November, 2007
2007 Tax Reminders
November, 2007
2007 Tax Reminders
Another year is winding down, and that means taxpayers should be alert to any last minute steps they can take to reduce their federal income taxes. Here's a brief list of opportunities you might have missed.
Energy credit. Replace your old furnace with a new energy-efficient model and you could qualify for a tax credit of as much as $150. The credit is also available for various other energy-efficient improvements to your principal residence. (Amounts vary.) Unless Congress extends this credit, it won't be available after 2007.
Charitable rollover. Taxpayers who have reached age 70-1/2 can make a tax-free rollover from their traditional individual retirement account (IRA) to a qualified charity. Up to $100,000 may be rolled over, and the rollover will be counted toward satisfying the taxpayer's required minimum distribution (RMD) for the year. This is another tax break that won't be available after 2007 unless it's extended.
Tuition deduction. Pay college tuition bills for yourself or your dependent this year and you might be able to claim a deduction for the expense on your tax return. The tuition deduction is capped at $4,000 or $2,000, depending on your income level, and it isn't available if you have modified adjusted gross income exceeding $80,000 ($160,000 if married filing jointly.) Absent a law change, this deduction isn't on the books for next year.
Zero percent capital gain rate. Turning things around, this is a tax opportunity you might want to wait for if you expect to be in a 15% or lower regular income-tax bracket next year. If you anticipate a long-term capital gain from the sale of stock or other securities, waiting to sell your investment until 2006 could save you taxes. From 2008 through 2010, the 5% capital gains rate available to those in the lowest tax brackets is replaced with a 0% rate. In other words, the gain will be tax free. But be careful. With stocks and other securities, there's always the chance that your paper gain could disappear if you wait to sell your investment.
All of the tax provisions mentioned here have various requirements that you'll need to meet to benefit from them. We can fill you in on the details if you are interested.
Individuals are generally supposed to pay their federal income taxes during the year through paycheck withholding and/or by making quarterly estimated tax payments. Penalties can result if estimated tax payments for the year fall short of the rquired amount, which is either:
*An underpayment penalty won't apply if the tax shown on the return, after reduction for withholding taxes paid, is less than $1,000.
If you're the owner of a small business, the following may not come as a surprise: Government figures released earlier this year* show that wages and salaries paid to employees of small firms (between 1 and 99 workers) accounted for 73.8% of total employee compensation. The remaining 26.2% is the cost of the employee benefits that employers provided.
Provide A Reality Check There are several good reasons why your employees should be aware of their "hidden" compensation. The most important may be to make them aware of your costs. You might want to prepare a company-wide benefit statement showing how much you spend on paid leave, health insurance, and contributions to a retirement and/or profit sharing plan, as well as other insurance premiums and benefits (including the legally required ones: Social Security, Medicare, workers' compensation, and unemployment insurance). This can be a real eyeopener.
Get Feedback A public review of your employee benefits is also an opportunity to make sure your workers known what's available to them. It could lead to questions and provide you with feedback about what your staff feels is important. You might find out that something you view as a valuable benefit is not something your employees need or use - or even want.
Encourage Understanding If you're planning to make changes that call for your employees to absorb a greater portion of their benefit costs, workers may be more sympathetic when they understand the economics of your decision. If you have to deliver a negative message, be honest and straightforward. Being prepared with cost comparisons for a number of years will help your employees see the big picture. And be sure to highlight the costs that you still plan to cover.
If you'd like our help preparing figures that show how much you provide in the way of benefits, just give us a call.
As a business owner, you should be aware of a few estate planning matters that deserve special attention. The successful transfer of your business may depend on it.
Organizational Documents How long has it been since you (or a professional advisor) reviewed your organizational documents? If they've been gathering dust, put a review on your to-do list so you can make sure they are up to date.
It may seem like an unnecessary formality, but corporations are supposed to have annual shareholder meetings and keep minutes of the meetings. The minutes serve as a record of key business decisions and will be very hepful to have if the IRS or a state taxing authority audits your company or if you sell the stock in a buyout.
Integration Issues, Part I The language in a real estate deed outranks the language in either a will or a business agreement. For this reason, you'll want to make sure that ownership of any business-related real estate is coordinated with your personal estate plan. Also confirm that your company stock is appropriately titled.
Integration Issues, Part II You also want to make sure that your estate plan and your business agreements are in sync. For example, you may have a buy-sell agreement that requires annual valuations of the company. Failure to do such valuations could cause serious problems.
Steps taken now can prevent battles over who owns what following your death. Otherwise, your intentions could be derailed and your business could become the main casualty.
More than 650,000 small nonprofits - those with gross annual receipts of $25,000 or less - have been getting mail from the IRS. The news isn't bad, but it is important. It's about a new notice that these organizations must file.
