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Perspective

An Inside View

Dear Clients and Friends,

     It is November already and once again many of us are astounded at how quickly another year has gone by.  Of course, this is the time of year when we need to assess our tax situation for any final planning actions. 

     As we assess various ideas, the two tax bills passed in 2006, remind us of several key items.  Page One of our newsletter highlights the recent “Pension Protection Act of 2006”.   This tax act addresses one of the most significant and prudent tax ideas available, namely, contribution to some form of retirement plan.  Higher contribution limits for IRAs, SIMPLEs, and 401(K)s plans are now permanent.  Contributions range from $4,000 to $5,000 for IRAs, $10,000 to $12,500 for SIMPLE plans and $15,000 to $20,000 for 401(K) plans.  Contributing to these retirement tax deferral plans allows for current tax deductions while deferring the tax liability to future years.

     The Tax Increase Prevention and Reconciliation Act of 2005 (TRA 2006) also made several important changes.  The controversial dividend and capital gains tax rate cut, enacted in 2003, lowered the maximum tax rates to 15 percent for qualifying taxpayers.  Certain taxpayers are eligible for an even lower rate of 5 percent.  Originally, these rates were scheduled to expire at the end of 2008.  TRA 2006 extends these cuts for two more years through December 31, 2010.  So while we can still enjoy these tax cuts for a few more years, the timing of when to sell a capital asset must still be considered.  For example, if you can control whether a sale near the end of a year can be deferred to the next year, an analysis should be done to determine the best tax results. We can help you make this assessment.

     TRA 2006, also temporarily reduced the tax impact of the alternate minimum tax (AMT) for year 2006 only by creating a higher exemption amount.  Remember that the AMT is a second tax calculation that is made along with the regular tax computation. You must pay the higher of the two.  Other tax law changes over the years have extended the AMT’s reach, so even if you don’t consider your tax situation unusual, you may be subject to the AMT.

     Be aware that TRA 2006 changed the “kiddie tax rules.”  These rules require a child’s unearned income, such as dividends and interest to be taxed at the parents’ tax rate.  Previously the law applied to children under age 14.  The TRA raises the age limit to under age 18 effective for the entire 2006 tax year.  This may be an unpleasant surprise to parents who planned for various investments in their children’s accounts to mature between ages 14 and 18.

     As you can see, tax preparation and tax planning are constantly changing.  Let us know if we can help you with any tax issues or considerations as 2006 draws to a close.  Thanks for your trust and confidence in us.  We wish all of you a joyous Holiday Season and a very prosperous New Year.

Sincerely,

Nick

Nicholas F. Nolan III

Changes In Roth Conversion Rules Provide New Opportunities

   Taxpayers with adjusted gross incomes over $100,000 have had to sit on the sidelines when it comes to converting their traditional IRA to a Roth IRA. But recent tax law changes have eliminated this restriction beginning in 2010, opening the door to a popular tax-planning opportunity. Should you consider a Roth conversion?

     The rules regarding IRAs are fairly straightforward. Contributions to a traditional IRA are tax-deductible, and withdrawals made at retirement are taxable. Conversely, a contribution to a Roth IRA is not tax-deductible, but retirement withdrawals are not taxable. In addition, the traditional IRA requires distributions beginning at age 70½, while the Roth has no such requirement.

     The absence of required distributions and other factors have made converting a traditional IRA to a Roth attractive to many taxpayers. But there is a catch — income taxes must be paid on the amount converted. To help cushion this burden, newly qualified taxpayers will be allowed to spread the tax over two years.

     Is converting to a Roth a good idea for everyone? If you expect your tax bracket to be significantly lower at retirement, or you do not have non-IRA cash to pay the tax bill, then you might want to remain with the traditional IRA. However, the greater the number of years until retirement, the better the conversion looks. Be aware that there is some skepticism that this law will remain on the books until 2010. Until then, maximizing your traditional IRA annual contribution, or even contributing to a nondeductible IRA, might be a good strategy.

Business Solutions

Professional Accounting Expertise

How To Keep Your Customers Satisfied

     In some industries, service has become a quaint memory, and customers are reduced to selecting the provider who costs or annoys them the least. But the golden rule has not been repealed, and pleasing your customers can create a powerful competitive advantage. A few simple changes may well increase your bottom line.

     For example: We all hate having our time wasted, and businesses are among the worst offenders. To distinguish your firm from the rest, establish the following customer service policies and procedures.

Communicate with your customers. Return their calls promptly, update them about matters in progress, and explain delays as soon as you can.

Don’t make your customers jump through hoops. Offer discounts at the point of sale, rather than giving out coupons or making buyers apply for mail-in rebates. If you employ an automated phone system, provide a simple method for reaching a live person.

