Tax News Archive

• November, 2003
  Nanny Tax
• September, 2003
  Car-Related Tax Deductions
• July, 2003
  Compliance Results and Activities for FY 2002
• April, 2003
  Building a Larger Nest Egg With a Roth IRA 
• March, 2003
  4 Fundamental Tax Saving Strategies
• November 2002
  Vehicle Expenses - Complex Tax Ramifications 
• August 2002
  Low and Zero Emission Vehicles Tax Credit
• July 2002
  GA Adopts Higher Education Savings Plan (529 Plan)
• June 2002
  Frequent Flier Miles Taxable?
• April 2002  
  1998 Deadline To File
• March 2002
  GA Sales Tax Holiday!
• February 2002 
  Driver Education Credit
• December 2001
  Year-End Tax Planning For 2001
• November 2001
  Charitable Contributions
• October 2001
  Know the Tax Rules when Taking Deductions for Education Expenses
• August 2001
  Rules for Keeping Tax Records
• July 2001
  Repeal of Estate Taxes?

Nanny Tax

According to Child Magazine, “nanny tax” is a term used to describe the employment taxes required by law if you pay someone to work in your home”. As per Arthur Ellis, president of The Nanny Tax Company of Chicago, the taxes fall into the following three categories:

1. Social Security (FICA) and Medicare taxes
2. Unemployment tax
3. income tax

If you are paying a babysitter at least $1,400 in 2003, you need to pay Social Security and Medicare taxes, explains Allen Goldberg, president of NannyTax, Inc. in New York City. The babysitter cannot be a parent, spouse, child age 20 or younger, or person age 17 or younger. Additionally, you are responsible for state and federal unemployment taxes if you pay your nanny at least $1,000 in any calendar quarter, says Ellis.

For more detailed information on nanny tax, go to www.irs.gov and look for the IRS Publication 926 or contact our office. We are happy to discuss how the nanny tax applies to your specific situation.

Source: Child Magazine, September 2003 Issue.

Car-Related Tax Deductions

If your vehicle is used for business purposes, you may only deduct the costs of operating and maintaining your car, van, pickup, or panel truck that pertain to business, according to David Meier of Yahoo! Small Business. “This is accomplished by prorating or allocating the total cost of operating and maintaining your car between deductible business use and nondeductible personal use”.

You may make the deductions using actual expenses (know as actuals) or the standard mileage rate. If you decide to go with actuals, you will deduct the business portion of the actual expenses incurred for the vehicle. Cost of the car, gas and oil, insurance, licenses, parking fees, registration fees, repairs, tires, tolls, and even garage rent are examples of these expenses. These expenses are then prorated between business and personal usage to give you the deductible portion. If you decide to use the standard mileage rate, the rate for 2003 is $.36 per business mile.

It is a good idea to figure your deduction both ways to see which method gives you the greater deduction, if you qualify for both methods.

According to Meier, the following is a list of factors you may want to consider when deciding whether to go with actuals or the standard rate:

• You may want to consider taking the standard mileage rate method if you drive a large number of miles
• You may want to use actuals if the purchase price of your car is greater
• If you choose the standard rate for a year, you cannot deduct your actual expenses for that year, except for business-related parking fees and tolls.
• If you want to use the standard mileage rate, you must choose to use it in the first year the car is used in your business.
• You cannot use the standard mileage rate if you operate two or more cars (for business use) at the same time.
• If you lease a car, you can also choose between either the standard mileage or actuals.

We encourage you to contact us for answers to any questions you may have regarding car-related tax deductions.

Source: David Meier, www.smallbusiness411.com, 6/30/2003.

Compliance Results and Activities for FY 2002

On March 20, 2003, acting Internal Revenue Service Commissioner Bob Wenzel released a statement regarding the compliance results and activities for fiscal year (FY) 2002. Wenzel asserts “that the Service took important steps during the year to increase collection results and focus new attention on high-risk compliance areas while upholding taxpayer rights”. According to CCH Inc., the IRS has recently begun realigning its resources to focus on key areas of noncompliance. The new priority areas include: promotion of abusive tax schemes, misuse of devices such as offshore accounts, use of abusive corporate tax avoidance transactions, underreporting of income and non-filing, the Earned Income Tax Credit program, and the National Research Program.

“With respect to compliance results…audits of high-income taxpayers (those earning $100,000 and above) increased by 22 percent from 2001; overall individual audits of taxpayers remained mostly unchanged, while audits of taxpayers earning less than $100,000 declined slightly; the number of math error notices mailed to taxpayers increased to 8.3 million; and, as part of the document-matching effort, the IRS contacted more than 3.4 million taxpayers in FY 2002 through the underreporter and non-filer programs, an increase of 36 percent from 2.5 million contacts in FY 2001”, as stated in the article by CCH Inc.

