2006 Mileage Rates Released

The standard mileage rate falls to 44½ cents for 2006 business driving. While that's 4 cents higher than 2005 began, an increase in September brought the rate for the last part of 2005 to 48½ cents.

Medical miles decrease from 22 to 18 cents each, though they had started 2005 at 14 cents.

And of course, charitable miles remain flat at 14 cents. This article offers some insight into the reason for the charitable mileage rate remaining unchanged every year. Apparently the medical and business rates are based on actual operating costs, while our congressional representatives have to manually set the charitable rate. Apparently, having to consider the issue more than once every five years is too much of a strain on them.

Individual Tax Extensions Extended

The IRS recently issued new regulations which will allow for a streamlined extension process for individuals. Instead of receiving a four-month extension on April 15th, individuals will now be able to extend their due date to October 15th with one filing.

While individuals could already extend six months to October 15th, the process required an initial four-month extension to August, then an additional two-month extension to be filed by August 15th. The second extension request also wanted an explanation of the reason you needed a second extension, while the new system provides for automatic extensions of six months right off the bat.

One important item to remember about extensions is that they're always extensions of the filing deadline, but NOT the payment due date. Even if you need an extension, you must pay your tax in full by April 15th to avoid late payment penalties.

Increased Gifting Limits, More Updates For 2006

The IRS released further updates for 2006 today, updating various amounts that are supposed to increase each year based on inflation. One key change was an increase in the gift exclusion from $11,000 to $12,000.

The gift exclusion is the amount of money you can give to another person without affecting the amount you can leave tax free at your death. If you and your spouse both choose to each give the maximum of $12,000 to one of your children and their spouse, you can basically give $48,000 to a married child next year.

Other regular annual changes include increasing the standard deductions and widening each of the tax brackets, so that you can enjoy a little more income at each of the lower brackets.

Retirement Contribution Limits for 2006 Announced

The IRS recently released the updated limits on contributions to retirement plans effective January 1, 2006. These limits define the amount you can contribute to a 401k or similar plan during a year. There are a lot of obscure amounts in their information, so we'd like to highlight the key numbers for you.

• Maximum contributions to a 401(k) plan - increases from $14,000 to $15,000.
• Additional contribution allowed for those over 50 - increases from $4,000 to $5,000.
• Total amount allowed to be contributed for an employee, including their deferral and company match - increases from $42,000 to $44,000.

The full details of the release can be found at this site. When it comes to retirement savings, I always like to remind clients that I've never run across anyone who complained about having saved too much. Consider increasing your savings, and you can probably save some tax at the same time.

Katrina Relief Bill Signed by Bush

President Bush recently signed a bill containing tax relief provisions for those affected by or volunteering to help with relief from Hurricane Katrina. While many of these provisions will have more effect in my old hometown in Mississippi, there are some provisions that will help us in Washington who help personally or financially.

The main provisions that affect us outside of the Katrina devastation involve new breaks for contributions. The limits on contributions as a percentage of income are lifted for the remainder of 2005.

Another nice break for anyone who has traveled to affected areas to give relief is the increased mileage deduction for hurricane relief. As I've written before, the oddity is that charitable miles are a 14 cent deduction, while business miles apparently cost 48.5 cents. This bill, however, increases the charitable mileage deduction for hurricane relief efforts to 70% of the business rate. That should come out to about 34 cents per mile - a nice bump from the regular rate.

Quite a few people have asked if my family and friends were affected by the hurricane. While everyone I know is safe, there was some pretty serious devastation in my old hometown of Hattiesburg, Mississippi. My old high school caught a good bit of the blow - here are some pictures if you're interested.

For more details on the tax bill, click here.

Your Estimate Payment May Be Lost!

Did you make an estimated tax payment in September? You might have to do it all over again!

September 11th is just not a good day for the federal government. On that date two weeks ago, there was apparently an accident on the San Mateo bridge involving an truck transporting estimated tax payments to the IRS lockbox. The payments were blown all over the bridge and into the bay. The IRS thinks it lost between 30,000 and 46,000 estimate payments in the accident.

