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Houghton, MI 49931 USA
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July 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

July 15 - Deadline for filing 1998 partnership returns with extensions of the April 15 deadline

August 2 - Deadline for filing retirement or employee benefit plan returns (5500 series) for plans on a calendar year.
(would normally be July 31 except that July 31 is a Saturday)

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

Good tax news for smokers trying to quit

The IRS recently announced that the cost of prescription drugs or programs designed to break the smoking habit can be deducted as a medical expense.

Over-the-counter drugs, nicotine patches, and nicotine gums will not be deductible.

To benefit from this new ruling, you must itemize deductions on your tax return, and your total medical expenses must exceed 7.5 percent of your adjusted gross income. Tax returns can be amended for up to three years to claim the deduction in prior years.

Make the right gift to cut taxes

Making gifts of the wrong type of property can defeat your tax planning. The best property to give will depend on your tax goals. Are you trying to reduce current income taxes, future estate taxes, or both? Here are some items which may not be suitable gifts when trying to accomplish certain objectives.

* Items that shrink in value. Items such as patents, copyrights, certain mineral rights, and some improved real estate can actually have lower value in an estate than they have currently.

* Assets with potential tax losses. The tax loss from selling certain assets may be more beneficial to the donor than to any intended recipient.

* Property you intend to use. If you continue to use property, such as a residence, after you have given it to another, you may not get the tax benefits you sought.

* Highly appreciated property. Elderly people may want to retain property with a low tax cost (basis) since the property will get a "step-up" in basis in an estate (generally, the value at date of death). If you make a gift of this property during your lifetime, the recipient is required to use your lower tax cost (basis) for all tax considerations.

* Contracts. If you are currently receiving contract payments on which you are reporting gain, a gift of this contract will generally accelerate all the tax on the contract.

* Life insurance. Gifts of life insurance will not remove the value of the policy from your estate if you die within three years of the gift.

Gifting can substantially reduce your income tax and estate tax if done properly. If you are planning to make sizable gifts, please contact us. We would be happy to assist you and your attorney.

New Business

The Internet economy is booming

A report just out indicates that business on the Internet is outpacing previous estimates. In 1998 the Internet economy produced $301 billion in revenue and created 1.2 million jobs.

The report stated that Internet growth has averaged 174.5 percent a year for the past four years.

The study was conducted by the University of Texas and sponsored by Cisco Systems, Inc. Additional details on the study are available at

Smart Business

Get the best tax deal on that new business car

When you shop for a new car or truck, it is often tempting to accept the car dealer's offer to take your old vehicle as a trade-in, so that the exchange of vehicles is wrapped up in one transaction.

But if you have your own business, and if you are buying or selling business vehicles, you need to consider the tax consequences before making final plans to trade in your old car or truck.

First, calculate your tax basis in the vehicle by taking your original cost and subtracting all tax depreciation you have deducted. Then check the market value of your old vehicle - would you have a profit or a loss from a sale? If you're facing a taxable gain, you are probably better off from a tax standpoint trading the vehicle in on the new one. The result: No gain is required to be reported on your tax return.

On the other hand, if your tax basis is more than the market value, consider selling the vehicle yourself. The sale of the vehicle will result in a loss which can be deducted on your tax return. A word of caution: Selling your old vehicle to the same dealer who sells you the new vehicle will be treated by the IRS as a trade-in. No loss deduction is allowed if the vehicle is traded instead of being sold.

Special rules apply if the old vehicle was used less than 100 percent for business or if the standard mileage allowance was used to figure your tax deduction in prior years.

Calculate your tax basis before bargaining for a new business vehicle. Advance planning is the key to lowering the amount of income tax you pay.

Please call us if you would like assistance.

What's New in Financial Planning?

IRS says it was wrong about Roth IRAs

Just prior to the April 15 tax filing deadline, the IRS informed taxpayers they had until April 15 to reverse Roth IRA conversions for which they didnít qualify. Otherwise, the converted amount would be treated as a taxable withdrawal and could also be subject to the 10 percent early withdrawal penalty.

Taxpayers did not qualify for converting a regular IRA to a Roth IRA if their income, on either a single or joint return, exceeded $100,000. Married taxpayers filing separately were ineligible for Roth conversions.

According to the IRS, even those eligible for a conversion could not undo the conversion once they filed their 1998 tax return and the April 15 deadline passed.

After a closer look at the tax law, the IRS now admits it was wrong. Taxpayers who filed by April 15 can undo a 1998 conversion any time up to October 15, 1999, (the deadline for filing fully extended 1998 tax returns). The taxpayer must then file an amended 1998 tax return within three years.

What's wrong with borrowing from your 401(k) plan?

At first glance, 401(k) loans may seem very attractive. Rates are low compared to other forms of consumer debt. Thereís not even a credit check since youíre borrowing your own money.

A closer look, however, reveals some disadvantages to 401(k) loans. When you repay your loan, you will not be getting a tax deduction for the interest you pay to your 401(k).

To improve your tax situation, consider a home equity loan. Home equity loans usually generate a current tax deduction for mortgage interest.

Home equity loans may also feature long maturities and low monthly payments. Contrast this with 401(k) loans, which generally have a five-year maximum term.

If your 401(k) investments are making a better rate of return than the rate you will be paying on borrowed funds, you will be reducing the tax-deferred accumulation of your retirement funds. It makes very little sense to cut off the high earnings of your retirement plan if you can borrow the funds elsewhere at a lower rate.

Margin borrowing may be one of many better alternatives. A margin loan is based on the current value of your brokerage account. In turn, your brokerage account serves as collateral for the loan. Your investments remain intact and continue to grow.

Changing jobs can present special problems if you have a 401(k) loan. Generally, the loan will become due when you leave your current employer. If you canít repay the loan, any remaining balance will be treated as a taxable distribution from the 401(k) plan. In addition to current income taxes due on the distribution, tax laws provide a 10 percent penalty if you are less than 59-1/2 years old. Taxes and penalties will often equal 40 percent or more of the distribution. Other types of loans donít represent taxable income, with or without a job change.

Alternative forms of credit often represent a better deal than borrowing from your 401(k). For assistance in evaluating the consequences of borrowing from your 401(k), give us a call.

Chuckle of the Month

Safety on the streets -- If you want to walk the streets safely at night, carry a projector and slides from your last vacation.

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 planninginformation 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