Timothy W. Tuttle & Associates
Volume 4 Edition 5 Please email comments to firstname.lastname@example.org May 2008
Major Tax Deadlines
For May 2008
* May 15 - Deadline for calendar-year
exempt organizations to file 2007 information returns.
* May 31 - Deadline for IRA, SEP, SIMPLE, Roth IRA, MSA, and education savings account trustees to file annual statements (Form 5498) with the IRS, with copies to participants.
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, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
* 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
Tax scam warnings
The Justice Department's Tax Division recently announced the creation of a national "tax defier" initiative to "investigate, pursue, and, where appropriate, prosecute those who take concrete action to defy and deny the fundamental validity of the tax laws." The IRS reminds taxpayers to be wary of scams and promises to avoid paying taxes that seem too good to be true, saying "There is no secret formula that can eliminate a person's tax obligations."
Taxpayers also need to be alert to tax-related scams designed to steal their identity for fraudulent purposes.
You may be able to find tax-saving options in new 2008 rules
The tax law seems to change year-to-year. This year is certainly no exception. With careful planning, you can take advantage of new tax-saving opportunities in 2008 while avoiding potential pitfalls. Here's a summary of several key provisions.
* Capital gains and dividends
The maximum tax rate on net long-term gain and qualified dividends for taxpayers normally in the 10% or 15% regular income tax brackets is reduced from 5% to 0% for 2008. Under current law, the 0% rate will remain in effect through 2010.
This may be a good year to have your children sell securities that have appreciated in value. However, such sales may trigger "kiddie tax" complications.
This tax break isn't strictly limited to lower-income taxpayers. If you can push your taxable income for 2008 below the cut-off point for the regular 25% tax bracket - perhaps by increasing charitable gifts or 401(k) contributions - your long-term capital gains and dividend income could qualify for the 0% rate.
* Small business assets
Under the new economic stimulus law, your business can currently deduct up to $250,000 of business assets placed in service in 2008. Previously, the inflation-indexed amount for this "Section 179 deduction" was $128,000. In addition, a business may elect "bonus depreciation" in 2008 equal to 50% of the cost of qualified assets.
If handled correctly, your business can combine the enhanced Section 179 deduction with bonus depreciation. Regular depreciation deductions may be claimed for any remainder.
* Mortgage insurance
Congress previously approved a one-year deduction for mortgage insurance premiums in 2007. A full deduction was available for taxpayers with an AGI of $100,000 or less. Once income exceeded $100,000, the deduction was phased out.
The new mortgage relief law extends this tax break for three years through 2010. Therefore, you may qualify for a 2008 deduction for amounts paid or accrued this year.
* Kiddie tax
Under the kiddie tax, a child's investment income above an annual threshold ($1,800 for 2008) is taxed at the top tax rate of his or her parents. Prior to this year, the kiddie tax applied to children under age 18. But now the rules have changed.
Beginning in 2008, the kiddie tax generally applies to your children who are under age 19 or full-time students under age 24 if they can be claimed as your dependents.
To minimize the tax damage, try to keep investment income of children below or near the $1,800 threshold. For example, you might have a child switch funds into tax-deferred or tax-free investment vehicles.
* IRA contributions
If you contribute to an IRA, the contributions may be fully or partially deductible. Although deductions are generally not available to high-earning taxpayers if either spouse participates in an employer's retirement plan, contributions may still grow on a tax-deferred basis until withdrawn. The contribution limit for the 2008 tax year increased from $4,000 to $5,000. Plus, if you're age 50 or older, you can add a "catch-up contribution" of $1,000. The contribution deadline for 2008 is April 15, 2009, but you may earn more by contributing earlier.
Finally, a word about the new economic stimulus payments the IRS has been distributing: These rebates aren't available until you've filed your 2007 return, so taxpayers with extensions have to wait. Certain individuals who normally aren't required to file returns - such as those receiving social security benefits - may follow a simplified filing procedure.
Contact our office for details or guidance with your 2008 tax planning.
Vehicle depreciation limits
The IRS has issued the depreciation limits for business vehicles first placed in service in 2008. Recent legislation allows higher limits for new vehicles that will qualify for 50% bonus depreciation.
The first-year limit for new cars is $10,960; for used cars, it's $2,960. Depreciation limits for later years are the same for both new and used cars: $4,800 in year two, $2,850 in year three, and $1,775 in all following years.
The 2008 first-year depreciation limit for trucks and vans is $11,160 for new vehicles and $3,160 for used vehicles. Limits for both new and used vehicles in year two are $5,100, in year three $3,050, and in each succeeding year $1,875.
For details relating to your 2008 vehicle purchases, contact us.
What should you do to help your child get started in business?
Perhaps you're thinking of helping one of your children get started in business. Since the failure rate for new businesses is high, you need to do whatever you can to increase your child's chances of success. That includes considering three M's: motivation, money, and mentoring.
