February 2007
Make Estate Planning a Priority
February 2007
Make Estate Planning a Priority
Estate planning often takes a backseat to other matters that seem more pressing. But it's something you really should take care of, as uninviting as the prospect may be. Here are five estate-related items that deserve attention.
Your will
Unless you have an up-to-date will, your property may not be distributed as you would have wanted. In the absence of a will, the probate court will use state "intestacy" law to determine the distribution of your estate. Your will is also the place to name a guardian for minor children.
Titling of property
How your property is titled is critical. For example, if you are married, you may own various assets - your home, other real estate, investment accounts - jointly with your spouse. When one of you dies the survivor will automatically become the owner of assets owned jointly with a right of survivorship. Probate court is bypassed, but tax or other planning complications can sometimes outweigh this advantage.
Business continuity
Outlining a plan for the transfer of any business interests you have and for the payment of estate taxes that may be due can help ensure the business's survival without threatening your family's financial security.
Taxes
Federal estate tax laws are in period of transition. For those dying in 2007 and 2008, taxable estates worth up to $2 million generally are not subject to federal estate tax. The federal exemption will increase to $3.5 million for 2009. In the year 2010, the tax is repealed, but it will return in 2011 with a $1 million exemption unless current law is changed. Some states also impose death taxes. If taxes may be an issue, there are various planning strategies you might consider to reduce the potential burden.
Once you have an estate plan in place, don't just forget about it. Your plan may need to be updated periodically for tax law changes and significant life events, such as marriage, divorce, the birth of a child or grandchild, a business purchase, or relocation to a different state.
This tax filing season, the government will be refunding federal excise tax paid on long-distance service for March 2003 through July 2006. At their option, businesses and tax-exempt organizations may use an IRS-provided formula to estimate their refunds.*
The formula method uses information from the April 2006 (includes tax on both local and long-distance service) and September 2006 (includes tax on local service only) phone bills. First, the percentage of each bill attributable to federal excise tax is calculated. Then the difference between the two percentages is applied to total phone expenses over the 41-month period. Refunds are capped at 2% of total phone expenses (250 or fewer employees) or 1% of expenses (more than 250 employees).
Sole proprietors filing Form 1040, Schedule C have somewhat different options. We can provide details.
*The IRS has provided optional standard refund amounts for individual claims.
Planning the "fun" part of retirement is easy. Just make a list of all the things you want to do that you don't have time for now. Planning the financial part of your retirement can be much more stressful. How can you be sure you'll have enough money to live on when you don't know how long your retirement will last or how well your investments will perform?
What They Are
Offered by life insurance companies, immediate annuities are contracts that are purchased with a single lump-sum premium. Payouts begin immediately according to the terms of the contract. Several payout options are available.
Payments for a fixed period
This option provides payments for a certain number of years (the fixed term). If you die before the term is up, the beneficiary of your annuity receives the rest of the paypments. If you outlive the term of the annuity, however, the payments stop.
Payments for life
Single life or straight life payments eliminate the risk of outliving your annuity income - you receive payments as long as you live. However, if you die before you receive payments equal to your premium, the insurance company kekeps the remainder. There is also a joint-and-survivor life option that provides payments as long as either spouse is living.
A combination of both
Many annuities offer a single life option with a guaranteed minimum term. This option provides you with lifetime payments regardless of how long you live. If you die before the guaranteed period is up, your beneficiary receives payments for the remainder of the term.
Right for you?
One strategy might be to use a portion of your savings to purchase an immediate annuity to cover your basic expenses. Nonessential expenses would come out of your other savings, giving you flexibility and control over how quickly you deplete your nest egg.
While immediate annuities can be useful, they also have drawbacks. You'll want to carefully weigh the pros and cons, including fees and other costs, before you make any decisions.
Every year, the IRS announces optional mileage allowances. Businesses and individual taxpayers can use the allowances (instead of their actual expenses) to figure out their transportation deductions. Starting in January 2007, the allowance for business travel is 48.5¢ per mile, up 4¢ a mile. The allowance for mileage related to essential medical care is up 2¢ to 20¢ a mile, as is the allowance for miles driven in connection with a move that qualifies for the moving expense deduction. The allowance for miles devoted to charitable use remains at 14¢ per mile.
Why Are They Different?
The allowance amounts are based on the tax deductions that apply - and those vary by use. The deductions allowed for business use, for example, include the cost of owning a vehicle - depreciation or lease payments - as well as operating costs, including repairs, routine maintenance, tires, gasoline, oil, insurance, and license and registration fees.
When a car is used for qualified medical reasons or moving, only out-of-pocket expenses are deductible. Therefore, the optional mileage amount is lower. The mileage allowance for using a vehicle for charitable purposes was set under the Taxpayer Relief Act of 1997 and is not subject to adjustment.
