Kulzick Associates, PA
Client Update - January 5, 2001

 This newsletter contains:

Financial Strategies
    Estate planning: Will Congress make it unnecessary?
    Make some financial resolutions for a new year & a new century
Service of the Month
    Taxes
What's New In Taxes
    Congress Passes Tax Revision 12/00
    Update on Tax Rates For 2001 Tax Planning
    Payroll tax deposit rules changed for some small businesses 01/01
    Major tax deadlines for January
Smart Business
    Is paying zero tax a good idea for your corporation?
News From Us
    Check out our web site
    Add a friend to our mailing list
    Note for AOL users
    Unsubscribe

The new year has begun and it's time once again to think about positives (new beginnings) and negatives (taxes). In order to assure smooth and on-time completion of your taxes and financials this year, please try to bring in your information as early as possible and complete. If you have questions, call early so we can resolve them. If you are using new accounting software, please contact us, so that we can be sure to get you off to a good start and avoid potential problems.

Estate planning: Will Congress make it unnecessary?

Lately there's been a lot of talk in Washington about repealing the federal estate and gift tax. Last year Congress passed a bill containing such a provision, but President Clinton vetoed the bill, claiming it would benefit only the rich. If the estate tax is ever repealed, will estate planning become a thing of the past? 

For most people, the answer is no. 

Your will. A key component to most estate plans is having a will drawn up. In your will, you designate how each of your assets (excluding those assets that have named beneficiaries or are held jointly with right of survivorship) will be distributed upon your death. 

If you have young children, your will should name a guardian for your children and trustees for the assets that they will inherit. And if you have heirs who aren't as financially responsible as you would like, you can designate in your will that their inheritance be held in trust.

Other documents. In addition to your will, two documents essential to your family's financial well-being are commonly drafted during the estate planning process. A durable power of attorney allows another person to make financial decisions on your behalf if you become incapacitated, and a medical directive or "living will" sets out your preferences for medical treatment if you become too ill to communicate these wishes yourself.

Business owners. If you're a business owner, estate planning will still be a must. Even though businesses will no longer need to be sold or leveraged in order to pay estate taxes, proper succession planning is needed to ensure that your business will pass to your heirs as smoothly as possible.

Since the rules surrounding estate and gift taxes are very complicated and continually changing, please give us a call if you would like to discuss your current estate plan.

Make some financial resolutions for a new year & a new century

Without a plan, without goals, how can any of us know where we're going financially? The start of a new century is a good time to set your priorities and resolve to do a better job of managing your money. 

Step 1 - Pay yourself first. Have your bank transfer money from checking to savings each month, or set up an automatic savings plan where you work. ($100 socked away regularly each month and earning only 8.5% grows to $18,000 in just ten years.) Make your own savings plan your most demanding creditor.

Step 2 - Eliminate consumer debt. Avoid those whopping 18% credit card interest charges. Pay off your credit card bill in full each month. If you can't do that, it's time to cut up the cards and start buying only what you can afford to pay for in cash. 

Step 3 - Diversify your investments. Spread your risks among treasury bonds, money market savings accounts, stocks, corporate bonds, real estate, and savings bonds. The recent nosedive in technology stock prices is a clear illustration of the wisdom of not putting all your eggs in one basket.

Step 4 - Profit from tax-deferred savings. Contribute to an IRA or take advantage of your company's 401(k) plan. If you have self-employment income, set up a Keogh plan, a SEP, or a SIMPLE. 

Step 5 - Bring your estate plan up to date. There's more to it than putting assets in joint names. Have your will reviewed by a lawyer, and resolve to start a personal financial plan.

Step 6 - Set long-term financial goals and write them down. Work within three time frames, setting one-year, three-year, and ten-year goals. Evaluate your progress each year, and make adjustments as appropriate to achieve your goals. 

We offer a full-range of quality, professional tax services for all types of taxes and all types of taxpaying entities. Our tax experts are available to you year 'round. We go beyond just filling in returns to assist you in planning and by offering suggestions of ways to reduce your taxes.

The total tax rate in the United States is at its highest level since 1945. Taxes have been steadily rising, but there are many strategies that can be employed to reduce the taxes you pay.

More information on the wide range of tax services we provide is available on the web at Tax Services.

Call today to schedule an appointment regarding your tax needs. Remember, good tax advice doesn't cost, it pays.

Congress Passes Tax Revision 

Before adjourning for 2000, Congress passed legislation providing $31.5 billion in tax cuts and reinstating the installment method for reporting asset sales by accrual basis taxpayers. 

Part of an omnibus funding bill (H.R. 4577), the tax cuts include incentives to encourage investment in community renewal projects in economically distressed areas.

The legislation also extends for two years the availability of tax-advantaged medical savings accounts. Another provision specifies that effective December 21, 2000, investors in securities futures contracts will be treated for tax purposes as if they owed the underlying asset.

