April 2002 Online Advisor
Major Tax Deadlines
For April 2002
April 15 - Individual income tax returns for 2001 are due.
April 15 - 2001 calendar-year partnership returns are due.
April 15 - 2001 annual gift tax returns are due.
April 15 - Deadline for making 2001 IRA contributions.
April 15 - Deadline for employers to make contributions to certain retirement plans.
April 15 - First installment of 2002 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
Teachers get a new tax break
Starting this year, the latest tax law gives teachers a new "above-the-line" tax deduction. Teachers who spend their own money to buy supplemental classroom supplies can write off up to $250 in expenses without having to itemize deductions on their income tax return.
To qualify for this new deduction, you must be an elementary or secondary school teacher, instructor, counselor, or principal. Also you must work at least 900 hours during the school year. The deduction applies to amounts spent for books, supplies, equipment, and supplementary materials used in your classroom.
This new tax break is temporary. It only applies to amounts spent in 2002 and 2003. If you qualify for this tax break, you'll want to start saving receipts to back up the deduction on your 2002 tax return.
For details about this new law and for your other tax planning needs, give us a call. We are here to help.
Think taxes before you sell mutual fund shares
When you sell mutual fund shares, the tax computations can get tricky. You can choose among three methods to determine capital gains and losses for mutual fund shares that you've purchased in lots over a period of time. These include the first-in, first-out method; the specific-identification method; and the average-cost method.
*Under the first-in, first-out method, you assume the first shares sold are the first ones that you purchased. If your fund has steadily risen in value, this method results in the highest gain and the greatest tax.
*Under the average-cost method, you determine the cost basis by dividing the total cost of shares you've purchased by the total number of shares you own. If your fund has risen in value, this method may result in lower capital gains than the first-in, first-out method.
*Under the specific-identification method, you must specify exactly which shares you are selling. With proper planning, you can pick the shares that will minimize your taxes. For example, you might be able to pick shares that will create a loss on your tax return instead of a gain.
To aid in planning and to get the best tax result when you sell mutual fund shares, you need good records. Your recordkeeping should include your original cost of shares and the amount of dividends and capital gain distributions reinvested to buy additional shares. Good recordkeeping and tax planning help minimize your tax bill. For assistance, give us a call.
Frequent flier award miles may be tax-free
Recently the IRS settled a long-standing question. The value of frequent flier miles earned for business travel is tax-free income, even if you use the award miles for personal travel.
Most companies allow employees to keep the mileage awards they earn for business travel. Since frequent flier programs began back in 1981, the IRS has issued a series of conflicting announcements about the tax status of these awards. In an audit, it was unclear whether the IRS would try to include the value of these employer-provided mileage awards in a taxpayer's income. The IRS's recent announcement finally settles the issue.
This tax-free status applies only to frequent flier miles redeemed for travel. Some programs allow you to convert award miles to cash. If you redeem your miles for cash, you must report this income to the IRS.
New law adds "bonus" depreciation for businesses
The Job Creation and Worker Assistance Act of 2002 gives taxpayers an added incentive to invest in their businesses. Now businesses can use "bonus" depreciation to write off the cost of equipment purchases and property improvements more quickly than before.
Generally, you must write off or depreciate the cost of business equipment and improvements over the useful life of the asset. That means it may take years to receive the full tax break for the cost of new property.
There are a couple of ways to speed up your deduction. Some small businesses qualify for the Section 179 deduction which allows you to deduct up to $24,000 of equipment costs in the year of purchase. And now the new law adds another option for businesses called bonus depreciation.
What is bonus depreciation? Under the new law, businesses can write off up to 30% of the cost of certain equipment purchases and property improvements made after September 10, 2001, and before September 11, 2004. This is in addition to any Section 179 deduction and the regular first-year depreciation deduction.
For luxury autos and certain other vehicles purchased after September 10, 2001, the new law increases the first-year depreciation limit from $3,060 to $7,660.
What property qualifies for bonus depreciation? Bonus depreciation applies to new property, including vehicles, office furniture and equipment, most software, most machinery and equipment purchases, and certain property improvements.
