WELCOME
Welcome to another issue of Tax Beat. Inside you will find a variety of articles of interest to you, your family, and your business. If you have any questions on how these articles can be applied to your situation, please give us a call.
Once again, if you would prefer to receive future issues via email, please let us know by sending a quick e-mail to taxbeat@komisarbrady.com. In order to read the newsletter, you will need to have Adobe Reader installed on your computer, which can be downloaded free at www.adobe.com.
We are also implementing an online tax organizer for our individual tax return clients that can be filled out instead of the traditional paper copy that is mailed to you. If you are interested in using the online organizer, or have any questions, please send an email to tax-beat@komisarbrady.com. We will have more information as we get further along in the implementation process.
A NEW OPTION FOR 401(k) PLANS: ROTH 401(k) Beginning in 2006, 401 (k) plans will have the ability to offer eligible plan participants the option of designating some or all of their employee contributions as Roth 401(k) contributions. If this Roth 401(k) option is selected, the participant's taxable wages will include the employee contribution, but just like Roth IRA distributions, qualified distributions are excludible from gross income. Employees would be able to make contributions to the regular and/or Roth account, but they will not be allowed to switch money from one account to the other once the money has been contributed. The employee cannot increase their overall contribution to the 401 (k) plan (limited to $15,000 in 2006, $20,000 if over age 50) by making contributions to both accounts, the limit applies to all contributions. If the employer makes matching 401(k) contributions, those contributions must be put into the regular 401(k) accounts, even if the employee is directing 100% of his/her contributions as Roth 401(k) contributions.
Just like regular 401(k) accounts, distributions are required from Roth 401(k) accounts by April 1st of the calendar year following the year the individual reaches age 70 1/2. It is possible to avoid the required distributions by rolling over the Roth 401(k) account into a Roth IRA account, which does not have the required distribution rules.
Roth 401(k) plans will allow you to put more dollars into an account in which qualified distributions will be tax free. Unlike Roth IRAs, there is no income limitation that disallows some individuals from making Roth 401(k) contributions. If you are under the Roth IRA income limitation ($110,000 for single individuals, $160,000 married individuals) it appears possible to maximize both a Roth 401(k) and a Roth IRA contribution, and contribute $19,000 to different Roth accounts in 2006 ($15,000 Roth 401(k) contribution, $4,000 Roth IRA contribution), if you are over age 50, catch-up contributions would push the amount possible to contribute to $25,000 ($20,000 Roth 401(k), $5,000 Roth IRA).
Just like most of the provisions of the 2001 tax law that created Roth 401 (k), Roth 401(k) are set to expire after 2010, unless extended by Congress. What that means is still unclear, but the most likely scenario is that no new money would be able to be contributed into the Roth 401(k) plan, but the money in the plan would be allowed to stay there or be rolled into a Roth IRA account.
If you are interested in adding a Roth 401(k) option to your 401(k) plan (the Roth option also applies to 403(b) plans which are offered by tax exempt organizations and public schools), you will need to amend your plan and you will need to properly document and establish procedures for the administration of these new accounts. If you need further information or assistance in creating the Roth 401(k) option in your plan, please contact your plan administrator or Komisar Brady & Co., LLP.
ESTATE PLANNING Estate planning is something many people believe does not apply to them for one reason or another. However, everyone should have some type of plan in place to help ease the burden on those left behind and to ensure that your wishes are carried out. It is never too early or too late to start the estate planning process. Not only is it important to have some type of plan in place but it should be a written plan that is kept in a safe place. In addition, it is a good idea to let someone else know that you do have a written plan and the whereabouts of the plan. You should also review your plan every few years (or upon some significant change in your life) to ensure that it is up to date, not only with current tax law, but also with your current situation.
Why do you need estate planning? The reasons vary from person to person. A very common reason is to ensure you, not the state, will determine the guardian of your children and the heirs to your assets. An estate plan also helps to ease the administration of your post-death affairs as well as to help minimize the tax consequences related to the transfer of assets after your death.
The estate planning process consists of a series of steps. One of the first things you should do is to summarize your assets – remember to include how the assets are titled and where they are located. You should also make a list of your liabilities, including the amount and repayment terms.
Next you should review your life insurance policies, annuities, IRAs, and retirement plans – remember to designate the primary and the secondary beneficiaries. You may want to consider a charitable beneficiary if you are so inclined. While you are reviewing your beneficiary designations you should also look to see if you have adequate insurance coverage, not only your life insurance but also disability and long term care.
There are several documents commonly associated with estate planning – first and foremost of which is the will. In a will you can name a guardian for your children as well as a personal representative of your estate. The personal representative will be the person you designate to carry out the instructions in the will. Another document used is a revocable living trust. A revocable living trust is beneficial in the event of incapacity as the provisions in the trust document can make the trust effective immediately upon incapacity. Another benefit to a trust is the assets in trust avoid probate which can be a very costly and time consuming process. Moreover, if you title out-of-state assets (e.g., a vacation home) in the trust’s name, your estate won’t need to go through probate in that state.
