ROGER A. KAHAN
Tax and Business Advisor, Wealth Care Professional
Serving the tax and financial needs of individuals and small to medium businesses
1214 Park St., Suite 203
Stoughton, MA 02072-3738
VOICE: 781.963.RAK-1 (963-7251)
E-mail: kahan@rak-1.com

Invest alone?
Type of life insurance
S Corporation losses
Tax planning for 2003
Certified?
Publication available
Tax Tip of the Week
Employee or contractor reporting
States’ use taxes
Lower your tax liabilities
Your child’s allowance
A trap for investors
Home mortgage interest
A tax benefit
Age 70½ distributions
Charitable contributions
Vehicle donations
Family wealth Management
Your retirement goals
Estate plans that work

Life insurance can provide protection in case of death, and can also function as an investment. Although many insurance companies offer a wide range of policies, there are really only two basic types of coverage: (1) term insurance and (2) policies that generate cash values. The choice of insurance product depends, of course, on what you wish to accomplish.

1. Term coverage: Term life insurance provides death protection for a specific time period. Premiums are based on the insured's age and may increase each year, but they are generally cheaper than other types of insurance such as whole life (discussed below). Some forms of term insurance include:

a) Renewable insurance, which may be renewed at the end of the term without having to take a new medical exam. The renewal rate is usually higher than the original premium.
b) Convertible insurance, which permits conversion into a cash-value policy without regard to changes in health.
c) Decreasing term insurance, which is term insurance with a constant premium and a declining face value. Such policies are commonly used for paying off a mortgage.

2. Cash-value insurance: Life insurance may be used to generate a forced savings or a rate of return as an investment.

a) Whole life: One of the most popular forms of insurance is whole (or permanent) life insurance. It provides coverage for the insured's life as long as a constant premium is paid. The premium both pays for the insurance and builds up a cash value return. Usually the policyholder has the right to (1) borrow the cash value at good interest rates, or (2) terminate the policy and receive the cash value. TIP: The cash value's rate of return may be below what is available from other investments.
b) Universal life: Universal life insurance combines a renewable term policy with a cash value feature. Many such policies guarantee a minimum interest rate of return. After you pay the first year's premium, the accumulated cash value can be used to pay the premium. You have the choice as to whether to make further payments (within certain limits). Also, many such policies allow you to select either a death benefit that is constant while the policy is in effect, or one that increases according to changes in the policy's cash value.
c) Variable life: This type of insurance provides a variety of investments for a fixed premium. The death benefit will reflect the investments' performance (i.e., the increase or decrease in cash value). These policies are securities that have prospectuses filed with the SEC.
d) Universal-variable life: This combines the flexible premiums of universal life with the investment choices of variable life.
e) Single-premium life: This is paid for only once. Its cash value can be invested in a variety of ways, but the return may not be guaranteed. A holder of this type of insurance may also be able to borrow against the cash value at low (or no) interest rates after the first year.
I have only outlined general considerations in analyzing the type of insurance that's right for you. You should seek the advice of a Wealth Care Professional for your specific situation. Further, it is vital that the estate planning implications of owning life insurance (not addressed here) be discussed with a person like me, a tax advisor.

For complete information on any of the above, including charges and expenses, obtain a prospectus or brochure. Read it carefully before investing or buying a policy. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be higher or lower than their original cost. This could affect your policy values.

Write-offs of S corporation losses are limited to the shareholder's tax basis in his/her stock plus any debt owed to him/her from the corporation less any loans or advances made to him/her.  If your S corporation will throw off a loss to you in 2002, you have an opportunity to determine when the loss may be taken on your income tax return.

If you have enough other taxable income to support the loss (and you want to take advantage of that loss), make sure the combination of your stock basis plus or minus debt owed equals or exceeds the anticipated loss.  If that combination of balances isn't high enough, consider making either a capital contribution or a loan to the corporation before the end of the year sufficient to bring it to the desired amount.

However, if you do not wish to take the loss in 2002, (because you anticipate your 2003 income to be substantially higher than 2002) make your combined balance of stock basis plus debt to be zero.  You can accomplish this by taking a distribution of the remaining combination amount prior to the end of the year.  As long as you do not distribute more than the combined balance, you should not trigger a taxable transaction.

