Online Advisor - February 2003
Major Tax Deadlines
For February 2003
* February 28 - Payors must file information returns (such as 1099s) with the
IRS. (Electronic filers have until March 31 to file.)
* February 28 - Employers must send W-2 copies to the Social Security Administration. (Electronic filers have until March 31 to file.)
For March 2003
* March 3 - Farmers and fishermen who did not make 2002 estimated tax payments must file 2002 tax returns and pay taxes in full.
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
President Bush proposes tax cuts
Early last month, President Bush revealed his plans for cutting taxes and stimulating the economy. The centerpiece of his plan is a proposal to eliminate the taxes shareholders pay on the dividends they receive that have already been taxed at the corporate level. The President's plan also proposes to accelerate several of the tax cuts included in the 2001 tax law that are scheduled to be phased in over the next several years. Among the tax cuts that Bush would like to see moved into 2003 are the following:
* Expansion of the 10% tax bracket.
* Tax rate cuts scheduled for 2004 and 2006.
* Marriage penalty relief scheduled to begin in 2005.
* Increase in the child tax credit to $1,000 per qualifying child.
Bush's plan would also increase the exemption threshold for the alternative minimum tax for a two-year period, and it would increase the expensing limit for the purchase of business equipment from the current $25,000 to $75,000.
Factor the likelihood of coming change into your early 2003 tax planning efforts.
For tax savings, pay attention to itemized deductions
Each year hundreds of thousands of taxpayers overpay their taxes because they claim the standard deduction when itemizing these deductions would be more beneficial. The cause may be poor recordkeeping or simply overlooking valuable deductions. A basic review of itemized deductions may prevent this from happening to you.
* Taxes. State and local income taxes, real estate taxes, and personal property taxes are deductible. To qualify, the taxes paid must be your responsibility. Federal income tax, social security tax, and sales tax are not deductible.
* Medical expenses. You can deduct unreimbursed medical expenses for you, your spouse, and your dependents to the extent they exceed 7.5% of your adjusted gross income. This includes amounts paid for doctors and dentists, hospital care, prescriptions, nursing services, and medical aids.
You can deduct health insurance premiums, long-term care insurance premiums (within limits), and transportation and lodging costs related to receiving medical care.
You can even deduct the cost of weight-loss programs (except diet food) provided you're under a doctor's orders to lose weight for health reasons. Medical procedures that are cosmetic in nature are not deductible.
* Interest. You can deduct interest paid on your principal residence and a second home. This includes interest on your first and second mortgages up to $1 million and on home-equity loans (where available) up to $100,000.
Points paid to obtain a mortgage are also deductible, and points paid for refinancing are generally deductible over the loan's term.
Interest paid on money used for investment is deductible within certain limits.
* Contributions. Donations to qualified organizations are deductible to the extent you don't receive anything in return. Deductible contributions can be made to churches, schools, libraries, and qualified charities. Donations can be made by cash, check, or credit card. You can also deduct the fair market value of noncash donations, such as clothing and household items, vehicles, stocks and bonds, and real estate. There are specific records required based on the size and type of your donation.
* Casualty or theft losses. Losses from a theft, fire, or natural disaster are deductible within limits.
* Miscellaneous deductions. Other deductible expenses include some unreimbursed job expenses, investment expenses, gambling losses, and fees for tax planning and preparation. Most miscellaneous expenses are only deductible to the extent they exceed 2% of your adjusted gross income.
To get the best tax results, an awareness of the deductions that may apply to you and good recordkeeping are important. If you have questions, give us a call.
Businesses get a bigger incentive to purchase equipment
This year the expensing limit for the purchase of equipment by small businesses increases to $25,000, up from last year's $24,000 limit. This expensing provision allows a write-off in the year of purchase instead of depreciating an item over a period of years.
An additional incentive for businesses to purchase equipment was included in legislation passed last year. Under that law, businesses can claim an extra first-year deduction for 30% of the cost of new equipment purchased. This bonus depreciation is in addition to any expensing deduction and to regular first-year depreciation.
Tax cut proposals released in January suggest that businesses may get even larger tax breaks for purchasing equipment. The plan offered by Congressional Democrats and President Bush's plan include an increase in the equipment expensing limit. The Democrats are proposing increasing the 2003 limit to $50,000, and the President's plan would increase it to $75,000.