Another document used in the process includes a living will which outlines your wishes in a situation where a decision needs to be made regarding life-sustaining measures. Based on the recent events in Florida this document should be written and its existence made known to others. Additionally, a medical power of attorney is used to designate someone to make medical decisions for you in the event of your incapacity.
Other common estate planning documents are a marital property agreement, which specifies how spousal assets are classified for both control and ownership purposes during life and at death, and a financial power of attorney which enables a third party to act on your behalf regarding financial decisions.
As part of the estate planning process, you will need to make a number of decisions. You will need to determine the parties who you will name to be the guardians of your children, the personal representative of your estate, the trustee of your trust(s), and the holders of powers of attorney. You will need to determine to whom you would like to leave your assets and under what conditions. If there are specific items of personal property (heirlooms, jewelry, etc.) which you would like to leave to specific people, you should create a written list identifying the items and the recipients. Finally, you will need to select a qualified attorney to prepare the necessary documents.
Estate planning is a very personal but necessary process and the information we have provided to you is meant to help you obtain a basic understanding of the estate planning process as well as the documents used in a plan, and other items to keep in mind during the process. Please feel free to contact our office if you have any questions or would like further information.
TIMING YOUR MUTUAL FUND BUYS AND SELLS You probably have heard the phrases "there is no such thing as a free lunch" and "if it looks to good to be true, it probably is." This is certainly the case when it comes to fund distributions. As much as it seems that you are earning extra money by purchasing shares of mutual funds right before it pays a distribution, in reality all that you are doing is paying taxes on the distribution and gaining nothing in return. This also holds true if you are planning to sell mutual fund shares that you have held for greater than a year. If you wait until after the fund distribution is paid, you are subjecting some of your gain to possibly higher ordinary income rates as opposed to lower capital gain rates.
This distribution warning is not an issue if mutual fund shares are held in an IRA or 401(k) account where taxes are deferred and money is not taxed until it is withdrawn. Nor is it a worry if you own shares of money market or bond funds which declare and pay dividends monthly. In these money market and bond funds, you are entitled to the dividend based upon each day you own the fund, not holding it on a specific date.
To illustrate the poor choice of buying into a fund distribution, let's pretend that you inherited $20,000 from your long lost aunt and you decide to invest the money in a mutual fund without checking the fund distribution date. You purchase 4,000 shares at $5 a share. The next day the mutual fund states that current shareholders (that's you) as of today will receive $1 per share as an ordinary income dividend, but since the fund is paying out $1 per share, the price of the mutual fund (ignoring fluctuations in price due to market changes) will also drop $1. After the distribution, the value of your investment is still $20,000 (4,000 shares at $4 per share and $4,000 cash or reinvested share) but you now need to pay tax on that $4,000 distribution on which the federal tax rate could be as high as 35%. If you would have waited until after the distribution date of record to purchase the mutual fund shares, you would purchase 5,000 shares at $4 per share, a $20,000 investment, but by waiting until after the fund distribution date, you would not owe any additional tax.
Since the price of a mutual fund (ignoring changes due to market fluctuation) drops by the price of the distribution, if you have mutual funds held greater than 1 year that you are planning to sell, by selling them before the dividend distribution date, you can avoid at least some of your gain being taxed at ordinary rates and not the lower capital gain rates. If you purchased 2,000 shares of a mutual fund years ago at $2 a share, and now the shares are worth $7 per share or $14,000. By selling those 2,000 shares, you would create a long term capital gain of $10,000. If you were to wait until after the dividend distribution date, and the fund paid out $1 per share, the price of shares would decrease to $6 per share. You would still receive $14,000 between selling your shares and receiving the distribution, but your long term capital gain would decrease to $8,000, and you would have a taxable distribution of $2,000. Since qualified dividends are taxed at the same rate as capital gains, the possible increase in tax owed on the transaction has been minimized, but short-term capital gain distributions and nonqualified dividends will increase your overall tax on the transaction.
As a general rule, try to avoid buying into fund distributions or selling shares right after the fund distribution is made. To accomplish this, you will need to determine the fund dividend distribution date. The easiest way to determine the dividend distribution date is to either call the mutual fund company or to check the mutual fund's website. The date that you are looking for is the date of record where shareholders as of that date will be paid the dividend, not the date the dividend is actually paid.
FREE CREDIT REPORT To assist you in the prevention of identity theft, the Fair and Accurate Credit Transaction Act was signed into law in December of this past year. One of the provisions allows for you to receive one free credit report from each of the consumer credit companies each year. Requesting the credit report does not require you to purchase or subscribe to anything; they are free as required by law. To get the free, no strings attached credit report, you must go through AnnualCreditReport.com.
