Online Advisor - September 2002
Major Tax Deadlines for September 2002
Due date for individuals to pay third quarter installment of 2002 estimated tax.
Due date for filing 2001 tax returns for calendar-year corporations that had an automatic extension of the March 15 filing deadline.
Deadline for businesses to adopt a SIMPLE retirement plan 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
October 31 is the deadline to make NOL decision
When your business loses money, you have the opportunity to use the net operating loss (NOL) to offset taxes paid in earlier years and get a refund. A new law gives taxpayers a longer period to carry back losses. For tax years ending in 2001 or 2002, businesses and individuals can carry back a net operating loss to offset income in the prior five years instead of the usual two years.
In deciding how to use your 2001 or 2002 NOL, you are faced with three
choices. You can:
*Use the new five-year carryback period to recover tax refunds from three additional years.
*Keep the old two-year carryback period.
*Forgo the carryback altogether and use the loss to offset income in a future year.
If you've already filed your 2001 tax return, the IRS says you can switch
to any one of the three choices above as long as you do so by October 31,
2002. Please contact us if you need more information about net operating
losses or if you'd like help with amending your return.
Preserve valuable tax breaks to cut your tax bill
There are many deductions, credits, and other tax breaks that depend on your income level. When you begin to lose these deductions and credits as your adjusted gross income (AGI) increases, you're effectively increasing your tax rate and you pay higher taxes.
Deductions affected by AGI include those for medical expenses, casualty losses, job expenses, IRA contributions, student loan interest, higher education expenses, and total itemized deductions. Credits affected include the adoption credit, dependent care credit, child tax credit, earned income credit, and various education credits.
An important part of your tax planning is managing your AGI to minimize the loss of these tax breaks. There's still time to reduce your AGI for 2002.
*Retirement plans. If you're covered by a 401(k) plan at work, be sure to contribute the maximum amount allowed. If you're self-employed, maximize your contribution to your SEP, Keogh, or other retirement plan. If you're eligible for a deductible IRA contribution, consider maximizing that too. Don't overlook the new catch-up contributions for IRAs and other plans if you're 50 or older.
*Investments. You can control your AGI by managing your taxable investment gains or losses. Taxes shouldn't drive your investment strategy, but they are an important factor in deciding when to sell your investments. By taking strategic capital losses, you can offset capital gains plus up to $3,000 of ordinary income.
*Self-employment income. If you are self-employed, you might have additional flexibility to manage AGI. For cash-basis taxpayers, delaying year-end billing can postpone income until next year, while last-minute purchases can reduce this year's self-employment income.
For planning assistance, call us.
S corporation salaries may get more attention from the IRS
If your business is operating as an S corporation, the salary you take is subject to both income and payroll taxes. The profits above that amount (i.e. dividends) are subject to income tax but not payroll taxes. You must take a reasonable wage for the work you do but no more than that. The question is: What is a reasonable salary?
A new Treasury Inspector General's report suggests that S corporations may be paying unreasonably low salaries to their shareholders to avoid payroll taxes. The report goes on to say that artificially low salaries are not getting enough attention from IRS auditors. In reviewing 84 returns previously audited by the IRS, inspectors discovered the average wage paid to S corporation shareholders was $5,300 while the average distribution paid to shareholders was over $349,000. Yet IRS auditors didn't address the reasonable compensation issue in 22% of these cases.
The Inspector's report recommends that IRS auditors be given more sophisticated software and extra technical training to help them identify abuses in this area. In addition, the report suggests that the IRS use its computers to help scrutinize shareholder salaries and dividends.
If you own an S corporation and would like more information about shareholder
compensation, contact us.
Looking for a tax shelter? Check out an individual 401(k) plan
Are you looking for a way to shelter more of your income from tax? Higher contribution limits, simplified administration, and a new tax credit are good reasons for one-owner businesses to look into an individual 401(k) plan. Plans designed to fit businesses where the owner is the only employee are less complex, less burdensome, and less costly to manage than traditional 401(k) plans.