These payments were those made from residents of western states, including Washington and Oregon. If you made a payment before September 11, watch your bank statement or online banking system to see if it clears. If you see nothing by September 30, the IRS would like you to call them at 800-829-1040 for further instructions.

Any underpayment penalties will be waived for payments they receive late because of this accident. That's great, but another issue that strikes me is the opportunity for identity theft with all these payment checks blowing around. As always, keep a close eye on your bank account to make sure things look right.

https://www.wscpa.org/wscpa/ShortForm/050923/0923sf3.htm

IRS Realizes Gas Price Increasing

With the recent spike in fuel costs, the IRS has increased their standard mileage rate for the last four months of the year. The new rate as of September 1 will be 48.5¢, up from the 40.5¢ rate set for January 1.

The standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

But the really big news? Charitable mileage can still only be deducted at 14¢ per mile. What's up with that? The rate hasn't increased for years. If any one can point me to the charitable gas station where I can fuel up that cheaply, please drop me an email.

The New Cost of Dying

If you didn't already fear dying, the Washington state legislature has given you a new reason: estate taxes.

The legislature passed a bill that creates a new state-level tax on folks with more than $1.5 million in their estate. Beginning in 2006, the threshhold increases to $2.0 million. Rates will range from 10-19% of the estate.

The tax took effect May 17, 2005, and replaces a state-level estate tax that was declared invalid by the Washington Supreme court earlier this year. I guess the pot of dead peoples' cash was so attractive to legislators, they couldn't help but try to grab a piece. The estate tax has always seemed patently unfair to me, as estates are composed of assets purchased with money that has already been taxed once. The logic behind death being a taxable event escapes me.

Anyway, here's a link to the bill.

A Hybrid Credit, Courtesy of the Energy Bill

I've written previously about tax advantages of purchasing a hybrid vehicle. The attractive tax aspects of these vehicles were enhanced by the energy bill signed by President Bush on my birthday, August 8.

The energy bill replaces the old deduction with two new credits for the purchase of a hybrid under 8500 lbs GVW. The credits vary based on the efficiency of the hybrid vehicle. For the first credit, fuel efficiency is compared to the 2002 average fuel efficiency for a vehicle type (car or light truck) and weight class. This credit ranges from $400 for a vehicle that gets at least 125% of the 2002 average, all the way up to $2,400 for one with average mileage 250% of 2002.

The second credit is based on the 'Lifetime Fuel Savings' of the vehicle, which they calculate as the estimated number of gallons you'll save over a 120,000 mile life. This credit adds between $250 and $1,000 (available when a vehicle should save 3,000 gallons over a lifetime).

As you can see, the total credits here can be as much as $3,400, and they're a pain to calculate! I suspect that vehicles will eventually be prequalified for a certain credit amount, and you'll know that amount from the dealer when you purchase the vehicle. Still, these credits are a nice enhancement from the $2,000 deduction (not credit) that was previously the code.

Offers In Compromise May Be Severely Curtailed

Pending legislation may well put a stop to offers that would be submitted under the IRS' offer in compromise (OIC) program. The OIC allows a taxpayer to offer an amount to the Service in full payment of their IRS debts. Last year, the Service added an application fee to reduce the number of offers they receive, but that must not have been enough for them.

The Service would like to require a 20% nonrefundable down payment be made with any offer. It's feared that this would be a disincentive to submissions, as there's no guarantee your offer will be accepted, and taxpayers would be out their down payment. I suppose the funds would be applied to the debt already owing, but this still stands to curtail a program that has been a lifesaver for many taxpayers.

A New Deduction For Your Production

Beginning in 2005, companies engaged in 'domestic production' will be allowed a new deduction for their efforts. The deduction will be 3% of the income generated by qualified production activities (increasing to 6% in 2007 and 9% in 2010).

There are still a lot of details to be worked out regarding eligibility for the deduction, but some industries that qualify are construction (in the US), manufacturing, and farming. You don't have to be incorporated to benefit, either.

