Kulzick Associates, PA
Client Update - June 8, 2000

    Welcome to our new monthly e-newsletter for clients. E-mail allows us to get you information quicker than the quarterly printed version. Since most of our clients now have e-mail, we will be dropping the printed version after the next edition.

    If you are an AOL user, please page down to the end of the newsletter before trying to use any of the links. You can access our internet site and use hyperlinks, but you may need to get up-to-date first in order to properly access the internet.

This newsletter contains:

Financial Strategies
    Use your social security refund wisely
    Getting married? Time to talk about money
What's New In Taxes
    Roth IRA reconversions
    Deductions versus credits
    Business: Changes in installment sales
    Major tax deadlines for June
Smart Business
    Pay attention to inventory
News From Us
    Check out our web site
    Note for AOL users
    Add a friend to our mailing list

Financial Strategies

Use your social security refund wisely

Legislation passed in April will mean sizable refund checks for more than 400,000 workers aged 65 through 69. The new law eliminated the reduction in benefits for social security recipients in this age group who are still working. Now, instead of losing $1 of benefits for every $3 of wages over $17,000 earned this year, workers will get refunds for the benefit reduction already made for 2000. The average refund check is about $3,500.

If you're in the group receiving a refund, think before you use the money on a shopping spree or a quick vacation.

Remember that a portion of your social security benefits will still be subject to income tax if your income exceeds $25,000 if you're single or $32,000 if you're married. The new law did not make any changes there. You may want to set aside some of your refund to cover taxes.

Once taxes are considered, think of the ways you could use your refund to achieve longer-lasting benefits. For example, you might pay off some of your debt -- especially higher interest credit card bills. Since you're still working, consider contributing your refund to your 401(k) plan or IRA. You might also invest outside your retirement plan -- in stocks if you want appreciation and have a long-term view or in a certificate of deposit or Treasury bill if you prefer interest income and consider the stock market too volatile.

Getting married? Then it's time to talk money and taxes

Summer is a favorite time for weddings. If you're planning a wedding this summer, financial and tax issues are probably the last thing on your mind. But before you head down the aisle to say your "I do's," having a serious money talk with your mate-to-be could be well worthwhile.

Before marriage, couples tend to see each other through rose-colored glasses and may overlook the fact that they do not share attitudes toward such matters as saving, investing, and credit card debt.

Having different attitudes toward money can cause a serious rift in a marriage, leading to frequent arguments and even eventual divorce. Discussing financial issues prior to marriage can make for happier times after the wedding. If you don't know how your spouse-to-be feels about money matters, have a serious discussion. If you've already spotted habits that concern you, include these issues in your discussion.

You may even find that it makes sense to visit an accountant before the wedding to get information about how marriage will change your tax and financial situation.

Topping the list of the tax issues you should check out is how the marriage penalty will affect you. Many working couples pay higher taxes than they would pay on the same income as two singles. There's not much you can do to avoid the marriage penalty short of not getting married, but if it will affect you, adjust your withholding to cover the tax increase.

You should review the investments each of you has and consider any realignment that's necessary to keep your new joint portfolio properly diversified. You'll also want to check your health insurance coverage and see if you want to maintain separate coverage or change to joint coverage on just one plan. Life insurance should be reviewed for a change in beneficiary designation, if appropriate. If you're planning to buy a home soon after marriage, you'll need to decide how to take title and soon after that, you'll want to consider writing or rewriting wills.

While it's not particularly romantic to bring up money and taxes before the wedding, doing so may increase your chances of living happily ever after.

What's New in Taxes

New rules apply to Roth reconversions in 2000

If you thought it was difficult to understand the Roth reconversion rules for 1999, wait until you see the IRS changes for 2000. But before the changes can be explained, it is important to understand how the Roth reconversions worked in 1999.

The tax law allows a taxpayer who already has a traditional IRA and who wants to convert any portion of it to a Roth IRA to do so if his or her adjusted gross income (AGI) is less than $100,000. The converted amount is treated as income.

Many taxpayers whose IRAs are invested in stocks and mutual funds have found the current market volatility to be a problem when converting a regular IRA to a Roth IRA. Since the IRA's value at the point of conversion determines the tax that will be owed, the best time to convert a regular IRA to a Roth is when the market (and the IRA's value) is lower.

If a conversion from a regular IRA to a Roth IRA is done when the market is high, the IRA's value is higher and more income tax will be due. Then if the market falls soon after, a taxpayer is left with less value in his Roth IRA, but with a tax bill based on the higher value at the conversion point.

In 1999, if an individual converted a traditional IRA to a Roth IRA, and the value of the Roth subsequently declined, the taxpayer was allowed to transfer the Roth funds back to a traditional IRA and then reconvert the funds into another Roth. This enabled the individual to save on taxes, since income tax would be owed on the lower value at the point of reconversion. In 1999, only one reconversion was permitted.

Now for the changes for the year 2000. Taxpayers are no longer permitted to reconvert the same IRA in the same calendar year. If a taxpayer converts from a traditional IRA to a Roth IRA in one year and then recharacterizes the amount back to a traditional IRA, he or she is not permitted to reconvert back to a Roth IRA until the beginning of the next year or 30 days after the recharacterization, whichever is later.

If a reconversion is attempted before the allowed date, the IRS considers it a failed conversion, and it must be recharacterized back to a traditional IRA.

The rules governing IRA conversions, recharacterizations, and reconversions are complex. Contact us for the specific rules that will apply in your situation.

What's the best tax cutter -- a deduction or a credit?

Not all tax breaks are alike, so be sure you know the difference between tax credits and tax deductions. Tax deductions are subtracted from your gross income to determine the amount of income subject to taxation. Tax credits are subtracted directly from your tax bill. Because tax credits represent a dollar-for-dollar reduction of your tax liability, they merit special attention.