Nondeductible S corporation losses can be carried forward indefinitely and used in later years when you have sufficient tax basis (you can contribute to capital, make a loan to your corporation, or have taxable income passed through to you in a subsequent year).
If you need help, please call our office.

The Internal Revenue Service has announced 36 cents as the optional rate for deducting or accounting for expenses for business use of an automobile, 14 cents as the optional rate for use of an automobile as a charitable contribution, and 12 cents as the optional rate for use of an automobile as a medical or moving expense for 2003. Plan ahead!

The Internal Revenue Service announced that a revised Publication 520, Scholarships and Fellowships is now available. This publication will provide basic federal tax information concerning scholarships, fellowships, and tuition reductions. You can get a copy of this publication by calling 1-800-TAX FORM, writing to the IRS Forms Distribution Center nearest you, or, download it from the IRS internet web site at www.irs.gov

If you are pleased with our services, please tell others. If you are not pleased with our service, please tell us; that way we can please you.

I am now writing TAX TIP OF THE WEEK that is periodically distributed over the Internet to a select list of people. Items may also appear in the printed monthly version. If you would like to be included in the weekly electronic distribution, just send your e-mail address with the subject of: “TTW subscribe” to kahan@rak-1.com and please include your name, city, and state of residence in the content of the message. We cannot accept a new name without a location. Thanks.

Did you know we do more than just prepare, compile, and crunch numbers? We are not “bean-counters.” We can also advise you on estate and business planning and offer financial strategies to meet your goals. As your CPA, we know your needs better than any other professional.

DON’T FORGET: “IT’S NOT WHAT YOU MAKE THAT COUNTS; IT’S WHAT YOU KEEP!”

A federal law mandates reporting of new hire employees to the state agency for child support enforcement activity.  Massachusetts again leads the way and requires that, in addition to employees, subcontractors who will be paid more than $600 on a 1099 basis be reported within 14 days of hire or re-hire after a lapse of more than more than 30 days of pay (e.g., maternity leave, or employees/contractors used on a seasonal basis, like school bus drivers or tax office support staff).

In Massachusetts, we are able to fax a W-9 or W-4 to the Mass Dept of Revenue (MDOR) within 14 days, or to report new or re-hires online.  For a small fee, I offer a reporting service to my clients who don't have computers or who don’t want to spend the time or I can give them a supply of preprinted W-4 or W-9 forms with the MDOR fax number so they can comply on their own.

Massachusetts will add enforcement activity soon to these laws by requiring the employer to pay the amounts MDOR might have collected from the wages/contract payments to deadbeat parents. This may sound a little harsh, but surely is a real wake-up call.

I recommend that my clients withhold any payment to subcontractors until they have a completed and signed W-9 in possession. I also suggest that an employer/payor send a letter to the contractor, which tells the contractor that if they do not provide the ID info timely, the payor is required by federal law to withhold 20% of the pay as backup withholding.  It works well.

Use taxes — i.e., taxes imposed by states in place of sales taxes — are often overlooked. Be sure your business is not hit with an unpleasant surprise in the form of unexpected enforcement of use tax liability.

Here is how use taxes work: Example: XYZ Co., located in State A, purchases equipment from a Web-based company located in State B. XYZ does not pay any sales tax on the transaction. XYZ Co. may be liable for a use tax, payable to State A, depending on the laws of State A. Had sales tax been paid on the purchase, use tax would not be owed.

TIP: When making out-of-state purchases, keep receipts showing that sales tax was paid. If no sales tax is paid on an out-of-state purchase, be sure to stay informed as to whether use tax is owed to your state on the purchase.

Note: There may be exemptions from use tax liability under certain circumstances.

Have your child work for you in your business and pay him or her a reasonable wage for time spent. Instead of paying a nondeductible allowance, you may be paying an "ordinary and necessary" business expense. Tasks such as answering the phone, filing papers, and doing simple maintenance jobs for a parent's business may qualify.

By the way, hiring an over age 14 family member and paying a reasonable wage may also be a benefit to the family as a whole by allowing you to deduct the wages at your HIGHER tax rate.