MONTHLY CLUB NEWSLETTER

June 2002

In This Issue:

• Major Tax Deadlines for June 2002
• Weight-loss costs may be tax-deductible
• Review your tax situation before you marry
• Teach your employees how to spot common business scams
• Does your business have a retirement plan?
• Try laddering your investments for higher returns
• How to plan for a comfortable retirement

Major Tax Deadlines for June 2002

June 10 - Employees who work for tips.  If you received $20 or more in tips during May, report them to your employer.  You can use Form 4070.

June 17 - Second quarter 2002 individual estimated tax is due.

June 17 - Expiration date for automatic two-month extension given to U.S. citizens and resident aliens living and working outside of the U.S. and Puerto Rico to file 2001 income tax returns.  File Form 4868 to request an additional two-month extension.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule.  There are exceptions if you owe $100,000 or more on any day during a deposit period, or if you owe $2,500 or less for the calendar quarter.

• Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

• Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

Weight-loss costs may be tax-deductible

A recent IRS announcement is good news for individuals fighting obesity.  The cost of weight-loss programs may qualify as a medical expense according to the IRS.  This deduction only applies to individuals under a doctor's orders to lose weight for health reasons.  It does not include the cost of diet food or the costs of losing weight for your general health or appearance.

You can deduct medical expenses if you itemize your deductions and to the extent your medical expenses exceed 7.5% of your adjusted gross income.  If you didn't deduct your weight-loss expenses on prior returns, you can amend returns back to 1999 to cash in on this tax break.

Review your tax situation before you marry

As summer approaches, you may be among the many couples that are planning marriage.  If so, taxes are probably the last thing on your minds.  But the fact is that marriage has tax consequences.  Many couples find that the taxes they owe as a married couple are higher than the combined taxes they paid as singles.  This is the so-called marriage penalty, and it now affects almost half of all married couples.

There are two main reasons why the marriage penalty arises.  First, the standard deduction for a married couple is less than twice the standard deduction for singles, so a couple's combined taxable income is higher.  Second, because of the way the tax brackets are structured, a married couple's combined income often pushes them into a higher tax bracket.  You're most likely to be hit with the penalty if your income and your spouse's are about the same.

Married couples are penalized in numerous other ways too.  For example, many tax credits and other tax breaks phase out when incomes hit certain levels.  But the income phase-out levels for married filers are usually less than twice the level for single filers, penalizing two-income families.  This is the case with eligibility for a Roth IRA and the child tax credit, among others.  It also applies to the threshold for taxing social security benefits, affecting married senior citizens.

In some cases, the same income limit applies whether you're married or single.  Examples include eligibility to convert to a Roth IRA and limits on capital losses, mortgage interest deductions, and rental property losses.  In these cases, two singles receive twice the tax break that a married couple receives.

Last year's tax law gradually expands the 15% tax bracket, the standard deduction, and certain income phase-out limits for couples to provide partial relief from the marriage penalty.  However, some of these breaks don't begin to phase in until 2005.  So a review of your tax situation before you tie the knot could save you money.

Teach your employees how to spot common business scams

According to the Federal Trade Commission (FTC), businesses lose millions of dollars every year because they fall victim to scams.  Crooks owe their success in part to overworked and undertrained employees and careless bookkeeping practices.  To protect your business, it pays to teach your employees how to spot the most common business scams.  Here are some examples:

Phony invoices.  Con artists send a phony bill demanding payment for a product or service you didn't receive.  These bogus invoices are often marked with "final notice" in hopes your bookkeeper will simply pay the bill to avoid being turned over to a collection agency.

Nonexistent advertising.  The Yellow Pages Publishers Association estimates that over $500 million in phony advertising is collected annually by con artists.  Crooks try to sell advertising in alternative or nonexistent business directories or on phony Web sites.  Con artists fool businesses into believing that they are dealing with a local, affiliate telephone company or other legitimate advertiser.

Office supply schemes.  This telemarketing scheme may involve a "bait and switch" approach, or suppliers may simply ship merchandise you didn't order in hopes you'll pay for it.

It's good business to follow the FTC's advice:  Implement and follow good purchasing practices.  Be cautious in your dealings with telemarketers and businesses you haven't dealt with before.

