RICHARD C. WOODBURY P.C.

CERTIFIED PUBLIC ACCOUNTANT
103 E. Sharon Avenue
Houghton, MI 49931 USA
Phone (906) 482-1305
Fax (906) 482-9555
Email rwoodbur@up.net

ONLINE ADVI$OR


November 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 Deadline for November 1999

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

IRS gives more time to correct Roth mistakes

The IRS has extended the deadline for fixing incorrect Roth IRA contributions and conversions done by taxpayers in 1998. Previously, the IRS said taxpayers had until October 15, 1999, to fix Roth mistakes made in 1998. Realizing that the Roth IRA was new and the rules were complicated, the IRS will now allow taxpayers to fix 1998 errors if they do so by December 31, 1999.

Taxpayers were ineligible to make full $2,000 contributions to Roth IRAs once 1998 income exceeded $95,000 for singles or $150,000 for couples. Also, taxpayers could not convert a traditional IRA to a Roth IRA if 1998 income exceeded $100,000, whether single or filing jointly. Married couples who filed separately were ineligible for Roth conversions regardless of their income.

Check your exposure to the alternative minimum tax

With December 31 just around the corner, you should have already started your year-end tax planning. As you formulate your plan, don't overlook how your tax-saving strategies might be affected by the alternative minimum tax (AMT).

Enacted back in 1969, the AMT was designed to make sure that high-income taxpayers pay a minimum amount of tax, even if they have sufficient deductions and credits to reduce their federal income tax liability to zero. Over the years, however, the AMT has begun to affect moderate-income taxpayers as well.

The reason is that the tax brackets, personal exemptions, and standard deductions applicable to the regular tax calculation are indexed for inflation, but the tax brackets and exemption amounts applicable to the AMT are not. As inflation causes people's income to increase, more and more taxpayers will find themselves subject to the AMT each year.

Do you need to concern yourself with the AMT? You do if you have a lot of dependents or if you claim substantial itemized deductions. You may also be subject to the AMT if you realized hefty capital gains during the year or exercised your incentive stock options but have not yet sold the stock. Claiming certain tax credits might trigger the AMT as well. And if you are an owner of rental real estate or a capital intensive business, you need to be aware that the amount of depreciation allowed under the AMT is limited.

Don't let the AMT cause your year-end tax planning strategies to backfire. To find out whether you might be impacted by the AMT, give us a call now.

New Business

Small businesses carry a heavy tax burden

A recent study took a look at the tax requirements small businesses must meet. According to the study (which covers all farmers and sole proprietorships, partnerships, S corporations, and corporations with assets of less than $5 million), almost half of all taxes collected annually by the IRS come from small businesses.

There are more than 200 tax requirements that could apply to small businesses. These include (1) income tax returns, (2) employment tax filings, (3) employee benefit filings, and (4) miscellaneous other income, excise tax, and information reporting requirements.

If 1997 audit rates are any indication, small businesses are audited more frequently than other taxpayers. The overall audit rate for 1997 was 1.3 percent of all returns filed by all taxpayers. For the same year, 3.2 percent of sole proprietorships were audited, 1.8 percent of all farmers, 6 percent of all partnerships, 1 percent of all S corporations, and 2.1 percent of all C corporations.

Of the business returns audited, 63.8 percent of sole proprietorships audited were assessed additional taxes and penalties. The rate of additional assessments was 59 percent for farm audits and 52.4 percent for corporation audits.

Smart Business

Select the right retirement plan for your business

Selecting the right plan for your business begins with understanding your choices. Each plan has advantages and drawbacks. To help you decide which might be appropriate for you, here are highlights of three common plans:

* Simplified Employee Pension (SEP) Plan

Also known as a SEP-IRA, this retirement plan lets you establish individual retirement accounts for yourself and your eligible employees. You can also have a SEP if you are self-employed. Setting up a SEP can be as simple as completing a short, written agreement. Other than annual disclosure statements to employees, there are no filing requirements.