Three key proposals aimed at improving the fairness of tax administration and compliance will be supported by the IRS FY 2004 budget, according to Wenzel. The first proposal will be “focusing additional resources on high-income taxpayers and businesses in areas where noncompliance is likely to be greatest”. The second will be “permitting private collection agencies to support the Service’s collection efforts while affording full protection of taxpayer rights”. The final proposal is aimed at “improving the effectiveness of the Earned Income Tax Credit program by ensuring that benefits go to qualified individuals”.

Tax.cchgroup.com 3/21/2003

Building a Larger Nest Egg With a Roth IRA 

Tax-Free Growth and Other Advantages Provide a Powerful Savings Opportunity 

As you're no doubt aware, a variety of vehicles exist to help you build that nest egg for your golden years. One such vehicle is the Roth IRA. You've probably heard about this type of account and perhaps you even know a little bit about it. But, like many people, you may wonder whether the Roth IRA really lives up to its hype. 

Well, no retirement plan is risk-free. But the Roth IRA does offer a powerful, tax-advantaged savings opportunity for those who qualify to open one. And, even if you have plenty of retirement savings, a Roth IRA can allow you to grow assets tax free to pass on to your heirs. Plus, these accounts are particularly good for supplementing savings through employer-sponsored plans. 

Want to learn more? Then read on for a closer look at the benefits, eligibility requirements and other important details of this popular retirement plan. 

Flexibility Makes the Difference 

Senator William Roth delivered his namesake IRA to prospective retirees as part of the Taxpayer Relief Act of 1997. It didn't eliminate its counterpart - the traditional IRA - but rather offered an enticing alternative. How so? Well, to answer that question, let's first consider what these two IRA types have in common. Both provide a tax-favored way to accumulate retirement wealth. And as long as your modified adjusted gross income (AGI) doesn't exceed statutory limits, you can contribute a total of $3,000 ($3,500 for taxpayers over 50) annually from earned income to either or both combined. (These amounts gradually increase to $5,000 and $6,000, respectively, by 2008.) 

Where these two plans diverge is in how they affect your income taxes and how much flexibility you have over contributions and distributions. You see, unlike traditional IRAs and most employer-sponsored retirement plans such as 401(k)s, Roth IRA contributions don't reduce your taxable income. 

Isn't this a bad thing? Not necessarily, because in return you receive future tax benefits and considerably more freedom as to how long you can contribute and when you may withdraw funds. More specifically, Roth IRAs feature the following benefits: 

• Account assets grow tax free - and neither you nor your heirs will pay income tax on qualified withdrawals as long as the account is more than five years old (otherwise known as "the five-year rule") and you're 591/2 or older. They're a great place to put stocks or mutual funds with high growth potential. 
• These plans aren't saddled with the required minimum distributions beginning at age 701/2 that often beleaguer traditional IRA owners as well as participants in most employer-sponsored qualified plans. In other words, you needn't withdraw Roth IRA funds by any specific date. That means account assets can continue to grow tax free if you don't need them. (An exception: Nonspouse beneficiaries must begin withdrawals at some point.) 
• You can contribute to a Roth IRA as long as you have earned income and don't exceed income limits. (See "Income Determines Eligibility" below.) For traditional IRAs and certain employer-sponsored plans, you can't make contributions after age 701/2. 
• Spousal beneficiaries can sometimes defer minimum distributions even further by rolling over Roth IRA assets into their own Roth IRAs. 

Also, as with traditional IRAs, you may take special penalty-free Roth IRA withdrawals for death or disability, first-time home purchases and higher education expenses. Earnings withdrawals (a $10,000 maximum applies to first-time home purchases) are tax-free for the first two reasons, while earnings withdrawals for the third are not. Even better, you can take withdrawals up to the amount contributed completely free of tax and penalties at any time and for any reason. 

Income Determines Eligibility 

With these kinds of tax benefits and savings opportunities, it's not surprising that Roth IRAs come with some eligibility requirements. To qualify for contributing to one, you must be a joint filer with a modified AGI (before IRA contributions) of less than $160,000 or an individual with a modified AGI of less than $110,000. Eligible contributions begin to phase out at $150,000 for joint filers and at $95,000 for individuals. 

On the bright side, these requirements are much less restrictive than those for traditional IRAs, for which eligibility to make deductible contributions phases out for individuals with modified AGIs between $34,000 and $44,000 and for married couples with modified AGIs between $54,000 and $64,000. (There are no AGI limits to make nondeductible traditional IRA contributions, but keep in mind that tax will still be owed on the built-up earnings or appreciation, and other traditional IRA rules will apply.) 

You may ignore these traditional IRA requirements if you're an individual not covered by an employer-sponsored qualified retirement plan or if neither you nor your spouse participates in such a plan. And if only one spouse participates in an employer-sponsored plan, Roth IRA eligibility phases out between a modified AGI of $150,000 and $160,000 for the uncovered spouse and between $54,000 and $64,000 for the covered spouse. 

