Timothy W. Tuttle & Associates
Volume 4 Edition 10 Please email comments to email@example.com October 2008
Major Tax Deadlines
For October 2008
* October 15 - Deadline for filing 2007
individual tax returns on automatic extension of the April 15 filing deadline.
* October 15 - If you converted a regular IRA to a Roth IRA in 2007 and now want to switch back to a regular IRA, you have until October 15, 2008, to do so without penalty.
* October 15 - Deadline for filing 2007 partnership and limited liability company returns on extension of the April 15 filing deadline.
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.
DISASTER EXTENSIONS: Several states have suffered from disasters. If you are in a "covered disaster area," you may qualify for extended payment or filing dates by the IRS.
For more information on tax deadlines that apply to you or your business, contact our office.
What's New in Taxes
Year-end tax planning is essential this year
As Congress works to settle the financial markets, its attention is diverted from tax issues. However, you need to keep your eye on how any tax changes Congress makes before year-end could affect your tax situation for 2008.
Year-end tax planning is always a smart thing to do, but this year it becomes even more important. We are coming up on the sunset year for the 2001 tax law, a new President in 2009, and almost certainly major tax revision in the next year or two. So please call our office soon to schedule a review of your tax situation and a look at options you might consider to minimize your taxes, both in the short and long term.
You may qualify for a tax break when you sell vacant land
You probably know that you can exclude up to $250,000 of gain ($500,000 for most joint filers) when you sell your principal residence. IRS regulations may now allow you to apply this gain exclusion when you sell vacant land that is adjacent to your home.
To qualify, the land you sell must be adjacent to the parcel on which your house sits. Also, the land sale must occur within two years before or after the residence is sold. You must meet the other usual requirements for claiming the exclusion. If you qualify, you can apply your $250,000 or $500,000 exclusion to both sales combined.
Example: You own and live in a house which sits on four acres. You decide to sell the house on a one-acre lot and sell the other three acres of empty land to a developer. Provided the land sale occurs within two years before or after you sell the house, you can exclude up to $250,000 ($500,000 if you file jointly) of the combined gain from both sales.
Partnership filing extensions shortened next
Partnerships are "pass-through" entities that file Form 1065 reporting partnership income but paying no income tax. Instead the income "passes through" to partners who pay tax on their share of the partnership's income on their individual tax returns.
The filing deadline for Form 1065 for partnerships on a calendar-year is April 15 of the following year. An extension of time to file has been available giving the partnership an additional six months or until October 15 to file.
That will change next year. For tax returns due after December 31, 2008, the extension period is shortened from six months to five months, giving partnerships until September 15, 2009, to file their 2008 returns.
The change will benefit individual partners who will now have their K-1s a month earlier, giving them the information they need for filing their extended individual tax returns (Form 1040) due on October 15.
S corporations are now facing increased scrutiny from the IRS
According to the Journal of Accountancy, the S corporation is the most popular form of business ownership in the country, swelling to around four million entities. The primary reason for their growth is that S corporations avoid the double taxation that applies to regular C corporations while still offering protection from personal liability.
However, as the popularity of S corporations continues to rise, they are facing greater scrutiny from the IRS. In particular, the IRS has focused its attention on three issues.
* Shareholder-owner compensation. The basic tax rule is that compensation paid to shareholder-employees must be reasonable in amount. Historically, the IRS has questioned compensation amounts paid to C corporation owners that seemed unreasonably high. With an S corporation, a high-tax bracket owner may establish a compensation amount that is extremely low, or even zero, while increasing other pass-through income (i.e., dividends). By doing so, the owner avoids employment taxes on these payments.
The IRS recognizes the tax benefits of this strategy. Therefore, it may object to compensation that appears to be low relative to corporate profits.
Suggestion: Have compensation reviewed before the end of the year. If appropriate, the S corporation may pay bonuses to shareholder-employees. In any event, document the reasons for compensation amounts.
