Thanksgiving greetings to our clients and friends.
It's time to begin preparation for the 2005 income
tax filing season. You can start by collecting and keeping track of your
income and deductions documentation.
Enclosed is the November issue of "Tax Tips and
Facts" to read at your convenience.
If you have any questions feel free to give me a call at 781.963.RAK-1, or
send me an email at: kahan@rak-1.com.
Electronic filing has grown leaps and bounds. In fact,
the state has mandated electronic filing for most professional preparers,
individuals AND business entities. I am one of those tax preparers that
is required to file returns electronically for clients.
Here are a few things to remember in preparation
of your tax return:
• Names should be exactly as they appear
on your social security card
• Confirm that your social security number
is correct
• Include all dependents, date of birth
and social security numbers
Please understand that you can file electronically
even if there is a balance due. You do not have to pay until April 15
th and only mail a check, not the whole return. (Think of the postage
you will save.) Complete instructions will be included with the client
organizer kit to be mailed around January 1st. If you wish, I can arrange
for your bank account to be charged on April 15, 2005, so you don't have
to worry about watching for the date to mail the check.
There has been recent legislation regarding Tax Credits
on Energy Policy Act of 2005.
Autos: Credits range from $1700 to
$3000 depending on various factors. This replaces the $2000 credit for
hybrid cars and is available 2006-2009.
Primary residences: Credits of up
to 10% of the cost of energy saving improvements done in 2006 & 2007
with a lifetime credit maximum of $500. There are other energy credits
for solar systems etc.
The law also extends daylight savings beginning 2007 (I
do not understand why they make us wait so long). It starts the second
Sunday in March rather than the first Sunday in April and ends the
first Sunday in November rather than the Sunday in October.
Once again I will be pre-booking tax preparation
appointments. Your appointment information will be mailed along
with your client organizer kit . Those of you who prepared your
return by mail will only receive the organizer kit, however, if you would
prefer an office appointment give me a call, as I would be happy to see
you. Those of you, who have come in for an appointment, but prefer to mail
in the information, please call and let me know so that I may adjust my
calendar accordingly.
Have a great Thanksgiving...
I look forward to hearing from you after the New Year!
TOPICS
COVERED IN THIS ISSUE
- TAX PREPARATION TIME
- PLAN MARRIAGE WITH TAXES IN MIND
- CORRECTING LATE 401(K) DEPOSITS
- WAGES TO ILLEGAL ALIENS
- GIFT TAXES
PLAN MARRIAGE WITH TAXES IN MIND
If you are planning to marry around the end of the
year, review the tax consequences now. There may be compelling reasons
to delay that wedding until 2006.
Although the “marriage penalty” has been reduced, it
still exists, especially at those higher income levels. Moreover, marriage
can affect taxes in various ways due to specific items on the spouses'
returns, such as:
- If both spouses have income and one has a large item that is
deductible only to the extent it exceeds a percentage of adjusted
gross income (AGI) such as a medical deduction that is deductible
only to the extent that it exceeds 7 1/2% of AGI, or one spouse
has a large employee business expense that must exceed 2% of AGI,
then combining AGI on a joint return will reduce or eliminate the
deduction. May items on the tax return have AGI-related limits,
so it is best to “run the numbers” and see which filing status
is better to report.
- If one spouse has a large capital gain, while the other has a
net capital loss in excess of $3,000 that cannot be deducted, marriage
can let the loss be used to offset the gain to save tax.
You may want to either move marriage up to 2005 or
delay it until 2006. This kind of tax planning may pay for your wedding.
I mention this subject now, as the question has come
up a lot in the past few weeks.
Planning for the future
is a lot like planting a tree. You've got to do it today if you want
your family to enjoy it tomorrow.
CORRECTING LATE 401(k) DEPOSITS
Sometimes it just happens. The person responsible for
payroll takes a vacation and forgets to send the 401(k) deposit in prior
to leaving. At the end of the year, the accounts are reconciled and low
and behold, the missing contribution is found.
