March 2005 Newsletter
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What's New in Taxes
Review Your Children's Tax Filing Requirements
Children who have income may have to file income tax returns. Here are the filing requirements for 2004.
If your child had wage income only during 2004, a tax return is required if wages exceeded $4,850. If the child earned less than $4,850 but employers withheld taxes, a tax return must be filed if you want a refund.
If your child had net self-employment earnings of $400 or more in 2004, a return is required and a self-employment tax of 15.3% is due. Income tax could be due if earnings exceeded $4,850.
If a child had investment income only during 2004 (such as dividends and interest), filing is required if the total exceeded $800.
If your child had both earned and investment income, a return is required if the total was more than the larger of (a) $800 or (b) $250 plus up to $4,600 of earned income.
A Job Change Creates Tax Issues
Taxes may be the last thing on your mind when you're changing jobs, but overlooking their impact could mean missed tax-saving opportunities. Issues to consider include:
Your retirement plan. Distributions from retirement plans are generally taxable and may also be subject to an early withdrawal penalty. The penalty would also apply to amounts withheld for income taxes. When you leave a company, any unpaid 401(k) loan is also considered a taxable distribution if you don't repay the loan according to the terms of your plan.
Planning Tip: Have the money in your retirement account transferred directly into another qualified plan or an IRA. A direct rollover avoids automatic income tax withholding and income taxes.
Job-hunting expenses. You can deduct the costs of looking for a new job in your present line of work, even if you don't get the job. Typical expenses include travel to job interviews, resume costs, and employment agency fees. You must itemize your deductions, and your total miscellaneous deductions must exceed 2% of your adjusted gross income.
Moving expenses. If you meet two tests, you can deduct the costs to move your household and personal effects, including your in-transit travel expenses and storage expenses.
First, the distance from your old home to your new workplace must be at least 50 miles farther than the distance from your old home to your old workplace.
Second, you must work full time in your new location for at least 39 weeks during the 12 months following your move. The time test doesn't apply if you're laid off from your new job or later transferred for your employer's benefit.
Residence sale. You can exclude from taxation up to $250,000 of gain ($500,000 for joint filers) if you own and occupy a home as your principal residence for at least two of the five years preceding its sale. If you sell your home due to a change in employment, you can still exclude part of the gain even though you don't meet the ownership and use tests.
To discuss the tax issues relating to a job change, call us. We are here to help.
New Business
New Study Reveals Employee Preferences
A recent employee-benefits study conducted by MetLife Inc. revealed some interesting information about employee preferences and behavior.
Of the full-time employees surveyed, 64% said they preferred paid vacation days over other employer-provided benefits such as pension plans, disability insurance, life insurance, and long-term-care insurance.
Younger employees (21 to 30 years of age) valued sick leave and flexible work schedules more than pension and savings plans.
Though about half of the survey respondents worried that they wouldn't have enough set aside for retirement, one-third revealed that they haven't even started saving for retirement.
What's New in Financial Strategies
Important IRA Deadlines Coming Up
The rules governing IRAs are complex, and making mistakes can be costly. Here are some important deadlines and reminders —
* You have until April 15, 2005, to establish and contribute to an individual retirement account (IRA) for 2004.
* If your 2004 IRA isn't yet fully funded ($3,000 if you're under age 50; $3,500 if you're 50 or older), designate your 2005 contributions as being for 2004 until you reach that limit or the April 15 deadline passes. You can then deduct these amounts on your 2004 tax return for an earlier tax benefit.
* If you turned 70½ in 2004, you must start taking required minimum distributions (RMDs) from your IRAs (except for Roth IRAs). If you haven't yet taken your 2004 RMD, you must take it by April 1, 2005, or face a 50% penalty.
* Be aware that the financial institutions that hold your retirement accounts could make errors in following your instructions and create unexpected tax consequences and penalties. Give the financial institution adequate time to meet deadlines and follow your directions. And follow up to be sure that no mistakes are made.
Don't Let Neglect Derail Your Plans
Although life's only certainties may be death and taxes, we rarely enjoy planning for them. But without planning, your assets can go to unintended recipients — including the government.
* Keep track of documents
Naming your beneficiaries is only the first step. It's just as important to periodically review the beneficiaries designated by your will, insurance policies, investment accounts, retirement plans, and similar documents. Examine each document carefully, because some assets may pass to the beneficiaries named in the governing document, regardless of the terms of your will.
Example: You name your husband as sole beneficiary in your will, on your life insurance policy, and in your 401(k) plan. After a few years, you divorce and remarry. You remove your ex-husband from your will and name your new husband as the insurance beneficiary, but you forget about the 401(k) plan. The result: When you die, your ex-husband probably will inherit the plan assets.
Events that might require changing beneficiaries include marriage, birth, divorce, death (e.g., of a beneficiary), increases or decreases in your wealth, changes in tax law, or simple changes of heart. Even in the absence of a triggering event, it's wise to review your designations regularly. A beneficiary may have fallen out of favor. A once-needy beneficiary may have become wealthy, enabling you to divert your assets elsewhere. Ongoing changes to estate tax law may mandate different approaches to beneficiary selection.
* Begin a thorough review
When reviewing your beneficiary designations, start by listing the relevant documents. In addition to your will, personal life insurance, and active retirement plan, include employer-provided life insurance and life insurance associated with services such as credit cards, medical plans, and trade associations. You'll also need to look at stock purchase plans, stock option plans, and similar benefit programs.
If you haven't reviewed your beneficiary designations lately, think about doing it soon. For assistance in your review, give us a call.
Chuckle of the Month
Never be afraid to try something new. Remember that a lone amateur built the
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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.