Don’t worry about trying to save face. If you’re even partly wrong, apologize and proceed to a resolution. Train your employees to do the same, and reward them for positive outcomes.

     Let customers know you’re there for them and that you regard them as more than mere cash cows. Listen to their concerns, and address them promptly. If someone is unhappy with a purchase (whether product or service), fix it, replace it, or refund the payment in full. At worst, the loss won’t be compounded by damage to your reputation. At best, the money will come back multiplied by repeat business and referrals.

Reorganizing Your Portfolio Can Provide Tax Savings

     If your investment portfolio is due for a review and perhaps some realignment, you may be able to reorganize your portfolio and cut taxes too. Here are some suggestions to consider.

·    Consider selling some securities. The tax code allows you to offset up to $3,000 of net capital losses annually against other taxable income ($1,500 if married filing separately). Selling enough “winners” or “losers” to reach this figure may result in the maximum tax benefit for 2006. But if you decide to repurchase securities you sell, beware of the “wash sale” rule. If you buy the same security within 30 days before or after selling it at a loss, the loss is not deductible. This rule does not apply if you sell at a gain. Let’s look at a couple of examples.

     Example A: Sally has realized $5,000 of taxable gains in 2006. She decides to dispose of losers and sells enough to generate $8,000 in losses. Her $3,000 net loss should be fully deductible in 2006.

     Example B: Jack has realized losses of $10,000. He still owns a stock with large unrealized gains, and he expects it to appreciate further. He decides to sell enough shares to generate $7,000 in gains and immediately repurchases the shares. Combining the $10,000 of losses with the $7,000 of gains gives him a $3,000 net loss which is fully deductible. Jack’s cost is the commission he pays on the sale and repurchase.

·    Consider donating appreciated stock to your favorite charity. Generally, you’re allowed to claim a charitable deduction for the fair market value of the stock and avoid tax on the gain. The charity can then sell the stock tax-free.

What’s Your Biggest Business Problem?

     If you run a business, try this exercise. First, write down what you think is the single biggest problem in your business. Then ask the key people in your company to do the same. Try to include input from all areas of operations — sales, manufacturing, personnel, purchasing, shipping, finance. The number of inputs will depend on the type and size of your business, but make sure you cover everything from internal operations to relationships with customers.

     Then compare the answers. You might find that one common theme emerges, or you might find some issues that you weren’t aware of. There might be a problem with your suppliers, or it might be a problem in closing sales. It could be an internal problem in meeting orders, or a shortage of suitable employees. Perhaps it’s a financial problem, such as finding financing or collecting payments. Sometimes it’s a frequent source of customer complaints.

     Why focus on problems? Why focus on your problems instead of looking at what’s working well? Because directly or indirectly, problems translate into dissatisfied customers, higher costs, lower sales, and reduced profits. It’s usually true that it costs more to fix something that’s wrong than to do it right in the first place.

     Once you have your list of problems, call together the group that provided input. Discuss the results and how to solve the most important problem or problems. It doesn’t have to become a big bureaucratic exercise. By the end of the meeting you should have fleshed out the issues and decided on a course of action.

     Sometimes just the internal communication at the meeting will help to resolve issues. Often the true nature of a problem will change or become clearer as it is discussed. Make sure you involve key managers from all parts of your business. The different perspectives will help you reach a better solution. Also, the joint problem solving will make your staff feel appreciated and part of a team. But the best result of all is that your business will have recognized and addressed some of its biggest problems.

Do Year-End Tax Planning For Your Business

     Many small businesses and self-employed business owners make the mistake of not thinking about taxes until it’s too late. Most tax moves must be made before year-end. Here are a few tax-cutting ideas that will help reduce your 2006 business taxes.

Purchase business assets. If your business will soon require additional computers, furnishings, or even transportation equipment, make those purchases before the end of the year and take maximum advantage of the Section 179 expensing election.

Plan for retirement. If you don’t have a retirement plan, consider setting one up before the end of the year, even if you don’t have to actually fund the plan until 2007. In fact, there are federal tax credits for some of the costs of setting up a new retirement plan. And don’t overlook a Simplified Employee Pension (SEP) plan, which does not have to be either established or funded until 2007.

Use your credit card. Even a cash basis business can deduct expenses purchased with a credit card on the date of the charge, not necessarily when the credit card payment is made. So if you find that you need business supplies or equipment before the end of the year and you’re short of cash, consider using your credit card and deduct the expense this year.

Defer income and accelerate deductions. For cash basis taxpayers, consider sending out your invoices late in December so the payment isn’t received until the following year, thereby deferring current taxes. Also, stock up and pay for office supplies and other needed office items before year-end, including paying any outstanding bills or prepaying certain business expenses.