Kulzick Associates, PA
Client Update - August 3, 2000
This newsletter contains:
Financial Strategies
Savings bond alert!
What to do when you're in the money
What's New In Taxes
IRS releases tax statistics
Turn your vacation home or rental property into a tax break
Major tax deadlines for August
Smart Business
Casual dress, casual attitude?
Plan to succeed, and you probably will
News From Us
Check out our web site
Note for AOL users
Add a friend to our mailing list
Unsubscribe
When savings bonds reach final maturity, they stop paying interest. If you don't cash them in or convert them at that point, you are giving the government an interest-free loan.
To check the value of any old bonds you have, check the U.S. Treasury's Web site at www.publicdebt.treas.gov or call 304-480-6112. The Treasury also offers a free pamphlet that gives the value of old bonds and tells you whether they're still paying interest.
If you have savings bonds that have matured, you should take them at once to a bank to either redeem them for cash or exchange them for Series HH bonds.
And by all means, keep an eye on the maturity date of any other bonds you purchase.
What to do when you're in the money
What would you do if you received some unexpected cash? You may not win the lottery, but perhaps you receive an income tax refund, a bonus from work, a small inheritance, or even a lump-sum payout from your retirement plan.
Most of us think first of tropical beaches or shiny new cars, but that's usually not the smartest way to use the money. Instead, for windfalls of a few hundred or few thousand dollars, consider these ideas to improve your financial health.
* One of the best investments around is to take full advantage of the employer matching contributions in your company's 401(k) plan. If you're not contributing the maximum, consider putting more of your paycheck into your 401(k) and using the windfall to make up the difference in your take-home pay. The combination of employer matching contributions and tax-free compounding of earnings is an investment that's hard to beat.
* Another idea to consider is adding the money to your child's education fund. A small amount invested early enough can compound to a significant sum by the time your child reaches college age.
* Don't overlook the option of paying off some of your debt. Paying off high interest loans, such as credit cards, will give you a guaranteed after-tax return equal to the rate on the credit card, some of which charge 15% or more. This is a better return than you'd earn on most other investments.
* If your windfall is a payout from your retirement plan, you have some serious decisions to make. The choices you make can affect the quality of your retirement for years to come. Too many people spend their distribution on material goods and live to regret it.
Among the important decisions to consider is whether to accept a lump-sum distribution or an annuity. If you choose a lump-sum distribution, you must decide whether to roll it over tax-free into an IRA or to be taxed immediately. The right choice for you depends on your age, your physical and financial health, and your goals for retirement.
Although the choices may appear overwhelming, the tax professionals in our office can lead you through the decision process and help you achieve your retirement goals.
Whatever the source of your windfall, it's probably not necessary to invest every dollar. You may want to spend a little on something special. But a windfall can help you achieve financial security only if the bulk of it is handled wisely.
The IRS has released some interesting information on taxes and tax return filing. Among the items are these:
* The number of taxpayers who used a credit card to pay their income taxes for 1999 increased 250% over 1998. The biggest credit card payment made was a whopping $7.2 million.
* A majority of taxpayers use a professional to prepare their tax returns.
* For the tax year 1997, one percent of taxpayers reported income of $250,736 or more. This one percent of taxpayers paid 33.2% of the total 1997 individual income tax collected.
Turn your vacation home or rental property into a tax break
Do you own a vacation home or rental property that you have been reluctant to sell because you face a large capital gain? Armed with the appropriate information, proper planning, and a bit of patience, your problem may be solved.
The tax law allows you to exclude up to $250,000 per person ($500,000 per couple) in profit from the sale of a principal residence. Regardless of your age, you can use this exclusion every two years. The only requirement is that you own and use the home as your principal residence for two out of the five years prior to the sale.
Prior to changes made in the law in 1997, you could only postpone (but not exclude) paying tax on the gain in a home sale by buying a more expensive replacement home. There was also a once-in-a-lifetime $125,000 gain exclusion available to taxpayers age 55 and older. The 1997 tax law repealed both of these provisions.
Whether you own one or several properties, you can now exclude the gain from tax by converting each property to your principal residence for the requisite period of time before selling. Of course, you can only have one “principal residence” at a time. Temporary absences, such as vacations, do not reduce the time used as a primary residence. If you fall short of the two-year mark due to health reasons or job relocation, you may still be eligible for reduced gain exclusion.
If the property has been depreciated after May 6, 1997, the depreciation will be subject to recapture and tax. However, all depreciation before that date is forgiven and subject to the gain exclusion.
Consider a couple with a primary home, a vacation home, and a rental property, each with built-in gain of $500,000. Over little more than a four-year period, they could exclude up to $1,500,000 in gains (except for depreciation taken after May 6, 1997) for a significant tax savings. This could be well worth the inconvenience of moving!
If you own real estate, be sure to contact our office well in advance of selling so that we can help minimize your taxes.
* August 15 - Due date for filing 1999 individual income tax returns that received an automatic extension of the April filing deadline. If a second extension is required, Form 2688 must be filed with the IRS explaining why additional time is needed.
* September 15 - Due date for corporate tax returns (1120 & 1120S) with an extension (for 12/31 year-ends).
Note: Businesses are required to make federal and state 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.
Casual dress, casual attitude?
There's a growing trend in business to allow employees to dress casually. Some offices have a casual day - typically Friday; others allow casual dress every day. In 1998, 97% of companies allowed some kind of casual attire.
Now companies are having second thoughts about casual dress. In a recent survey, nearly half of employers said they've noted an increase in employee absenteeism and tardiness since a casual dress policy was adopted. Employers also expressed concern that casual attire encourages slacking off and may end up affecting company profits.
Not much research was conducted before casual dress became such a fad, and not much has been done since. Researchers are now planning studies to determine whether there's any link between casual dress and productivity. Businesspeople, stay tuned.
Plan to succeed, and you probably will
A written business plan is an essential tool for every business. Don't make the mistake of thinking your organization is too small to have a business plan. The fact is that many small businesses fail because their owners have not taken the time or the effort to plan what they want their companies to achieve. If you don’t know where you are going, you won’t know if you are getting there. Your business plan should answer the following types of questions:
1. How well do your products and services meet the needs of your current and anticipated markets?
2. What is your competition doing?
3. What are your future sales goals?
4. Do your company’s existing facilities, equipment, and location meet existing needs?
5. Will you have to invest in new facilities and/or change your location to fulfill future targets?
6. Does your workforce have the talent, skills, and desires to grow along with your business?
7. Are your compensation policies in line with others in the industry?
8. Will you need more employees to meet anticipated demands?
9. Does your business have enough income and cash flow to pay for needed inventories, payroll, supplies, and equipment and to provide you with a good standard of living?
10. Will you need to borrow or seek outside investors to finance expansion? If so, will those funds be available? Many money sources will want to see a business plan to justify any decision to lend or invest.
Your business plan will show you how to figure out where you are and how to get where you want to be. However, it is not a static document that, once prepared, you file away. On the contrary, you will subsequently find its best value as it helps you manage your growing business.
We have considerable experience in helping business owners create and manage their business plans. There are also a number of pages on our web site covering different aspects of business planning. Click on Business and then page down to the "Strategy and Planning" heading for a list of links.
We've maintained a free information site on the web since 1997. There are currently over 170 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.
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.
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© Copyright 2000 Raymond S. Kulzick. All rights reserved. 000803.
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.