August 2007 Tax Newsletter
Major Tax Deadlines
For August 2007
Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.
Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees’ pay and both the employer’s and employees’ share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.
Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.
For more information on tax deadlines that apply to your business, contact our office.
Tax Headlines: IRS warns charities and churches to stay out of politics
Though national elections are not until next year, the IRS is reminding charities, churches, and other nonprofit organizations to stay out of politics. A 2006 report on political activities showed a steep increase in the number of complaints about improper activities by these organizations. The tax-exempt status of nonprofit organizations is dependent on their refraining from engaging in partisan political activities.
In its attempt to increase compliance with the rules, the IRS has issued guidance on what constitutes legal and illegal activity. Details can be found in Revenue Ruling 2007-41 on the IRS’s Web site www.irs.gov.
Control your “AGI” to stop tax breaks from disappearing
At tax time it pays to read the fine print. A variety of allowances, deductions, credits, and exemptions are phased out as income rises. If your income reaches these “phase-out” levels, you may lose tax benefits.
For example, let’s say you finally snag that big promotion. If the promotion causes this year’s income to climb into the phase-out zone, your deduction for college bond interest or child credits may be reduced. The result? You earn more money, but more of it is taxed. Your big promotion — after taxes — is now smaller.
Some items subject to phase-out income levels are the child tax credit (starts at $110,000 for joint filers), the Hope and Lifetime Learning credits ($94,000 to $114,000), Roth IRA eligibility ($156,000 to $166,000), and the college bond interest exclusion ($98,400 to $128,400). These phase-out levels are for “adjusted gross income” — also known as AGI — on 2007 joint returns.
Clearly, many middle-class families and small business owners reach these income levels. And these are just a few of the items affected by phase-outs. Others include personal exemption amounts, rental real estate passive loss allowances, exclusion of social security benefits, charitable deductions, and medical deductions.
How can you avoid losing all or part of these tax benefits as your income rises? One way is to manage your AGI, the main number used to determine your taxable income. The goal is to manage income levels so you won’t lose tax benefits for which you would otherwise qualify. Here are three suggestions.
* Take more “above-the-line” deductions. These deductions are reported on your tax return above where the AGI is calculated. They include contributions to individual retirement accounts, self-employed retirement plans, and health savings accounts. Other “above-the-line” deductions are alimony payments, moving expenses, payments for student loan interest, and self-employed health insurance.
* Reduce your business’s taxable income. Companies are taxed on their net income. To reduce this year’s taxable income you might consider sending out invoices in late December so you’ll receive payments after year-end. Bumping up year-end expenses — such as business equipment purchases, advertising, and repairs — is another strategy to keep your AGI below the phase-out levels.
* Defer income. Even if you don’t own a business, you can sometimes push your income into the following year, thus lowering your AGI. For example, you might work out an arrangement with your boss to receive a bonus in January rather than December. Or you might wait to sell that hot stock until after year-end.
For assistance with the tax planning that will help you retain your tax benefits, give us a call.
Got a nonprofit organization? You could benefit from this free IRS online workshop
The IRS now has an Internet version of its Exempt Organizations Workshop available on its Web site at www.irs.gov. The workshop, titled “Stay Exempt – Tax Basics for 501(c)(3)s,” covers tax compliance issues faced by small and mid-sized tax-exempt organizations, including charities and churches.
The workshop has five interactive modules including the following:
* Tax-Exempt Status — How can you keep your 501(c)(3) exempt?
* Unrelated Business Income — Does your organization generate taxable income?
* Employment Issues — How should you treat your workers for tax purposes?
* Form 990 — Would you like to file an error-free return?
* Required Disclosures — To whom do you have to show your records.
Is my worker an “employee” or an “independent contractor”?
There’s an ongoing debate that’s almost as old as the tax code itself. If you have people working for your business, should you classify them as employees or as independent contractors?
Classifying your workers as independent contractors generally saves you money. That’s because you avoid paying employment taxes and benefits on their behalf.
In most instances, however, very few of your workers actually qualify as independent contractors. If the IRS determines that you misclassified your employees as contractors, you could end up paying back all of the employment taxes and benefits that should have been paid over the years. Depending on the size of your workforce, the cost to you could be substantial, potentially bankrupting your business.
How can you ensure that you properly classify your workers? Start with the factors listed by the IRS to determine a worker’s classification. If you maintain control over your workers through hiring, training and supervision, scheduling the work to be done, and by providing them with tools and materials, your workers are most likely your employees. The same holds true if you pay your workers a set salary or an hourly wage and have the right to let them go at any time.
As a general rule, if you only have the right to control or direct the result of the work and not the means and methods of accomplishing the result, the individual may qualify as an independent contractor.
If your business employs independent contractors, take steps to protect yourself and your business. The IRS is currently focusing its audit efforts in this employment tax area. Be consistent with how you classify your workers, and follow how other businesses in your industry classify their workers. And don’t forget to send a Form 1099-MISC to any contractor who earns more than $600 from you during the year.
To find out more about properly classifying your workers, please give us a call.
The Latest in Finances: Updates on the housing market
Existing home sales fell to a four-year low in May, with the median home price declining for the 10th straight month.
According to the National Association of Realtors, the number of homes for sale is now the highest in 15 years.
To add to the housing market’s woes, mortgage companies are tightening requirements for home loans. Buyers are expected to have higher credit scores and to put down larger down payments.
Getting Married or Divorced? Get your finances in order
If you are getting married, divorced, or have recently lost your spouse, you certainly have a lot on your mind. While you may feel overwhelmed with all there is to do, it is important not to overlook financial matters when your marital status changes. Some actions you may want to consider include the following:
* Will. Update your will and power of attorney if you have them. If you do not, hire a lawyer to draw them up for you.
* Life insurance. Review your life insurance coverage. Given the recent events in your life, you may want to change your beneficiary and the amount of your coverage.
* Beneficiaries. Review the beneficiaries you have named for your 401(k) and IRA plans. Make any changes that are appropriate given your new circumstances.
If you’re getting married, review your combined contributions to 401(k) plans to make sure you’re maximizing both employers’ matching contributions.
* Withholding. Adjust your Form W-4 (income tax withholding form) for your change in marital status and any change in the number of your dependents.
If you’re getting married and both you and your spouse work, check to see if you will be affected by the marriage penalty. If so, you may need to adjust your payroll withholding.
* Health insurance. Analyze your health insurance options. If you are getting married, you may be able to save money by joining your spouse’s plan or by having your spouse join your plan.
If you are divorcing or have lost a spouse and have relied on him or her for health insurance, you should investigate the COBRA laws, which may allow you to retain your insurance coverage for up to 18 months.
* Disability insurance. Consider purchasing disability insurance if someone will be dependent on you for financial support.
* Auto insurance. Talk to your automobile insurance agent. If you are getting married, you may save money by combining separate policies. You may also qualify for a marriage discount.
* Prenup. Consider a prenuptial agreement if you’re getting married and you have children from a previous marriage or have substantial assets.
* Name and address. Notify the Social Security Administration if you change your name. If you move, notify the IRS of your address change.
Getting your affairs in order after a change in marital status is an important step toward financial well-being. For any assistance you need, contact our office. We can help you sort through your options and find the right choices for your new situation.
A graying America: Some statistics to ponder
* The number of Americans over the age of 65 is projected to double by 2030 to 72 million.
* The fastest growing category of Americans is the 85-and-older group.
* The wealthiest 20% of older Americans have an average net worth of $328,432, not counting their homes.
* 14,000,000 seniors say they have health conditions such as heart disease, arthritis, or other chronic illnesses.
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.