Does your business have a retirement plan?

As you probably know, contributing to a retirement plan is one of the best ways to keep more of what you make.  Funds invested in a retirement account can grow faster than other investments because earnings are not taxed until you withdraw the money.  The 2001 Tax Relief Act made extensive changes to the rules for retirement plans.  Higher contribution limits, simplified administration, and a new tax credit make setting up and keeping a retirement plan more attractive than before.

Two plans that are popular with small businesses are SIMPLE IRAs (Savings Incentive Match Plan for Employees) and SEPs (Simplified Employee Pension).  Unlike traditional company retirement plans, such as 401(k)s, these plans take less paperwork to start and maintain.  There's also a new tax credit of up to $500 per year to help your business defray the administrative costs of managing a plan for its first three years.

With either plan, the company contributes to IRAs set up for eligible employees.  The money contributed belongs to the employee; the company doesn't make investment decisions.  Both plans let you postpone making the company's contribution until the due date of your tax return, including extensions.

• SEP. 

  A SEP is a qualified retirement plan that allows employers to make tax-deductible contributions for owners and their employees.  Self-employed individuals can set up a SEP even if they have no employees.

  SEPs allow flexible contributions.  So if your company isn't having a banner year, you can contribute less than the maximum amount allowed, or you can even skip contributing altogether.  Employees can't contribute to their SEP IRAs unless the company has a special SEP, called a salary-reduction SEP, set up before 1997.

• SIMPLE IRA. 

  A SIMPLE IRA plan is available to self-employed individuals and to businesses with 100 or fewer employees and no other retirement plan.  SIMPLEs let employees contribute pretax wages to their SIMPLE IRAs, up to $7,000 for 2002 ($7,500 for those 50 and older).  Employers must make a limited contribution for each eligible employee.

  The company can choose between contributing 2% of each eligible employee's wages or matching employee contributions on a dollar-for-dollar basis up to 3% of wages, subject to a wage limit.

  The main attraction of SIMPLE IRAs is that they are easier and less expensive to manage than traditional company retirement plans.

Last year's tax law changes make retirement plans more attractive to businesses.  Selecting the right retirement plan for your business begins with understanding your choices.

Try laddering your investments for higher returns

The good news is that today's low interest rates make purchasing a home or a new car more attractive than before.  The bad news is that interest rates on savings accounts and other investments have plummeted over the last couple of years.  If you're an investor, what can you do to increase your returns while you're waiting for interest rates to rise?  One strategy might be to build an investment "ladder."

A ladder is a portfolio of several bonds or certificates of deposit (CDs), each with a different maturity.  For example, with $50,000 to invest, you might buy ten $5,000 bonds.  Each bond would mature at successive dates over the next ten years.

Generally, the longer the maturity, the higher the yield, so an investment ladder can provide you with a higher return than a portfolio consisting solely of short-term maturities.  If interest rates drop, your return is protected because you've locked into the higher rate on the long-term issues.  If interest rates rise, you can reinvest the funds maturing on your short-term issues to take advantage of the higher rates.

Like most investment strategies, a CD or bond ladder is not for everyone.  You should investigate all your options before you invest.

How to plan for a comfortable retirement

Some tasks are easy to put off, such as planning for retirement.  Yet those who fail to plan often live to regret it.  Suppose you recognize the need for planning.  Where do you start?  You might want to take the following systematic approach.

Compute your annual retirement income needs.  Decide what lifestyle you will accept during retirement.  For most, plan on about 75% of current living expenses.

Limited losses.  Project that annual requirement forward to your expected number of retirement years.  You must both adjust for inflation and estimate how many years you and your spouse will live.  Don't be conservative.  Too many retirees run out of resources before they run out of years.

Estimate the amount necessary to meet those needs.  Include social security, company retirement benefits, IRAs, veteran's pension, and similar resources.  Project these to your retirement date by adjusting for inflation, interest, and taxes.

Include existing resources.  Prepare for a shock; available resources rarely meet needs.  To bridge the gap, you'll need to increase savings, invest for higher returns, or plan for a simpler retirement.  Other options may include delaying your retirement or planning to work part-time during retirement.

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 at 1040form.com direct all correspondance or e-mail to the address at the bottom of the page.