AnnualCreditReport.com offers an annual free credit report from each of the 3 major consumer credit reporting companies, Equifax, Experian, or Trans Union. A recommended strategy is to order one of the reports to check for errors, order the second report 4 months later to verify that changes have been made, and the last report 4 months thereafter. You may, if you choose, order all three reports at the same time and compare them.
In order to try to space out the requests for the credit reports, the date you are first allowed to request a credit report has been broken down geographically. The Western U.S. and Midwest are currently available to request reports, the South will be allowed on June 1, 2005, and the Eastern US will be allowed beginning September 1, 2005.
The credit reports are available online at www.AnnualCreditReport.com. Online reports require an Adobe viewer which is available to be downloaded for free on the website. Reports are also available by phone or mail. To request a report by phone, call 1-877-322-8228, or mail your request to:
Annual Credit Report
Request Service
PO Box 105281
Atlanta, GA 30348-5281
DISPOSING OF COMPUTER EQUIPMENT If you are looking to update your current computer equipment, or if you are looking to finally get rid of all of the old computer equipment piling up over the years, disposal is not as simple as throwing it into the garbage, in fact it is against the law in many municipalities for businesses, and in some cases, individuals to do so. Even if it was that easy, the physical disposal of the computer should be the least of your worries. You should be worrying about what information is on that computer, could anyone access that information, and what could happen if someone were to access that information.
Besides any privacy or security issues, there are serious environmental issues with the disposal of computer equipment. A color monitor can contain as much as 10 pounds of leaded glass. Other heavy metals, such as cadmium, lithium, and mercury are also present in computers. These heavy metals can contaminate the land and groundwater if not disposed of properly. It is not just the computers and monitors that are hazardous; printers, keyboards, and even mice contain toxic metals as well. If computers are improperly disposed of in landfills and the groundwater nearby becomes contaminated, computers identified with your business may cause an EPA lawsuit directed at you.
Privacy and security concerns are of the utmost importance in the disposal of obsolete equipment, and for many industries it is a legal requirement. In the past few years, many laws have been passed protecting privacy: Health Insurance Portability and Accountability Act (HIPAA), Fair and Accurate Credit Transaction Act (FACTA), Sarbanes-Oxley, and Gramm-Leach-Biley. These laws force companies to protect the personal data of their patients, customers, and investors. By overlooking the secure disposal of obsolete equipment, you have wasted all the efforts you have made in developing a secure data system. Privacy concerns should not just be an issue for businesses, concerns of identity theft should make all individuals take steps to properly dispose of a personal computer as well.
There are a number of computer recycling centers and electronics de-manufacturers in Wisconsin. These businesses will provide two essential services for you, the physical recycling and disposal of your computer equipment, and the destruction of any data stored on the computer equipment. Many firms can also provide you with a Certificate of Destruction or and Certificate of Recycling, which can be used as documentation to prove compliance for any privacy or environmental law. Besides computer recycling businesses, many cities and counties have programs to recycle computer equipment, and computer manufactures such as Dell and Gateway have trade-in programs. Both of these options do not guarantee the security and destruction of any data on the computer equipment, and steps should be taken to make sure that info is removed prior to using them.
New Wisconsin Minimum Wage On June 1, 2005, Wisconsin’s minimum wage for adults (age of 18 or older) increased from $5.15 per hour to $5.70 per hour. The minimum wage for minors (under the age of 18) increased from $5.15 per hour to $5.30 per hour. Wisconsin’s minimum wage rule changes also contain a number of specialized pay rate adjustments for persons employed in certain types of work, including camp counselors, golf caddies, and agricultural employees. Please contact us if you need more information on these employees.
Despite the law changes, there was one rule that did not change. The minimum wage rate for Wisconsin tipped employees will remain the same. The minimum rate for a tipped employee is $2.33 per hour; however, an employer can only pay this minimum rate if the employer is able to establish by payroll records that the tips plus wages paid equal or exceed the new minimum wage rates ($5.70 per hour for adults and $5.30 per hour for minors). If the employer pays the tipped employee $2.33 per hour and the employer is later unable to substantiate via payroll records that the new minimum wage rate has been paid to the employee, the employer will be responsible for back pay necessary to get the employee to the new minimum rate.
If you have any questions regarding minimum wage rules or you would like us to review your payroll records for substantiation purposes please feel free to contact us.
To ensure compliance with Treasury Circular 230, we are required to inform you that any advice concerning U.S. federal tax issues contained on this website is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code and was not written to support the promotion or marketing of any transaction or matter discussed herein. Application of tax regulations is specific to the individual or business and we recommend that you consult a qualified Komisar Brady tax professional for how the above information may apply to you.