Time Plays a Key Role 

So you've just read about what a Roth IRA can do for you and what requirements you must meet to have one. Now you need to decide: Is this the right savings vehicle for me? A good way to answer that is to look at your age and current employment situation. The longer Roth IRA assets grow tax free, the more you'll have to enjoy during retirement or perhaps pass on to your heirs. In other words, you're best off if you have plenty of time to save and you don't need the money you'll be contributing to the plan. Thus, those with many years until retirement or who want to bequeath the Roth IRA assets to their heirs can especially benefit. 

If this sounds like you, a Roth IRA may be able to really bulk up your nest egg. For example, by contributing the maximum $3,000 annually at the end of each year to a Roth IRA with an 8% tax-free growth rate for 20 years, you'll have $137,286. Or, if you're age 50 or over, and you make $3,500 "catch-up" contributions to a Roth IRA with an 8% tax-free growth rate for 10 years, you'll have $50,703. Plus, don't forget that maximum contribution limits will be rising by 2008 and you can continue contributions after you turn 701/2 if you are still working. 

Your Estate Can Be Protected 

Roth IRAs are also excellent estate planning tools, assuming you don't expect to need the money in retirement. You can keep account assets growing for a longer time, because - unlike traditional IRAs - you needn't make minimum withdrawals when you reach age 701/2. And you can leave heirs your IRA funds income tax free. Plus, they can take distributions from a Roth IRA over their lifetimes; whereas, in many instances, they can't with a traditional IRA. 

When integrating a Roth IRA into your estate plan, make sure your heirs won't need to liquidate your account to pay estate taxes. If taxes will be substantial and your estate might not have the necessary liquid assets, a good way to preserve your wealth is to buy life insurance through an irrevocable trust. It will then pay the estate taxes in exchange for holding the Roth IRA funds after you die. The trustee can defer distributions for as long as practical to increase assets for beneficiaries who might otherwise withdraw and spend the proceeds too quickly. Use multiple trusts if significant age disparity exists among beneficiaries. Otherwise, payments in one combined trust will be based on the oldest beneficiary's life expectancy. 

Conversions Offer Advantages 

Any discussion about Roth IRAs must at some point touch on conversions. That is, if you have a traditional IRA, you can convert all or a portion of it into a Roth IRA - as long as your AGI for the year doesn't exceed $100,000 (not counting the converted IRA funds). You'll owe income tax on previously untaxed earnings and contributions, but you won't owe the 10% early-withdrawal penalty that would otherwise apply. 

In the right situation, converting your traditional IRA assets to a Roth IRA allows more of your savings to grow tax free, grants you more freedom with those assets and will eventually enable your heirs to receive more of their inheritance income tax free. But a conversion isn't always the right choice. One could push you into a higher tax bracket and disqualify you for other tax benefits. 

Moreover, you probably won't benefit from a conversion if you'll need to withdraw IRA funds after you retire and you expect your income to then fall into a much lower tax bracket. And, as you get older, a conversion will benefit you less because the Roth IRA assets will have less time to grow enough to make up for the tax you paid on the converted funds. 

Fortunately, you do have an "out." If you convert a traditional IRA to a Roth IRA and your account's value decreases during that year, you may "recharacterize" your Roth IRA back to a traditional one to avoid paying tax on the higher value. This process comes with its own requirements and risks, however, so proceed with caution. 

Professional Advice Is Key 

As we hope this article has made clear, the savings potential, contribution and withdrawal flexibility, and tax advantages of a Roth IRA can pay off quite handsomely. But you shouldn't consider any vehicle without professional advice. So please call us; we can help you crunch the numbers to see whether opening or converting to a Roth IRA would be the right choice for your retirement strategy.

< Back to Top >  <Back To Home Page>

4 Fundamental Tax Saving Strategies ... And How To Fully Use Them 

Looked at the calendar lately? That's right, year end is fast approaching - and with it the critical task of planning for your 2002 income tax. In light of last year's big tax act (not to mention this year's less-sweeping one), you may get that "deer-in-the-headlights" look when considering how to cope with your upcoming return. But remember, no matter how Uncle Sam tinkers with the system, some fundamental tax saving strategies will likely always pay off. Let's look at four examples of these kind of tried-and-true ideas. 

1. Timing Your Income Strategically 

Knowing exactly when to recognize income can greatly affect your tax liability. So even before you begin filling out your return, consider what bracket you expect to be in next year. If it appears you'll land in a higher one, accelerating income into this year can save you taxes because you'll be taxed at the lower rate. Conversely, if you believe you'll wind up in a lower tax bracket next year, deferring income to then will reduce your income taxes. 