Form 990-N Tax-exempt organizations with gross receipts over $25,000 generally must file annual information returns (Form 990 or Form 990-EZ) with the IRS. In the past, organizations that didn't meet that threshold didn't have to provide information. But a recent tax law changed that. For tax years beginning after 2006, many small nonprofits will have to submit a Form 990-N, "Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ.
Filling out the e-Postcard is simple and straightforward, says the IRS, and only basic information is required. But continued failure to file could lead to the loss of tax-exempt status.
When he first started thinking about opening Marvin's Magic Shop. Marv had no clue what was in the cards. He knew there would be some red tape, but he was not prepared for the tangle of federal, state, and local regulations that have to be met.
Poor Marv was disillusioned. Just to open a business, he found out, a person must maneuver through a maze of permits and licenses. (Warning: The following is by no means a comprehensive list.)
A Short List All three levels of government - federal, state, and local - are likely to have requirements. For starters, an employer identification number (EIN) from the IRS is needed by businesses formed as corporations, limited liability companies, partnerships, and sole proprietorships that have employees.
As for an operating permit or license, new businesses generally don't need one from the federal government unless they are regulated by a federal government agency. Businesses typically do need a local license and, possibly, a state license as well, depending on the state and the type of business.
For certain businesses, environmental issues may also be s consideration. On all three levels, permits may be required. And retailers may need a seller's permit for something similar) from the state.
Things can get surprisingly complicated on the local level where there are zoning, building and safety, and health regulations and permit requirements.
A Real Solution Maneuvering through the regulatory maze has been hampered by the absence of a central clearinghouse of comprehensive information - until recently. The Small Business Administration (with 21 other federal agencies) has developed "Permit Me", an online tool that consolidates federal, state, and local government license and permit requirements in one place. It's at www.business.gov, along with a wealth of links to state agencies, compliance guides, and more.
Maria and Arturo never discussed finances before they tied the knot. After a year of marriage, however, they've discovered they have very different attitudes about money - Maria spends it freely, while Arturo wants to save for their future.
Everyone goes into marriage with established attitudes about money and financial matters. So it shouldn't be surprising if there are some bumps along the way. Maria and Arturo have an opportunity to work out their differences before their financial situation becomes more complicated.
The couple should start by having a frank discussion about their "fiscal philosophies" and their concerns. Next, they should identify financial goals that are important to both of them - a down payment on a house, perhaps, or a new car - and map out how to achieve them. Designing a budget that provides Maria with some spending money should also help.
Bill-paying can be a source of conflict. If Arturo has been in charge of paying all their bills, Maria may have no idea where their money is going. Paying bills together may give her a better understanding of their cash flow. If that doesn't work, they might be better off segregating their finances so that each one pays half of their shared expenses.
There are many ways to unite your finances. If your and your spouse's money isn't as happily "married" as you'd like, we'd be glad to help you explore other financial options.
Retail shrinkage - inventory losses occurring from employee theft, shoplifing, organized retail crime, administrative error, and vendor fraud - averaged 1.61% of retail sales in 2006, virtually the same as in 2005. Product categories experiencing the highest rates of shrinkage included: cards, gifts and novelties, crafts and hobbies, specialty accessories, and supermarket and grocery items (National Retail Security Survey, University of Florida and the National Retail Federation, 2007).
Qualified subchapter S subsidiaries and single-owner entities that are not treated as entities separate from their owners for most federal tax purposes must nonetheless pay their own employment and excise taxes, says the IRS in newly finalized regulation.
The average rate of employee turnover across all industries in 2007 was 18.3%, according to a Compdata survey. Turnover was highest in the hospitality industry (34.3%) and lowest in the utilities industry (8.6%).
A federal appeals court has reversed its own controversial decision in a case involving the taxation of personal injury awards, finding that damages for emotional distress and loss of reputation must be included in income.
Question: I'm a free-lance photographer, and I'm going out of town on business. I'd like to stay a few extra days to visit friends. Will my expenses be tax deductible?
Answer: As long as the primary reason for your travel is business related, the cost of your round-trip airline ticket is deductible as a business expense. You can also deduct the cost of lodging and 50% of your meals during the business portion of your trip. Any other spending is personal and not deductible.
Question: I want to put money into a Section 529 college savings plan for my granddaughter. Will that be considered a gift for federal gift-tax purposes?
Answer: Yes, but 529 plan contributions qualify for the gift-tax annual exclusion. So you can contribute up to the annual exclusion limit ($12,000 in 2007; $24,000 for married couples) for your granddaughter gift-tax free every year. To jump-start her savings, you can contribute up to five times the exclusion amount in one year gift-tax free, but your contributions for the next four years would be limited to any inflation increases in the exclusion.