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May 1999

Welcome to ONLINE ADVI$OR.

Our monthly online newsletter provides useful tax, business, and financial planning information as part of our firm's commitment to total client service.

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 ADVI$OR, or for assistance with any of your tax, business, or financial planning concerns, contact our office.
Major Tax Deadlines

During May, there are no major tax deadlines for individuals.

Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business. For information on the tax deadlines that apply to your business, contact our office.
What's New in Taxes

IRS gives taxpayers a break on deducting mortgage points

The IRS recently issued a private letter ruling that lets taxpayers make a choice in deducting points paid on a home mortgage. They can either be deducted in full in the year the home is purchased or pro rata over the life of the loan.

The ruling came as a result of a situation in which a couple purchased a home late in the year. Their deductions, including the mortgage points, totaled less than the standard deduction for the year. So they took the standard deduction on their tax return and got no tax benefit from the points they paid. The couple then asked the IRS if they could deduct the points over the life of their loan. The IRS said yes. Because the couple itemized their deductions thereafter, they were able to enjoy a tax benefit from the mortgage points.

If you take the standard deduction in the year you purchase a home, keep this ruling in mind. By amortizing the mortgage points over the loan's life, you'll enjoy a tax break that would otherwise be lost.
Use new tax rules in your 1999 planning

As you get your tax planning for 1999 underway, be aware of the many tax changes that went into effect this year. Among them are the following:

* Up to $1,500 of interest paid on higher education loans is deductible in 1999. The deduction phases out at higher income levels ($40,000-$55,000 for singles and $60,000-$75,000 for couples).

* The child tax credit increases to $500 for each child under 17 (up from $400 for 1998). The credit starts phasing out at $75,000 of income for singles and heads of household and at $110,000 for couples.

* If you use part of your residence for business, you might find it easier to deduct part of your expenses for your home office in 1999. Starting this year, taxpayers will no longer be denied a deduction when the home office is used only for administrative and managerial tasks (such as billing clients or customers, setting up appointments, etc.) if there is no other location to perform these tasks.

* Self-employed individuals, partners, and owners of more than 2% of an S corporation may deduct 60% of medical insurance premiums paid in 1999, an increase from 45% in 1998.

* The so-called "unified credit" exempts a certain amount of your estate from estate taxes. For 1999, this amount increases to $650,000 (up from $625,000 for 1998).

If utilized to its fullest extent, this exemption, which applies to you and your spouse individually, allows the two of you to make tax-free bequests totaling $1,300,000 under the 1999 limit. Wills and other estate planning documents should be changed, if necessary, to take full advantage of this increase.

* Certain business tax credits have been extended through June 30, 1999. These include the research tax credit, the work opportunity tax credit, and the welfare-to-work tax credit.

* The election to expense rather than depreciate newly acquired business equipment increases from the 1998 maximum of $18,500 to $19,000 for 1999.

* The prior-year safe harbor for estimated taxes required of individuals with more than $150,000 of income increases from 100% of prior year tax liability to 105%.

As you consider your tax-cutting options, and before making important financial or business decisions this year, call us to discuss these and other tax changes.
New Business

Tax deposit rules for businesses change again. Yes, again.

The IRS has issued proposed rules that once again change the requirements for businesses that deposit federal taxes. Previously, businesses that deposited more than $50,000 of federal taxes annually faced penalties if they did not make those deposits electronically after June 30, 1999.

Effective January 1, 2000, the IRS will require electronic deposit only if the business deposited more than $200,000 in federal taxes during 1998. Penalty relief for failure to deposit electronically will run through December 31, 1999.
Smart Business

Protect your company's trade secrets when an employee leaves

Many companies rely on their trade secrets to keep one step ahead of their competitors. Important trade secrets include customer lists, marketing plans, and details about new products or programs. Your company should establish and implement proper safeguards to protect these trade secrets.

The first step is to plan ahead. For example, consider requiring key employees to sign nondisclosure and noncompetition clauses, which can be part of an employment contract. To limit access to sensitive information, documents which contain trade secrets should be stored in locked file cabinets and stamped "confidential." Computer data files should be off limits to all but a few authorized individuals. Steps like these will demonstrate to employees that management places a high value on the companyís trade secrets and will not tolerate leaks of sensitive information.