If you're a business owner who recognizes business income on your personal return, controlling business income may help you minimize your individual taxes. For example, as long as your business uses cash method accounting, you can delay billing notices as you approach year end and pay as many expenses as possible. 

Then again, if you use the accrual method, you can delay shipping products or delivering services until the new tax year. Of course, beware of the business risks of these types of strategies. 

Whether or not you're a business owner, various circumstances may complicate the accelerate-or-defer decision. For starters, if you're subject to the alternative minimum tax (AMT) this year or next, you may need to modify your approach. (For more on this, see "Anticipating the AMT" later in this article.) Also, whether you must recognize income depends on its source. For example, up to 85% of your Social Security benefits may be taxable if your modified adjusted gross income (AGI) - AGI plus tax-exempt interest - exceeds threshold amounts. Then again, you may be able to exclude interest on some types of government bonds. 

Ultimately, controlling your income is the key to timing it. Easier said than done, of course, but breaking down your income into its various sources can reveal opportunities. For instance, you may defer your cash salary or bonus as long as you don't constructively receive (gain access to) it in 2002. 

Or if you sell real estate or other nonpublicly traded property and use the installment sale method to report the income, you can recognize only the gain as you receive payments. Thus, you may defer most of it to future years. Better yet, you'll get interest payments on the note you give the buyer. 

2. Reaching Above the Line For Deductions 

Effectively handling your above-the-line deductions can get your tax return off to a great start. But many people are so focused on itemizing, they fail to make the most of them. Fact is, above-the-line deductions are the critical adjustments that determine your AGI, which in turn determines your eligibility for various deductions, exemptions and credits. So these deductions can have a greater impact on your final tax bill than itemized deductions. 

The above-the-line deductions available to you depend on your situation. For example, you can take this deduction type for alimony paid, but not child support. And students can deduct above the line a portion of qualified higher education expenses, while those finished with school - though not its expense - may claim an above-the-line deduction for up to $2,500 (with restrictions) of student loan debt. 

Then again, if school is a distant memory and you're looking ahead toward retirement by investing in a traditional IRA, you may be able to deduct above the line up to $3,000 or 100% of earned income (whichever is less). Similarly, you can take an above-the-line deduction for contributions to simplified employee pensions (SEPs) and Keoghs. 

In fact, earnings in traditional IRAs, SEPs and Keoghs accumulate tax deferred. And this year the annual addition limits for defined contribution Keogh plans will increase to $40,000. The benefit limits for defined benefit Keogh plans will go up from $140,000 to $160,000. Meanwhile, the limit on compensation taken into account under qualified plans rises to $200,000 and will be indexed for inflation. 

Or perhaps you use a different employer-sponsored retirement plan, such as a 401(k) or 403(b). Well, you needn't worry about claiming above-the-line deductions for these accounts, because contributions to them are taken from your compensation pretax up to the legal limit - $11,000 for 2002. If the plan allows, individuals age 50 or up can make an additional "catch-up" contribution of $1,000 in 2002. Plus, your employer may match some of your contributions - also pretax. And plan assets grow tax deferred. 

By the same token, under a Savings Incentive Match Plan for Employees (SIMPLE), you may elect to have your employer contribute up to $7,000 of your salary rather than pay you cash. Again, you may exclude the contribution from your income, though other rules apply. 

Don't think we've forgotten about the self-employed, either. In 2002, you can deduct 70% of your health insurance costs for yourself, your spouse and your dependents. In 2003, this percentage rises to 100%. This above-the-line deduction is limited to the income you've earned from your trade or business. You can also deduct above the line half of the self-employment tax you pay on your self-employment income. 

3. Maximizing Your Itemized Deductions 

After getting all you can from your above-the-line deductions, you'll need to decide whether to claim the standard deduction or to itemize. Most homeowners and higher net worth individuals usually opt for the latter - because their total deductions exceed the standard one. (In case you're interested, however, the standard deductions for 2002 are: $4,700 for single, $6,900 for head of household, $7,850 for married filing jointly and $3,925 for married filing separately.) 

Examples of itemized deductions are numerous. Investors can deduct the interest - up to their net investment income for the year - on any money they borrow to buy or carry taxable investments. But be careful: Unless you make an election and forgo the lower long-term capital gains tax rate, you can't include long-term capital gains in your net investment income for deduction purposes. 

Then again, maybe you prefer to keep your money close to home. In that case, your residence provides many great opportunities. You may be able to deduct mortgage-related points. And you can claim an itemized deduction for your property taxes, too. 

In addition, you may be able to maximize your interest deduction by paying off nondeductible interest - such as that on credit cards or auto loans - with money from a deductible class, such as a home equity loan. Currently, you may deduct interest on as much as $100,000 of home equity debt used for these or other similar purposes. 