Another Option
In some cases, claiming actual expenses (plus depreciation for businesses) may result in a bigger deduction. There are numerous restrictions, however, so check with us to see which approach will yield better results.
You can't expect every employee to be at work every day. In fact, you may encourage your employees to stay home when they are sick. Still, from a workflow and cost perspective, unscheduled absenteeism can be a real problem for businesses.
It's a problem that is becoming more prevalent, according to the 2006 CCH Unscheduled Absence Survey. The absenteeism rate among surveyed employers climbed to 2.5% in 2006, its highest level since 1999. Why are employees taking unscheduled time off? The survey found that only 35% of unscheduled absences were due to personal illness, while other reasons, such as family issues, accounted for 65% of the absences.
If poor attendance is a problem for your business, you may want to revisit your attendance policy to make sure it is clear, well communicated, and consistently enforced. Offering incentives for exemplary attendance also might prove helpful.
When a project doesn't go particularly well for your business, what do you do? You probably review procedures form start to finish and try to pinpoint the things that could have been handled differently. Small businesses can't afford to make the same mistake more than once. So analyzing your mistakes and uncovering your weaknesses is important.
What do you do when a project goes well? Maybe you treat your employees to lunch or take some well-deserved time off. But do you conduct a thorough project review? Duplicating your successes and uncovering your strengths is just as important as avoiding your mistakes - so add some post-success analysis to the mix.
Sift Through the Details
Project analysis is the same whether you're reviewing a success or a less than stellar performance. You want to look at as many details as possible and identify the ones that made a difference, positive and negative. Since each project is different, no single template will apply to every analysis. But these general suggestions can serve as a starting point.
Your Secret Ingredient
Maybe your analysis will uncover some surprises. But even if it doesn't, delving into the details will help you make the most of your most valuable resources: the staff and the processes that are driving your successes - and setting the stage for more to come.
More than one third of families headed by a person age 55 or older were carrying housing and/or credit card debt in 2004. the median amount of housing debt was $60,000, while the median amount of credit card debt was $2,000. Source: Employee Benefit Research Institute, Fast Facts from EBRI, November 2006
Taxpayers claiming a credit for the payment of higher education expenses need to have proper records to back up the amount of tuition and expenses they paid. The IRS has cautioned that amounts reported by colleges on Form 1098-T reflect amounts billed, not amounts actually paid.
Payroll taxes aren't the only thing at stake in determining whether a worker is an employee or an independent contractor. Overtime pay can also be an issue. In a recent case involved a satellite TV installer who worked six days a week for a company, the court sided with the company in finding that he was an independent contractor not entitled to overtime pay.
As of last November, the IRS was holding refund checks worth $92.2 million. All told, there were 95,746 checks that had been returned as undeliverable, averaging $963 each.
Fran is working with a group of people to open a nature center in her community. They would like to operate the center as a tax-exempt nonprofit organization.
The group will want to obtain IRS approval to operate as a tax-exempt nonprofit organization. The federal tax law spells out several requirements that must be met.
To be officially recognized as a tax-exempt organization, the nature center will have to file a formal application with the IRS. An employer identification number should also be obtained.
Assuming all applicable tax law conditions are satisfied, the organization should qualify as a "Section 501(c)(3)" organization that can accept tax-deductible contributions. In general, a Section 501(c)(3) organization is a nonprofit that is organized and operated exclusively for charitable, education, literary, religious, or scientific purposes. The tax code also lists a number of other categories of tax-exempt organizations, such as veterans' organizations and trade associations.
After the new organization's tax exemption is granted and the nature center is up and running, Fran and her colleagues will want to monitor its activities closely. Even a tax-exempt organization can owe income taxes if it has "unrelated" trade or business income.
As experienced professionals, we are familiar with the many financial and tax issues that arise in forming and operating a non-profit organization. If you are involved with an organization that needs assistance, please let us know. We'd be happy to meet with you.
Question: When I was gathering my 2006 tax information, I came across a 1099 form from 2005 that showed bank interest that wasn't reported on my 2005 return. Can the missing income be included on my 2006 return?
Answer: While that might seem to be the simplest solution, it's not permitted. You should file an amended return for 2005 and pay any extra tax you owe (plus interest).
Question: My ex-husband and I have two young children. I have custody of the children, but he will be claiming the child tax credit and dependency exemptions fro them on his tax return. (I've signed a release). Am I still allowed to claim a credit for their child-care expenses?
Answer: Yes, assuming you meet the requirements for the credit. You also may be able to file your return as a head of household. The head-of-household tax brackets are more favorable than those used by single taxpayers.