The Department of Labor (DOL) takes a very harsh position
on this occurrence. This is considered a prohibited transaction (PT)
and is subject to all sorts of sanctions. The PT must be immediately
corrected and an excise tax is due for as long as it is outstanding.
Additionally, if the correction is made in another plan year because
it crossed over, two Form 5330's must be filed with a doubling of the
excise tax.
Interest is due from the date it should have been made
to the date of the correction. The DOL has provided worksheets for a
safe-harbor computation on their website. Even if all corrections are
made, the DOL can still impose a 20% penalty tax on the fiduciaries for
the breach of their responsibility.
Clearly an overkill for a minor infraction. To avoid
the 20% penalty tax on the breach, you can file under the Voluntary Fiduciary
Correction Program and the DOL will issue a no penalty letter.
If the late deposits happen to you, contact our office
and we can help you through this maze.
To be on the safe side, always deposit the 401(k) contributions
and loan repayments on each pay date. Most vendors accept electronic
submission of the payroll data in an ACH deposit.
Did you know we do more than just prepare,
compile, and crunch numbers? We are not just 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 many other professionals.
WAGES TO ILLEGAL ALIENS
Individual Identification Numbers (ITINs) are issued
by the Internal Revenue Service to certain nonresident and resident aliens,
their spouses and dependents. It is used for income tax purposes only.
An ITIN is not a legal identification number for employment. ITINs begin
with the number '9' and are formatted like a Social Security number with
the fourth and fifth digits ranging from 70-80.
The Social Security Administration offers employers
and authorized reporting agents two methods for verifying employee Social
Security Numbers (SSNs). To verify up to five names and numbers, call
800-772-6270. To verify up to 50 names and numbers, contact your local
Social Security office. For more information, check www.ssa.gov/employer/ssnv.htm.
GIFT TAXES
To reduce your estate and ultimately your federal and/or
state estate taxes, you may make annual gifts of a present interest in
property up to a value of $11,000 per donee per year without incurring
a federal gift tax. If you spouse consents, the limit can be increased
to $22,000 per year, per donee. This means, for example, if you make
gifts of $22,000 to each of six donees (your children, daughter- or son-inlaw,
grandchildren, etc.) you will have removed as much as $132,000 from your
estate without paying any gift tax.
This method of transferring property will not affect
the $555,800 Applicable Credit (formerly, the Unified Credit) or the
Gift Tax Credit (the $1.5 million estate value exemption). In an estate
with a potential tax bracket of 48%, this can mean an ultimate federal
estate tax savings of $63,360 plus a Massachusetts estate tax. You have
made the gift to those who would probably inherit the property from you
eventually, and this way, you may be able to watch them enjoy it.
In order to take advantage of the annual exclusion
(either $11,000 or $22,000) for 2005, you must COMPLETE the gift
on or before December 31. This means you must actually transfer the
property by December 31. An intent or unwritten agreement will not
be sufficient. The check used as a gift must clear your bank by December
31. Merely adding the donee’s name to the bank or broker account
or Certificate of Deposit is not sufficient to trigger the transfer.
If you gift stocks or bonds, the transfer must be recorded by December
31. Gifts of $11,000 or more or more to any one donee must be reported
on Form 709 by April 15 of the year after the year in which the gift
is made.
There are some waiting periods in order to escape
an add-back of a gift. Under current law, for Medicare/Medicaid purposes,
a gift within 36 months of admittance to a long-term care facility
(or entrance into the Medicaid program) will be added back to your
amount of countable assets that you may need to "spend down" in order
to get Medicaid coverage. You might consider supplementing your gift
planning and obtain long-term care insurance coverage for at least
three years. If you are thinking of purchasing long-term health care
coverage, please shop around. There are some, although not many,
policies that will only pay if you conform to their many limitations
and restrictions. Consult with an insurance or financial professional
before you make a deposit or sign an agreement. It may be well worth
the cost or fee.
I am licensed to discuss and sell long-term care insurance
coverage as you may require. Give me a call and arrange an appointment
to see the many options and coverages.