Are you a giving person? If so, your charitable contributions are generally deductible - meaning the more you donate, the more you save. You can occasionally impart relatively small gifts. Or you may donate larger amounts more regularly using sophisticated charitable vehicles such as private foundations, donor-advised funds or charitable remainder trusts (CRTs). All of these generate itemized deductions. 

Whatever your situation, bunching specific deductible expenses in one year can help you exceed applicable floors. So if your miscellaneous itemized deductions already exceed the 2% floor, you should record and prepay these expenses (which include deductible investment expenses, professional fees and unreimbursed employee business expenses) before year end. Remember, though, that most of these deductions are not deductible for AMT purposes. 

4. Anticipating the AMT 

As you may know, the AMT is an alternate tax system designed to catch taxpayers skilled enough to bob and weave their way out of regular tax liability. Your AMT liability is determined by adding various tax adjustments back to your taxable income and deducting an exemption depending on filing status - $35,750 for single and head of household, and $49,000 for married filing jointly. This exemption starts to phase out when AMT income exceeds $112,500 for single or head of household, $150,000 for married filing jointly and $75,000 for married filing separately. 

Bottom line: Those the AMT snags are taxed at a 26% rate on the first $175,000 of AMT income and 28% for income exceeding that amount. So if you get caught this year, defer to next year any non-AMT deductions, such as state and local income taxes. Then postpone other deductions to 2003 even if you can deduct them against AMT income - they'll likely be more valuable then. 

Also, accelerate ordinary or short-term capital gain income to this year to qualify for the lower AMT rate. Particularly do this if you suspect you'll wind up in a higher regular tax bracket next year. Last, delay exercising any incentive stock options if you are subject to the AMT. You could fall into AMT liability on the spread between the fair market price and the exercise price. 

And what if you'll escape the AMT in 2002, but you'll probably face it next year? Do the opposite. For example, prepay your state income tax this year. After all, that deduction won't matter in 2003. Also, defer income to next year (instead of accelerating it to this one), because you'll likely garner a relatively lower AMT rate at that time. Finally, be sure to rid yourself of any private activity bonds. 

Remember, if you paid the AMT last year, you may be able to claim a credit, depending on which adjustments generated it. Common adjustments include depreciation adjustments, passive activity adjustments and the tax preference on the exercise of incentive stock options.

Saving a Slew in 2002 

These are just a few of the fundamental ways you can cut your tax bill. We haven't even mentioned exemptions, which reduce the amount of income you pay tax on. Indeed, this year you're allowed a $3,000 exemption each for yourself as well as your spouse and dependents. And what about tax credits? These take dollars directly off your bill and include the Child, Adoption and Dependent Care credits (for parents) as well as the Hope and Lifetime Learning credits (for students or parents of students). 

Truth is, we'd need an article longer than this one to summarize all you can do to save on income tax this year. And even then, we couldn't address your specific needs. So please call us; we can help you with these fundamentals and other tax saving strategies.

Vehicle Expenses - Complex Tax Ramifications 
by Stanley M. Smith, II, CPA

The accounting for use of an automobile in a business should be a simple process. It is not. The fact of the matter is that using any vehicle in the course of business creates more tax complications than almost any other asset. Every situation is unique and involves the application of a variety of complex tax rules. This is why it is very important to involve your tax consultant at the beginning of any decision making process regarding the use of a vehicle in your business.

Substantiating Vehicle Use

Regardless of how you intend to use the vehicle or how you acquire the vehicle (purchase or lease), you are required to maintain adequate records or sufficient evidence to support the business portion of auto expense. To meet this requirement, a taxpayer should maintain an account book or log (or similar statement of expense or trip sheet) that establishes each business expense. A deduction must be documented by adequate records or sufficient evidence substantiating the (1) amount of an expenditure (or mileage for vehicles), (2) time and place of use, (3) business purpose, and (4) business relationship for use of any vehicle for which you wish to receive a tax deduction.

The detail required to document business use will vary depending on specific facts and circumstances. Keep in mind that commuting expenses between a taxpayer's residence and a business location within the area of the taxpayer's home generally are not deductible.

Limitations for Luxury Autos

Cars placed in service in 2002 with an adjusted basis greater than $15,500 are subject to several limitations on the deductibility of expenses. These limitations include the reduction of depreciation deductions, lease income inclusion amounts, and a limitation of use of Cents-per-Mile method for valuing employee's personal use of autos. All of these issues require detailed analysis and are highly variable depending on the specifics of the situation. They therefore require the attention of an experienced tax professional early in the decision making process.

Personal Use of Vehicles

The portion of an employer-provided vehicle used by an employee in the employer's business is referred to as a "working condition fringe benefit" and is excluded from the employee's income. The balance of the vehicle's use is considered personal use and is a taxable fringe benefit to the employee. Additionally, the personal use of a vehicle can serve to reduce the amount of expenses available for deduction for certain businesses and/or their owners.

