Newsletter - September 2002
MAJOR TAX DEADLINES FOR SEPTEMBER 2002
September 16
Due date for individuals to pay third quarter installment of 2002 estimated
tax.
WHAT’S NEW IN FINANCIAL STRATEGIES
Section 529 plans offer tax advantages
If it's your goal to send your child to college, you might want to check into a Section 529 plan. These plans have grown in popularity following last year's tax changes. Section 529 plans offer a tax-advantaged way to save for college.
What are Section 529 plans? Section 529 plans come in two forms - prepaid tuition plans and college savings plans.
*Prepaid tuition plans are designed to hedge against inflation. You can purchase tuition credits, at today's rates, that your child can redeem when he or she attends one of the plan's eligible colleges.
*College savings plans let you build a fund for your child's college expenses. These state-sponsored plans are probably what you've been hearing about in the news, and they are the focus of this article.
How do college savings plans work? Every state now has a college savings plan in place or under development. Typically, a parent or grandparent sets up and contributes to a plan for a child or grandchild, although you can establish one for anyone. Your contribution is considered a gift, and it's not tax-deductible.
You aren't allowed to contribute beyond what's considered necessary to pay for your child's college expenses (each plan sets its own limit). You remain in control of the fund, and you decide what happens to the funds that accumulate.
What are the tax benefits? Once in the plan, your money grows tax-free. Provided the funds are used to pay for your child's qualified college expenses, withdrawals are tax-free.
Most state plans are available to both residents and nonresidents. Although the federal income tax rules are the same for every state plan, the state income tax rules vary.
What if you change your mind? If your child decides not to go to college, you can pick another beneficiary of the same generation within your family without losing the plan's tax benefits. If you change your mind about keeping the plan or need your money, you can withdraw funds from the plan. But you'll generally owe income taxes and penalties.
Before you decide on a 529 college savings plan, do your homework. Although college savings plans offer some nice tax advantages, they're not the best choice for everyone. We encourage you to work with us to develop an education funding plan tailored to your specific circumstances.
SEC requires truth in labeling for mutual funds
The Securities and Exchange Commission has a new rule that may help reduce confusion when it comes to investing in mutual funds. The rule prohibits the use of mutual fund names that may mislead investors about a fund's investments and risks. Mutual fund companies are required to comply with the following requirements:
*When a mutual fund name suggests that the fund focuses on a particular type of investment, the fund must invest at least 80% of its assets in that type of investment. For example, 80% of XYZ Large Cap Fund's assets would have to be in large company stocks. Before this rule change, only 65% of a fund's assets were required to be consistent with its name.
*The rule forbids the use of any name suggesting that a fund or its securities
are guaranteed or approved by the
*A fund can't change the 80% investment policy unless it gets prior approval
from its shareholders or tells shareholders of the change at least 60 days
in advance.
Of course, a fund's name doesn't tell you the whole story about a fund. Before you invest in any fund, you should read the fund's prospectus. You should also make sure that the fund is suitable for your current financial situation, your age, and your risk tolerance. If you'd like assistance in this area, call us.
SMART BUSINESS
Looking for a tax shelter? Check out an individual 401(k) plan
Are you looking for a way to shelter more of your income from tax? Higher contribution limits, simplified administration, and a new tax credit are good reasons for one-owner businesses to look into an individual 401(k) plan. Plans designed to fit businesses where the owner is the only employee are less complex, less burdensome, and less costly to manage than traditional 401(k) plans.
Both incorporated and unincorporated businesses can set up an individual 401(k) plan. Even if you're self-employed, you're still considered an employee of the business. Since they allow higher contributions than other plans, such as SIMPLEs and SEPs, a 401(k) gives you more opportunity to cut your taxes while building a bigger retirement nest egg.
Under a 401(k) plan, you can elect to have the company contribute part of your earnings to the plan. Though these plan contributions are subject to social security tax, they are not subject to income tax until you withdraw money from the account. This year, you can contribute up to $11,000 of your earnings to a 401(k) plan. Those 50 and over can contribute an extra $1,000 for a total of $12,000. These limits increase over the coming years.
Your business can make tax-deductible matching contributions to your individual 401(k) plan. This year the maximum company contribution increased to the lesser of 25% of wages or $40,000 (for self-employeds the limit is 20% of net earnings or $40,000). Another important change is that employee contributions no longer count toward this percentage or dollar cap, so you can make a higher combined employer/employee contribution than before.
CHUCKLE OF THE MONTH
Tax reform is taking the taxes off things that have been taxed in the past and putting taxes on things that haven’t been taxed. –Art Buchwald.
It took an IRS accountant to catch Al Capone. – IRS recruiting poster
The hardest thing in the world to understand is the income tax. – Albert Einstein
On the first day of school, a first grader handed his teacher a note from his mother. The note read, "The opinions expressed by this child are not necessarily those of his parents."
Whoever hopes a faultless tax to see, hopes that ne’er was, is not and ne’er shall be. – Alexander Pope, 18th century poet, critic, satirist
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The information contained in this site 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 newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.