March 2002 Online Advisor

Major Tax Deadlines

For March 2002

March 1 - Farmers and fishermen who did not make 2001 estimated tax payments must file 2001 tax returns and pay taxes in full.

March 15 - 2001 calendar-year corporation income tax returns are due.

March 15 - Deadline for calendar-year corporations to contribute to certain retirement accounts and still receive a tax deduction for 2001.


For April 2002

April 1 - Deadline for taking your first required IRA distribution if you turned 70½ in 2001. Unless you're still working, this deadline also applies to your other retirement accounts.

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.

IRS releases latest tax return statistics

The IRS recently published data about income, tax deductions, and tax credits reported on 1999 tax returns. Here's a glimpse at the numbers.

*Sixty-four percent of taxpayers with adjusted gross income from $50,000 to $75,000 itemized their deductions. They claimed an average $14,185 in total itemized deductions.

*Eighty-two percent of taxpayers with adjusted gross income from $75,000 to $100,000 itemized their deductions. They claimed an average $17,179 in total itemized deductions.

*Ninety-one percent of taxpayers with adjusted gross income from $100,000 to $200,000 itemized their deductions. They claimed an average of $23,745 in total itemized deductions.

*Ninety-three percent of taxpayers with adjusted gross income from $200,000 to $500,000 itemized their deductions. They claimed an average of $41,569 in total itemized deductions.

Remember that the figures above are averages. Only the amounts you actually pay are deductible. Also, you should claim all the deductions you're entitled to even if you fall above these averages.

If you'd like more information about itemized deductions, call our office. We are here to see you pay no more tax than the law requires.

Taxes play a role in your investment strategy

Are you wondering how to get a higher return from your investments without taking on any more risk? If you're like many investors, some simple tax planning might do the trick. By setting up your investment portfolio to take advantage of the current tax rules, you may be able to increase the after-tax return on your investments.

*Tax-deferred. Start by evaluating whether you're maximizing your tax-deferred investment opportunities, such as IRAs, 401(k)s, and other retirement plans. Remember, you owe no taxes on the investment income earned within these accounts until you withdraw the money. The contribution limits for all retirement plans increase this year, so you can put aside even more investment dollars in these tax-deferred accounts.

How advantageous is tax-deferred growth? If you invest $10,000 in a tax-deferred account earning 8% a year, your investment will grow to $46,600 in 20 years. Assuming a 35% tax rate, a similar investment held in a taxable account would grow to just $27,600.

*Tax-free. Don't overlook the tax-free savings opportunities currently available to you, including Roth IRAs for your retirement or education savings accounts and Section 529 plans for your children's education. When you withdraw money from these accounts, you'll generally owe no income tax on the earnings, as long as certain conditions are met.

If you're in one of the higher tax brackets, switching to tax-exempt bonds and bond funds might increase the after-tax return on your investments. But be aware that this strategy could also trigger the alternative minimum tax or subject otherwise tax-free social security benefits to tax.

*Which account? As you choose investments, consider which type of investment belongs in which type of account. Keep in mind that investments like tax-free municipal bonds should not be held in retirement accounts. You'll earn a lower return and convert what would be tax-free income into a taxable distribution.

High-dividend stocks may be a good choice for your tax-deferred accounts. But growth stocks, where the return comes mostly from capital appreciation, should probably go in your taxable accounts. There you can take advantage of the lower tax rates on long-term capital gains.

The rules for Roth IRAs are different, because Roth earnings can be tax-free. Consider keeping those investments which generate the greatest total earnings in your Roth IRA.

To discuss the role that taxes play in your investment strategy, please give us a call.

New Business

Step up your security measures

Sabotage, retaliation, and theft are valid concerns for every business, especially for those contemplating layoffs. Here are some practical steps you can take to protect your business.

Evaluate your internal controls. Physical security of assets, segregation of employee duties, and cross-training of employees are a few examples of controls that could cut your business losses.

Protect your technology. Perform regular backups and store them securely off the premises. Take back laptop computers and lock employees out of the computer network as soon as job cuts occur. Your company should also have policies on the security and use of laptop computers.

Inform your employees that company information (client lists, customer data, trade secrets, etc.) is legally protected. Misuse can result in dismissal, civil damages, fines, and jail time.

It's often said that an ounce of prevention is worth a pound of cure. If you'd like to discuss ideas for protecting your business, call us.

Smart Business

Make the right choices for your new business

Part of the challenge in starting a new business is making the right choices before you begin. Here are some issues you need to consider to help ensure your business's survival.

