April 2004 Newsletter
What's New in Taxes
The IRS says that about two million taxpayers will lose $2.5 billion dollars in tax refunds that they failed to claim for the year 2000. The three-year statute of limitations for filing or amending tax returns for 2000 ends on April 15, 2004.
Many students, retirees, and others didn't earn enough to be required to file a 2000 return, yet they had income tax withheld from part time jobs or from jobs held only part of the year. To get the refunds due them, taxpayers must file a 2000 tax return.
This situation serves as a reminder to taxpayers: File a tax return for any year where taxes were withheld but your total income for the year fell below the filing requirement amount. If you don't file within the three-year statute of limitations, your refund will be lost forever.
Don't overlook tax planning in a divorce
In the midst of a divorce, the last thing you may want to think about is taxes. But if you don't negotiate your divorce settlement with taxes in mind, you may regret it in years to come. Here are some things to consider.
Alimony. Often one spouse agrees to support the other spouse or their dependent children. Whether that support is called "alimony" or "child support" makes a huge tax difference to both spouses. Alimony is tax-deductible by the payer and taxable income to the recipient. On the other hand, child support is neither deductible nor taxable.
Children. The dependency exemption is a valuable tax break, and parents can negotiate who gets to claim it. The 2004 exemption deduction is $3,100. Even in the 15% tax bracket, claiming a dependent could reduce your taxes by $465. Other tax breaks also hinge on who claims the exemption, including the child tax credit and education tax credits.
Property. In many cases, splitting your assets 50-50 may appear to be a fair distribution, but not all assets are created equal under the tax law. You should always consider what will remain after taxes when the property is eventually sold. For example, assume one spouse accepts $500,000 in cash and the other spouse accepts $500,000 in stock as a fair division of the marital property. Let's further assume the stock has a capital gain of $400,000 that will be taxed at 15% when it's sold, resulting in a $60,000 tax bill. One spouse will end up with $500,000 while the other is left with only $440,000.
Retirement accounts. There is a right way and a wrong way to split up IRAs and other retirement accounts in a divorce. Unless you divide them the right way, you could get hit with unnecessary taxes and penalties.
If you're considering a divorce, call us early in the process. We can work with your attorney to help you make informed choices that take taxes into account.
New Business
Appeals court upholds legality of Do Not Call list
Millions of consumers added their phone numbers to the national "do not call" registry after it opened last July. However, court challenges to the registry left businesses and consumers uncertain about the enforcement of the list.
In February 2004, the U.S. Court of Appeals for the 10th Circuit upheld the constitutionality of the list, finally resolving the legal issue. Those challenging the law were undecided as to whether they would ask for a review of the court's decision or appeal the decision to the Supreme Court. So for now, businesses should become familiar with the new rules and take whatever steps are necessary to bring their practices into full compliance. Penalties for noncompliance are steep, up to $11,000 per illegal call.
What's New in Financial Strategies
After August 31, 2004, Series HH savings bonds will no longer be issued, according to an announcement by the Treasury Department. Since 1980, Series E and EE savings bonds could be exchanged for Series HH bonds, deferring the tax on the E bonds until the HH bonds matured.
The Treasury reports that $13.3 billion of the $204 billion in outstanding savings bonds are HH bonds. Discontinuing the HH bonds is part of the Treasury's program to save money and to promote a paperless savings bond program.
You have many options for IRA investments
Do the assets in your individual retirement account complement your overall financial strategy? If not, it may be time to take a look at what's available.
Traditional investments that can fit your needs — and fit into your IRA — include the following:
Stocks and American Depository Receipts (ADRs). You can purchase individual stocks and ADRs through a self-directed IRA account. ADRs provide an acceptable way to diversify into foreign stocks.
Bonds. Treasuries can generate a current income stream within your IRA and help preserve principal. Junk bonds and zero-coupon bonds offer more risk — and perhaps more return. All are permissible IRA investments.
Mutual funds and unit investment trusts. Mutual funds permit easy diversification and the ability to spread your annual IRA contribution over several installments.
Real estate investment trusts (REITs). This investment provides the opportunity to own real estate through the purchase of securities that trade on established markets.
Less common investments that might have a place in your IRA include:
Real estate. Your IRA can own rental properties, trust deeds, and mortgage notes. Holding a mortgage for yourself or a relative is not permitted in an IRA.
Gold, silver, platinum, or palladium bullion. To be part of your IRA, precious metals must meet specific fineness standards and be held in the physical possession of your trustee.
Coins. An IRA can own certain gold, silver, and platinum coins, generally those minted by the Treasury Department or issued by states. Coins that have been made into jewelry may not meet the criteria of an acceptable investment.
When making new contributions or rebalancing your IRA, you have a wide range of options. Just remember that some investments are specifically prohibited. For example, an IRA cannot own a life insurance policy or collectibles (art works, rugs, antiques, metals, gems, stamps, alcoholic beverages, and some coins). For details or assistance in this area, give us a call.
Chuckle of the Month
I say we scrap the current Social Security system and replace it with a system wherein you add your name to the bottom of a list, and then you send some money to the person at the top of the list, and then you…Oh, wait, that IS our current system. – Dave Barry
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The information contained in this newsletter 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 this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.