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June 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

June 15 - Second quarter 1999 individual estimated tax is due.

June 15 - Automatic two-month extension for U.S. citizens and resident aliens living and working outside of U.S. and Puerto Rico to file 1998 income tax return expires. File Form 4868 to request additional two-month extension. (Additional time to file is provided for Armed Forces personnel and support personnel serving in a designated combat zone.)

NOTE: 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

New rules for 1999 tax estimates

If you're required to make quarterly estimated tax payments, the second installment for 1999 is due June 15.

For higher-income taxpayers, this year's payment of estimated taxes comes under new rules. If your adjusted gross income exceeds $150,000 annually, you can no longer use 100 percent of your prior-year tax liability as a safe-harbor computation for your 1999 quarterly estimates. Instead, you must use 105 percent of your 1998 tax liability to compute your 1999 estimates.

For the next two years, that percentage will change to 106 percent, and in the third year to 112 percent. Four years from now, it will drop again to 110 percent, the figure that applied to the estimated tax payments of higher-income individuals prior to the 1997 Taxpayer Relief Act.
Check the silver lining if you suffer a disaster

In the old saying, "Every dark cloud has a silver lining," the dark cloud could be a natural disaster and the silver lining could be the Internal Revenue Code. If you are a victim of a natural disaster, such as the recent tornadoes in Oklahoma and Kansas, you may qualify for an income tax deduction called a disaster loss. This gets a different tax treatment than a normal casualty loss.

To qualify for this deduction, the disaster must be the result of a sudden, unexpected, or unusual event which causes you to suffer a financial loss. Additionally, your loss must have occurred in a "disaster area." An area qualifies only if the President of the United States declares it to be in need of federal disaster assistance. To find out if your area is a disaster area, check with your local IRS office.

There are some additional hurdles to clear before you may take a disaster loss deduction. First, your loss must be reduced by any insurance recoveries. Second, the remaining amount is deductible only to the extent that it exceeds 10 percent of your adjusted gross income and $100.

To determine the amount of your loss, you must compare the fair market value of your damaged property before and after the disaster. Normally, the difference (less any insurance recoveries) is your loss, though your loss might be less, depending on your cost in the property.

The tax law allows you to elect to deduct the disaster loss in the year of occurrence or in the previous year. So for a disaster that occurred in 1999, you could amend your 1998 tax return and receive your refund this year, instead of waiting until next year when you file your 1999 return.

New Business

New automatic extensions for plan returns

Effective immediately, the IRS will automatically approve all applications for a 2 1/2 month extension of time to file employee benefit plan returns. The extension request (Form 5558) must be filed on or before the normal due date of the required return or report. The normal due date for filing 1998 returns for calendar-year plans is August 2, 1999.
Smart Business

Consider this new business form

Many business owners incorporate to protect their personal assets from creditors and lawsuits. The price they pay may include double taxation, potential loss of privacy, additional formalities, and various operating restrictions.

If the owners try to avoid double taxation by operating as an S corporation, they face additional limits on ownership and earnings.

The limited liability company (LLC) is a relatively new legal entity which avoids many of these disadvantages, while combining some of the best features of partnerships and corporations.

An LLC exists separately from its owners, who thus avoid personal risk for most company obligations.

Like an S corporation, the LLC can pass its income through to shareholders without being taxed at the company level. Unlike an S corporation, the LLC has much more flexibility in the types of income it can earn, and it has few restrictions on ownership.

Forming an LLC may require as few as two steps: drafting a written LLC agreement and filing with the responsible state agency.

Although an LLC is the best choice for many businesses, it is not for everyone. Their biggest disadvantage may be their newness. Several details of LLC tax treatment have not been resolved, and federal and state legal precedents have yet to be established.

In addition, state rules for LLCs vary widely and must be researched for each location before proceeding.

Changing from an existing corporation to an LLC creates additional pitfalls since liquidating an old corporation could have severe tax consequences.

Although starting as an LLC might be the best choice for a new company, the cost of converting a similar business already operating as a corporation might be prohibitive.

Whether or not you adopt this business format, your choice will have important legal and tax effects which should be discussed in advance with your tax and legal advisors. For more information, give us a call.

What's New in Financial Planning?

Joint Accounts Get More Protection

If you have a joint bank account, you now have more insurance protection if the bank fails. The Federal Deposit Insurance Corporation used to insure bank accounts up to $100,000, including joint accounts. Now you're insured for up to $100,000 of your share in a joint bank account.

Though bank failures are rare enough to create only minor concern, the added protection is still good to know about for your financial planning.

Wedding bells ringing? Beware the marriage penalty.

Marriage brings many blessings, but a lower tax bill may not be one of them. Many couples find that the taxes they owe as a married couple are higher than the combined taxes they paid as singles. This is the so-called marriage penalty, and it now affects almost half of all married couples. You're most likely to be hit with the penalty if your income and your spouse's are about the same.

There are two main reasons why the marriage penalty arises. First, the standard deduction for a married couple is less than twice the standard deduction for singles, so a couple's combined taxable income is higher. Second, because of the way the tax brackets are structured, a married couple's combined income often pushes them into a higher tax bracket. The result is a higher tax bill.

Married couples are penalized in numerous other ways, too. For example, many tax credits and other tax breaks now phase out when incomes hit certain levels. But the income phase-out levels for married filers are usually less than twice the level for single filers, penalizing two-income families. This is the case with eligibility for a Roth IRA, the child tax credit, and the education IRA, among others. It also applies to the threshold for taxing social security benefits, affecting married senior citizens.

In some cases, the same income limit applies whether you're married or single. Examples include eligibility to convert to a Roth IRA, and limits on capital losses, mortgage interest deductions, and rental property losses. In these cases, two singles receive twice the tax break that a married couple receives.

If you're planning a wedding, you might want to determine whether the marriage penalty will affect you. If it does, factor that into your 1999 tax planning.

Chuckle of the Month

It's June - and wedding bells are ringing. Here's how marriage looks to the younger set:

How do you decide who to marry?

"You got to find somebody who likes the same stuff. Like if you like sports, she should like it that you like sports, and she should keep the chips and dip coming." Alan, age 10

"No person really decides before they grow up who they're going to marry. God decides it all way before, and you get to find out later who you're stuck with." Kirsten, age 10

What is the right age to get married?

"Twenty-three is the best age because you know the person FOREVER by then." Camille, age 10
"No age is good to get married at. You got to be a fool to get married." Freddie, age 6

How can a stranger tell if two people are married?

"Married people usually look happy to talk to other people."
Eddie age 6

"You might have to guess, based on whether they seem to be yelling at the same kids." Derrick, age 8

How would the world be different if people didn't get married?

"There sure would be a lot of kids to explain, wouldn't there?"
Kelvin, age 8

"You can be sure of one thing - the boys would come chasing after us just the same as they do now." Roberta, age 7

How would you make a marriage work?

"If you want to last with your man, you should wear a lot of sexy clothes, especially underwear that is red and maybe has a few diamonds on it." Lori, age 8

"Tell your wife that she looks pretty even if she looks like a truck." Ricky, age 10

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