Businesses can get tax credits for such things as hiring economically disadvantaged workers, building low-income housing, increasing research, and improving accessibility for the disabled. Individuals may qualify for such credits as the earned income credit, the child tax credit, and education credits.

On the deduction side, there are hundreds of possibilities. Among them are such items as interest expense, charitable contributions, property taxes, union dues, tools and work supplies, protective work clothing, subscriptions to professional publications, IRA fees paid separately, and fees for tax advice and tax return preparation.

It's important to identify tax credits and deductions that could lower your tax bill -- both in your tax planning and at tax filing time.

Business:  Treasury eases new installment sale rules

A business sale made after December 16, 1999, could trigger more tax than the entire first-year proceeds from the sale. That's because a new law taxes most installment sellers on their total profit in the year of sale. Before, such sellers would have paid tax only on the portion of the profits actually received in any year.

Example: A company sells its assets for $250,000, payable in equal installments over five years. The tax basis for the assets sold is $50,000, so the taxable gain on the sale is $200,000.

If the company's tax bracket is 34%, tax in the year of sale will be $68,000 even though the company receives only $50,000 from the buyer. Under prior law, only one-fifth of the tax, or $13,600, would have been due on the first year's installment.

The tax law change only applies to accrual method taxpayers, and it does not affect property used or produced in a farming business or, under certain conditions, sales of residential lots or timeshares. However, since most businesses use the accrual method, their sales of fixtures, equipment, or other business assets generally will be fully taxed in the year of sale.

Planning can ease the tax bite

In most cases, the new law's potential cash crunch can be avoided with planning. Possible solutions include:
* Taking a large enough down payment to pay all of the taxes due.
* Taking a loan from a third party (using the buyer's note as security) to help cover the taxes.
* Structuring the sale as a tax-deferred exchange.
* Selling stock in the business instead of assets.

Recent Treasury regulations help some businesses

The business community has not been happy with the 1999 tax law change and has been agitating for its repeal. To provide some relief, the Treasury issued regulations allowing qualified businesses with average annual gross receipts of $1 million or less to use the cash method of accounting, which also would allow them to report sales on the installment method.

Congress has indicated that it would like to repeal this unpopular provision. While legislation works its uncertain way through Congress, it is essential that you seek advice on any proposed sale of business assets before proceeding. Call our office for details and assistance.

Major tax deadlines for June

* June 15 - Second quarter 2000 individual estimated tax is due.

* June 15 - Expiration date for automatic two-month extension given to U.S. citizens and resident aliens living and working outside of U.S. and Puerto Rico to file 1999 income tax returns. File Form 4868 to request additional two-month extension. (Additional time to file is provided for Armed Forces personnel and support personnel serving in a designated combat zone.)

* June 30 - Florida Intangible Personal Property tax return is due.

Note: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business. For information on the tax deadlines that apply to your business, contact our office.

Smart Business

Pay attention to inventory levels

If you run a business, you probably manage your cash very carefully. But what about your inventory? It's almost as valuable as cash, but does it get the attention that it deserves?

You might think of inventory as the items sitting on your shelves, but inventory is actually a process.

For a manufacturing business, the process begins with the purchase of raw materials, and it moves through production and sale. For other companies, the inventory process begins with a purchase and ends with a sale. In every type of business, inventory requires careful management.

* You must have enough inventory to support your business, as well as to handle sudden or unexpected customer demand. But you should avoid excessive inventory, which can tie up cash and shelf space, require extra security and warehouse personnel, increase insurance costs, and trigger additional borrowing.

* You must have up-to-date information. You need to know what's in stock, how quickly your inventory turns over, and all the costs associated with carrying inventory. At any given time, you should also know which items are selling and which aren't. In effect, you need an aging of your inventory, similar to the aging of your receivables.

* You should know how well your customers are being served, which is ultimately the most important function of any inventory system. For example, what percentage of your orders are shipped on time? How long does it take to fill back orders? What is the ratio of customer complaints to shipped orders?

For example, by installing a simple, low-cost inventory control system for a small business client, we were able to reduce their inventory by over 50%, freeing up substantial capital. At the same time, out-of-stocks, that were costing the company in lost sales, were reduced by over 30%. Proper inventory control systems can simultaneously increase sales and reduce costs by assuring that you have the right items in stock.

An effective inventory system is one of your best business investments, but it isn't a do-it-yourself project. Please give us a call for assistance in improving your inventory control system.

News From Us

Check out our web site

We've maintained a free information site on the web since 1997. There are currently over 130 pages containing a wide variety of useful information. You can access either through indexes or through a "search" function. To check it out, click here.

Note for AOL users

If you are using AOL, you will need to access the internet in order to use the links in this newsletter or access our website. Unlike every other service, AOL remains a separate, proprietary system that is not part of the internet. However, recent customer and government demands have forced AOL to provide access links between their system and the internet.

To access the internet from the AOL proprietary system, you must either be using version 5 of AOL's browser (earlier versions cannot directly access the internet) OR go to AOL, link to the internet, minimize your AOL browser, and then bring up and use either Microsoft's Internet Explorer or Netscape's Navigator. These are the browsers everyone else uses and both are free. You can download them from Microsoft or Netscape. If you are using any ISP except for AOL, you are already accessing the internet and should have no problems.

Add a friend to our mailing list

If you have a friend or business associate who you think might benefit from this newsletter, we would be happy to add them to our distribution list. Just e-mail me with their full name and e-mail address.


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Copyright 2000 Raymond S. Kulzick. All rights reserved. 000608.

This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.


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Copyright 2000 Kulzick Associates, PA - Last modified: September 13, 2008