Companies need to be particularly concerned about protecting trade secrets when an employee resigns or is fired. Upon starting a new job, the former employee might try to pass sensitive company information to a competitor. To reduce this risk, hold an exit interview with every employee who leaves the company. During the interview, ask these employees to sign a written acknowledgement indicating that all sensitive company information has been returned or destroyed.

Also, remind terminated employees that they are still obligated to refrain from disclosing any of the companyís trade secrets. If an employment agreement was previously signed, the nondisclosure and noncompetition clauses should be reviewed at this time. Holding the exit interview will be managementís final opportunity to demonstrate that they intend to vigorously protect their companyís trade secrets.

What's New in Financial Planning?

IRS issues new IRA reconversion rules

Many taxpayers whose IRAs are invested in stocks and mutual funds have found the current volatility in the stock market to be a problem when converting a regular IRA to a Roth IRA. Since the IRAís value at the point of conversion determines the tax that will be owed, the best time to convert a regular IRA to a Roth is when the market (and the IRA's value) is lower.

If a conversion from regular IRA to Roth IRA is done when the market is high, the IRAís value is higher and more income tax will be due. Then if the market falls, a taxpayer is left with less value in his Roth IRA, but with a tax bill based on the higher value at the conversion point.

To get around this tax problem, people were switching from regular IRA to Roth, then back to a regular IRA, followed by an immediate reconversion to a Roth IRA, attempting to fix the IRAís value at the lowest tax cost.

The IRS has issued rules limiting taxpayers to one such reconversion in 1999. Effective January 1, 2000, the IRS rules will be even tougher. A taxpayer who has changed back to a regular IRA from a Roth will be required to wait until the following year to reconvert to a Roth.

For assistance with your IRA decisions, contact our office.

Consider municipal bonds for your investment portfolio

Municipal bonds pay interest that is exempt from federal income tax, so they might seem like great investments for everyone. Unfortunately, they arenít. Whether you buy municipal bonds directly or through a mutual fund, here are some issues to consider.

* Do municipal bonds fit your portfolio? For most people, it makes good financial sense to own a mix of stocks and bonds. Stocks have historically provided growth in excess of the inflation rate, while bonds pay steady income. If your portfolio is already tilted heavily towards bonds, you may not need any more Ė even tax-exempt bonds.

* Do municipal bonds make sense in your tax bracket? Surprising as it may seem, some people are better off owning taxable bonds. For example, say youíre in the 28% tax bracket. Letís also assume that taxable bonds are yielding 6%, while comparable municipal bonds are yielding 4%. If you invest in taxable bonds, youíll be left with 4.32% yield after taxes, which is more than you would earn from the municipals. In this case, as in many real-life cases, the combination of your tax bracket and the municipal bond yield makes taxable bonds more attractive.

* Are there other tax considerations? Retirees should be aware that municipal bond interest can actually increase the tax on their social security benefits. And any individual who is concerned about the alternative minimum tax (AMT) should be aware that income from certain "private activity" municipal bonds isnít tax-exempt for purposes of the AMT.

* Are you buying quality? Like corporate bonds, municipal bonds vary widely in quality. Before you buy any municipal bond or mutual fund, find out how itís rated by Moodyís, Standard & Poorís, or some other reputable rating service.
Chuckle of the Month
This letter comes from a Y2K engineer to his business supervisor:

I hope I haven't misunderstood your instructions. Because to be honest, none of this Y to K problem makes any sense to me.

At any rate, I have finished converting all the months on all the company calendars so that the year 2000 is ready to go with the following new months:
ONLINE ADVI$OR is issued monthly to provide useful information. Return to this site every month for helpful tax-cutting suggestions, business information, and financial planning tactics.

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.

If you would like more information on anything in ONLINE ADVI$OR, or if you'd like to be on our mailing list to receive other tax, business, or financial planning information from time to time, please contact our office. We're here to help you minimize your taxes, manage your business more profitably, and identify financial planning strategies suited to your situation.

Copyright 1999 Richard C. Woodbury P.C. CPA