Take a Break....
Sharing the wealth
Remember reading about Warren Buffett’s $43.5 billion donation to charity? In 2006, the rich not only got richer, they followed Buffett’s lead and donated a record amount to charitable causes.
According to The Chronicle of Philanthropy, there were 21 donations of $100,000,000 or more made by individuals in 2006. The 60 most generous givers (excluding Buffett) donated $7,000,000,000 (yes, seven billion) in 2006.
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APRIL 2007 NEWSLETTER
WHAT'S NEW......
New $5,000 penalty for making "frivolous" tax claims
In a March 2007 notice, the IRS specified forty tax positions that will be treated as frivolous. Taxpayers who make these arguments in order to keep from paying taxes will be subject to a new $5,000 penalty. Four IRS Revenue Rulings were issued to accompany this IRS warning. The rulings targeted the major frivolous positions taxpayers (and often unscrupulous tax preparers) take, including the following claims:
* Wages are not taxable income.
* Filing returns and paying taxes are voluntary.
* The IRS must provide taxpayers with a "summary record of assessment" before it can collect overdue taxes.
* The government cannot impose federal income taxes on those claiming to be a citizen of a state rather than of the United States, or who claim not to be a "person" as defined by the tax code.
IRS Commissioner Mark Everson cautioned taxpayers not to fall for schemes claiming to eliminate tax liability. He pointed out that people are "ultimately responsible for what is on their tax return even if some unscrupulous preparer has steered them in the wrong direction."
Tax refund is good news. Now the bad news. . .
Businesses are being reminded that the telephone tax refund they received this year may be taxable income on their 2007 income tax returns.
The refund results from the IRS having charged excise tax on long-distance telephone services during the period of March 2003 through July 2006. The courts have determined that the tax should not have been collected, and the IRS has been issuing refunds to both individuals and businesses.
Businesses that deducted the telephone taxes as part of their deductions for telephone bills will owe income tax on the refunds they receive in 2007.
Recent scams target debit cards
According to the Federal Reserve, debit card use has now surpassed credit card use. Unfortunately, debit card fraud has also grown, reaching $662 million in 2005, a 21% increase from the previous year.
Though debit cards are convenient to use, they put consumers at greater financial risk for two reasons: (1) the cards directly access an individual’s bank account, so your money can be withdrawn by scam artists, and (2) debit cards don’t provide the same legal protection against fraud that comes with credit cards.
To help protect yourself when using a debit card, heed the following tips:
* Check the ATM or card-reader for signs of tampering (tape, loose connections, etc.).
* Check for hidden cameras before entering your PIN, and shield your fingers on the keypad.
* Check your bank and credit statements carefully.
* If you suspect fraud, close the account immediately.
* Don’t let your card out of your sight, especially at gas stations, restaurants, or convenience stores where your card’s data could be copied and used by scam artists.
* Report errors, no matter how small, to the financial institution that issued the card.
Stop lending money to the IRS
Will you be among the thousands of taxpayers who get a big tax refund this year? While most Americans happily accept their tax refund checks, smart taxpayers understand that refunds actually cost them money. Here’s why:
* The government pays no interest on refunds. Kept in your hands, those dollars could have been productive. For example, you could have invested the money or used it to pay off your debt during the year. If the money had been added to a 401(k) plan, tax would have been deferred on both the investment and its earnings. Even better, your employer might have matched all or part of your investment, adding to your retirement savings.
* Refunded cash is not available for use until actually received. Even though most taxpayers get their checks promptly, circumstances or errors can delay (or stop) a refund.
To prevent losing money on tax refunds, consider reducing your withholding or estimated tax payments. For most taxpayers, withholding must equal either the prior year’s tax or 90% of the current year’s liability. If your annual income changes little, it’s relatively easy to avoid overwithholding. You should consider filing a revised Form W-4 withholding statement with your employer if you’re having too much withheld.