While this might not be a huge deduction for most companies until the rates increase, I'd put this one under 'Every little bit helps'!

IRS Wants More From S-Corporations

A disturbing recommendation from the IRS suggests that the income of S corporations should be subject to self-employment tax, as is the case with unincorporated sole proprietorships.

Fortunately, the commissioner of the IRS branch dealing with small businesses and the self-employed disagrees with this recommendation. It is far too soon to tell whether this proposal has a chance in Congress, though with the current efforts needed to increase the solvency of Social Security, any proposal that increases Social Security taxes will likely receive serious consideration.

For years we have advised individuals that using S corporations instead of sole proprietorships can save significant taxes by allowing the gain remaining inside the business to be free of self-employment taxes. The owner is required to take a 'reasonable' salary, upon which payroll taxes are paid, but the remainder of the profits can be taken as a distribution, exempt of self-employment tax. This proposal would eliminate that exemption.

We will watch this issue carefully as it progresses. You may wish to contact our federal legislative representatives and express your feelings, though this has not yet come up as a bill in Congress.

Hate Penalties? This Can Help

What You Don't Know About Paying Federal Taxes Electronically Could Cost You Money

Did you know that non-users of the Electronic Federal Tax Payment System (EFTPS) are 31 times more likely to be assessed an IRS penalty than users of EFTPS?

Why? Because taxpayers and tax professionals that use EFTPS can schedule payments in advance to avoid missing deadlines, and they can double check their work before submitting a payment.

EFTPS is a secure service provided free by the U.S. Department of the Treasury, through which taxpayers make payments by Internet or phone. More than 3 million people are already using EFTPS to their benefit. To visit EFTPS go to: http://www.eftps.com.

All businesses and especially individuals making estimated tax payments with Form 1040ES can use EFTPS to avoid penalties.

• Schedule one or even all estimated payments for the entire year up to 365 days in advance (120 days in advance if it's a business tax payment)
  
• Cancel a payment up to 48 hours before it's scheduled payment date
  
• Receive an immediate Acknowledgement Number for every payment, which is a receipt for your payment.

EFTPS uses the highest level of security; plus it's convenient, easy-to-use, exceptionally accurate...and it's free.

Business Trip or Personal Vacation?

As I sit in a hotel room about to head on an overseas trip, I'd like to know how much of my impending expenses might benefit me come tax time. Fortunately, the IRS has some detailed, if not exactly easy to read, guidance on what's deductible.

Here are the facts: I'm traveling to Austria to visit a client of mine to whom I provide web design services. My wife is joining me, and we've stopped in the Atlanta area to drop off our children at my mother's. What portion of my expenses count for tax purposes?

First, I'm traveling outside of the USA, and will be pursuing some non-business activities. If I want my travel expenses to be fully deductible, I must meet one of four requirements:

1. No control over the trip - This one's out the door. I planned the whole thing myself
2. Outside US no more than a week - I think I'll be able to use this one...my stay is exactly one week.
3. Less than 25% time on personal activities - I don't think my wife will let this one happen. She's not coming with me to Europe to watch me mess with my laptop!
4. Vacation is not a major consideration - I can't legitimately argue this one.

Even if I can't use one of these exceptions to be able to deduct all of my travel expenses, I can allocate the expenses based on the ratio of business days to total days. A business day is any day that I spend most of the work day (probably at least 5 hours) on business, travel days, days my presence is required, or holidays/weekends that fall between business days. Sounds like I better have my client 'require my presence' every day, right?!?

I expect I'll be able to legitimately meet one of the above scenarios and deduct my travel expenses. Notice I said 'my', and not my wife's!

There are a lot more details regarding travel deductions available in the IRS publication on travel expenses.

Sales Tax - Due on Internet Sales?

As more businesses make sales or provide services via the Internet, we're often asked wether Internet-based businesses are taxed differently from other businesses. The answer is no.
The following discusses the tax application for internet businesses:

• Items delivered in Washington
  Washington sales tax must be collected on all sales delivered to customers in Washington. Income from these sales is also subject to B&O tax, though items delivered outside of Washington are not subject to B&O.
  