These added incentives to buy equipment for your business should be taken into account in your 2003 tax planning. For details and a review of how current law and proposed changes could affect your purchasing decisions, give us a call.
Negotiate with vendors to cut costs
Vendor payment terms establish the amount of time between the receipt of the goods or services you ordered and when you must pay for them. The terms vary from vendor to vendor depending upon their individual method of doing business.
For some vendors, payment terms are hard and fast. But in many cases, payment terms can be renegotiated as the economic climate changes. For example, you might negotiate a shorter payment period in exchange for a discount on the invoice. You might also negotiate a longer payment period to improve your cash flow.
Let's say you currently pay your vendors under the terms net 30, meaning you must pay the full invoice amount within 30 days of receiving it. Some vendors may be willing to offer a discount for earlier payment, say 2% if paid within 10 days. However small the percentage discount you negotiate, it adds up over time. A 2% discount for paying in 10 days instead of 30 days computes to an annual rate of return of 36%.
Other vendors may view a discount for early payment as too costly. But they still value your business. They may be willing to extend the payment terms to 45 days, adding 15 days to the previous 30 days. This will slow down your cash outflow.
Negotiating your vendor payment terms can offer an effective way to cut costs and improve cash flow.
What's New in Financial Strategies
No tax on dividends? The devil is in the details
The centerpiece of President Bush's $674 billion, 10-year tax and economic plan is the elimination of the tax on dividend income paid to shareholders.
That sounds like a good reason to start loading your investment portfolio with dividend-paying stocks. As you realign your investments for 2003, remember that nothing in tax law is ever as simple as it at first might appear. As the tax law now stands, corporations pay tax on their income; then when they distribute income to shareholders in the form of dividends, those individual investors are taxed again. While appreciation in a stock's price is taxed at lower capital gains rates when the investor sells his shares, the dividends an investor receives are taxed at ordinary (higher) income tax rates.
There may be good reason to invest in dividend-paying stocks, but be cautious about making investment choices that hinge on the expectation that your dividends will escape taxation. Dividends from certain companies might still be taxable. Also, keep in mind that a proposed tax change is a long way from an actual tax law. The coming debate over the proposed tax cuts are likely to result in a final bill that looks much different from the initial proposals. Proceed with caution in making your investment decisions before the tax changes for 2003 are actually signed into law.
Boost your savings for financial security
Saving is like exercising. We know we should do it, but many of us give up too quickly because results are not immediately apparent. Yet, just as exercise is important for our physical well-being, saving is important for our financial well-being.
The compound interest effect is often referred to as the eighth wonder of the world. This effect causes small amounts of periodic investments to grow substantially over time. For example, cash invested at 7% interest can double in just ten years. The key to using this tremendous wealth-building tool is to start saving early, commit to regular deposits, and be patient.
* How much should you save? Your target should be to save at least 10% of your after-tax income each year. When calculating your savings, consider all sources: retirement plan contributions, principal payments on your mortgage, and other investments. While a 10% target may seem ambitious, it is achievable if you have self-discipline. For example, if your boss announced a 10% pay cut, you'd probably find a way to make ends meet. So announce your own pay cut and start saving today.
* How do you get started? Saving money doesn't take complicated strategies, just discipline and planning. Review your spending to see where your income is going. Look at your expenses and think creatively about ways to cut each one. Don't go shopping unless you really need something. Comparison shop for the things you need: goods, services, insurance, interest rates - everything. Consider refinancing your mortgage at a lower interest rate to lower your payments.
* Look for ways to save at work. If your employer offers a flexible spending account, you can pay child care expenses, out-of-pocket medical expenses, and certain insurance premiums with pretax dollars to stretch your wages. If your employer offers a voluntary retirement plan, participate to the maximum extent possible. If you aren't participating, you are forfeiting an opportunity to reduce your taxes, and you may be missing out on potential employer-matching contributions.
* Pay yourself first. Arrange to have savings automatically deducted from your paychecks, or set up an automatic transfer from your checking to your savings account. To strengthen your resolve, put your savings where they're hard to reach. For example, retirement plans are difficult to access before retirement without incurring large penalties. Bank certificates of deposit charge early withdrawal penalties.
To reap financial security, you must plant the seeds of savings. The earlier you start, the richer the harvest. If we can be of assistance, contact our office.
Chuckle of the Month
Have you ever noticed that when you put the two words "the" and "IRS" together, it spells "theirs"?
The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.