James C. Nelson (1898-1982) Wesley C. Nelson, CPA Charles A. Nelson, CPA Cindy M. Tuttle, CPA Robert J. Bork, CPA Kim Adamson, CPA
Nelson & Nelson, CPAs, L.L.P. 1517 S Minnesota Ave Sioux Falls, SD 57105
www.nelsonandnelsoncpas.com
Telephone (605) 336-1988 Fax (605) 336-1054
June 2, 2005
******************** IMPORTANT ******************* IF YOU MAKE PERSONAL QUARTERLY ESTIMATED PAYMENTS TO THE IRS, THE NEXT ONE IS DUE
June 15, 2005
********************************************************
To Our Clients and Friends: With the completion of your 2004 return behind us, we want to thank you for your reliance on our tax services. The last twelve months have ushered in a host of changes in the tax arena. From the massive American Jobs Creation Act of 2004, to the more modest Working Families Tax Relief Act of 2004, we’ve seen major changes in nearly every area of the Tax Code. With most of these changes effective this year, the complexity of tax law continues to increase with no end in sight. For example, Congress and the President currently have several more legislative proposals under discussion that contain significant tax provisions. We believe there is a strong possibility that some of these provisions could be enacted by year-end. Our firm is pleased you have allowed us to handle your tax matters. As potentially major legislative developments take place, we are always available to discuss the impact of a new or pending tax law on your personal or business situation. In addition, to meet our commitment to you, we are constantly trying to identify ways to improve the quality of the services we offer. Also, we are always honored when clients refer others to us for assistance. If you were significantly overwithheld or underwithheld on your 2004 tax return With about half the year left, now is a good time to check to see if you are on track to have about the right amount of federal income tax withheld from your paycheck for 2005. An individual who is significantly underwithheld in 2005 risks being hit with an interest rate penalty at a time when the rate is getting higher. A client who is over-withheld again this year is effectively making an interest-free loan to the government at a time when decent rates can be earned from CDs and money market accounts. According to IRS Publication 505 (Tax Withholding and Estimate Tax), an individual is most likely to have an incorrect amount of federal income tax (FIT) withheld in the following situations: • Married and both spouses work. • Holds more than one job at same time. • Receives significant nonwage income (from interest, dividends, capital gains, alimony, and so forth). • Has self-employment income and owes self-employment (SE) tax.
• • •
Has obsolete Form W-4 on file with employer. Wages exceed $125,000 or $175,000 if married. Works only part of the year.
For an individual who is an employee, the simplest way to correct for underwithholding or overwithholding of FIT is by turning in a new Form W-4 (Employee’s Withholding Allowance Certificate) to the employer to adjust the amount withheld from paychecks for the rest of 2005. This is done by increasing or decreasing the number of allowances claimed on line 5 of Form W-4. The more allowances claimed, the lower the FIT withholding from each paycheck, and vice versa. If claiming zero allowances for the rest of the year would still not result in enough extra withholding, the client can ask the employer to withhold an additional amount from each paycheck by entering the desired amount on line 6 of Form W-4. Online Form W-4 Calculator You can also consider using the online Form W-4 calculator available from the IRS. You can find the calculator at www.irs.gov. From the home page, click on the “Individuals” link. Then scroll down and click on the “IRS Withholding Calculator” link. Please understand the IRS calculator is not perfect; however, using the calculator to make withholding allowance changes with your employer is probably better than doing nothing if you are likely to be significantly underwithheld or over-withheld for the year. Alternative Minimum Tax (AMT) Congress still has not corrected the problem with AMT. More individuals will be subject to the additional tax. The lack of indexing the tax, and recent tax rate cuts have actually exacerbated the AMT problem. The AMT is almost a flat tax. There are only two tax brackets. The first $175,000 of AMT income is taxed at 26%. Above that, a 28% rate is imposed. Couples get a $58,000 exemption. Singles and household heads get $40,250. These exemptions are scheduled to be reduced after 2005. The exemptions phase out above $150,000 for married and $112,500 for others. Many deductions are nixed: personal exemptions, state income taxes & local sales taxes, property tax, some medical expenses, and most miscellaneous write-offs. Some of your mortgage interest may not be deductible under AMT. It’s estimated that 400,000 MORE taxpayers will owe AMT in 2006. 2005 Federal Income Tax Rate Structure
Single 10% Bracket 15% Bracket 25% Bracket 28% Bracket 33% Bracket 35% Bracket Standard deduction Personal exemption $0–7,299 $7,300–29,699 $29,700–71,949 $71,950–150,149 $150,150–326,449 $326,450 and up $5,000 $3,200 Joint $0–14,599 $14,600–59,399 $59,400–119,949 $119,950–182,799 $182,800–326,449 $326,450 and up $10,000 $3,200 Head Household of Married Filing Separately $0–7,299 $7,300–29,699 $29,700–59,974 59.975–91,399 $91,400–163,224 $163,225 and up $5,000 $3,200
$0–10,449 $10,450–39,799 $39,800–102,799 $102,800–166,449 $166,450–326,449 $326,450 and up $7,300 $3,200
IRS Audits Congress has issued additional money to the IRS to conduct more audits in the coming years. The IRS intends to audit more individuals with high-income and self-employed individuals. It is important to keep
receipts and proof of payment for any deductions that you take. It’s also a good idea to label all of your deposits that you make into your personal checking account so, upon an IRS audit, you can identify the nature of the deposit if needed.
