Major Tax Deadlines for January 2002
January 15 - Final 2001 individual estimated tax payment is due, unless
2001 tax return is filed and taxes are paid in full by January 31, 2002.
January 31 - Employers must provide 2001 W-2 statements to employees.
January 31 - Payors must provide 2001 Form 1099s to payees.
January 31 - Deadline for employers to file Form 941 for the fourth
quarter of 2001 and pay any tax due.
January 31 - Employers must generally file 2001 federal unemployment
tax returns and pay any tax due.
NOTE: Businesses are required to make federal tax deposits on dates
determined by various factors that differ from business to business.
Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.
Monthly depositors are required to deposit payroll taxes accumulated
within a calendar month by the fifteenth of the following month.
Semiweekly depositors generally must deposit payroll taxes on Wednesdays
or Fridays, depending on when wages are paid.
For more information on tax deadlines that apply to your business, contact our office.
What's New in Taxes
Last-minute tax law gives tax relief to attack victims
Congress failed to pass an economic stimulus package before it adjourned last year. But at the eleventh hour, it approved the Victims of Terrorism Tax Relief Act of 2001.
This legislation provides tax relief for the victims of the September 11 attacks, the Oklahoma City attacks, and the anthrax attacks. For those who perished in the attacks, the new law shields income and a limited amount of their estates from tax.
The law exempts certain victims' benefits from income tax, including death and disability benefits, workers' compensation benefits, and government retirement plan benefits. This law makes it easier for charitable organizations to give money to victims' families, and it gives the Treasury Department more flexibility in extending tax filing deadlines.
Please contact us if you have questions about this new tax law or other
tax law changes that affect you.
New tax breaks kick in this year
Several new and expanded tax breaks kick in this year, including those for education, retirement, and your estate. Keep these changes in mind as you begin your 2002 tax planning.
Education. You can contribute more to an education savings account (education IRA) this year. The maximum contribution increases from $500 to $2,000. In addition, you can use the funds to cover more costs than before, including elementary, secondary, and higher education expenses. This year, you can take tax-free distributions from state-run Section 529 plans to pay for qualified college expenses.
There's a new "above-the-line" deduction for up to $3,000 of qualified
tuition and related expenses, subject to certain income limitations. And
you can deduct up to $2,500 of the student loan interest you pay (also
subject to income limitations) on certain student loans whether or not
you itemize your deductions. Prior law limited this interest deduction
to the first 60 months of repayment, but Congress repealed this limitation,
effective January 1, 2002.
Retirement. The maximum amount you can contribute to an individual retirement account increases from $2,000 to $3,000. The maximum annual elective deferral for 401(k) plans, 403(b) annuities, and salary reduction SEPs is $11,000. The annual deferral for SIMPLE plans is $7,000. If you are 50 or older, you can make additional "catch-up" contributions to your IRA and other retirement plans.
Estates. The estate tax exemption increases from $675,000 to $1 million this year, and the top estate tax rate drops from 55% to 50%. Due to these and other estate tax changes that phase in over the next nine years, it's a good idea to review all your estate planning documents with us and with your attorney.
Tax rates. The tax rates above the 15% bracket drop again this year. The new rates may affect your long-term tax strategies, as well as the amount you pay in withholding and estimated taxes for 2002.
For details on how these changes might affect your individual situation,
give us a call.
Good news: More businesses can use the cash method
Now more small businesses can use the cash method to report their income to the IRS. The IRS recently announced that certain small businesses with gross receipts of $10 million or less can use the cash method of accounting for tax purposes. That's up from the previous limit of $1 million or less.
This change in policy is good news for small businesses. The cash method allows businesses to report income when customers pay their bills rather than when the sale occurs (the accrual method). Since most customers don't pay their bills immediately, businesses using the accrual method often have to come up with the money for taxes before they receive payment from their customers.
An estimated 500,000 small businesses may benefit from this change. Qualifying businesses can switch methods for their 2001 returns by following a special IRS procedure. The new rules specifically exclude certain types of businesses from using the cash method even if they meet the gross receipts test. For example, manufacturers, wholesalers, retailers, and mining operations must continue to use the accrual method.
If you'd like to discuss whether your business might benefit from changing
its method of accounting, give us a call.
Every business needs a written plan
Without planning, it can be difficult for a business to survive. A written business plan can dramatically increase your probability of success by identifying potential roadblocks and developing strategies for overcoming them. Small businesses, whether already in operation or just starting out, can benefit from a written business plan.
How can a plan help? For new businesses, a written business plan helps in the start-up process. It provides a clearer understanding of the business and its goals. Often businesses spend a lot of time and money on product development, equipment, and marketing -- without analyzing the feasibility of the basic business idea. Writing a business plan gives you a better understanding of your ideas. It allows input from others before wasting time and resources.
