20017 E. Sharon Avenue
Houghton, MI 49931 USA
Phone (906) 482-1305
Fax (906)482-9555


Online Advisor
October 2002

Major Tax Deadlines for October 2002

* October 1 - Deadline for self-employeds and small businesses to establish a SIMPLE retirement plan for 2002.
* October 15 - Deadline for filing 2001 individual tax returns on second extensions.
* October 15 - If you converted a regular IRA to a Roth IRA in 2001 and now want to switch back to a regular IRA, you have until October 15, 2002, to do so without penalty. (See What's New in Taxes.)
* October 15 - Deadline for making the "deemed sale" election on 2001 returns. (See What's New in Taxes.)
* October 31 - Deadline for making or revoking a 2001 net operating loss election.

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

Pay attention to these important October tax deadlines

October 15, 2002, is your last chance to make two important tax decisions for 2001 individual returns.

* 2001 "deemed sale" election. In 2001, capital gain tax rates dropped by 2% for assets held more than five years. Higher-bracket taxpayers can use the lower rate only on assets purchased after 2000. A special "deemed sale" election allows taxpayers to treat an asset acquired before 2001 as if it were acquired on January 1, 2001. Individuals making this election treat the asset as if it were sold on January 1, 2001, and pay any income tax due on this phantom "sale." Then when the asset is actually sold five or more years later, the gain will be taxed at 18% rather than 20%.

The deemed sale election might make sense in situations where an asset's pre-2001 gain is negligible, but you expect the asset to substantially appreciate in the future, or you have excess 2001 capital losses to offset your deemed sale gains. If you've already filed your 2001 return, you have until October 15, 2002, to amend your return and make a deemed sale election for 2001.

* 2001 Roth conversion. When you convert a traditional IRA to a Roth, you owe income tax based on the value of the IRA on the date of the conversion. If your IRA's value has dropped since you converted it to a Roth, you are paying tax on value that is no longer there. Fortunately, you have until October 15, 2002, to reverse a 2001 Roth conversion and eliminate the tax bill. If you've already filed your 2001 return, you'll have to amend your return to get a refund. The IRA rules are complex. If you would like more information on reversing your Roth conversion, please call us.


Make tax-smart investment moves at year-end

Volatile financial markets can create tax planning opportunities, and you should be especially alert for such opportunities as 2002 winds down.

* Capital losses. If you're selling investments to weed out poor performers, remember that losses can cut your tax bill. You can use capital losses to offset taxable gains plus up to $3,000 of other income. If you still have losses left over, you can carry them forward to use in future years.

* Netting gains and losses. If you've racked up excess stock losses outside your retirement accounts this year, consider selling some winners by December 31 to offset those losses. These gains will be entirely tax-free to the extent of your losses.

For example, let's say you own two stock mutual funds, one that has increased in value and one that has lost money since you bought it. In a situation like this, you might want to realize both your gain and loss, offsetting one with the other. Or, you might want to take only your loss. Then, to avoid a "wash sale," you might purchase a fund that is similar (but not identical) to the one you sold. Consider transaction fees in deciding whether these strategies make sense for you.

* Capital gain distributions. On the subject of mutual funds, a few cautions are in order. Mutual funds generally distribute capital gains every year. Shareholders must pay tax on their share of the distribution even though they receive no actual cash. Call your mutual fund and ask for an estimate of their 2002 capital gain distributions. Once you have this information, you may be able to do some planning, instead of being surprised at the last minute.

If you are thinking about buying or selling mutual fund shares between now and the end of the year, you should also find out the date when the fund's dividend becomes official. In a taxable account, you should generally make your investment after this date. Conversely, if you are planning to sell a mutual fund, consider doing so before the distribution date.

* Appreciated stock. If you have shares of an appreciated stock or mutual fund, you can use them, instead of cash, to make a charitable contribution. You'll generally be able to deduct the full market value of your security as an itemized deduction, but you won't have to pay tax on the built-in gain.

You can also use appreciated securities to make family gifts. If the family member is in a lower tax bracket, he or she can sell the security and pay capital gains tax at a lower rate than yours.

Contact our office if you'd like assistance with your tax planning.


New Business

IRS announces 2003 mileage rates

If you use your personal car for business, keep track of your mileage. It could result in a tax deduction, one that many folks overlook. The IRS just announced the new mileage rates for 2003.

* Business driving. For 2003, the standard rate for business driving will drop from the current 36.5 cents to 36 cents per mile.

* Job-related moves. Next year the rate for moving-related mileage increases to 13 cents per mile, up from 12 cents in 2002.