*Choose the right legal form. The form of business entity that you choose for your new business can make a difference in the taxes you pay, the costs of doing business, and the amount of paperwork and red tape you'll have. There are several forms to choose from, and each has advantages and drawbacks.

Sole proprietorships are perhaps the easiest form of business to operate, but they provide no protection from personal liability.

Corporations are separate legal entities that pay their own income tax and provide liability protection to their owners, but they can be costly to set up and administer.

Limited liability companies and S corporations are hybrid entities that provide liability protection to their owners, but owners report profits or losses on their personal tax returns.

*Plan your cash needs. You'll probably need capital to start your business, plus a cash reserve until your business becomes self-sufficient. Plan your cash needs carefully and realistically, and provide a generous cushion for setbacks and unexpected expenses.

*Decide to lease or buy. The main advantage of leasing the building and/or equipment your business will need is that your initial cash outlay is generally less than if you purchase. However, the main disadvantage of leasing is that you could pay out more over the term of the lease than if you purchased the asset. And when the lease term expires, you must return the asset or buy it.

One way to determine whether buying or leasing is better is to do a cash flow analysis. You will then have an estimate of how much cash you would need to set aside today to cover the cost of each alternative. To do an analysis, you'll need to consider such things as the terms of the lease and purchase options, the asset's expected useful life and its estimated value at the end of its life, interest rates, and income tax rates.

*Hire the right employees. You need a plan to attract the best people. What special skills are you looking for? How much can you afford to pay? What benefits (health insurance, sick or vacation pay, etc.) will you offer? Would you be better off contracting for services rather than hiring employees?

*Consider pricing issues. Pricing is more than just determining how much to charge for a product or service. Customers now look at delivery time, return policies, and technical assistance as part of what they are buying. While it can be difficult to compete on price with large companies that can buy in quantity, you might offer more customized services to support a higher price.

*Establish credit policies. Many business owners are so concerned about marketing and selling their product or service that they neglect billing and collection efforts. Every new business should establish credit, billing, and collection procedures.

For start-up assistance, call us.

What's New in Financial Strategies

If it sounds too good to be true, it usually is

The Securities and Exchange Commission (SEC) recently launched a phony Web site at www.mcwhortle.com to educate the public about the telltale signs of investment fraud. This project illustrates how easy it is to be scammed. In the first three days after the bogus site was launched, it received more than 150,000 hits.
If you rush into investment "opportunities" without doing your homework, you stand to lose more than your hard-earned money. Providing personal information, such as your social security number and credit card number, gives con artists the tools they need to steal your identity.

What can you do to protect yourself against fraud? The SEC offers the following warnings:

*If it sounds too good to be true, it is.

*"Guaranteed returns" aren't.
Check out the company before you invest. If you've never heard of a company, broker, or advisor, spend some time checking them out before you invest.

*If it is that good, it will wait. Don't be pressured by a sense of urgency.

*Understand your investments. If you don't understand an investment, don't buy it.

*Beauty isn't everything. Don't be fooled by an impressive looking Web site. Having a Web site doesn't mean a business is legitimate.

If you'd like our assistance with reviewing a potential investment opportunity, give us a call. We are here to help.

A durable power of attorney may protect your loved ones

A general power of attorney is a legal document by which you authorize another person (your agent) to act on your behalf. The power can be as broad or as specific as you want it. Unfortunately, the general power of attorney terminates if you become incompetent or mentally disabled. This is usually the time when it is most needed.

The solution to this problem is the durable power of attorney (DPOA). This type of power of attorney remains in force even if you become disabled. It can provide considerable savings of time, expense, and court proceedings. To be recognized, the DPOA must contain special language, so you'll want to check with your attorney.

Everyone should consider a durable power of attorney in his or her financial planning. An injury, stroke, or heart attack can occur in the blink of an eye. The medical burdens imposed on your family at such times should not be aggravated by financial concerns. Yet, lacking a DPOA, dispositions of property could be subject to court proceedings which will only add stress to an already distressing situation.

Select your agent carefully, since the power of attorney may give him or her broad leeway with your financial affairs. Alternate agents should be named in case your primary agent can't or won't act. You can change or revoke a DPOA at any time as long as you are competent.

Your attorney can prepare a durable power of attorney suited to your specific situation and advise you on its use.

Chuckle of the Month

A state patrolman pulled over a driver going 22 miles per hour in a 55-mph zone. He then had to explain that 22 was the highway route number, not the speed limit.

When he asked why the passengers seemed terrified, the driver explained that they had just gotten off Route 119.

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