February 2007 Tax Newsletter
For February 2007
February 28 – Payers must file 2006 information returns (such as 1099s) with the IRS. (Electronic filers have until April 2 to file.)
February 28 – Employers must send 2006 W-2 copies to the Social Security Administration. (Electronic filers have until April 2 to file.)
For March 2007
March 1 – Farmers and fishermen who did not make 2006 estimated tax payments must file 2006 tax returns and pay taxes in full.
NOTE: 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 Changes: Last-minute Congress
Just before adjourning for 2006, Congress passed the Tax Relief and Health Care Act of 2006. President Bush signed the bill into law on December 20, 2006. The law retroactively reinstates a number of tax breaks that had expired at the end of 2005, making them effective for 2006 and 2007. Here’s a brief overview of what was extended.
* The itemized deduction for state and local sales tax was reinstated for 2006 and 2007. This is a boon for taxpayers in states without a state income tax, but taxpayers who pay both state sales and income taxes can deduct whichever is higher.
* Middle-income taxpayers can claim a deduction for up to $4,000 of qualifying higher education expenses for 2006 and 2007. This is an above-the-line deduction so you don’t need to itemize to claim it. However, income limits apply.
* Teachers can claim a deduction for classroom supplies that they pay for out of their own pocket. This is also an above-the-line deduction, with a limit of $250.
* The law also extends a number of business tax credits and deductions, including the research credit, the work opportunity and welfare-to-work credits, and the 15-year recovery period for certain leasehold and restaurant improvements.
* The Energy Tax Incentives Act of 2005 provided several tax credits and deductions intended to promote energy conservation. Though these tax breaks generally were not scheduled to expire until the end of 2007, the new law further extended certain ones through 2008.
The new law makes other miscellaneous changes to the tax code. For additional information and guidance in your tax planning, give us a call.
Deductions even when you don’t itemize
If you’ve given up itemizing deductions, you’re not alone. These days over half of all taxpayers find they’re better off using the standard deduction. But even if you take the standard deduction, you can also deduct some individual expenses. Consider the following.
* IRA and HSA contributions
You can deduct up to $4,000 in contributions to a traditional IRA this year. That increases to $5,000 if you’re age 50 or older. Income limitations may apply in some cases. You can’t deduct contributions to Roth IRAs.
Health Savings Accounts (HSAs) are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. You make annual deductible contributions to your HSA. Contributions are invested and grow tax-free, and you’re allowed to withdraw money in the account tax-free to pay for your unreimbursed medical expenses.
* Student loan interest and tuition fees
Deduct up to $2,500 interest on student loans for yourself, your spouse, and your dependents. You can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.
* Self-employment deductions
If you’re self employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.
* Other deductions
Don’t overlook deductions for alimony you pay, certain moving expenses, and early withdrawal penalties. Teachers can deduct up to $250 for classroom supplies that they buy themselves.
Contact our office for more information on these and other deductions that could cut your tax bill.
Why bring your corporate minutes up to date?
The start of a new year is a good time to take care of a few “housekeeping” details in your business. One of those details, and it’s a very important one, is making certain that your corporate minutes are complete, accurate, and up to date.
To preserve the legal benefits of incorporation, corporations should hold regular director/shareholder meetings. By keeping clear and appropriate records of these meetings in the form of corporate minutes, firms can save taxes and avoid business problems.
Business matters with potential tax consequences should be carefully recorded in the minutes. These include dividends, bonuses, deferred compensation arrangements, and loans, leases, or other transactions between officers or shareholders and the company. You should clearly document the business intent behind each decision.
If your corporate minutes have been neglected, get with your attorney and bring them up to date.
Can your business grow too fast?
Most businesses hope to grow. They consider themselves successful if growth is taking place and the faster the growth the better. Can too much business growth be bad for a company? It can be if the company grows too rapidly without adequate planning.
For example, a company that doubles its volume every year for three or four years may find itself strapped for cash, for working space, and for trained personnel.
In most companies, a 12% to 15% annual growth rate would probably be manageable. The ideal growth rate for your company depends on the unique circumstances in your firm and industry.
A new company (starting with zero sales) must obviously grow more rapidly than an established one. Some new businesses may double their sales each year for the first five years before reaching the level where a 15% annual rate is healthy.
Rapid growth may require more inventories and more space. Who will fund the growth? A 15% annual growth can probably be funded by retained earnings. A more rapid growth may require an injection of cash. If the owners can’t provide the money, will it be the suppliers (increasing the accounts payable) or a banker (new short-term debt)?
Every business should have a written business plan with its growth projections clearly identified. The plan should include provisions for the finances, space, equipment, and personnel that such growth will require. See us for assistance with your business projections so that your company’s growth is comfortable and profitable.
The Latest in Finances: You can split your tax refund three ways
In past years, you could ask the IRS to deposit your income tax refund into your bank account. For your 2006 tax refund, you’ll be able to have the IRS split your refund and make deposits in up to three accounts at different financial institutions.
Examples of accounts you can choose include checking, savings, IRAs, health savings accounts, Archer medical savings accounts, and Coverdell education savings accounts.
It will be up to you to verify that the institution will accept direct deposits, and in the case of IRAs, to verify the year the contribution is for and the fact that the contribution has been timely made.
Be aware of the gender gap in retirement savings
Do women need to save more for their retirement than men?
The answer is yes, they do. Even though the rules governing social security and private retirement benefits are officially gender-neutral, generally women statistically accrue lower benefits than men. Thus, women generally need to have a larger pool of retirement savings.
Why do women receive lower retirement benefits? Social security and many other pension benefits are tied to a worker’s earnings, and full-time working women earn on average only 77% of their male counterparts. In addition, women are more likely both to work part-time and to leave the work force entirely to raise children, further diminishing the accrual of private pension and social security benefits — the first two “legs” of a secure retirement.
Can women rely on their husbands’ retirement savings? Women who rely on their husbands for economic security would appear to be in relatively good shape financially. In the event a husband dies, private pension plans are generally required to provide benefits for the surviving spouse, and the same rule applies to social security. In the event of a divorce, the court may award the wife a portion of the husband’s pension benefit. Social security benefits also will be paid to a divorced wife, based on the husband’s earnings, if the marriage lasted at least ten years. But it’s also a sad fact that about 25% of elderly single women live in poverty, compared to 5% of elderly women who are married. It appears that divorce and the death of a husband do take a financial toll.
It only makes sense for a woman to build her own individual savings – the strong “third leg” of a secure retirement. Every woman should realize that the man in her life may not be willing or able to provide her with lifelong economic security.
Gender issues: Living longer but saving less
Males outnumber females in the U.S. in the under-20 age group. The population in the younger-than-20 group is 51.2% male and 48.8% female. In the over-70 age group, those numbers switch, with 40.1% males and 59.9% females.
22% of women business owners have no retirement investments. Among male business owners, only 10% say they have no retirement investments.
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.