Timothy W. Tuttle & Associates
Volume 4 Edition 9 Please email comments to firstname.lastname@example.org Sept 2008
Major Tax Deadlines
For September 2008
* September 15 - Due date for individuals to
pay third quarter installment of 2008 estimated tax.
* September 15 - Due date for filing 2007 tax returns for calendar-year corporations that had an extension of the March 17 filing deadline.
* October 1 - Deadline for businesses to adopt a SIMPLE retirement plan for 2008.
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:
Stimulus payment deadline approaching
The IRS has issued billions of dollars in tax rebate checks as authorized by the Economic Stimulus Act passed in February of this year.
The law provided for payments of up to $600 for singles and $1,200 for married couples filing joint returns, plus $300 for each qualifying dependent child. The rebates phased out for individuals with adjusted gross income over $75,000 (over $150,000 for married couples). Payments were computed by the IRS based on income reported on 2007 tax returns.
Individuals not required to file 2007 returns because their income didn't meet the filing threshold could still qualify for a rebate of $300 ($600 for married couples) if they had at least $3,000 of qualifying income and filed a modified version of the 2007 tax return.
The IRS is reminding taxpayers that to receive a rebate in 2008, a 2007 tax return must be filed by October 15, 2008. Those who do not file a tax return to obtain a rebate this year may still receive their stimulus payment by filing a 2008 tax return in 2009. The stimulus payment will then be based on the taxpayer's 2008 qualifying income.
Lending money to family members could be a taxing situation
Lending to family members probably dates back to the invention of money. The IRS entered the mix a great deal later, but it now looms large in the equation. Tax problems can arise when you first lend money, as you're being repaid, or if you're not repaid. The issues usually involve imputed income, gift tax, or bad debts.
* Imputed income
Imputed income is revenue presumed earned but neither recognized nor received by the alleged recipient. The IRS may impute interest on a loan at the "applicable federal rate" (AFR) when a lower rate (or no interest) is charged. The agency then assesses tax on the excess of the imputed interest over the amount required by the terms of the loan.
* Gift tax issue
When the IRS imputes phantom interest, it also creates phantom taxable gifts. The imputed interest is treated as though the borrower actually paid it to the lender, whereupon the lender returned it to the borrower as a gift. Since the lender "constructively received" the additional interest, he or she owes income tax on it. Since the lender then presumably gave the interest back to the borrower, he or she also owes gift tax on it, unless an exclusion or credit applies.
* Bad debt deduction
Normally, a loan that goes bad is deductible, either against ordinary income (if made for a business purpose) or as a short-term capital loss. However, when the defaulting party is related, the IRS may demand clear and convincing evidence that the original loan was not actually a gift. Once a loan is recharacterized as a gift, no bad debt deduction will be allowed if the loan isn't repaid, and the lender also may owe gift tax on the principal unless an exclusion or credit applies.
Interest need not be charged and will not be imputed on a family loan of $10,000 or less unless the loan directly relates to purchasing or carrying income-producing assets. Without a written document imposing interest at the applicable federal rate (AFR) or higher, the loan probably will be considered a gift and thus will not be deductible if not repaid.
Interest will be imputed on a family loan over $10,000 if the stated rate is below the AFR. However, unless the principal exceeds $100,000, imputed interest will be limited to the borrower's annual net investment income, and no interest will be imputed if that income is $1,000 or less.
Obviously, lending to relatives can create unintended tax consequences. You should always have a written loan agreement on family loans to document the transaction for the IRS.
Please call us before you make your loan. We can help structure the terms to ensure your helpful act is gratifying and tax-smart for the entire family.
The clock is ticking on this tax break
Don't let time slip away and lose out on a big 2008 tax break for your business.
If you're planning to purchase business equipment, be aware of these two depreciation rules: You can expense $250,000 worth of new or used equipment purchased for your business this year, and you can take 50% bonus depreciation on new equipment purchases.
You can use both breaks this year, and the two benefits can even be combined on the same purchase. For example, you can use the expensing option on a piece of equipment and apply bonus depreciation to the remaining cost if the property qualifies.
Off-the-shelf computer software qualifies for both tax breaks.
As you plan your acquisitions, remember that both 50% bonus depreciation and the increased expensing election are available only for 2008. Also, the expensing benefit phases out once your total equipment purchases for 2008 exceed $800,000. For details and help in best utilizing these tax breaks, give us a call.
