiday parties, meals directly related to company business meetings or training sessions, and food and beverages furnished for employees on the business premises.
*Review customer receivables for bad debt write-offs. Accrual-basis businesses can deduct accounts receivable in the year they become uncollectible. If there is a question regarding uncollectibility, you can, at a minimum, write off the collection agency's fee once the receivable is turned over to them.
*Check the status of estimated tax payments. If it appears that your business has paid in too little in estimated taxes to date, make an adjustment in the fourth quarter payment to minimize any underpayment penalty. If enough has already been paid in, consider eliminating the last quarter's payment.
Owners of "pass-through" entities, such as partnerships and S corporations, can adjust their income tax withholdings from wages before year-end.
For a review of year-end moves that could reduce 2001 taxes for your business,
give us a call.
What's New in Financial Strategies
Interest rates drop again
Some recent moves by the federal government could affect your investing and financial planning strategies.
Federal Reserve drops interest rates. In an effort to boost the economy, the Federal Reserve recently dropped interest rates for the tenth time this year. The federal-funds rate (the overnight rate banks charge each other) dropped to 2%, and the discount rate (the rate charged by the Federal Reserve to member banks) dropped to 1.5%. In response, some banks immediately cut their prime interest rate which is the benchmark for consumer and business loans.
Treasury ends sale of 30-year bonds. In a surprise move, the Treasury Department recently announced that it would no longer sell 30-year bonds. Treasury officials indicated that the government doesn't need the 30-year bond to meet its current financing needs; however, these bonds could be reintroduced at a future date if the government's borrowing needs change. The immediate reaction by other long-term lenders was a drop in mortgage interest rates, which is good news for home buyers and those planning to refinance.
Treasury bonds called before maturity. Owners of certain 30-year Treasury bonds which mature on February 15, 2007, will receive their final interest payment on February 15, 2002. That's because the Treasury Department called these bonds before their maturity date. If you own one of these bonds, you can redeem it on February 15, 2002, or you can reinvest it in 5-year or 10-year Treasury notes.
Take these recent changes into account as you review your financial strategies
for the coming months.
Do you need long-term care insurance?
What would you do if you were faced with an additional yearly expense of $50,000 or more for nursing home care? Could you afford it? This is the question facing our steadily aging population. For some, the answer may be a long-term care insurance policy.
*Who needs a long-term care policy? Consider your overall financial picture.
If you have enough assets to pay the premiums, but not enough to afford several
years of uninsured care, a policy may provide peace of mind. Prior to buying
a policy, you might want to discuss such a purchase with your family. Generally,
you should not buy a long-term care policy if paying the premiums will cause
a financial hardship.
* When should the insurance be purchased? The younger you are, the lower your annual premiums will be. Depending on your family's medical history, serious consideration should be given to purchasing a policy no later than in your fifties.
* What should you look for in a policy? Policies vary greatly, so it is important to compare. The daily benefit amount, the period for which benefits will be paid, the elimination period (period before benefits start), cost of living adjustments, and home care options are all factors which affect the premium.
* What are the tax issues? For income tax purposes, a qualified long-term care insurance contract is considered health and accident insurance. This means that, subject to limitations based on age, premiums are treated the same as any other medical expense and may be deductible.
A qualified policy must meet strict IRS rules, which may make it more difficult to begin receiving benefits than with a nonqualified policy. You should decide if the potential tax deduction is worth the increased possibility of decreased benefits under the qualified policy.
Benefits received under a qualified policy that pays only actual expenses are tax-free. In contrast, part of the benefits from policies that pay a set dollar amount (per diem) may be taxable.
Purchasing long-term care insurance can be as confusing as it is important.
Contacting an insurance professional with expertise in this area will help ensure
that you obtain a solution that meets your needs. For help with the tax issues,
give us a call.
Chuckle of the Month
A Patriotic Moment
The kindergarten teacher was showing her class an encyclopedia page picturing several national flags. She pointed to the American flag and asked, "What flag is this?"
A little girl called out, "That's the flag of our country."
"Very good," the teacher said. "And what is the name of our country?"
"Tis of thee," the girl said confidently.