YES,
WE ARE BACK!
After the BEST tax season ever, I have finally
found time to create and issue TAX TIPS AND FACTS again. Thanks
go to our many clients (both old and new). We loved to be busy,
we loved to meet with all of you, we loved helping you save tax dollars
during this just passed tax season, and we loved helping you make those
savings grow for you in the future.
TOPICS
COVERED IN THIS ISSUE
HUGE REFUNDS HURT YOU
The Internal Revenue Service just announced that the average refund for 2005 returns has topped $2,400, and that’s up about 4% over 2004 returns. Unfortunately, that is good news for Uncle Sam and your Treasury Department, who have effectively had an interest-free loan from you of about $10 billion in refund money. That is bad news for you who have lost the use of that money.
Review your income tax withholdings and estimated tax payments for 2006 NOW. Our clients paid estimates generally based reported 2005 income. Adjust those payments so that you come closer to breaking even when you file your 2006 return in 2007.
YOUR FIRST BUSINESS TAX RETURN
The first tax reporting of your business is critical. Many elections have to be made (depreciation basis and methods, method of accounting, write-off of goodwill and other intangibles, etc, etc, etc), and those elections can only be made on a timely filed income tax return. If you are not sure what elections are available or what elections you should request on your first income tax return, call us and be confident you have what we feel are the best tax benefits for your new business.
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.
RULE OF 72
The Rule of 72 is a saving rule of thumb that says your savings will double, approximately, in the number of years you determine by doing the following.
1. Start with the number 72.
2. Divide by
the interest rate you earn on your deposits.
For example, if the interest rate you receive on
your deposits is 7.2 percent, you would double your money in about
10 years:
1. Start with the number 72.
2. Divide by 7.2 to get a result of 10.
Keep in mind that the Rule of 72 does not include
taxes or inflation. Also, the rule assumes that you compound your
interest yearly at a fixed rate of return over a long period of time.
If you compound more frequently, you could save more or double your
money sooner.
Investments generate fluctuating returns so the
period of time in which an investment can double, cannot be determined
with certainty. This is a hypothetical example and is not intended
to represent a real investment. Both principal and returns of investments
vary over time.
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.
CANADIAN WITHHOLDING
Canada is now imposing a 15% withholding tax on distributions from
Canadian mutual funds to foreigners, including US IRAs. This
creates a problem for those non-taxable investment owners who cannot
claim the Foreign Tax Credit (FTC) for the tax incurred by their
IRAs and their IRAs can’t claim the FTC because they do not have
any income to claim the credit against. We suggest you own
Canadian mutual funds in taxable investment portfolios that can use
the FTC
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 $12,000 per donee
per year without incurring a federal gift tax. If you spouse consents, the limit can be increased
to $24,000 per year, per donee. This means, for example, if
you make gifts of $24,000 to each of six donees (your children, daughter-
or son-in-law, grandchildren, etc.) you will have removed as much
as $144,000 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 $12,000 or $24,000) for 2006, 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 donees 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 $12,000 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.
MEALS AND ENTERTAINMENT EXPENSES
Generally, 50% of business related meals and
entertainment expenses are tax deductible by the payer.
If the related expenditure covers mostly
employees or staff of the company, the amount paid may be considered
as a Staff Meeting expense and should be fully deductible.
Related entertainment should be associated with a business meeting,
occurring just before, during, or just after the meeting.
Meals solely for yourself (no business related person is accompanying
you), other than when you are away traveling overnight, are not deductible.
These types of expenses must be substantiated
with the dates, places and names of the participants along with
an explanation of the business purpose. An invoice must also
support meals and entertainment of $75 or more.
You can share this information with your
acquaintances and family. It
may provide some “small talk” for your conversation and give you
an opportunity to boast about your professional tax preparer, your
CPA.
NO LONGER TAX HAVENS
For many years gone by, many people thought it was good to move
to sunny states to escape the dreaded state income tax in retirement
years.
Two thoughts should be considered.