The installment sales bill (H.R. 3594) is welcome relief to small businesses. It repeals the 1999 tax change that disallowed use of the installment sale method for reporting asset sales made by accrual basis taxpayers. These taxpayers will once again be able to pay tax on an installment sale as money is received, rather than all at once in the year the sale is made. 

For details on these and other provisions in the new tax laws, contact our office. 

Update on Tax Rates For 2001 tax planning 

Many tax numbers are adjusted each year, usually for inflation or as a result of tax law revision.

As you begin your tax planning for 2001, take the following changes into account: 

* The standard mileage rate for business driving increases to 34.5 cents per mile, effective January 1, 2001. The mileage rates for medical and moving expenses increase to 12 cents per mile, but the rate for charitable mileage remains at 14 cents a mile. 

* The maximum earnings subject to social security tax increases to $80,400 for 2001. As before, all earned income (wages and self-employment income) is subject to Medicare tax. 

* The expensing limit for equipment purchases increases to $24,000 for 2001. This deduction allows business taxpayers to treat the cost of qualifying property as an expense rather than as a capital expenditure subject to depreciation. The maximum deduction is limited if purchases exceed $200,000 for the year. 

* The exclusion for foreign-source income and housing costs increases to $78,000 for 2001. 

* The "luxury car" excise tax drops to 4% for 2001. 

* The "kiddie tax" threshold increases in 2001 to $1,500. 

Taxpayers who make quarterly tax estimates and whose income exceeds $150,000 annually may have to increase their tax payments this year. The prior-year safe harbor percentage increases from 108.6% to 110%. 

For details on changes that may apply to you, give our office a call.

Payroll tax deposit rules changed for some small businesses 

Effective January 1, 2001, certain small businesses will no longer need to make monthly payroll tax deposits.

Under the new rules just issued by the IRS, small businesses can make their payroll tax payments quarterly if they have less than $2,500 due. This replaces the previous $1,000 limit. The higher threshold will reduce paperwork and cash flow requirements for about a million small businesses and lessen the chance for errors and the resulting IRS penalties. In addition, the quarterly payment can be sent with Form 941 instead of being deposited with a financial institution.

Businesses with $2,500 or more of employment taxes must still make deposits to an authorized financial institution.

The IRS mailed out letters to each payroll tax-paying business in December telling you what your deposit requirements are for 2001. If you think you may be impacted by the above rule changes, please contact our office to verify this before reducing the frequency of your payments. Also note that the above, as with any deposit requirement, is the minimum schedule. Payments can, and often should, be made on a more frequent schedule.

Major tax deadlines for January

January 16 - Final 2000 individual estimated tax payment is due, unless 2000 tax return is filed and taxes are paid in full by January 31, 2001.

January 16 - Final 2000 U.S. Corporate Income tax payment is due for those businesses qualified to pay estimates quarterly.

January 31 - Employers must provide W-2 statements to employees.

January 31 - Payors must provide Form 1099s to payees.

January 31 - Employers must generally file 2000 federal unemployment tax returns and pay any tax
due.

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.

Smart Business

Is Paying Zero Tax a Good Idea For Your Corporation?

When you run your business as a regular C corporation, it can make sense to pay a little tax this year to avoid large estimated tax payments next year. 

According to the general rule for corporate estimated taxes, the IRS won't charge a penalty as long as a company pays in current-year estimated tax at least the amount that was owed on the preceding year's return. However, this "safe harbor" is available only when at least some tax was owed for the earlier period. If a company shows zero tax liability in a given year, next year's estimated payments must equal 100% of the expected tax liability for that year. As a result of this quirk in the law, you might want to plan corporate income and deductions so that you always show at least some taxable income and some tax liability.

Example 

Your corporation will incur a small operating loss this year. Next year is likely to be more profitable, with the company projected to owe about $100,000 in federal income tax. If you do no planning, you will be required to pay next year's tax bill in full via quarterly installments of $25,000 each, creating a potential cash flow crunch just when your company might need liquidity.

However, if your company were to report (say) $10,000 of taxable income this year (perhaps by delaying deductible expenditures or selling an appreciated asset), this year's tax bill would be $1,500 (15% of $10,000). Next year, you may be required to prepay a total of only $1,500, reducing your quarterly installments to $375 each. The remainder of your tax bill would be due on the filing date for next year's return, but in the meantime, you have the use of your cash.

Warning: If this planning strategy might apply in your situation, you should note that the safe harbor exception is only available to corporations with taxable income of less than $1 million for each of the preceding three years. 

We've maintained a free information site on the web since 1997. There are currently over 220 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.

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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 or later 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 2001 Raymond S. Kulzick. All rights reserved. 010105.