October 2003 Online Advisor
Major Tax Deadlines
For October 2003
October 15 - Deadline for filing 2002 individual tax returns on second extensions.
October 15 - If you converted a regular IRA to a Roth IRA in 2002 and now want to switch back to a regular IRA, you have until October 15, 2003, to do so without penalty.
October 15 - Deadline for filing 2002 partnership and limited liability company returns on second extensions.
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
The IRS makes health care less costly for some
If you have a flexible spending account (FSA) to pay for medical expenses with pre-tax dollars, the IRS has good news for you.
You can use your FSA funds to pay for over-the-counter drugs, such as aspirin, flu medication, allergy pills, and cold medicines.
Vitamins and dietary supplements still don't qualify; nor do toiletries, cosmetics, and sundry items.
Unfortunately, the cost of over-the-counter drugs continues to be nondeductible as an itemized medical deduction.
Pay attention to taxes before lending money to relatives
You have the money, and someone in your family needs assistance. It feels great to help, but be careful or your loan could create tax problems for you. The IRS pays special attention to loans between family members.
You might ask why the IRS cares if you lend money to a relative. Over the years, some taxpayers took advantage of the difference between their tax rates and those of their children. They would make interest-free loans to children who would then invest the money. The resulting income would be taxed at the children's lower tax rates. The IRS effectively closed this loophole with new regulations that make using this strategy more difficult.
There are now rules that apply to loans between family members. The principal tax issues to be concerned about if you lend money to a relative are loan amount, loan interest rate, the use of loan proceeds, and loan documentation.
* Loan amount and interest rate. The IRS rules generally do not apply to loans under $10,000. On such loans, you generally may decide if you want to charge interest or not. If you decide to charge interest, you will pay tax on the amount of interest you receive each year.
On loans you make that exceed $10,000, you must calculate a required minimum rate of interest, even if you do not charge or receive interest from the borrower. The IRS provides some help here with monthly tax tables that indicate the minimum rate to charge based on the term of the loan. For example, short-term loans (3 years or less) made in January 2003 could be made at 1.81%, mid-term loans (3-9 years) could be made at 3.43%, and long-term loans (9 plus years) could be made at 4.90%.
On loans larger than $10,000, you are required to pay income tax on the interest you actually charge or the minimum rate, whichever is greater.
There is, however, a special rule for interest-free loans on amounts between $10,000 and $100,000. For loans in this range, the IRS allows you to pay tax on the lesser of the minimum rate of interest or your borrower's net investment income.
For example, if you made a five-year, $50,000 interest-free loan to your son in January of 2003, you would pay tax on $1,715 of interest each year. If your son's net investment income was less than $1,715, you would pay tax on only that lesser amount. If his net investment income was less than $1,000, a de minimus exception applies and no tax would be due.
* Loan documentation. You should always have a written loan agreement on family loans to document the transaction for the IRS. Without a formal agreement, the IRS may consider your loan a gift, and you could be subject to gift tax. A written agreement will also reduce misunderstandings among family members. Be cautious when dealing with the tax implications of any family loan. Please call us before you make your loan. We can help structure the terms to ensure your helpful act is gratifying and tax-smart for the entire family.
IRS extends depreciation deadline to December 31
In March 2002, tax legislation was passed allowing businesses to take 30% bonus depreciation for new equipment purchases made after September 10, 2001. By the time they knew about the law, many businesses had already filed their 2001 tax returns. So the IRS allowed additional time for businesses to amend returns to claim the tax break.
Now the IRS has further extended the deadline for claiming the bonus depreciation on a 2001 tax return. Businesses who failed to take 30% bonus depreciation but who now wish to claim it for 2001 have until December 31, 2003, to do so on amended returns.
If you wish to review the advisability of amending your return to claim the deduction, call our office as soon as possible.
What your accountant can do for your business
Our economy depends on small businesses to provide goods and services of every nature. Small businesses look to their accountants more than to anyone else for financial and business advice.
Some businesspeople think of accountants only as preparers of financial statements and tax reports.
Your accountant can, and should be, much more to you. Buried in the financial history of your company is a lot of good analytical information. Your accountant should use it to serve as your business advisor in the following ways:
* Review company controls to reduce waste and employee theft.
* Assist with long-range financial planning for both your business and your personal investment program.
* Assist with long-range forecasts of sales, net profit, plant and equipment acquisitions, and cash management.
* Act as liaison between you and government agencies, attorneys, insurance agents, real estate people, and your banker.
* Provide independent, specific advice on any number of business decisions.
* Compare your business with other companies in your industry and make specific recommendations to improve your profitability.
Have lunch with your accountant regularly and talk shop. He or she will tell you if you are approaching billable time. The information you give your accountant over lunch will be held in strict confidence; therefore, you have nothing to lose and much to gain from these frequent informal get-togethers.
What's New in Financial Strategies
Credit card companies offer rewards for not paying your bill
What's this? Credit card companies don't want you to pay? That's right. Credit card companies are starting to offer incentives to cardholders for carrying a balance on their credit cards and paying interest on that balance.
Rewards vary and can include such things as a rebate of a percentage of interest you pay or points toward airline tickets. You still have to pay your monthly minimum, but card companies want you to carry a balance because their earnings rely on your interest payments.
Don't be lured into this kind of offer. You're still way ahead financially to use credit sparingly and pay off your credit card bill in full every month. It makes no sense to pay interest charges on a card balance at rates ranging from 9% to 17% in order to get a 3% rebate or points toward some "reward."
Teach your children about money
Teaching your children to be money-smart is one of the greatest gifts you can give them. Too often, youngsters are sent into the world without the necessary financial skills to survive. The result can be massive consumer debt, lost opportunities, bankruptcy, and even failed relationships. With proper guidance, your kids can develop sound financial habits that will serve them a lifetime.
Dealing with money is a natural part of life. Learning to live within a budget, regardless of age or income, is one of the most important lessons you can impart to your child. Introduce budgeting at an early age. An allowance can be an excellent way to teach kids about saving and spending money. Establish a scheduled pay date and avoid giving advances. This discipline should reinforce planning and discourage impulse buying. Encourage your children to save at least half of what they earn for purchasing big-ticket items.
Your children also need to understand the "hidden" costs of their purchases. The stated price of an item isn't the only expense. For example, beyond the automobile sticker price, they need to budget for applicable sales and excise taxes. Then they face the ongoing costs of licensing, insurance, gas, and upkeep.
Finally, teach your children how to make their money work for them. Illustrate the power of compounding with the following example. If they save a dollar a day from age 12 until age 65, and earn an annual return of 6%, they will accumulate over $140,000. Invest that same amount at 10%, and the result will be over $725,000.
Create enthusiasm for investing by establishing specific family goals. Encourage each family member to contribute to a special investment account for a designated purpose, such as vacation. Your children will experience a sense of satisfaction as they watch their monthly investments grow toward that goal.
Instilling financial literacy at an early age is key to building a solid financial future. Raise money-smart kids if you want them to become money-smart adults.
Chuckle of the Month
Maybe typos don't matter so much after all. . .
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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.