Major Tax Deadlines For February 2002
Deadline for filing 2000 tax returns for taxpayers who received a 120-day filing extension due to the September 11 terrorist attacks. This includes 2000 individual returns, gift tax returns, trust returns, and partnership returns for taxpayers directly affected by the attacks.
Payors must file information returns (such as 1099s) with the IRS. (Electronic filers have until April 1 to file.)
Employers must send W-2 copies to the Social Security Administration. (Electronic filers have until April 1 to file.)
For March 2002
Farmers and fishermen who did not make 2001 estimated tax payments must file 2001 tax returns and pay taxes in full.
2001 calendar-year corporation income tax returns are due.
Deadline for calendar-year corporations to elect S corporation status for 2002.
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
IRS plans new audit project
The Internal Revenue Service recently proposed its new audit plan to Congress. Beginning this fall, the IRS plans to audit approximately 50,000 2001 tax returns under a new audit project called the National Research Program. The Service will use information gained from these audits to measure how well taxpayers are complying with the tax law and to help it develop new formulas for the audit selection process.
It's been more than 13 years since the IRS conducted its dreaded line-by-line audits to develop noncompliance data. The Service says it's time to update its methods to detect tax cheating and to help manage its audits more efficiently.
Because it's the law, you should always file complete and accurate income
tax returns. This new project underscores the reasons for doing so. For
assistance in preparing your tax return, please call our office.
Do your 2002 tax planning with new numbers
Many tax numbers are adjusted each year, usually for inflation or as a result of tax law revision. As you begin your tax planning for 2002, take the following changes into account:
*The standard mileage rate for business driving increases to 36.5 cents per mile, effective January 1, 2002. The mileage rates for medical and moving expenses increase to 13 cents per mile.
*The maximum earnings subject to social security tax increases to $84,900 for 2002. As before, all earned income (wages and self-employment income) is subject to Medicare tax.
*Self-employed individuals can write off up to 70% of their health insurance premiums.
*The exclusion for foreign-source income increases to $80,000 for 2002.
*The "luxury car" excise tax drops to 3% on purchases over $40,000.
*Taxpayers who make quarterly tax estimates and whose income exceeds $150,000 annually may have to increase their tax payments this year. The prior-year safe harbor percentage increases from 110% to 112%.
*The annual gift tax exclusion increases to $11,000 per donee.
Some rates didn't change for 2002:
*The expensing election for business equipment remains at $24,000.
*The mileage rate for charitable driving remains at 14 cents per mile.
*The capital gains tax rates remain the same as 2001 rates (8%, 10%, 18%, 20%, 25%, and 28%).
For details on any item that may apply to you, give our office a call.
Use this new tax credit to offset retirement plan set-up costs
Your small business may be eligible for a new tax credit if you set up a retirement plan this year. The tax credit of up to $500 a year applies to start-up costs incurred during a plan's first three years.
To qualify for the credit, your business must meet several tests.
*The new plan must cover at least one employee who is not a highly compensated
*Your business must not have employed more than 100 employees who received $5,000 or more in compensation during 2001.
*Your company must not have maintained another plan during the past three years.
The credit applies to the administrative expenses for retirement plans
established after 2001, including SIMPLE, SEP, and 401(k) plans. To discuss
how a retirement plan might benefit your business, give us a call.
Understand the rules for business vehicles
Buying a new business vehicle can be a major expense, so it's important to understand the tax and financial issues involved. Here are the most common questions asked about business vehicles.
*Should I lease or buy? In making your decision, consider financial,
usage, and tax issues.
The down payment and monthly payments are typically less for a lease than they would be if you purchased the same vehicle. Leasing allows you to drive a more expensive car for the same monthly payment. But you won't own the car at the end of the lease.
Leases usually limit the number of miles you can drive per year and charge a fee for additional miles and for damage beyond normal wear and tear. If you cancel a lease before it ends, stiff penalties may apply. When you purchase a vehicle, you have no mileage limits, and you can sell or trade the vehicle whenever you want.
You receive similar tax benefits for a business vehicle whether you
buy or lease it.
