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Small Business and Work Opportunity Act of 2007President Bush signed the latest tax law, also known as the Small Business Tax Act, on May 25. The new law, as usual, covers a multitude of topics and includes some retroactive effective dates. Several items will affect many of our clients. Deduction for Business Equipment PurchasesImmediate expensing, also called Section 179 expense, allows businesses to deduct the cost of most furniture, computers, and business machinery in the year of purchase rather than deducting depreciation over several years. The new law increases the maximum annual deduction to $125,000. The new limit applies to 2007 through 2010. Husband/Wife Business PartnersAnother provision removes the requirement that husband-wife business partners must file a partnership tax return. If both spouses materially participate, and if there are no other owners, then the business may report each spouse's share of income on a separate Schedule C of the couple's individual tax return. "Kiddie Tax"Investment income of children under age 14 has been taxed at the parents' rate for quite a few years. Beginning in 2006, the tax was expanded to include children under age 18. The new law includes dependent children under age 19 or dependent student under age 24. The new age limits take effect in 2008. For calendar year 2007, the "kiddie tax" covers children who are under age 18 as of 12/31/07. The delayed effective date creates a planning opportunity for families with children who turn 18 or older during 2007. If you have children in this age group and are planning to sell appreciated assets held in the child's name, call us for a tax planning appointment. The new law also affects the tip credit, work opportunity tax credit, and Katrina recovery incentives. If you need details of those provisions, call us.
Tax Issues for 2006The Deficit Reduction Act of 2005 and the Pension Protection Act of 2006 added hundreds of pages to our tax code. We will look at just two important items. If you are over age 70.5 and you have an IRA account, then you already know that you need to receive a distribution each year, and that your distribution is taxable. Your IRA trustee should tell you the amount of your required minimum distribution. This year, you may choose to have your trustee transfer all or part of the distribution directly to your church or charity instead of sending you the money. From a cash flow point of view, it makes no difference whether you receive a distribution and then make a contribution or whether you make a direct transfer. But from a tax point of view, the direct transfer may have an advantage. Keep reading if you want the technical explanation, or skip to the next paragraph if you don't! A direct transfer distribution will not appear on your income tax return, so it won't be included in adjusted gross income, a number on which other tax calculations depend. Lower AGI is a good thing. By eliminating this amount of income from your tax return, you receive an above the line charitable contribution, and you will still be able to take a standard deduction on your return, or you can itemize if other deductions apply. If you do not otherwise claim itemized deductions, the tax benefit of the charitable contribution is lost if the direct transfer method is not used. The limit for this type of contribution is $100,000. This provision is effective for 2006 and 2007. Tax law changes also affect long term care. The rules that allow individuals to qualify for care paid by Medicaid have been tightened by the new law. More records (five years of bank records and other financial records) will be required and fewer individuals will qualify for benefits. This change greatly emphasizes the need for long-term care insurance for many individuals. If you do not have LTC insurance and need a referral to an experienced insurance agent, please call us.
Taxes and ChildrenTaxation of children's income is once again in the news. Congress expanded the "kiddie tax" to cover children who are under the age of 18 at the end of the year, and the change is effective this year. The prior law covered children under age 14. The kiddie tax affects unearned income only. Unearned income is also known as investment income, and it includes interest, dividends, rents, and capital gains. How is unearned income taxed?
How is earned income taxed? Earned income from wages or self-employment is always taxed at the child's tax rate, and a larger exemption applies before any earned income is taxed. What else should we know about children and taxes? Children over age 18 are often still dependents of their parents. The educational credits or deductions are still available. In order to correctly allocate dependency exemptions and educational benefits, we have to receive income information for all family members before we complete any return. We recommend that college students do not file tax returns before their parents' tax returns are completed.