How to spot problem accounts early
If you extend credit to your customers, some losses are inevitable. So unless you are willing to forgo the credit part of your sales, you have to figure out ways to control your bad debt losses.
Once you have extended credit to a customer, you have a stake in continuing the relationship even if you suspect there might be trouble a-brewing. You don't want to crack down on a good customer too hard too soon; yet you don't want to be "taken" by a debtor who has become unable or unwilling to pay. The problem is distinguishing between slow pay (which is bad enough) and no pay.
What you need is an early warning system to detect a credit problem in the making, so you can stop additional sales to that customer and begin collection procedures in earnest. Here are some of the telltale signs that point to an account that is turning sour.
* The debtor has begun paying erratically, settling up on smaller invoices while larger ones just get older, at the same time disputing specifications or terms.
* The debtor fails to return your phone calls or shows unusual annoyance at your inquiries.
* Your requests for information, such as updated financial statements, are ignored.
* The debtor places jumbo orders and presses you for a higher credit limit.
Any one of these hints of trouble can be the handwriting on the wall. Two or more and it's time to crack down. Take a firm stand; turn up the heat on your collection efforts with this debtor, and make no more sales unless they're cash on delivery.
What's New in Finances:
401(k) debit cards: Weigh the pros and cons
If your employer's 401(k) plan offers the 401(k) debit card feature, don't sign up without a serious look at what you're getting into.
A 401(k) debit card allows you to borrow up to $50,000 or 50% of your plan account, whichever is less, via a debit card. Every time you use the card, you are withdrawing money from your 401(k) savings. You must repay the money along with fees and interest.
Using a 401(k) debit card may sound like a good deal when you need money. It's relatively easy, and it is, after all, your own money. But consider the down side. Borrowing from your retirement account could leave you with a much smaller fund in retirement. If you use your 401(k) to meet a short-term cash need, you probably won't be able to both contribute to the account and repay the loan, so for a time you're missing out on your company's matching contribution. Perhaps most important, if you can't meet the repayment schedule, the borrowed funds will be treated as a distribution subject to income tax, and if you're under age 59-1/2, subject to an early withdrawal penalty as well.
Bottom line: Whether a traditional 401(k) loan or a 401(k) debit card, tap your retirement savings only in emergencies and only as a last resort. Otherwise you'll have a smaller nest egg, and if you default on the loan, the possibility of serious tax consequences.
Long-term care insurance: What you need to know before you buy
Mention long-term care insurance in a crowd, and you'll likely receive a collective groan. Lacking the immediacy of health insurance and the certainty of life insurance, many people find it difficult to move this financial planning issue to the top of their to-do list. And when they finally do, it's often too late.
Long-term care (LTC) insurance provides coverage for nursing and personal assistance costs related to chronic illness or disability. Such services are notoriously expensive, potentially wiping out one's life savings. If you want to hedge your long-term care future with insurance, here are some things to watch for.
* Coverage. Some LTC plans pay only for nursing home expenses and others only for in-home care. A more expensive policy will cover both types of care, plus assisted living or adult day care expenses. Most LTC policies provide a monthly or daily benefit limit. Costs above this limit would be your responsibility.
Policies also vary as to the timing of the coverage. A plan might require you to pay the first few months of care out of your own pocket (called the elimination period). Further, some policies will pay benefits only for a specific length of time, while others pay for life.
* Cost. LTC insurance is expensive, but there are two ways you can help ease the burden. First, establish a policy long before you begin having health issues. Old age and ill-health will lead to much higher premiums. The best time to buy a policy is probably many years before you are likely to need it.
Second, seek a "qualified" long-term care policy that is eligible for a tax deduction. If you can write off the premiums, the tax savings will help offset the costs. The rules for deducting long-term care insurance premiums are complex, so get details before you buy.
* Company choice. The insurance company you choose can be as important as the type of coverage you buy. Research the financial soundness of potential insurance companies by reviewing their industry rating. And ask for references. You should shop and compare LTC policies like you would any significant purchase.
Long-term care is not a pleasant issue to dwell on, but a sober review now could reap benefits down the road. For a complete analysis of this and other financial planning issues, give our firm a call today.
Take a Break
Can you figure out what these words have in common? No peeking at the answer!
No, it's not that they all have at least two of the same letters. Try again.
In all of these words, if you take the first letter and put it at the end of the word, and then spell the word backwards, you get the same word.
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Timothy W. Tuttle & Associates