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Online Advisor - April 2003


Major Tax Deadlines
For April 2003

April 1 - Deadline for taking your first required IRA distribution if you turned 70½ in 2002. Unless you're still working, this deadline also applies to your other retirement accounts (except for Roth IRAs).
April 15 - Individual income tax returns for 2002 are due.
April 15 - 2002 calendar-year partnership returns are due.
April 15 - 2002 annual gift tax returns are due.
April 15 - Deadline for making 2002 IRA contributions.
April 15 - Deadline for employers to make contributions to certain retirement plans.
April 15 - First installment of 2003 individual estimated tax is 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

Hybrid cars qualify for a $2,000 tax break

There's been a lot of recent publicity about the tax breaks available for large sport utility vehicles. When used as business vehicles, SUVs are not subject to the same depreciation limits as business cars are.

A tax break that every taxpayer can use is the $2,000 deduction allowed for the purchase of a new hybrid gas/electric car. You don't have to use the car in business to get the deduction, and you don't have to itemize deductions on your tax return to benefit from this tax break. You take the deduction in the year you purchase the car. And if you didn't take the deduction for a hybrid car you purchased in 2001 or 2002, you can file an amended return and get a refund.

For additional information or filing assistance, give us a call.



Heed the tax issues when you change jobs

As the economy continues to languish, moving to a new job and new location has become a reality for many workers. If you're considering such a move, you should be aware of some important tax issues.

* Retirement plans. If you have a retirement plan at work, you may have several choices upon leaving a job.

You can roll your retirement funds into an IRA, possibly roll the money into a new employer's plan, or perhaps even leave the money in your former employer's plan. Keep in mind that any amount distributed directly to you is subject to automatic 20% income tax withholding, and you may also face a 10% early withdrawal penalty.

* 401(k) loans. Facing a layoff or new job and need cash? Tap your 401(k) balance only as a last resort. If you have an existing 401(k) loan, pay it off. If you leave your employer and can't repay the loan within a preset time, the loan balance is considered a withdrawal. As such, you'll be hit with income taxes and possibly a 10% penalty.

* Job search expenses. Expenses incurred to search for a new job are tax deductible, even if your job search doesn't land you that coveted position. To qualify, you must be looking for a job in the same occupation.

* Moving expenses. If your job-related move qualifies (the IRS has both a distance and a time test), you can deduct the costs of moving your household goods and your family.

* Home sale. When you sell your home, you can exclude up to $250,000 of the gain from your taxes. The exclusion amount is $500,000 for married couples filing a joint return. To qualify for the full exclusion, you must have owned and occupied the house as your main home for two out of the five years prior to its sale. A partial exclusion may apply if you fail the two-year test due to a job-related move.

If you're considering a job-related move and want help sorting out the tax issues, give us a call.



New Business

"Money service businesses" must use new IRS form

The IRS recently announced a change in one of the forms that certain businesses are required to file. More than 200,000 so-called "money service businesses" will be affected by the change.

Businesses that issue or redeem money orders or travelers checks or that transmit money are required to report "suspicious" transactions to the IRS if they involve $2,000 or more. Convenience stores, grocery stores, liquor stores, service stations, drug stores, and even the U.S. Postal Service are included in this requirement.

The new form, TDF 90-22.56, replaces Form TDF 90-22.47 previously used for reporting suspicious money transactions. The effective date for required use of the new form is March 1, 2003. The new forms are available by calling 800-829-3676, or they can be downloaded from three different government Web sites: IRS (, the Financial Crimes Enforcement Network (, and a site set up for money service businesses (



Smart Business

Is your internal security at risk?

Most business owners and managers are aware of external security risks, but there are also internal risks that you can't afford to ignore. Lacking the resources large corporations have to hire their own security firms, what can you do to improve security in your workplace? Here are some suggestions.

* Hiring and training employees. Perform pre-employment background checks with an eye for criminal history, workplace violence, or malicious mischief.

