November 2003 Online Advisor
Major Tax Deadlines
For November 2003
During November: It's wise to estimate your 2003 income tax liability and review your options for minimizing your 2003 taxes. Call us if you'd like to schedule a tax-planning session.
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
IRS gives relief to disaster victims
The IRS recently announced special tax relief for certain taxpayers affected
by Hurricane Isabel or the California wildfires. If you had losses due to Hurricane
Isabel, the California fires, or some other natural disaster this year, be aware
that there are several provisions in the tax law that may provide relief.
* Extended tax deadline and interest abatement. The IRS is authorized to postpone the deadlines for filing and paying taxes by up to 120 days in a Presidentially-declared disaster area. Also, the IRS must remove interest penalties that result from your delay in paying any tax during the extended filing period.
* Faster refund. Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it in the year the loss occurs, or it can be claimed on your prior year's tax return. Amending your prior year's return may allow you to get much-needed cash now instead of waiting to deduct the loss on your 2003 return.
* Special tax treatment. If the insurance proceeds exceed the tax basis of your property, the resulting casualty gain may receive special tax treatment.
If you suffered a casualty this year, see us for any additional information you need.
Act now if you want to lower your 2003 tax bill
There is very little time left to take steps to reduce your tax bill for 2003. Consider these suggestions:
If you haven't already done so, estimate your income and deductions for this year. Generally, it makes sense to defer income until next year and pull deductions into the current year. However, because many tax breaks are subject to income limitations, you may need a different strategy.
Review your investment portfolio to see if you have underperfoming investments you want to sell at a loss. Capital losses can be used to offset first the capital gains you've taken during the year, and then up to $3,000 of ordinary income.
In reviewing your investments, be aware that the long-term capital gains tax rates for investments sold after May 5, 2003, have dropped from 10% to 5% for those in the two lower tax brackets and from 20% to 15% for all other taxpayers. Remember, too, that dividends are now taxed at these lower rates rather than at higher ordinary income rates. Factor these changes into your year-end selling and portfolio rebalancing decisions.
Making deductible contributions to retirement plans is still a good way to cut your current-year tax bill.
Your tax planning should consider your exposure to the alternative minimum tax (AMT). It's estimated that 1.3 million taxpayers will owe the AMT this year, including many middle-income taxpayers.
If you're planning a change in marital status at year-end, find out whether a slight change in dates could save significant tax dollars.
There may be many other year-end moves available to you, so take time to consider your options. For assistance, contact our office.
SUV tax break may be cut
Business owners got a big break in the 2003 tax law an increase in the amount that can be expensed in the first year a piece of business equipment is purchased. For 2003 through 2005, the annual expensing allowance is $100,000. That includes purchases of business vehicles that weigh 6,000 pounds or more.
Many were critical of having this tax break apply to big sports utility vehicles used in business, suggesting the law was subsidizing gas guzzlers.
The Senate Finance Committee recently took the first step in what may be the end to this huge tax break. The committee voted to cut the expensing option for such vehicles to $25,000. The House has not as yet acted to change the current law.
Business or hobby? What a tax difference a word makes
The tax law requires you to pay tax on all income that you earn. This includes business income and hobby income.
If you are engaged in a business, you can deduct all of your allowable expenses, even if these expenses exceed the amount of income generated by your business. However, if you are engaged in a hobby, you can only deduct expenses up to the amount of income you earn AND only if you itemize deductions.
Example: Ringo is a drummer and earned $7,500 this year from playing in a band. He also incurred $10,500 in expenses drum repairs, travel, etc. If Ringo is engaged in a business, he can deduct all of his $10,500 expenses. If he is engaged in a hobby, he can only deduct $7,500.
The IRS test
Sometimes it can be difficult to determine whether your activity is a business or a hobby. To help resolve the controversy, the IRS has developed a three-out-of-five-year test. If your activity shows a net profit for three out of five consecutive years, it is presumed to be a business. Conversely, if your activity shows a net loss for three out of five consecutive years, it is presumed to be a hobby. (In the case of horse-related activities, the test is two out of seven years.)
Overcoming the hobby presumption
If you are engaged in an activity and have net losses in three out of five years, you still may be able to deduct all of your expenses, but you'll have to prove to the IRS that your activity is a bona fide business and not a hobby. The IRS will consider the following factors:
* Total gross income. The more income generated by the activity, the less likely
it will be deemed a hobby. Gross income of $10,000 or less supports a hobby
* Time devoted to activity. If you devote the majority of your working day (6-8 hours) to the activity, it tends to favor business classification.
* Personal enjoyment derived. If your activity involves painting, golfing, playing a musical instrument, or a similar endeavor that can be associated with personal enjoyment, the IRS will be more likely to conclude it is a hobby.
* Bank account and business license. If you maintain a separate checking account and have obtained a state, city, or local business license, this will help prove your activity is a business.
What's New in Financial Strategies
What's worse than identity theft?
It's hard to imagine a scam that's worse than identity theft. Victims of identity theft have their personal information stolen and used by con artists to run up debt on their credit cards, write bad checks on their bank account, and in general wreak havoc in their financial lives.
But the newest scam takes identity theft one step further. It's called "criminal identity theft." Your name and other information are used by another person who is being arrested for some criminal act. If you're the victim of criminal identity theft, you'll find yourself having to deal with the police, lawyers, and the courts to clear your name.
Criminal identity theft is one more good reason to remain alert to the many ways con artists can steal and misuse your personal information.
How to be smart when you inherit money
If you're fortunate enough to receive an inheritance, you have some important decisions to make. Here are seven tips for acting wisely.
* Take your time. Hasty decision-making can lead to impulsive spending and later regrets. Consider parking your inheritance in a short-term Certificate of Deposit or Treasury bill. If you inherit stocks or other securities, you might want to leave them untouched for a few months. While your inheritance is safely invested, write down what you would like to achieve with it.
* Review your emergency fund. If necessary, use your inheritance to ensure that you have several months of living expenses set aside.
* Protect your new assets. An increase in wealth may mean that your liability, property, and life insurance needs have changed. Review your coverage to make sure you are adequately protected.
* Pay off debt. Eliminate high-interest loans, especially those that generate no tax deductions. Establish a spending plan to avoid creating more debt.
* Plan your investment strategy. Now that your short-term finances are in order, develop a plan for the long-term. Take a look at the list you created earlier, and choose investments that fit those goals.
* Review your tax situation. Your taxes could be affected by an increase in your investment income. In addition, distributions from an individual retirement account (IRA) that you receive as part of an inheritance are subject to tax as ordinary income.
* Make a wish list. Now that the hard work is done, it's time to play! Allocate a small portion of your inheritance for fun, and enjoy yourself.
No matter how much you inherit, wise planning is advisable. For assistance with the tax and financial issues, give us a call.
Chuckle of the Month
Education is when you read the fine print.
Experience is what you get if you don't.
-- Pete Seeger
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.