The above only begins to describe the complexity of using a vehicle for business purposes. Every situation is different and requires the specific attention of a tax professional. If you have specific questions, please contact one of our tax specialists to schedule an appointment.

Sources: tax.cchgroup.com; 2002 Master Tax Guide; 1040 PPC Guide.

< Back to Top >  <Back To Home Page>

Low and Zero Emission Vehicles Tax Credit

Georgia allows a credit against income taxes for Low or Zero Emission Vehicles in the year purchased. The amounts are $2,500 for low emission vehicles and $5,000 for zero emission vehicles. This applies to vehicles registered in the state of Georgia. Also, if a standard vehicle is converted to a zero emission vehicle, a $2,500 credit is allowed in that year. A zero emission vehicle is one that doesn't have tailpipe and evaporative emissions as defined under the rules and regulations of the Board of Natural Resources.

Source: Georgia Department of Revenue

< Back to Top >  <Back To Home Page>

Georgia Adopts Higher Education Savings Plan 
(529 Plan)

Effective April 24, 2002, Georgia has its own Tax-Free 529 College Savings Plan. A 529 plan like the Coverdell Education Savings accounts (IRA) allows you to save money for college without paying taxes on the earnings if used for qualified expenses. However, under the 529 plan, you can contribute more than the $2,000 limit of the Coverdell plan. Some benefits of the new Georgia Higher Education Savings Plan are:

• Earnings grow Tax-Free if used for qualified expenses
• Tax-Free Withdrawals if used for qualified expenses
• Georgia Tax Deduction of $2,000 per year per beneficiary subject to AGI limits
• Estate Benefits includes accelerated gifting and maintaining control 
• Transferability to certain family members

To enroll: www.gacollegesavings.com or 1-877-424-4377

The above information is a highlight of the new Georgia 529 plan. Please contact our office for additional rules and limitations.

< Back to Top >  <Back To Home Page>

Frequent Flier Miles Taxable?

The IRS has discussed this issue since the 1980's when frequent flier programs became popular. If you're not sure whether the frequent flier miles you earned on your flight, credit card, or your long distance provider, were business or personal, you no longer need to worry. The IRS will "not assert" that frequent flier miles accrued for business are taxable when converted for personal use. "It's very difficult for taxpayers to comply," said agency spokesman Frank Keith. "They don't have to report them. We will deem them to have met their tax obligations."

AccountingWEB. 2/21/2002

< Back to Top >  <Back To Home Page>

1998 Deadline to File

If you have not yet filed your 1998 tax return, and expect a refund, midnight on April 15, 2002 is the deadline. After that time, you will be ineligible to claim your refund. "According to the IRS, more than $2.3 billion in unclaimed refunds is awaiting tax filings from approximately 1.7 million tax payers who have yet to file their 1998 tax returns."

There are a variety of reasons why this refund money has not been claimed. Some didn't file because their income fell below the required level necessary to file, however, they may have had taxes withheld, which they are entitled to have refunded. Others may have been eligible for the Earned Income Credit, but did not realize it.

You may find 1998 tax forms on the IRS web site www.irs.gov or you may call to request one at 1-800-TAX-FORM. You should also consider state filing responsibilities.

AccountingWEB. March 1, 2002

< Back to Top >  <Back To Home Page>

Special Report: GA Sales Tax Holiday!

March 29 and 30, 2002 marked the first-ever sales tax holiday in Georgia. The sales taxes, which consist of the state's 4% plus the local taxes were wiped out for 48 hours on various items, such as some clothing, school supplies, and computers and accessories. Another sales tax holiday is already scheduled for August 2nd & 3rd of 2002. For lists of exempt and taxable items, please log on to www2.state.ga.us/departments/dor/salestaxholiday.

The Atlanta Journal Constitution. March 24, 2002

< Back to Top >  <Back To Home Page>

Driver Education Credit

Driver education provides a credit for an individual taxpayer for the amount paid for a successfully completed course of driver education for each minor child of the taxpayer at a private driver training school licensed by the Department of Public Safety. The credit for each dependent child, is an amount equal to the amount paid for the course or $150, whichever is less. The credit is further limited to the taxpayer's income tax liability. The credit is only allowed once for each dependent minor child. Written proof of successful completion of the course and the amount paid for the course must be attached to the return. A completed course of driver education includes additional courses offered by private driver training schools such as defensive driver education courses. The credit cannot be carried back or forward to other tax years. An amount paid for a completed course of driver education, to a private or public high school, does not qualify for this credit. For additional information refer to Georgia Code Section 48-7-29.5 and Form IND-CR.

