October 2004 Online Newsletter

What's New in Taxes

Congress Extends Tax Breaks

On September 23, 2004, Congress passed tax legislation to extend through 2010 the $1,000 child tax credit, marriage penalty relief, and expanded 10% income tax bracket. These provisions had been scheduled to revert to prior levels after this year. The legislation also includes a one-year extension of the 2004-level alternative minimum tax exemption, as well as extension of several expired or soon-to-expire business tax credits.

Look For Tax Breaks To Help With College Costs

Yesterday's kindergartner is today's college freshman — and you have the tuition bill proving it. You're aware of the tax breaks for education costs, such as the Hope and lifetime learning credits, the tuition and fees deduction, and the student loan interest deduction. But you may be wondering how to maximize your savings. Here are five suggestions.

* Timing income. The benefits of most education tax breaks begin to evaporate at certain income levels. For instance, married taxpayers filing jointly in 2004 begin losing part of the Hope and lifetime learning credits when income reaches $85,000. (For single and head of household status, the reduction of these credits begins at $42,000.) If you're approaching the phase-out range, think about shifting expenses and income between years to stay under the limits.

* Giving up exemptions. Is your income too high to claim the Hope or lifetime learning credit? You could choose to give up claiming a dependency exemption for your child. Why? A child with taxable income may be able to use the credits. Caution: Before employing this strategy, calculate the impact on your taxes of losing the exemption.

* Timing payments. If you meet the requirements, Hope and lifetime learning credits are allowed for qualified expenses paid in the current year. This is true even when classes you've paid for are scheduled to begin in the first quarter of the next year. The tuition and fees deduction has the same provision. To make the most of this rule, consider accelerating multi-year tuition payments into the same year.

* Borrowing money. When you take out a loan for tuition, you can claim the Hope and lifetime learning credits (if other conditions are met) in the year you use the proceeds to pay the expense. In addition, you may be able to deduct interest paid on the loan whether you itemize or not. If your income exceeds the limits for deductibility of student loan interest ($100,000 for joint; $50,000 for single or head of household), one option is to have your child borrow the money and claim the deduction.

* Coordinating withdrawals. You can take withdrawals from a Coverdell education savings account in the same year you claim the Hope or lifetime learning credit. But pay attention to the amount taken from the account. Distributions in excess of qualified education expenses — including those used to claim either credit — may be taxable.

You'll also want to plan distributions from other tax-free sources (certain college savings accounts or scholarships, for example). Expenses paid with these withdrawals are ineligible for purposes of claiming the education credits.

Other planning ideas include making use of the savings bond interest exclusion and gifting appreciated stock. To explore all your options, give us a call.

Smart Business

Know The Tax Issues Before Going Into Business

Before you launch a new business, it’s a good idea to prepare for an uninvited partner — the tax man. Knowing your tax obligations in advance can save time, money, and even the life of your business. Here are a few tips:

* Open a separate checking account for your company, and don’t mix your business and personal payments. IRS auditors are trained to hunt for, and disallow, personal expenses claimed as business deductions.

* Apply for an employer identification number (EIN). Even if you’re a sole proprietor with no employees, you’ll need an EIN to start a self-employed retirement plan.

* Keep complete accounting records. Although no special system is required by the government, your records must clearly reflect your income and expenses. Save business papers such as canceled checks, bank statements, receipts, and invoices.

* If you’re a sole proprietor, partner, or owner of a limited liability company, you could owe substantial self-employment tax. This tax should be included with your quarterly estimated income tax payments.

Depending on your location and type of business, you also could owe state and local taxes on income, gross receipts, payroll, or business property.

With all these issues, give us a call before getting started. We can advise you about the specific tax requirements for your business, set up records that will pass government scrutiny, and continue to guide you as your business grows.

What's New in Financial Strategies

"Use It Or Lose It" Rule May Change (Flexible Spending Accounts)

Many employers offer flexible spending accounts (FSAs) that allow employees to set aside money that can be used to pay expenses such as child care and medical bills with pre-tax dollars. As the rules currently stand, money set aside in an FSA must be spent every year or it is forfeited. So taxpayers must make accurate estimates of their expenses, or they lose some of the dollars they've put into their FSA.

Senate Finance Committee Chairman Charles Grassley is hoping to change the "use it or lose it" rule for FSAs. He has asked Treasury Secretary John Snow to revise the rules administratively and allow for at least some carryover to the next year of unspent FSA funds. Grassley feels Treasury has the authority to change the rules without Congress having to pass legislation.

Watch for a likely change, either from the IRS or from Congress, but remember that nothing is certain. If you have an FSA, you may still have to figure out next year's spending under the use it or lose it rules.

 Watch Out For One More Credit Card scam

The scam artists are still at it. One of the latest scams plays on your willingness to assist those in law enforcement.

It works like this: You get a call from a would-be internal fraud investigator. The caller says something like this, "This is John Doe from the Security and Fraud Department at Visa. My badge number is 123456. Your credit card has been flagged for an unusual transaction. Did you purchase a computer service for $495 from a California-based company?"

When you say no, the caller will tell you that they will be issuing you a credit for the $495. "The credit will be sent to (and he reads your current address). Is that your correct address?"

The caller lets you know that Visa has been watching this particular company and if you have any further questions, you should call the customer service number on the back of your credit card and refer to control number XYZ123.

The caller then tells you he needs to verify that you have possession of your credit card. He says, "On the back of your card are seven digits, the first four are 1234 (the last four digits of your credit card number), and the next three are the ones that identify that you have your card in hand. Can you read me those three numbers?" When you read them he will say, "That is correct."

You have just given the caller the number he needs to make charges on your card. He did not ask you for your credit card number because he already had it before he called you.

The real Visa company will never ask you for information from your credit card; they already have all of it. Do not give card numbers, addresses, social security numbers, bank account numbers, passwords, etc., to anyone calling or e-mailing you unless you have initiated the contact.

Chuckle of the Month

Why does a slight tax increase cost you $200 and a substantial tax cut save you thirty cents?
--Peg Bracken

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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 ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.