- Some states, Florida for example, enjoy
a reputation as being tax friendly. While they do not have
an income tax, they do have an intangibles tax (on the market
value of investment property), a sales tax and a hefty local
real estate tax.
- Some states (Massachusetts is one of them) are reaching out to
retired taxpayers by calling pensions earned from employment or
businesses located in their state to be taxable and subject to
a non-resident income tax, gaining much needed revenue to help
balance budgets.
According to a recent survey, popular retiree
states such as Texas and Florida averaged in the middle of the
50 states for tax burden. The
survey included, in addition to a state’s income tax, whether Social
Security benefits, or military and public pensions are taxable.
If you are considering a move to another state for retirement, you
should consider all the taxes before making that move. Change
your residence because you want to be in a sunny climate, not to
beat the “tax man.
Changes to Employment Tax Filing Requirements for Small Businesses
The IRS announced the issuance of temporary and proposed regulations,
which reduce the filing burden on small businesses by changing
the employment tax filing requirements for eligible employers to
annually rather than quarterly. Employers that estimate their
annual employment tax liability to be $1000 or less will be eligible
to file the new Form 944, Employer's Annual Federal Tax Return. The
IRS will be sending letters of notification beginning February
1 to eligible businesses. Businesses that fail to receive
a notification by February 15 should contact the IRS at 1-800-829-0115. New
businesses can apply for annual filing when filing for their employer
identification number (EIN). The IRS will inform the new
employer whether they qualify when the EIN is issued.
The Massachusetts Society
of CPAs represents over 8,800 certified public accountants working
in public accounting, industry & business, government and
education.
DEDUCTIBLE LOSSES.
If you leave a deposit or pay for something in advance and the party
holding your money goes defunct before you get anything in return,
you may be able to deduct a non-business bad debt. This loss
is treated as a short-term capital loss, deductible to the extent of
capital gains plus the lesser of $3,000 or the excess of capital losses
over capital gains. Any remaining loss can be carried over. This
situation occurred several times during the past tax preparation season.
COVER YOUR ASSETS
If you died tomorrow, would the
“taxman” be your biggest beneficiary? For
many entrepreneurs, that question and its answer may be shocking. That’s
because those who postpone the task of estate planning may expose their
families and their company to enormous financial risks. Estate
taxes, which can reach up to 48% (or higher if state estate taxes are
applicable), can kill even the most promising of fast-growing businesses
by forcing heirs to sell prematurely to meet tax liabilities.
You say you don’t have time to worry about
that now? Then you
may well be missing out on some important estate-planning strategies,
which often need to be set in place early to work effectively. When
you clarify your estate-planning goals, you protect your family in
the event of your death. You may find ways to reduce the estate-tax
bite while allowing the family to retain control of the company
DON'T FORGET:
"IT'S NOT WHAT YOU MAKE THAT COUNTS; IT'S WHAT YOU KEEP!"
Roger A. Kahan is a Certified Public
Accountant, Business Advisor, and Wealth Care Professional with an office
in Stoughton, Massachusetts, serving the tax and financial needs of individuals
and small to medium sized businesses almost anywhere in the United States.
And with the advent of the Internet, his professional tax consultation
extends into several other countries. Roger is always seeking additional
clients and professionals wishing to save or invest money and better
manage their own life; or a friend, a relative, or a client's personal
or business life.
Do you know of someone that could
use our professional services? Please let us know if we can use your
name in an introductory letter or phone call.
Thank
you.
No one is required to pay more
in taxes than the law demands. If you pay too much, you have fewer resources
to meet your other financial goals. I can help find tax deductions and
credits, and help you plan so your taxes can be as low as possible. I
can also assist you with business and estate tax planning.
The information contained in this
publication has been obtained from sources I believed to be reliable
at the time of writing, but are not guaranteed as to their accuracy or
completeness. This material, or any portions thereof, may not be reproduced
without prior written permission of Roger A. Kahan, CPA.