To succeed, your child must be motivated. He or she may like the idea of self-employment but lose interest when confronted with the realities of planning and preparation.
Before involving yourself, find out how much time, thought, and effort your child has already devoted to the proposed business. If the enterprise is no more than an idea, you can suggest approaches to researching the market and determining the resources, knowledge, and skills that will be needed. However, your input should be limited to guidance and ideas. Your child should do the work.
Once your child has completed the necessary groundwork, and if the project still seems reasonably feasible, you'll be ready to consider the next steps.
Whether you're making a loan or buying an ownership interest, keep the following guidelines in mind:
* Never put up more money than you can comfortably afford to lose.
* Try not to be the sole source of capital. Risk is part of the business experience, and your child should have some personal assets at stake. Although loans from outside sources may also be part of the mix, they should be limited in order to keep the debt service from becoming overwhelming.
* Set limits. Make it clear that you'll lend or invest a specific amount and no more. You also may wish to set restrictions on the use of the funds within the business.
* Put everything in writing. Loans should be supported by signed notes that stipulate repayment terms and require interest at market rates. Investments should be supported by partnership agreements, shareholder agreements, or similar documents that describe operating arrangements, profit and loss sharing, buyout provisions, and closing contingencies.
* Don't forget tax planning. You probably will want to allocate any taxable income to your child, and you certainly will want to be able to write off your loss if the business goes bad. Proper documentation will be paramount, since the IRS closely scrutinizes family transactions.
Remember that the primary objective is to give your child business experience. Explain the reasons behind each of your requirements, and make it clear that the child must consider your input as a condition of accepting your money. You should offer advice freely, but let your child make most of the business decisions. Mistakes are part of the learning process.
If you're thinking about helping your child get started in a business, give us a call. We'll be glad to offer guidelines to fit your particular circumstances.
What's New in Finances
Put your tax refund or rebate check to good
Will you receive a 2007 income tax refund or an economic stimulus tax rebate check? Here are some suggestions for how to put these funds to good use.
1. Pay off consumer debt. This is generally one of the best uses for extra cash. For example, if you typically carry a credit card balance and pay 16% interest, you'll realize a 16% return if you pay off that debt. You probably wonít save quite as much by paying off other types of loans, but you should consider that as well.
2. Contribute to an individual retirement account (IRA). A contribution to an IRA is a good idea whether itís tax-deductible or not because IRA earnings grow tax-deferred. If youíre self-employed and show a profit for the year, you can also make a tax-deductible contribution to a Keogh plan.
3. Start or add to an education fund. Consider investing your extra money in stock or bond mutual funds earmarked for your childís education. We can help you decide whether your education fund should be held in your name, your childís name, or in trust. We can also help with planning to avoid getting snared by the "kiddie tax."
4. Invest in yourself. While planning for your familyís education, donít forget yourself. Have you put off training for new job responsibilities or a new career because you couldn't afford it? Now that you have some extra cash, spending it on yourself may be the best investment of all. You also may be entitled to a tax deduction for education expenses that are required by your employer or that improve the skills required on your current job.
Donít just spend a tax refund or rebate check; put it to work improving your financial well-being.
Are you prepared for a job loss?
In today's economy, the job market is not secure. Companies are downsizing, reducing hours, or cutting salaries to remain competitive. Losing your job or having your pay cut can be financially devastating. But there are things you can do to protect yourself, whether your job is threatened or you're suddenly terminated.
If you feel your job is in danger -
* Take stock of your finances. List all your debts and the monthly payments. Estimate what your monthly living expenses would be if you were not working.
* Line up sources of extra cash in case you need it. It's easier to obtain credit while you're still employed.
* Consider an equity line of credit if you own a house. You can draw this down as you need it, tapping into the equity in your home. Check whether it would pay to refinance your mortgage.
* Start networking to get a feel for the job market. Investigate the opportunities for part-time or evening jobs.
* Set a budget. Force yourself to make changes in lifestyle to reduce expenses. Even if you don't save much, the symbolic value is important.
If you lose your job -
* Start your job search immediately. Resist the temptation to take a vacation to "recover."
* Set yourself an aggressive budget and stick to it. It's better to reduce spending now than regret it later.
* If you begin to have problems making loan payments, talk to the lenders before you fall into arrears, and try to work out a payment plan.
* Tap into retirement savings such as IRAs or 401(k)s only as a last resort.
Hopefully you'll never find yourself in this situation. While you're working, develop a regular savings habit. Try to build a reserve equal to six months of living expenses for job loss or other disasters. Then at least you'll have a financial cushion if the worst should happen.
Take a Break
Question of the day
If "con" is the opposite of "pro," is Congress the opposite of progress?
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The information contained in this newsletter 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.
Timothy W. Tuttle & Associates