Both incorporated and unincorporated businesses can set up an individual 401(k) plan. Even if you're self-employed, you're still considered an employee of the business. Since they allow higher contributions than other plans, such as SIMPLEs and SEPs, a 401(k) gives you more opportunity to cut your taxes while building a bigger retirement nest egg.
Under a 401(k) plan, you can elect to have the company contribute part of your earnings to the plan. Though these plan contributions are subject to social security tax, they are not subject to income tax until you withdraw money from the account. This year, you can contribute up to $11,000 of your earnings to a 401(k) plan. Those 50 and over can contribute an extra $1,000 for a total of $12,000. These limits increase over the coming years.
Your business can make tax-deductible matching contributions to your individual 401(k) plan. This year the maximum company contribution increased to the lesser of 25% of wages or $40,000 (for self-employeds the limit is 20% of net earnings or $40,000). Another important change is that employee contributions no longer count toward this percentage or dollar cap, so you can make a higher combined employer/employee contribution than before.
If you'd like to learn more about an individual 401(k) plan for your
business, give us a call.
What's New in Financial Strategies
SEC requires truth in labeling for mutual funds
The Securities and Exchange Commission has a new rule that may help reduce confusion when it comes to investing in mutual funds. The rule prohibits the use of mutual fund names that may mislead investors about a fund's investments and risks. Mutual fund companies are required to comply with the following requirements:
*When a mutual fund name suggests that the fund focuses on a particular type of investment, the fund must invest at least 80% of its assets in that type of investment. For example, 80% of XYZ Large Cap Fund's assets would have to be in large company stocks. Before this rule change, only 65% of a fund's assets were required to be consistent with its name.
*The rule forbids the use of any name suggesting that a fund or its securities are guaranteed or approved by the U.S. government.
*A fund can't change the 80% investment policy unless it gets prior approval from its shareholders or tells shareholders of the change at least 60 days in advance.
Of course, a fund's name doesn't tell you the whole story about a fund.
Before you invest in any fund, you should read the fund's prospectus. You
should also make sure that the fund is suitable for your current financial
situation, your age, and your risk tolerance. If you'd like assistance
in this area, call us.
Section 529 plans offer tax advantages
If it's your goal to send your child to college, you might want to check into a Section 529 plan. These plans have grown in popularity following last year's tax changes. Section 529 plans offer a tax-advantaged way to save for college.
What are Section 529 plans? Section 529 plans come in two forms - prepaid tuition plans and college savings plans.
*Prepaid tuition plans are designed to hedge against inflation. You can purchase tuition credits, at today's rates, that your child can redeem when he or she attends one of the plan's eligible colleges.
*College savings plans let you build a fund for your child's college expenses. These state-sponsored plans are probably what you've been hearing about in the news, and they are the focus of this article.
How do college savings plans work? Every state now has a college savings plan in place or under development. Typically, a parent or grandparent sets up and contributes to a plan for a child or grandchild, although you can establish one for anyone. Your contribution is considered a gift, and it's not tax-deductible.
You aren't allowed to contribute beyond what's considered necessary to pay for your child's college expenses (each plan sets its own limit). You remain in control of the fund, and you decide what happens to the funds that accumulate.
What are the tax benefits? Once in the plan, your money grows tax-free. Provided the funds are used to pay for your child's qualified college expenses, withdrawals are tax-free.
Most state plans are available to both residents and nonresidents. Although the federal income tax rules are the same for every state plan, the state income tax rules vary.
What if you change your mind? If your child decides not to go to college, you can pick another beneficiary of the same generation within your family without losing the plan's tax benefits. If you change your mind about keeping the plan or need your money, you can withdraw funds from the plan. But you'll generally owe income taxes and penalties.
Before you decide on a 529 college savings plan, do your homework. Although
college savings plans offer some nice tax advantages, they're not the best
choice for everyone. We encourage you to work with us to develop an education
funding plan tailored to your specific circumstances.
Chuckle of the Month
On the first day of school, a first grader handed his teacher a note
from his mother. The note read, "The opinions expressed by this child are
not necessarily those of his parents."
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 the ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.