New Tax Law Includes Changes for All of UsOn May 17, 2006 President Bush signed The Tax Increase Prevention and Reconciliation Act of 2005. Tax laws are like a seesaw: some good news, some bad news, news that benefits some people but hurts others. Here are some ups and downs of the new law:
Still up in the air is an extension of our sales tax deduction, always important for Texans. That deduction officially ended in 2005, but some Congressmen still expect to extend it. We will keep you informed as new laws are enacted. We are learning about the new rules for Texas Franchise Tax and we will publish more information about that soon. Call us when change is on your horizon:
We can help you look at the tax side of the issues and discuss other important factors related to your decisions. It's our goal to help our clients make good financial decisions, set up appropriate plans for their families and their businesses, and receive all available tax benefits. Big Changes Result from Recent LegislationHurricanes blew through the gulf coast, and Congress whipped up a big mixture of tax benefits for victims and everyone else. In December, the House and Senate unanimously passed the Gulf Opportunity Zone Act of 2005. Provisions of the GO Zone act will benefit employers, business owners, and residents affected by the 2005 hurricanes. They will also provide a tax deduction for individuals who housed the victims of the storms. Most, but not all provisions benefit hurricane Rita & Wilma victims as well. The GO Zone Act clarified and expanded many provisions of the Katrina Emergency Relief Act that was passed immediately after hurricane Katrina. Employer benefits Other business owner benefits Benefit for people who assisted victims Individual tax relief Each tax benefit is subject to limitations and many more details. The comments above should be a starting point for investigating the benefits that may be available to you. Find additional details at www.irs.gov. Numbers to Know for 2005 Income Tax Returns
As we approach the end of 2005, you may want to consider...Car Donations -- Documentation Requirements Are Stricter This YearIf you donate a vehicle worth more than $500, you will need to include in your tax return a statement from the charity that explains whether the vehicle was used by the charity or sold. If the charity sold the vehicle, the statement will show the sale amount, and your deduction will be limited to that number (not the fair market value or blue book value). For vehicles valued between $250 and $500, you will need some lesser documentation. Year-end opportunitiesYou can still significantly affect your 2005 itemized deductions. By planning ahead and timing your deductions properly, you can maximize their value. Charitable contributions. Make contributions by December 31, 2005 if you expect to itemize deductions on your 2005 return. Consider waiting until 2006 if you will take the standard deduction in 2005 but will possibly itemize in 2006. Contributions of stocks. If you own appreciated securities that you have held more than a year, both you and your charity will benefit if you contribute the securities rather than cash. Real estate taxes. Pay in December or wait until January? Here's another place that a little planning can have a big impact. If you pay mortgage interest each year, you probably itemize each year. You should probably pay your property tax at the same time each year. But if you don't have a mortgage, you should probably pay your property taxes twice every other year (January and December of 2006 and 2008, for example), itemize in those years, and take the standard deduction in the years when you don't pay any real estate taxes (2005 and 2007, for example). Make most of your charitable contributions in the years that you itemize. This strategy works for many of our clients, but occasionally it fails because of the alternative minimum tax.
Common MisconceptionsMedia soundbites, conversations with friends and co-workers, and frequent tax law changes contribute to the confusion about the tax impact of various transactions. Tax law is complicated, and individual circumstances bring about varied consequences in similar situations. Following are a few samples of comments and misunderstandings we encounter in our practice:
What's the bottom line?We can help you much more if you include us in your transaction planning than if you engage us only to prepare tax returns. We are here to help. Please call us soon.