< Back to Top >  <Back To Home Page>

Year-End Tax Planning For 2001

Year-end tax planning is increasingly important to a growing number of taxpayers. The days in which these strategies were reserved for the super-wealthy have long passed. Good reasons exist for most middle-class and higher-income taxpayers to investigate a variety of year-end tax options.

This year, in addition to a growing list of "tried-and-true" year-end tax strategies, tax changes brought about by the historic Economic Growth and Tax Relief Reconciliation Act of 2001 have added to the opportunities available to you. Careful timing of your financial situation now and in January may help you realize significant overall tax savings. Most of these tax benefits, however, won't "just happen to you." You must take action to affirmatively be entitled to --or to effectively use-- many of these changes.

Here's an abbreviated list of some of the tax opportunities, and challenges, that await you during your year-end tax planning this year:

• Tax rates have dropped 0.5 percent in 2001 and will drop again by 0.5 percent in 2002, from the former 28, 31, 36 and 39.6 percent income tax brackets; 

• Starting in 2002, the annual contribution limit for individual retirement accounts (IRAs) increases to $3,000, with those 50 and older allowed to make special "make-up" contributions; 

• Starting in 2002, education IRAs can accept up to $2,000 each year, up from $500 in 2001; qualified state tuition programs are also made much more generous; 

• The alternative minimum tax (AMT) exemption increases for 2001 and 2002 by $4,000 for joint filers and $2,000 for others; 

• The estate tax begins its slow decrease starting in 2002, requiring many taxpayers to draft new will provisions while adopting new gift-giving strategies; 

• A new reduced rate on long-term capital gain for property held for more than five years started in 2001, giving a new --and sometimes complicated-- twist to buy-sell decisions this year end; 

• The maximum student loan interest deduction rose from $2,000 to $2,500 starting in 2001, and in 2002, the income phase-out limits increase;

In addition to the pressing year-end issues generated by recent legislation, many "tried-and-true" year-end tax strategies have particular relevance this year. Here is an overview of some of the more important techniques that may be used:

• Time your income and deductions so that your taxable income is about even for 2001 and 2002. If you anticipate being in a higher tax bracket for 2002 (even with the drop in the tax rates caused by the 2001 Tax Relief Act), accelerate income into 2001 and defer deductions into 2002. Income can be delayed through setting up deferred compensation arrangements, postponing year-end bonuses, maximizing deductible retirement contributions, and delaying year-end billings. 

• Maximize the value of itemized deductions between 2001 and 2002. Some taxpayers achieve this balance by taking the standard deduction one year and paying all bills that generate itemized deductions in the other year (care must be taken, however, not to run afoul of pre-payment rules). Other taxpayers must carefully watch whether their itemized deductions for medical expenses will exceed the 7.5 percent adjusted gross income floor, or their miscellaneous itemized deductions exceed the designated 2 percent floor. Still others may need to balance income if they anticipate exceeding the income level above which certain itemized deductions must be reduced ($132,900 in 2001, rising to $137,300 for 2002); 

• Compute whether you are in danger of being subject to the alternative minimum tax for 2001 or 2002 (a growing number of "average" taxpayers are). If necessary, investigate whether certain deductions should be more evenly divided between 2001 and 2002 and whether certain deductions won't qualify --or won't be as valuable-- for AMT purposes; 

• If you're in business, consider timing final quarter equipment purchases to capitalize on "half-year" and "midquarter" conventions; and space the purchase of depreciable assets to take full advantage of the $24,000 immediate write-off allowable for each year, in 2001 and 2002. 

• Time the recognition of capital gains and losses to minimize net capital gains tax (and maximize deductible capital losses). This involves an often complicated process of determining short term gains (taxed as ordinary income), long-term gains, short-term losses, long-term losses, depreciable gain, and gains and losses from collectibles, and then determining how you might vary the mix before year-end to maximize existing losses and minimize existing gains. Unfortunately, the maximum capital gains tax rate was not reduced along with the regular income tax rates in the 2001 Tax Relief Act. Adding to the confusion for 2001, will be an 8% capital gains rate for 15% income tax bracket taxpayers realizing long-term capital gain from property held for more than five years, and an 18% rate available beginning in 2006 (but subject to a 2001 election) for other taxpayers. 

• Income shifting between low-bracket family members and higher-bracket members usually starts with transferring income-rich assets before the start of another tax year, followed by careful timing of year-end sales to maximize use of the lower tax bracket.

In addition, changes in circumstances, such as marriage, divorce, the birth of a child, death, retirement or an economic windfall (or set back) through the stock market, earnings or inheritance, may signal a special need for year-end tax planning. Once January 1, 2002 rolls in, however, it will be too late to alter most of your bottom-line tax liability for 2001 due to these, or other "more ordinary" events.

Some "year-end" tax strategies can be implemented in a matter of days, but others may take a month or more to customize properly to fit particular needs. If you are interested in investigating what year-end tax planning will work best in your situation, please contact this office early enough to allow full consideration of the options available. Additional new opportunities may be available before the end of this year. If you have any questions in the meantime, please do not hesitate to call.