For taxpayers with fluctuating income or multiple sources of income, the problem is more complex. The IRS provides a worksheet with Form W-4, but many people find the form complicated. If you’d like assistance adjusting your withholding, contact our office.
Your business can choose a retirement plan that fits
Mention the words “employee benefits” to a small business owner and you might hear the groans of someone burned by sky-rocketing costs and mind-numbing complexity. But one type of benefit — a retirement plan — need not be a stress-inducing perk. In fact, it might just be the powerful tool you’ve been looking for to save taxes and retain employees.
While choosing a retirement plan can be complicated, the underlying concepts are not. The best plan for you will depend on your personal retirement needs, the size of your business, and how you wish to motivate your employees. Here are a few of the most popular plans available.
* 401(k) plan. The 401(k) is the workhorse of the retirement world, offering attractive flexibility to both owners and employees. The owner has the option to match employee contributions and specify when the benefits are vested. The downside to all this flexibility is high cost. Those with fewer than 20 employees may find other plans more economical. An exception to this is the one-person 401(k) for the self-employed, which has simpler filing requirements and lower costs.
* Simplified employee pension plan (SEP IRA). The SEP IRA was designed to give small businesses a low cost alternative to the 401(k). Unlike the 401(k), however, employees cannot contribute a portion of their own pay. What’s more, vesting is immediate, and the same percentage of salary that is contributed to the owner’s account must be paid to each eligible employee’s account. On the plus side, the maximum contribution limit is the same as a 401(k), and contributions can vary from year to year. So, if you have a lean year, you can reduce your contributions accordingly.
* SIMPLE IRA. Another option is the SIMPLE IRA. Designed for businesses with 100 or fewer eligible employees, the SIMPLE IRA permits worker contributions of up to $10,500 ($13,000 if over 50), plus a mandatory employer match of up to 3%. The SIMPLE IRA is often viewed as a good entry-level retirement plan. One drawback is the lower contribution limits compared to a SEP IRA or 401(k), which may hinder the business owner’s own retirement needs.
So which retirement plan is best for you? The answer will require careful analysis. But whether your time frame is near or far, or your business large or small, the good news is that more retirement options are available today than ever before. Give us a call to find the plan best suited for you and your business.
Don’t overlook renters insurance
Do you rent an apartment or condo? If so, do you have renters insurance to protect your belongings and to cover you against liability claims? A surprising number of renters don’t bother with insurance. Some assume they’re covered by their landlord’s policy. Wrong! Usually that covers only damage to the building and liability claims against the landlord. Others say that their belongings aren’t worth enough to justify the cost. But add up how much it would cost you to replace everything you might lose in a fire and you’ll be surprised. In most cases, the cost of insurance is a small price to pay for the protection you’ll receive.
Typical protection. Renters insurance, sometimes called a tenant policy, typically protects against three things:
* loss or damage to your personal belongings from fire, theft, etc.
* liability claims from someone injured in your apartment.
* the cost of temporary living expenses if your apartment is made uninhabitable by some catastrophe.
When you buy renters insurance, you’ll have to decide the amount and type of coverage. Your agent can help you estimate the value of your belongings. You can either choose "actual cash value" coverage or "replacement value coverage." The first pays you the estimated value of items at the time of loss, based on their age and condition. The second pays the cost of replacing items with equivalent new items, up to the maximum value of coverage. The second method will pay you more, but obviously the premium will be higher. Be sure to identify anything of special value, such as expensive jewelry or electronic equipment. You may need a policy rider to cover the full amount of these items.
A few final tips. You may receive a discount if you buy your renters insurance and car insurance from the same company. If you have a long-term roommate, ask whether you can take out a joint policy instead of two separate ones. And if you have children living away at college, check whether they’re covered under your homeowners policy. Once they leave college, though, they’ll need their own insurance.
Once you have your policy, there’s one last step to take. Make a thorough inventory of your belongings, recording the model and serial number of any equipment. Take plenty of photos too. This could be invaluable to support your claim if you ever have a loss.
This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, click here.
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