Enlist the help of your local police department or other community organizations to help train employees how to react in dangerous situations.

Establishing simple internal controls, such as cross-training employees and limiting the duties assigned to any one employee, can do wonders to reduce the chances of employee fraud and mischief.

* Protecting information. Take advantage of security features built into computers and network operating systems. Configure your system to give only authorized employees access to files. Perform regular computer backups and store them securely off the premises.

Inexpensive firewall software can block unauthorized access to your computer system and protect it from viruses. Keep the most current update of this software installed on your computers.

While there's no such thing as absolute security, implementing these simple suggestions may discourage would-be troublemakers and make it easier to detect them.



What's New in Financial Strategies

Refinancing hits all-time high

Homeowners are refinancing their home mortgages in record numbers. According to the Mortgage Bankers Association of America, the number of recent refinancing applications was five times greater than a year ago. Many homeowners are refinancing for a second or even third time.

If you refinance the mortgage on your home, don't overlook the tax deduction available for the points you pay on the loan. Here are the rules:

Points paid on a refinanced mortgage do not qualify for a current tax deduction; you deduct them prorata over the life of the loan. There is an exception if part of the refinanced funds are spent on home improvements. You may be able to deduct the same percentage of points paid as the percentage of the loan that was used for improvements. If you refinance more than once, and in so doing pay off a prior refinancing, the balance of points not yet deducted becomes deductible in the year of the new refinancing.

For additional information or assistance, give us a call.



A life insurance trust could cut your taxes

As you probably know, life insurance is often purchased to provide a source of cash to help pay estate taxes. If you own your life insurance policy, the proceeds paid at your death will be part of your estate and, as such, they may be subject to estate tax. However, life insurance proceeds might not be subject to estate taxes if your insurance policy is owned by a special type of trust called an irrevocable life insurance trust.

* How does the trust work? A life insurance trust is a separate legal entity that is established to own a life insurance policy and pay the policy premiums.

If you're planning to buy a new policy, the smart thing to do is to set up the trust first and have it buy the insurance. Then you never are the policy owner. If you already own the insurance policy, you can set up the trust and transfer the policy to it. If the transfer is done correctly and you've paid careful attention to the tax and legal requirements, the insurance proceeds should be removed from your estate.

Whether you can benefit from a life insurance trust depends on your individual situation. Though the Tax Act of 2001 increases the amount that can pass to your beneficiaries free of estate tax and eliminates the estate tax in 2010, a trust may still be a useful planning tool.

* How large is your estate? The amount exempt from federal estate tax rises from $1,000,000 in 2003 to $3,500,000 in 2009. If your estate exceeds the current exemption amount, or is likely to grow beyond the exemption amount in the future, an irrevocable life insurance trust could help in two ways. First, making gifts of policies or premium payments to the trust removes their value from your estate. Second, the policy proceeds may provide the cash your heirs need to pay your estate expenses.

* What type of assets do you own? Say the bulk of your estate is an IRA or a 401(k) account. If your heirs are forced to tap these accounts in order to pay your estate expenses, ordinary income tax is due and tax-deferred growth stops. An irrevocable trust could help your heirs avoid that outcome by giving them another source of cash.

If your estate consists mainly of real estate or a family business, your heirs may not be able to quickly liquidate assets or raise money to pay estate expenses. Insurance proceeds held in a trust may help provide liquidity.

* What does the future hold? The tax rules change constantly. The same tax law that gradually reduces and eventually eliminates the estate tax in 2010 restores it in 2011. (A current tax proposal could alter these dates, further complicating the outlook on estate taxation.)

If you want help evaluating a life insurance trust in your situation, contact us and your attorney.



Chuckle of the Month

"The most remarkable thing about my mother is that for 30 years she served the family nothing but leftovers. The original meal has never been found." . . . Calvin Trillin


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.


  Copyright 1998 Richard C. Woodbury P.C. CPA