Lights...Camera...(no) Action!Has a little security breach (like theft) turned into a wake up call to upgrade your security? Do you have a cyclical business that might have a slow season coming up soon? Whether it's prompted by extra time (unlikely) or an unpleasant incident, this fall is probably a good time to give your business a security checkup. Lights, Camera...If your business involves frequent public access, you should review the entire location for ways to improve security. As our metropolis grows, crime does not seem to decline. Many security measures are very inexpensive or less expensive than they used to be. Think about installing outside lights with either photo sensors or motion detectors. Lights and security camera systems discourage criminal activity. Security company signs and window stickers greatly discourage crime to your premises. Think about the way you handle cash, checks, and credit card information. Do you make bank deposits often, or do cash and checks remain in your office overnight? If you hold money, do you keep it locked in a place that would be difficult to enter? Do you protect your clients' and customers' credit card and other private information? Do you offer a location that's as safe as possible for your employees to work? Do you have overlapping schedules to minimize the amount of time that only one person works? Not Just the Building...As I visited with a client on the phone about these measures, our conversation segued into other important security concerns. Think about data and computer security. If you set up your current backup system a few years ago, it may be time to upgrade. Our office now has much more redundancy in the backup system than we had in prior years. The technology to operate it was easy to install, and the daily and weekly process does not take much time to complete. If you need help in this department, call us for a referral to our computer technician. Next, think about accounting security. Although we all hire excellent employees and would never suspect any misbehavior, it's always good company policy to have procedures in place to consistently encourage honesty and discourage fraud of any kind. Even in a very small business, separation of duties helps to accomplish this process. Usually the duties of handling cash and bookkeeping can be divided among the office person, the owner and the outside bookkeeper. Call us if you want to come over for a brainstorming session on various aspects of security. What's next?When you finish your review of business security, take the process home and put into place your good ideas for physical security, computer security, and identity theft prevention. You know the old saying: An ounce of prevention is worth many days of cleaning up after a disaster! Puzzle Pieces
What are some of the questions to ask and talk about with yourself, your spouse, and other family members? In putting together any puzzle, you first need to turn right side up all the pieces and find the ones with the straight edges. In other words, who are you? What is your lifestyle, your income, your values, your relationship with money, financial needs of your family and or extended family? The answers to these questions are the parameters of your financial plan or the edges and defining shape of your puzzle. Each family is different: the financial needs are different, risk tolerances are different, spending habits are different. The dynamics of life are unique for each family. Financial plans should not all look the same but represent the unique desires of your family. Financial planners should listen to these desires and help you to explore the nuances of the various choices. The next step in putting together a puzzle is to find the pieces that have common colors or lines that begin to link together to form a part of the picture. The common pieces of a financial plan generally include identifying your income sources, your expenses, college funding, your future needs for your retirement years, insurance, savings, and any tax effect of these decisions or combination of these decisions. As the picture of the puzzle begins to take some shape, what are some other things for you to consider as the sections start to be pieced together? Consider the following: What is the nature of your income? Is it earned income, wages or self-employment income, where payroll tax (social security and medicare tax) and income tax are paid on your earnings? Is it passive income, investment or rental income, where only income tax is paid on it? What are your expenses? What is tax deductible in whole or in part? How much debt do you have? Should you rearrange some of your savings (i.e. 401(k) retirement plans, home equity, other investments) to reduce higher interest bearing debt or interest that is not tax deductible - be it consumer credit, vehicle loans, or otherwise? Do you have the right amount of insurance - life, health, disability, liability, and property insurance? Are the amounts of the deductibles on these insurance policies at the right levels? In summary, your financial plan is just that - Yours! Once you and your family consider all the pieces of the financial puzzle, then the strategies for designing the puzzle to fit your desires will become apparent. And, remember, your puzzle may change its shape or picture as circumstances and the dynamics of life happen. So, what shape and design is your puzzle? | ||||||||||||||
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Your financial plan is like a big puzzle. When the puzzle is all put together, you have the complete picture. Each decision in your financial plan can be thought of as representing a puzzle piece. What will your puzzle look like? What then are the puzzle pieces? There are a lot of questions to ask and to be answered. Don�t overlook the help of professionals in configuring your puzzle. Qualified professionals will bring value to you. They will help you to explore the possibilities of different sizes and shapes of the pieces and will help you to decide which ones best fit your puzzle. Professional financial planners will facilitate the questions and offer solutions you may not be aware of.