Source: cchgroup.com

< Back to Top >  <Back To Home Page>

Charitable Contributions

Contributions made to a charitable organization are deductible in determining taxable income for an individual. The amount of the deduction is limited to a percentage of the taxpayers adjusted gross income. The different percentages are 50%, 30% and 20%.

In order for the contribution to qualify for the 50% of adjusted gross income, it has to be made to one of ten types of tax-exempt organizations, such as a church, school, hospital or governmental unit. However, if the contribution is of capital gain property, it would be subject to the 30% limitation. An example of capital gain property would be securities. Contributions of capital gain property to private foundations are subject to the 20% limitation.

Any amount of a contribution that exceeds the deductible portion may be carried over for the next five years. After the five years, any amount that is still left will be lost.

Please call our office if you have any questions regarding this information.

Source: U.S. Master Tax Guide

< Back to Top >  <Back To Home Page>

Know the Tax Rules when Taking Deductions for Education Expenses

As an example of how complicated the tax rules are on deducting tuition as a business expense, consider the following recent court decision. A taxpayer was a self-employed golf instructor. He enrolled himself at an accredited two-year business school that offered some golf-related management courses. Graduates could transfer their credits to other institutions and earn a bachelor's degree. On his federal income tax return, the taxpayer listed his trade, or business, as "golf instructor" and deducted his tuition as a business expense on his schedule C. Under U.S. Treasury Regulations section 1.162-5, tuition paid for courses that maintain or improve a taxpayer's skills in his or her current trade or profession is a deductible business expense. However, if the courses also qualify a taxpayer for a new trade or business, the tuition is not deductible. In this case, the taxpayer argued that the coursework maintained or improved his skills as a golf instructor. The IRS denied the deduction because the courses qualified the taxpayer for a new trade or business. The Tax Court sided with the government and held that because the courses could be used toward an undergraduate degree and would qualify the taxpayer for a variety of new trades and businesses, the tuition was not deductible (Fields v. Commissioner, TC Summary Opinion 2001-35). If you would like more information about the deductibility of your education expenses, or would like to learn about structuring your business expenses to maximize total profitability please consult with one of our tax and business planning professionals.

Source: Journal of Accountancy, July, 2001

< Back to Top >  <Back To Home Page>

Rules for Keeping Tax Records

How long are you supposed to keep the receipts and other documents that support the numbers you put on your tax return?

The Internal Revenue Service expects taxpayers to maintain certain financial records and sets guidelines for how long you are supposed to save this information. The records you are required to keep go hand in hand with the preparation of your tax return.

Keep cancelled checks, receipts, bank and brokerage statements, credit card statements, pay stubs, letters from receipts of charitable contributions (for contributions of $250 or more), utility bills, and any other documentation that adequately proves the correctness of the numbers that appear on your tax return.

The IRS recommends that you keep records that support the numbers in your tax return for at least three years from the time you file your tax return or the due date of the tax return, whichever is later. If you amend your tax return, the three-year rule still applies. Save your tax receipts for three years from the date on which you file your amended tax return.

The three-year rule comes from the fact that the IRS has three years from the later of the due date of your tax return or the date on which you file your return to examine the return and request supporting documentation.

If you don't pay all of your income tax with your tax return, it is recommended that you keep your tax records for three years from the due date of the return or two years from the date on which you complete the payment of your taxes, whichever is later.

If you own investments in items such as stocks, bonds, and collectibles such as valuable art or antique cars, keep receipts for the acquisition of these investments for as long as you own the investments, and then three years after the year in which you sell the investments. The same rule applies to items you use in your business, such as office equipment, machines, computers, and business furniture.

If you own a home, it is recommended that you keep the records from the purchase of the home for as long as you own the home, as well as three years after you file the tax return for the year in which you sell the home.

Source: AccountingWEB US 06 Aug 2001

< Back to Top >  <Back To Home Page>

Repeal of Estate Taxes?

The Economic Growth and Tax Relief Reconciliation Act of 2001 lowers the marginal estate, generation-skipping, and gift tax rates and increases the amount of assets that can be transferred at death without estate taxes between 2002 and 2009.  The table below summarizes these changes:

The estate and generation-skipping transfer taxes will be repealed on December 31, 2009, however, this Act must be reinstated by Congress or the estate and generation-skipping taxes, as they currently exist, would be reinstated effective January 1, 2011.  Given the uncertainty of projected budget surpluses, projected revenue shortfalls to fund various benefit programs, and the potentially changing political environment between now and January 1, 2011, one would be well advised to take this repeal of the estate and generation-skipping taxes as a possibility, not a certainty.

< Back to Top >  <Back To Home Page>