* Medical mileage. The standard mileage rate for driving to or from medical appointments is 13 cents per mile for 2002. For 2003, the rate drops to 12 cents per mile.

* Charitable driving. The mileage rate for charitable driving will remain at 14 cents per mile for 2003.

Keeping track of your mileage throughout the year can mean a lower tax bill. Call us if you have questions about your recordkeeping requirements.


Smart Business

Keep business costs under control

For small businesses, cost control can make the difference between survival and failure, between staying ahead of your competition or getting run over. Here are a few suggestions for keeping costs in line.

* Stay in touch with your finances. Some small business owners open their own mail, just to know what's going on in certain areas. They also like to find out if customers are complaining, and why. If you currently calculate profit and loss quarterly, or even monthly, you may want to calculate profit and loss more often — just to know where you stand financially.

* Control overhead. Do you really need to own your vehicles or offices, or could you lease for less? How much computer power do you really need? Are you paying for a luxury car when a less expensive one would serve just as well?

* Be careful when borrowing. Shop around and compare loan rates. With a little planning, you can often take advantage of bank rates, which tend to be lower than either credit cards or lines of credit.

* Check with industry groups. Discounts are often available for such items as group health plans and long-distance phone calls.

* Fight the urge to make across-the-board cuts. It's tempting to cut everything by ten percent, but don't. Study your costs and be selective. You may be cutting muscle — costs that directly contribute to revenue — instead of fat. Attack causes, not symptoms.

* Give your employees an opportunity to help. Solicit their input. Let them know your financial objectives and costs, and reward those who help make the company more profitable.

If you'd like help analyzing costs and finding ways to control them, give our office a call.


What's New in Financial Strategies

Read the fine print on "guaranteed" funds

Bank depositors rely on the FDIC to protect them from losing money. Government bonds are another safe investment. But if you invest in stocks or mutual funds, you could lose some or all of your investment when the share value drops. There is, however, one type of mutual fund that guarantees you won't lose your money.

* What do these funds offer? Principal-protected funds usually invest in a mixture of stocks and government bonds. In addition, investments are typically protected by an insurance policy. These funds guarantee that if you leave your money invested for a set period of time, usually five or ten years, you'll get your money back even if the fund's shares decline in value.

* What is the downside? These funds have extremely high fees. Some charge over 5% when you buy and sell shares. The annual fund expenses for these funds average 1.5%. The high fees are necessary to cover the cost of insurance policies that back up the principal guarantee.

Also, your money could be tied up for a long time. If you sell your shares before they mature, you'll receive market value for the shares which may be more or less than what you paid for them. Finally, although these funds guarantee you'll get your initial investment back, they do not guarantee a return on your investment.

Like all investments, you should understand what you are buying before you invest your money. For more information about these funds, contact our office.


Protect yourself against identity theft

The Federal Trade Commission says that identity theft was its number one consumer complaint in 2001. Identity theft occurs when someone fraudulently uses your personal information — your social security number, driver's license number, birth date, etc. — to apply for credit, services, or benefits using your name. Lawsuits, garnished wages, and tax liens can result. To make matters worse, you may not discover the theft quickly.

How can you protect yourself? Here are some practical steps you can take.

* Watch the numbers. Store your social security card in a safe place. Don't print your social security number on your checks, and refrain from using it as a password on your financial or Internet accounts. If you are required to provide your social security number, find out how it will be used and how it will be protected.

* Keep your data confidential. Give out your birth date only when absolutely necessary. Leave off either the day or the year, if possible.

* Prevent your account numbers from falling into the wrong hands by shredding documents rather than simply discarding them. Shred all discarded mail that contains personal information, such as pre-approved credit offers.

* Monitor your credit. Check your monthly bills to make sure all charges are legitimate. Investigate unusual items immediately.

* Consider lowering the limit on your credit cards to reduce the extent of fraudulent activity if a card is stolen or lost. Cancel cards you no longer use. Order a credit report at least annually. Check it for errors and notify the credit bureau if you find any.

Take measures to protect your personal information. For more information about identity theft, please contact us.


Chuckle of the Month

Simple truths children have learned:

* No matter how hard you try, you can't baptize cats.
* When your Mom is mad at your Dad, don't let her brush your hair.
* You can't trust dogs to watch your food.
* You can't hide broccoli in a glass of milk.
* Puppies still have bad breath even after eating a Tic-Tac.

Simple truths adults have learned:

* Raising teenagers is like trying to nail Jell-O to a tree.
* Middle age is when you choose cereal for the fiber, not the toy.
* If you can remain calm, you don't have all the facts.
* You're getting old when you stoop to tie your shoes and wonder what else you can do while you're down there.
* You appreciate the fact that wrinkles don't hurt.


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