Do you need to amend your 2001 tax return? Since the new law wasn't signed until March 9, 2002, you may have filed your 2001 income tax return before you became aware of this tax break. If so, you can amend your 2001 return to apply this new break to eligible purchases made after September 10, 2001.
For details about the new law or for assistance in preparing or amending your income tax return, give us a call. We are here to help.
What's New in Financial Strategies
Do "no-cost" mortgages really exist?
Low mortgage interest rates usually cause a flurry of home buying and refinancing. To generate business, some lenders advertise "no-cost" mortgages. But is there really such a thing as a no-cost mortgage?
When you obtain a home loan, you typically pay loan origination fees, appraisal fees, escrow fees, title insurance fees, document fees, processing fees, recording fees, and other miscellaneous fees. With a "no cost" loan, some or all of these expenses may be paid by the mortgage company.
In exchange for the mortgage company's picking up these costs, you typically pay a higher interest rate. And there may be other strings attached. For example, some no-cost mortgages call for a substantial prepayment penalty if you pay the loan off early. That means you might save money in the short-term, but you could end up paying out more money over the long run than with a traditional mortgage.
To determine whether a no-cost mortgage makes sense in your situation, make this comparison. Add up the total interest cost for the time you expect to pay on the no-cost mortgage. Then compare it with the total cost (interest and closing costs) of a traditional mortgage.
Before you borrow money, make sure you understand all the costs involved. If
we can help you analyze a loan's total cost, give us a call.
The way you own property has both legal and tax consequences, including the way property will transfer to your heirs and the taxes paid after your death. Joint tenancy with right of survivorship (JTROS) is one of the most common ways for family members to hold title to assets. While this choice is the right one in some cases, it could cause unforeseen problems in others.
Here are a few examples of what can happen with joint tenancy property.
Probate. Probate is the potentially lengthy and expensive process where a court approves your will and oversees the distribution of your assets according to the terms of your will. Many married couples choose joint tenancy to avoid probate. Holding title as joint tenants may avoid probate on the death of the first owner since assets generally pass directly to the joint owner. But when the second owner dies, these assets may have to pass through probate unless you take specific steps.
Control. Your will directs how, when, and to whom your assets go when you die. But when you hold property as joint tenants, your children or other heirs may not receive what you intended to give them. Joint tenancy assets generally pass directly to the surviving joint tenant(s) when you die regardless of what your will says.
Estate taxes. One common estate planning technique for wealthy couples is to set up a bypass trust or credit shelter trust to use each spouse's federal estate tax exemption. A common mistake is to leave assets titled in joint tenancy which may leave too few assets for the trust. As a result, you may forfeit your estate tax exemption causing your heirs to lose an unnecessary chunk of your estate to taxes.
Gift taxes. Adding a family member to the title of your property as a joint tenant may constitute an immediate gift. Depending on the value of your property and other factors, you may have to file a gift tax return, use up part or all of your lifetime gift exclusion, and perhaps even owe gift tax.
You should consider all the possible choices before you change or take title
to property. Your attorney can address the legal issues, and we can address
the tax issues with each of your choices. Call us to discuss what title choices
may be suitable in your situation.
Chuckle of the Month
"Isn't it appropriate that the month of tax begins with April Fool's Day
and ends with cries of 'May Day!' "
-- Robert Knauerhase
"This is the season of the year when we discover that we owe most of our
success to Uncle Sam."
-- The Wall Street Journal
"The trick is to stop thinking of it as 'your' money."
-- Revenue Auditor
"For every $50 you earn, you get $10 and they get $40. "
-- Jay Leno explaining Form 1040
"Death and taxes are both certain . . . but death isn't annual."
"Your federal government needs your money so that it can perform vital
services for you that you would not think up yourself in a million years."
-- Dave Barry
"Internal Revenue Service: The world's most successful mail order business."
-- Bob Goddard
"The hardest thing in the world to understand is the income tax."
-- Albert Einstein
"A taxpayer is someone who works for the federal government but who doesn't
have to take a civil service examination."
-- Ronald Reagan