*What kind of records do I need to keep? Records are necessary to support
every tax deduction, automobiles included. You must generally keep track
of the total business mileage driven on a vehicle. Your business mileage
log should contain the date of each business trip, the driver's name, and
the business purpose of the trip.
*Are company-provided vehicles a tax-free fringe benefit? Using a company
car for business purposes is nontaxable to an employee. Generally, if an
employee uses a company-provided car for personal purposes, the personal
use portion will be considered taxable compensation to the employee.
*Should I use the "actual expense method" or the "standard mileage method"?
Compare your tax deduction under both methods.
Under the standard mileage method, you simply multiply your business mileage by the allowable rate (36.5 cents per mile for 2002). So for 10,000 business miles, you could deduct $3,650. The standard mileage method is not permitted in certain circumstances.
Under the actual expense method, you deduct the business percentage
of your vehicle costs, such as gas, oil, insurance, repairs, etc. For example,
if you drove 15,000 business miles and 20,000 total miles for the year,
you could deduct 75% of your actual costs, including depreciation.
The rules for business autos are complex. For assistance, give us a
What's New in Financial Strategies
Review the investments in your 401(k) plan
The recent collapse of Enron Corporation and the market ride of the past few years underscore the importance of diversifying your investments, both inside and outside your retirement accounts.
As a general rule, you should avoid being too heavily invested in any one company's stock. When that company is also your employer, your risk of loss increases. A downturn for your company will not only diminish your portfolio value, it could adversely affect your next raise or bonus. It might even cost you your job.
Companies that offer 401(k) plans often match an employee's contribution with company stock rather than cash. Some companies place restrictions on selling the company stock from matching contributions, typically until an employee reaches age 50. That can cause a 401(k) account to be too heavily invested in company stock.
Don't risk your financial future by holding a disproportionate amount
of any stock, including that of the company for which you work. If we can
help evaluate your situation, please give us a call.
Check out index funds
If you are a long-term investor interested in diversification, low fees, and tax efficiency, consider index funds. You probably already know that an index is a collection of investments that indicate the general direction of the market. An index fund is simply a mutual fund that invests in all or most of the components of a particular market index. For instance, a stock index fund based on the Dow Jones Industrial Average would own all thirty of the stocks that comprise the Dow.
Index funds use a passive investment style because there is no need to actively research and choose which investments to buy or sell. Passive investing leads to lower management fees and may lessen the risk associated with choosing a fund manager. Index funds will always earn a slightly lower return than the index itself because of the fund's expenses. But index funds generally have lower expenses than actively managed funds.
Another benefit of passive investing is less trading activity. Index fund portfolios are adjusted only when the investments in the underlying index change. Infrequent trading typically results in lower capital gains distributions which means lower taxes.
Index funds are bought and sold through brokers and mutual fund companies. They are priced at net asset value at the end of the trading day. Like any investment, index funds are subject to risk. For example, stock index funds are subject to the same market risk as individual stocks. The market may decline, taking the price of stocks in the index down with it.
Understanding your investment choices and their tax ramifications will
help you build a well-diversified portfolio. If you have questions, give
us a call.
Chuckle of the Month
"What does love mean?" When this question was posed to a group of children, here are some of the answers they came up with.
"When my grandmother got arthritis, she couldn't bend over and paint
her toenails anymore. So my grandfather does it for her all the time, even
when his hands got arthritis too. That's love."
Rebecca - age 8
"Love is when you go out to eat and give somebody most of your French
fries without making them give you any of theirs."
Chrissy - age 6
"Love is what makes you smile when you're tired."
Terri - age 4
"Love is when you tell a guy you like his shirt, then he wears it every
Noelle - age 7
"Love is like a little old woman and a little old man who are still
friends even after they know each other so well."
Tommy - age 6
"My mommy loves me more than anybody. You don't see anyone else kissing
me to sleep at night."
Clare - age 5
"Love is when your puppy licks your face even after you left him alone
Mary Ann - age 4
"When you love somebody, your eyelashes go up and down and little stars
come out of you."
Karen - age 7