With Congress no longer urging the IRS to tread lightly, audit levels will continue to rise, particularly for individuals making over $100,000 a year. Also high on the enforcement list: the self-employed, S corporation shareholders, gamblers and people who work for tips.
Estate planning issues 1. Your IRA should have a primary and a secondary beneficiary. 2. You should have a will or a revocable living trust. 3. You must consider having a living will or durable power of attorney for health care. This is as important as your will. 4. There is a possibility that your IRA could be taxed twice - once inside of your estate and again to your beneficiaries. Consider leaving part or all of your IRA to a charity. Gifting to a charity prior to death will trigger income tax. 5. Large estates: Estates over $1.5 million can be subject to an estate tax. Use the annual exclusion of $11,000 to make gifts and to help reduce the estate tax. Top 10 reasons to contact your tax accountant during the year 1. Changing your marital status. 2. Buying, selling, or exchanging any real property (land or building); this includes converting your residence to rental. 3. Making gifts to any one person totaling $11,000 or more in any one year. 4. Taking out a loan using your home or other real property as security. 5. Going into business for yourself. 6. Expecting a significant change in your income and/or deductions. 7. Making charitable contributions of appreciated property or making charitable contributions that exceed 20% of your gross taxable income. 8. Changing jobs or retiring. 9. Drawing from or rolling over your retirement plan or IRA. 10. Changing your estimated tax payments to the IRS.
Employers
You have probably received junk mail regarding your requirements to post notices regarding state and federal labor law notices. They normally charge $50 to $75 for these posters. The posters are required by state and
federal law, but they are available from the Department of Labor for free, or you can print them out on the internet. Our office also has these notices available and would be glad to send them to you at not cost. Just give us a call, mail a note, or send me an email at cnelson@nelsonandnelsoncpa.com. Electronic filing of tax returns We have found that many of our clients have appreciated having their tax returns electronically filed. They have received their funds faster, they saved the postage costs, and it is more accurate than having an IRS employee enter the return. Many of our clients that have a balance due with their return are choosing to E-file also. As long as the payment and voucher are post-marked by April 15th, the payment is considered timely paid. Personal exemptions and dependents During the tax season we found that many people had questions regarding claiming a person as a dependent. There are five tests that all must be met for you to claim an exemption for a dependent. We will very briefly describe these tests. This is not a complete explanation of the tests, but just an overview. 1. SUPPORT TEST. The taxpayer must provide over 50% of the total support. 2. GROSS INCOME TEST. The dependent must have less than $3,500 of gross income. Exception: If a dependent is a child under 19 years of age at the end of the year, OR is a full-time student during at least five months of the year AND under 24 years of age at the end of the year. 3. CITIZENSHIP TEST. U.S. Citizen or resident of Canada or Mexico. 4. JOINT RETURN TEST. The dependent may NOT file a joint tax return. 5. MEMBER OF HOUSEHOLD OR RELATIONSHIP TEST. The dependent must live in the taxpayer’s household for the entire year OR be related as a child, grandchild, etc. This is only a very brief description of the tests. Please call if you have any questions. YMCA/Goodwill/Salvation Army Donations. If you are donating clothing, household goods, toys, etc. to an organization, you still need proper documentation. You should receive a receipt from the organization and also have an itemized list of what you donated. We have developed an Excel spreadsheet on our web site to help you with the documentation. www.nelsonandnelsoncpas.com Web page. We are updating our web page www.nelsonandnelsoncpas.com. There are ten new financial calculators to help you: Refinance Breakeven, Amortizing Loan Calculator, Personal Debt Consolidation, 1040 Tax Calculator, Retirement Planner, Roth vs. Traditional IRA, Lease vs. Buy, College Savings, Home Budget, and Business Valuation. We hope you’ll visit our web page and explore these calculators. Let us know what you think. We really appreciate the opportunity to serve you and thank you for your trust in us. Sincerely,
Chuck
Charles A. Nelson Certified Public Accountant
Wes
Wesley C. Nelson Certified Public Accountant