Timothy W. Tuttle & Associates
Volume 5 Edition 8 Please email comments to email@example.com Aug 2009
Major Tax Deadlines
For August 2009
Businesses are required to make federal tax
deposits on dates determined by various factors that differ from business to
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 you or your business, contact our office.
What's New in Taxes:
An update on tax collections
The economy hasn't been doing well, and when the economy slumps, so do tax collections. The American Institute for Economic Research reported a 34% drop in federal taxes collected in April 2009 compared with April 2008. For the 12 months ended in April 2009, tax revenue dropped 44% compared to a year earlier.
On the topic of taxes: President and Mrs. Obama reported 2008 income of $2.7 million and paid $855,000 in federal income tax. Vice President and Mrs. Biden reported $269,000 of income and paid $47,000 in federal income tax.
Put midyear tax planning on your summer agenda
Summer's here, and probably the last thing on your mind is tax planning. The problem is that if you wait until December, there's little time for changes to take effect. But if you take the time to plan now, you still have six months for your actions to make a difference on your 2009 tax return. With the recent tax changes, planning for the reduction of your 2009 taxes is more important than ever. Here are some suggestions to get you started.
* Pull out your 2008 income tax return, and review your income and deductions. Did you lose any credits or deductions because your income was above a certain threshold amount? If so, what can you do to keep this year's income below the threshold?
* You might want to schedule home improvement projects to benefit from the tax credits available for energy-saving expenditures on your principal residence.
* Evaluate your investment portfolio. If you have been avoiding the disheartening news, now is the time to reassert control over your investments. Review your holdings to see if you should take some losses to offset other income. If you're considering investment purchases, analyze the type of income you'll be receiving from the assets you buy. Then stash the investment in the proper account (taxable, deferred, or nontaxable) to achieve maximum return and tax savings.
* Adjust your retirement plan contributions. Are you still making contributions based on last year's numbers? Maximum amounts have increased for some plans in 2009. You can contribute up to $11,500 to a SIMPLE, up to $16,500 to a 401(k), and up to $5,000 to an IRA. Remember to add catch-up contributions if you'll be 50 by the end of December.
* Factor two recent tax changes into your planning for retirement fund withdrawals if you're 70-1/2 or older. First, the option to make a direct nontaxable donation of up to $100,000 from your IRA to a charity has been reinstated. Second, the requirement to take a minimum distribution from your retirement plan is waived for 2009. This applies to 401(k) plans, 403(b) plans, certain 457(b) plans, and IRAs.
* Now is the time to do tax planning for the upcoming fall college expenses. Check out the various tax breaks, including the new, enhanced Hope credit (renamed the American opportunity credit).
* The estate tax is still alive and well, so as part of your midyear review, do any updating that's needed to your will and other estate documents.
* Do some business tax planning, too. Plan your equipment purchases to benefit from the extension of 50% bonus depreciation for new equipment and up to $250,000 first-year expensing for new or used equipment.
Mix business with your summer vacation and you might be able to deduct some of your travel expenses on your 2009 tax return. To benefit, the primary reason for your trip has to be business.
Making time for 2009 tax planning now not only helps reduce your taxes, but also helps to put you in control of your entire financial situation. Tax planning should be a year-round process, but it's especially effective at midyear. Give us a call for guidance in implementing the best moves for your particular situation.
IRS defines new groups for work credit
The work opportunity tax credit is available to businesses that hire workers from certain disadvantaged target groups. The credit is based on the first-year wages paid to qualifying employees.
The "American Recovery and Reinvestment Act of 2009" added two new groups to the list that qualifies for the work opportunity credit: unemployed veterans and disconnected youth. The IRS recently published the definitions of these new categories.
An unemployed veteran is one who left the military during the five years prior to being hired and who received unemployment benefits for at least four weeks during the year prior to being hired.
A disconnected youth is an individual age 16 through 24 who has not been regularly employed or attending school during the six months prior to being hired, and who lacks basic skills for employment.
Consider incremental cost in business purchasing
If you run a business, you probably make many different kinds of purchasing decisions. You might buy some items infrequently and only one at a time (for example, computers). At the other extreme, there are probably some items that you buy regularly and in relatively large quantities. For a print shop, paper might be your highest volume purchase. For a manufacturing business, it might be plastic or steel.
If you are responsible for buying large quantities of a single item, you'll want to become familiar with the concept of "incremental cost." It sounds forbidding, but it's relatively easy to understand, and it can be a powerful tool.
Example: Product X is a vital part of your business, and it's available at the following prices:
UNITS OF PRODUCT X 1,000 2,000 3,000 4,000
TOTAL PRICE $2,500 $4,750 $6,750 $8,750
AVG. PRICE PER UNIT $2.50 $2.38 $2.25 $2.19
Based on average price per unit, an order of 4,000 would seem to offer the best deal, at $2.19 per unit. But take a closer look. In this example, it costs an additional $2,000 to order 4,000 units instead of 3,000 units, which means that each of the additional 1,000 units has an incremental cost of $2.00.
However, the incremental cost to go from 2,000 to 3,000 units is exactly the same - $2.00 per unit, or a total of $2,000. In this example, your incremental cost does not decline after 3,000 units, so that's the quantity you might decide to order.
In real life, your purchasing decisions may be more complex, and you may need to consider issues like cash flow and storage costs. Even so, the concept of incremental cost can be a help. For assistance with cost decisions in your business, give us a call.
What's New in Finances:
Social security and Medicare to go broke
earlier than expected
The federal government estimates that Medicare and social security will run out of money even sooner than previously predicted. According to these latest estimates, Medicare will be depleted in 2017, and the social security trust fund will run out in 2037.
As baby boomers retire and sign up for social security and Medicare, these programs will be paying benefits to millions more. It's estimated that the number receiving social security benefits will increase by one to two million a year from 2009 through 2032. In the 1990's, by comparison, about half a million beneficiaries were added each year. Starting in 2011, more than one million people will be added to Medicare each year.
Consider direct education gifts - There's no limit and no taxes
There are many ways to pay for a child's education, but one of the methods that you might not be aware of is that of direct education gifts.
In 2009 a person is allowed to give up to $13,000 to another individual without running afoul of the gift tax exclusion. However, if a payment is made directly to a qualifying education institution, the $13,000 per person annual gift limitation does not apply. Not only are the gift tax limitations removed, making substantial education payments in this manner could also reduce the taxable estate of the person making the gift, thereby reducing exposure to estate taxes.
In this case, a "child" doesn't have to be your offspring. It can be a niece, nephew, grandchild, or anybody else of any age, either related or unrelated. And the term "education" isn't limited to only college tuition. The rules also apply to private education institutions where tuition is a requirement for entry, such as elementary and high schools.
However, only tuition is allowed to be paid under these rules. Books, room, board, supplies, and entertainment aren't eligible for this exclusion.
It's even possible to make payments for multiple school years at one time, so you're not limited to making annual gifts for each school year. A potential pitfall to this multiple-year strategy is that once the funds are given to the institution, they can't be refunded. If the student decides not to attend that institution, your tax-saving plan will have backfired.
While this gift and estate tax savings strategy might seem simple, contact us for assistance to ensure the desired outcome.
Take a Break
A thought to ponder...
You're never as old as you're going to get. (Does that make you feel better?)
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Timothy W. Tuttle & Associates