SEPs can be funded only by employer contributions, but they offer flexibility because you decide each year how much you want to contribute. Annual contributions for each employee can be up to 15 percent of compensation, with a maximum of $24,000. Unlike other plans, SEPs can be established up until the extended due date of your tax return.

* Savings Incentive Match Plan for Employees (SIMPLE)

Like a SEP, a SIMPLE consists of individual retirement accounts (IRAs) for yourself and eligible employees. Alternatively, a SIMPLE can also be established as a 401(k) plan. Either type can easily be set up with a bank or insurance company using a "model," or standard plan document. In a SIMPLE, employees can make voluntary contributions of up to $6,000 through payroll deductions, and an employer matching contribution is required.

There are two requirements for setting up a SIMPLE: you must have 100 or fewer employees, and you cannot offer another retirement plan. Also, a SIMPLE must generally be established before October 1 of any calendar year.

* Keogh Plan

A Keogh or HR-10 plan is a qualified retirement plan for the self-employed. Eligible employees must be allowed to participate. Keoghs can be established using a standard plan. However, unlike SEPs and SIMPLEs, you may have to file an annual tax return for the plan.

Keoghs are more complicated than SIMPLEs or SEPs, but your contribution can be higher, so a Keogh may offer more tax and retirement benefits.

All of these plans feature low administrative costs and relatively simple rules, so you can provide employee benefits while concentrating on your business. If we can help sort through your options, give us a call.

What's New in Financial Planning?

Study reveals that frequent trades hurt investment returns

A recent study done by Terry Odean, Finance Professor at the University of California, showed that investors often think they know more than they actually do. Their overconfidence leads to more frequent trading -- and their frequent trading negatively affects their investment returns.

Odean also studied 1,607 investors who switched to online trading from 1991 to 1996. He found that before going online, these investors had returns that generally beat the market by two percent annually. After switching to online trading, they traded more frequently and their returns were lower than the market by more than three percentage points. Their returns were also lower than a control group of similar offline investors.

In your investing, keep this study in mind, and realize that too-frequent trading is not likely to benefit your portfolio.

Women: Take steps toward financial competence

Today many women spend their day working at full-time jobs and also taking care of their families at home. After completing these two full-time jobs, there is precious little time left to consider personal financial matters. However, financial independence is an important subject that shouldn't be ignored by women of any age. Consider these revealing facts about American women:

--50% of marriages end in divorce.

--The average age for widowhood is 56.

--Women live an average of seven years longer than men.

--50% of women have no retirement plan.

--Women earn an average of 74 cents for every dollar a man makes.

If you're a woman, you should expect to be alone at some point in your retirement years. It's never too early to prepare for this by learning about your financial situation and working toward financial independence. Here are some steps to get started:

* Educate yourself. There are many basic, readily available sources on investing. These include a wide variety of books, brochures, computer software, and Internet websites for the beginning investor.

* Know what you own. Become familiar with your investments, bank accounts, insurance policies, and retirement plans.

* Set goals. Once you understand the basics, consider your financial needs, such as a mortgage, college tuition, or retirement. Develop both short- and long-term investment plans to reach the specific goals.

* Establish working relationships with financial professionals. The expertise of a seasoned financial professional can be invaluable in reaching your goals. Find one whom you are comfortable working with on an ongoing basis.

The best time to start working toward financial independence is now. Call us; the professionals in our office can help you take steps in the right direction.

Chuckle of the Month

Supervising employees may seem less important to a boss than other tasks facing him or her. But when a boss or manager doesn't supervise properly, he or she could end up like the rich guy in this story:

The wealthy homeowner asked a handyman, "What will you charge to paint my porch?"

"Fifty dollars," said the handyman.

"Fine," said the homeowner. "There's paint and everything else you'll need in the garage."

In less than an hour, the handyman returned to say he was finished.

"Already?" said the man. "You painted the entire porch so quickly?"

"Yep," said the handyman. "Two coats, in fact. But I have to tell you -- that's not a Porch. It's a Ferrari."

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 1998 Richard C. Woodbury P.C. CPA