* Shareholder basis. Generally, a shareholder's "tax basis" for deducting corporate losses may be increased by contributing additional capital to the company, buying more stock, or lending funds to the company.
The IRS may challenge basis adjustments resulting from loans by third parties to the company. Furthermore, it has consistently maintained that a shareholder's guarantee of an S corporation debt does not increase basis.
Suggestion: Loans should be made directly from the shareholder to the S corporation. A written note, based on reasonable terms, can serve as proof that a bona fide loan exists.
* Fringe benefits. An S corporation may provide tax-free fringe benefits, like health insurance or employer-paid group-term life insurance coverage (up to $50,000), to its employees. However, if an employee owning 2% or more of the company receives fringe benefits, he or she is generally taxed on the value. To avoid abuses, the IRS may examine fringe benefit packages.
Note that there are several exceptions to the general rule. For example, certain "working condition" fringe benefits are tax-free to 2%-or-more shareholders.
Suggestion: Consider restricting benefits for owners to those that are essential or that result in minimal or no taxation.
In summary, S corporation owners must be careful to observe all the technicalities in the tax law. For assistance, contact our office.
What's New in Finances
Review your accounts for FDIC coverage
In today's financial environment, it's wise to review your various accounts to see if you have the protection you think you have.
As part of the bill signed by President Bush on October 3, 2008, the Federal Deposit Insurance Corporation (FDIC) provides $250,000 of basic insurance protection for personal bank accounts, including certificates of deposit (CDs), through December 31, 2009. That's $250,000 per person, per institution. To increase your protection, you can spread your accounts over a number of different banks (though accounts in different branches of the same bank will be aggregated).
Joint accounts are insured apart from separate accounts, so you can increase your coverage by putting some funds into a joint account.
You might also check out the "CDARS" option that lets you use one bank that disperses your large deposit among member banks, keeping each account under the insured amount.
Certain types of assets aren't covered by FDIC insurance, such as the contents of safe deposit boxes and annuities. Others have different coverage amounts, such as IRAs which are insured up to $250,000.
Review your accounts and your options for expanded protection with your banker, or visit the FDIC Web site (www.fdic.gov/edie) for more information. This FDIC site has an excellent estimator to help you determine coverage for your accounts.
Teach your children about money
If you haven't already started teaching your children about money and finances, you're neglecting an important part of their education. Consider these suggestions:
* Teach children how to live below their means. Children learn by example, and you can be their best teacher. Teach them to think first and spend later. Impulsive spending increases your children's chances for getting in over their heads with consumer debt.
* Illustrate the power of compounding. Here's an example. If your child invests $1,000 from a summer job at a 6% return, the investment will double in 12 years, grow to over $4,000 in 25 years, and exceed $10,000 in 40 years - all this from a single $1,000 investment.
* Fund a Roth with summer earnings. If your child has a summer job, consider setting up a Roth IRA. The funds can be withdrawn to cover college expenses or left to grow for retirement. If your daughter invests $5,000 in a Roth at age 16, and the fund earns a 6% return, by age 65 that $5,000 will have grown to over $86,000 tax-free. If she continues to invest $5,000 every year to age 65 with a 6% return, the balance will exceed $1,400,000.
* Match savings. Consider matching every dollar your child puts into savings. It may prepare him or her for later participation in an employer's 401(k) plan.
If you want your children to be money-smart, take the necessary steps to educate them while they're young.
Take a Break
How does the national debt stack up?
The U.S. national debt is currently $9.6 trillion. Yes, TRILLION. The U.S. population is currently 305 million. That translates to $31,500 of debt for every man, woman, and child in America.
Here's another way to picture it: Our national debt in one dollar bills would pave a one-foot wide path to the moon.
For you football fans: You can cover 18,500,000 football fields with the national debt in one dollar bills. Or stack the dollar bills on one football field, and your stack would be 1.2 miles high.
While you're considering these numbers, keep in mind that the financial bailout package could raise the national debt even higher.
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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