Online Advisor - August 2003
Major Tax Deadlines
For August 2003
August 15 - Due date for filing 2002 individual income tax returns that received an automatic extension of the April filing deadline. If a second extension is required, Form 2688 must be filed with the IRS explaining why additional time is needed.
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
More tax change on the agenda
A major tax law was just passed in May, but it appears that Congress has more tax legislation on its agenda for 2003. Here are a few of the issues lawmakers still hope to address this year.
* Increasing the child tax credit for low-income taxpayers.
* Raising the contribution limits for retirement plans.
* Adding tax incentives to encourage charitable giving.
* Extending tax credits scheduled to expire on December 31.
Keep informed about these and other possible tax changes as you do your tax planning for the remainder of the year.
When can you tap your IRA penalty-free?
The tax law generally makes you pay a 10% penalty if you take money out of an IRA before you reach age 59½. However, there are several ways to tap your IRA earlier without incurring the 10% penalty.
* Equal withdrawals. One way is to elect to take substantially equal withdrawals based on your life expectancy or the joint life expectancies of you and your designated beneficiary.
* Home and education. You may also take money from your IRA to help cover certain expenses. For example, if you, your child, or grandchild is purchasing a home and the purchaser hasn't owned a home within the last two years, you can withdraw, penalty-free, up to $10,000 to use towards this transaction. Likewise, if you, your spouse, child, or grandchild attends college or graduate school, you can take penalty-free distributions to cover eligible higher education costs.
* Medical expenses. The IRS also allows penalty-free access to IRAs when taxpayers face certain difficulties. For example, if your medical expenses exceed 7½% of your adjusted gross income, you may make a penalty-free withdrawal of up to the amount by which these expenses exceed the 7½% floor. Similarly, if you have been unemployed for at least 12 consecutive weeks, you can take a penalty-free distribution to cover medical insurance premiums. Also, you are exempt from the early withdrawal penalty if you become disabled.
Remember, before you make any withdrawals, it is best to contact us to be sure you're not going to get hit with a tax surprise after the fact. Also, remember that you will most likely owe regular income tax on the money withdrawn even if the withdrawal is penalty-free.
Obesity has become a business issue
As health care costs continue to rise, businesses are beginning to focus on a major health concern: obesity. A recent federally funded study estimated that 9% of health care spending each year is attributable to overweight and obesity. By comparison, costs related to smoking run from 6% to 14%.
Overweight workers cost employers billions of dollars each year. Researchers found that annual medical costs for an obese individual run almost 38% more than those of an individual of normal weight.
While companies won't find it easy to get workers to lighten up, making even a small effort may pay off. Serving healthier choices in the company lunch room or setting up exercise programs at work are two beginning steps your company might consider.
Problem customers cut into your profits
Sometimes in order to serve your customers better you have to get rid of the problem customers. Problem customers tend to complain about your prices or rates. They are slow payers, and they may be rude to you and your employees. They have had problems with all of your competitors. They cannot decide what they want, and they waste your time. They make unrealistic demands on your business. Problem customers are a drain on the resources of your business, and chances are they are not profitable.
* Separate the best and the worst. You should evaluate your customer base to determine your best and your worst customers. Then decide which of the worst customers can be salvaged and which should be eliminated. You can do this by examining the facts and figures. Determine the profitability of each customer. Also, ask for employee input to get a more complete evaluation.
* Some can be salvaged. Some unprofitable customers can be salvaged by reducing the costs of servicing them. Eliminating discounts, changing payment policies, increasing prices, and even renegotiating contracts can help. Customers who are profitable but are still problematic because of the way they deal with your company can be saved if you can eliminate the source of the problem.
* Change your policies. If an individual customer is a problem because of unacceptable behavior, refuse to deal with that individual. If the problem customer is a slow-payer, change your sales terms to them. If you sell merchandise, have the slow-payer pay for freight or have them pay COD. For any returned merchandise, charge a restocking fee. If your business is service-oriented, have the slow-paying customer pay a large deposit before you begin any work and have them pay for everything you do for them.
* When its time to say goodbye. There are several methods that can be used to eliminate a customer. You can suggest that the customer try a competitor. Another method is to have your worst customers eliminate themselves by providing them with the lowest level of service and having them pay for any additional services you provide. Sometimes the best approach is to be blunt and to tell the bad customer in person or by telephone exactly what the problems are.
You should view the elimination of your worst customers as a way of making your business better, more productive, and more profitable. But dont let restrictive policies for dealing with bad customers affect the liberal treatment your good customers deserve and expect.
What's New in Financial Strategies
Survey shows declining savings
A recent survey has shown that employees are cutting back on their participation in their company's 401(k) plan. Thanks to three straight years of declining stock prices, workers are finding their retirement nest egg severely diminished. Unfortunately, the response to the bad news has been to save less for retirement. Unless the trend is reversed, more people will have to delay retirement, work part-time in retirement, or plan to have less money to spend in retirement.
Timing matters when you sell a stock
As you ponder whether to hold or sell a stock, be sure to consider the tax effects of the sale. The tax ramifications are largely dependent on your income tax rate and whether you have a loser or a winner.
Selling a loser. Let's say that you've concluded that XYZ stock is a loser and has little chance of giving you the return you had hoped for. The decision here is relatively easy. Dump the stock so that you can deduct the loss against capital gains that you already have taken. If you don't have any capital gains, you can still deduct up to $3,000 of the loss against other income. If your losses are larger than your capital gains plus $3,000, you can deduct the remaining loss in future years.
What if you believe that there is a chance the stock price will bounce back? You may still want to sell the stock and consider buying it back after 30 days. The IRS allows you to deduct the loss if you don't buy back the stock before a 30-day period.
Selling a winner. Income tax laws favor long-term gains over short-term gains. If you hold a stock for more than 12 months, the gain is taxed at long-term capital gain rates of 5% to 15% instead of ordinary income tax rates that can be as high as 35%. On a $10,000 gain, this can mean a substantial tax savings.
But what if you believe the stock may take a dive before the 12-month holding period? You may want to figure out how much the stock can drop in value before the tax savings of a long-term holding period are lost.
To illustrate, let's assume that if you sold ABC stock today, you would realize a short-term gain of $10,000. Your after-tax profit would be $6,500, assuming your ordinary tax rate is 35%. In order to achieve the same after-tax profit, the long-term gain need only be $7,647 ($6,500 divided by .85 [1.00 minus .15, the capital gains tax you would pay]). Therefore, the market value of the stock can drop by $2,353 before the tax benefit of holding the stock for 12 months is lost.
As you analyze your portfolio, give us a call for assistance with the tax issues involved.
Chuckle of the Month
If you think you're too small to make a difference, you haven't been in bed with a mosquito.
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.