January 2005 Newsletter

HAPPY NEW YEAR!

What's New in Taxes

New Tax Numbers Are Released For 2005

The IRS adjusts many tax numbers for inflation each year. Other numbers change as a result of tax law revision. As you begin your tax planning for 2005, here are some of the changes you'll need to take into account.

* 2005 Retirement plan contribution limits are as follows: IRA $4,000 (age over 50 add $500); 401(K), 403(B) $14,000 (age over 50 add $4,000).

* The maximum earnings subject to social security tax increases to $90,000 for 2005. As before, all earned income (wages and self-employment income) is subject to Medicare tax. The earnings limit for retirees under age 65 increases to $12,000. There is no earnings limit for those 65 and older.

* The top estate tax rate decreases to 47%, but the exemption amount stays at $1.5 million for 2005. The annual gift tax exclusion remains at $11,000 per donee.

* The nanny tax threshold remains at $1,400 for 2005. If you pay household workers more than this amount during the year, you're responsible for payroll taxes.

* The kiddie tax threshold remains at $1,600. If your child under age 14 has more than $1,600 of unearned income in 2005 (e.g., dividends and interest income), the excess will be taxed at your highest rate.

* The first-year business equipment expensing limit increases to $105,000. A new limit applies to sport utility vehicles: when purchased for business use, no more than $25,000 may be expensed in the first year.

* The standard mileage rate for business driving increases to 40.5¢ per mile, and the mileage rate for medical and moving expenses increases to 15¢ a mile. The rate for charitable driving remains at 14¢ a mile.

For details or for assistance with your tax planning, give our office a call.

You Pay The Bills, But Can You Claim a Dependency Deduction?

It used to be easy to determine the number of dependents you could claim on your tax return. Your children were your dependents until they moved out, and then they weren't. These days, it's not unusual for older children to live with, or be supported by, their parents. Because of this, determining your child's dependency status for tax purposes has become more complicated.

Here are some of the rules you must know.

* 50% support. Your child does not have to live with you to be your dependent, as long as you provide more than half of his or her support. Common support items include food and lodging, clothing, transportation, and medical, educational, and recreational expenses. If you buy a car for your child and it is registered in the child's name, the cost is a support item.

* Age and income. If at the end of the year your child is under age 19, or is a full-time student under age 24, the child's income is not a factor in determining your right to a dependency exemption. As long as you meet the support test, you may still claim the child. (A full-time student is one who attends school full time for at least five months of the tax year.) However, if your child doesn't meet the age or full-time student requirement, you can't claim a dependency exemption if the child has more than a certain amount of income for the year ($3,100 in 2004 and $3,200 in 2005).

* Married child. If you support a married child, you can't claim a dependency exemption if the child files a joint return with a spouse, unless the only purpose for filing is to obtain a refund of withheld taxes.

* Divorce. If you're divorced or separated, special rules apply in determining dependency exemptions for children. The general rule is that the custodial parent is entitled to the dependency exemption for the child unless that parent waives the right to the exemption in writing.

The parent who maintains a home for a dependent child for more than half of the year may still qualify for the earned income credit, the child care credit, and the head of household rate even if that parent has waived the dependency exemption to the noncustodial parent.

The parent who pays the child's medical expenses may claim them along with his or her own, regardless of which parent gets the dependency exemption.

For more information about the rules as they apply to your particular situation, please call us.

New Business

Survey Shows Rising Health Insurance Costs

A recent survey of 3017 randomly selected public and private companies revealed that the cost of health insurance provided by employers rose 11.2% in 2004. Costs are expected to rise again in 2005, according to the survey conducted by the Kaiser Family Foundation.

The survey also found that employees contributed an average of $558 to the total annual insurance cost of $3,695 for single coverage and $2,661 to the $9,950 cost for family coverage.

Companies are trying to find ways to contain health insurance costs, including providing incentives to their workers to stay healthy. Wellness programs, financial rewards or prizes for exercising, eating right, and getting checkups are some of the methods employers use to keep workers healthier and health costs down.

What's New in Financial Strategies

Don't Let Your Gifts Disappear

About $17 billion of gift cards were given as gifts this past holiday season, according to the National Retail Foundation. That very likely means you or someone in your family received a gift card.

Gift cards are convenient, and since you get to choose what you purchase, you get what you want without having to exchange a gift that didn't fit or that you didn't like. But be aware of the fine print that comes with some gift cards. Some have monthly fees that eat into the card's value if the card goes unused; others have expiration dates after which point the card is worth nothing.

To insure that you get full value for any gift card you received this past holiday season, check the fine print. Don't let ignorance of the requirements reduce your gift to nothing.

Give Your Children a Good Financial Education

Schools teach children some financial lessons, but if you want your kids to pick up good money skills and become financially responsible adults, you should give them some training yourself. Consider the following suggestions.

* Set a good example. Children frequently do as you do, not as you say. Keep your own financial affairs in order, and your children will likely emulate your good habits.

* Talk about it. Three or four years is old enough for money lessons. Start with the names of coins and bills; then go on to how much each is worth. Let your child pay for things at the store.

* Give an allowance. An allowance teaches your child an important lesson for living in this country: work means money. A steady allowance for steady work is best. Extra pay is okay for extra work. Decrease the frequency (but increase the amount) for older children. Less frequent payments force your child to budget.

* Allow mistakes. At its most basic level, money is about making choices. Children who never feel the pain of their poor financial choices are less likely to learn how to avoid making them again. The cost of mistakes only goes up over time. If Junior wants to spend his whole wad on a video game, let him. It will be a while before he can afford another big purchase. That's a good lesson in deferring gratification.

* Encourage saving. Piggy banks are good for young children, but graduate them to a savings account as soon as their maturity allows. About the time they understand interest payments, they usually have enough money to meet the minimum deposit of a better-earning money market account.

* Teach money management. Specific lessons might range from how to compare interest rates on savings accounts to the pros and cons of mutual fund investing. But there should be one common element to all of your teaching in this area: money doesn't take care of itself.

* Talk with grown children, too. Many people feel uncomfortable discussing family finances with their children. However, sharing some information with your grown children can make things more comfortable for everyone.

Discuss your financial goals with your adult children, and let them know your plans for your retirement years. It's often a good idea to involve adult children in some or all aspects of your estate planning. Your particular family situation should dictate how much information you share and with whom.

If you would like assistance with your financial concerns or teaching finances to your children, please call. We're here to help.

Chuckle of the Month

The trouble with doing something right the first time is that nobody appreciates how difficult it was.

  ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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.