For existing businesses, a written business plan forces the business to analyze its environment, its target market, and its competition. It helps identify the strengths and weaknesses of the business. A business plan promotes consistency throughout the organization and provides long-term savings of time and resources. Having a strategic plan in place during an economic downturn will help you make changes rapidly and adjust proportionately to decreased demand.
What should your plan include? There is no standard format for business plans, but there are some guidelines. The plan should give a brief overview of operations. It should include information on the market and the competition, explain manufacturing and production processes, and discuss the management and organizational structure. It's especially helpful to have the plan include benchmarks for measuring performance.
New businesses should describe the planned products and services and include timetables of critical events. Continuing businesses should describe existing products and services, give a brief history, and provide financial information. Both new and existing businesses should include future plans.
Planning helps ensure that vital factors have been considered. A written business plan gives the business, its lenders, and its advisors a better understanding of the business's environment, which often leads to a more successful business.
If you haven't already done so, now's a good time to prepare this year's
plan. For assistance, please call us.
What's New in Financial Strategies
Are rebate programs a good way to save for college?
There are more ways than ever before to save for college. One way is to sign up for a rebate program. Hoping to capitalize on brand loyalty, participating companies offer to put a purchase rebate directly into your child's college savings account (Section 529 plan).
Section 529 college savings plans have been getting a lot of publicity since the 2001 Tax Act expanded their tax benefits. These state-sponsored plans allow you to set up a tax-advantaged savings account to pay for your child's college education. Your investment grows tax-deferred as long as it stays in the plan. When your child needs the money for college, you can take tax-free distributions to pay for tuition, fees, supplies, equipment, and certain room and board expenses.
Private companies run 529 rebate programs, and anyone can sign up for one. For example, aunts, uncles, grandparents, and friends can all help you fund your child's education simply by signing up for a rebate program and targeting their spending toward certain companies. Participating companies represent a wide variety of products and services, including apparel, food, entertainment, appliances, real estate brokerage, and even home loans.
Whether rebate programs are a good idea depends on your individual situation.
Some analysts worry that these programs simply help people rationalize
poor spending habits. A better alternative may be to set up a systematic
plan to save for college instead of "spending to save."
Know your options for IRA investments
Taxpayers can contribute more to their individual retirement accounts (IRAs) this year, thanks to last year's tax law. The maximum annual contribution limit increased from $2,000 to $3,000. And for the first time, individuals 50 and over can make an extra "catch-up" contribution of $500.
Do you know where to invest the additional IRA contributions you are permitted to make under the 2001 Tax Act? If not, it may be time to take a look at what's available.
Traditional investments that can fit your needs - and fit into your IRA - include the following:
* Certificates of deposit (CDs). These time deposits allow you to lock in a particular interest rate for a stated period of time.
* Stocks and American Depository Receipts (ADRs). You can purchase individual stocks and ADRs through a self-directed IRA. ADRs provide an acceptable way to diversify into foreign stocks. (Note: Self-dealing rules may prohibit equity investments in closely held corporations.)
* Bonds. Treasuries can generate a current income stream within your IRA and help preserve principal. Junk bonds and zero-coupon bonds offer more risk - and perhaps more return. All are permissible IRA investments. (Note: Certain types of bonds may not be desirable in an account that is already tax-deferred.)
* Mutual funds and unit investment trusts. Mutual funds permit easy diversification and the ability to spread your annual IRA contribution over several installments. (Note: Because withdrawals from traditional IRAs are generally taxed as ordinary income, the tax benefits of long-term capital appreciation are lost.)
* Real estate investment trusts (REITs). This investment provides the opportunity to own real estate through the purchase of securities that trade on established markets. (Note: REITs can furnish more liquidity than the outright purchase of real estate.)
Less common investments that might have a place in your IRA include the following:
* Real estate. Your IRA can own rental properties, trust deeds, and mortgage notes. (Note: Holding a mortgage for yourself or a relative is not permitted in an IRA.)
* Gold, silver, platinum, or palladium bullion. To be part of your IRA, precious metals must meet specific fineness standards and be held in the physical possession of your trustee. (Note: Storage costs and service fees can be expensive.)
* Coins. An IRA can own certain gold, silver, and platinum coins, generally those minted by the Treasury Department or issued by states. (Note: Coins that have been made into jewelry may not meet the criteria of an acceptable investment.)
When making new contributions or rebalancing your IRA, you have a wide
range of options. Just remember that some investments are specifically
prohibited. For example, an IRA cannot own a life insurance policy or collectibles
(art works, rugs, antiques, metals, gems, stamps, alcoholic beverages,
and some coins).
Chuckle of the Month
A mother mouse was out for a stroll with her babies when she spotted a cat crouched behind a bush. As the mouse watched the cat, the cat watched the mice.
Suddenly, the mother mouse barked fiercely, "Woof, woof, woof!" The cat was so terrified that it ran for its life.
Then the mother mouse turned to her babies and said, "Now do you understand
the value of a second language?"