• Items delivered outside of Washington
  When items are delivered to the buyer at a location outside of Washington, the sale is an interstate or foreign sale and exempt from sales tax, as well as B&O tax.
  
• Services performed in Washington
  Providing services in Washington, such as web design, is subject to B&O tax, regardless of the customer's location.

Out-of-state businesses are required to collect Washington sales tax if they have a physical presence in the state of Washington.

For more information, check the Department of Revenue's website.

Clean Up With A Hybrid

Hybrid vehicles have become very popular recently, especially given the increase in fuel prices. The government has a special deduction available for purchasers of these vehicles, but it may not be what the salesman promised.

Hybrid vehicles are eligible for the clean-fuel deduction of up to $2,000 for vehicles placed in service in 2005. In 2006, the maximum is scheduled to be $500, and the deduction terminates after 2006.

Note that this is a deduction, and not a credit. As such, it will reduce your taxable income, but is not a direct credit back to you. For instance, if you were in the 25% tax bracket, the clean fuel deduction would save you $500.

We wanted to clarify this provision, as some clients have understood when purchasing these vehicles that they come with a $2,000 credit, which is not the case. A list of the vehicles that qualify for this deduction can be found on the IRS website.

The Facts About Extensions

As we near the due date for individual income tax returns, extensions become a necessary tool for those clients who may still be waiting on information, or who just haven't gotten around to visiting us yet!

Many clients have questions about the implications of extending their returns. One misconception is that extending the return extends your time to pay your tax. The reality is an extension simply gives you an extra four months to file the return, but taxes are due by April 15, whether your return is filed or not. Anything you owe will incur additional interest after April 15th.

For more information on extensions, we have made available a brochure that can answer common questions.

Sales Tax Rises April 1

Sales Tax Rate Hike Information

Go dig up that manual for your cash register - you'll need to reprogram it on April 1st, when the sales tax rate in Cowlitz County increases by .1%. As a result, sales tax inside Kelso and Longview will be 7.7%, and 7.6% in the rest of the county.

Interestingly enough, the Department of Revenue's flyer linked above states mistakenly that the increase was approved in the November 2004 elections. In fact, it was imposed by the Cowlitz County Board of Commissioners.

The Commissioners yesterday began a push for consideration of ANOTHER sales tax increase, this one up to .2%. The proceeds would be used for criminal justice, and the citizens would have to approve it at election time. I'm not sure if drawing more money out of the pockets of our already financially-depressed citizens is the answer to anything, but the commissioners seem determined to at least try.

As a side note, have you ever heard anyone propose a decrease in sales tax??

How Long Do I Have To Keep This?

Record Retention Schedule

If you're in business, you know that space costs money. As a result, businesses often try to eliminate as much historical paperwork as possible to more effectively use their office or storage space. When working on a project like this, our clients usually want guidance on what to keep, and for how long.

We've developed a record retention schedule that gives suggestions on how long to keep various documents. Essentially, you need to keep things as long as they may be relevant to taxing or regulatory authorities, and certain other items just need to be kept indefinitely. For instance, if you're considering selling your business, the seller might want to see an in-depth financial history of many years. Some payroll records need to be kept indefinitely as well.

The retention schedule is available in our Forms area. If you have a question on an unlisted item, please feel free to drop us a line or add a comment here.

Reduce Junk Mail and Identity Theft

We all know about the rash of identity theft that has hit our community and others nationwide. One of the key sources for the data that is used to commit these crimes is unsecured mail. More than 400,000 Americans each year can trace falsely-opened credit accounts to stolen mail. Reducing the excess mail can help you reduce your exposure to this type of crime.

There are three key places you should contact to help tame the junk mail in your box.

• Remove your name from this list sold by consumer reporting agencies to credit card companies for preapproved offers.
  
  
• The Direct Marketing Association's removal tool can pull your name off of the mailing lists used by their 5,200 members - most of the junk you get. Obviously, they're not really concerned about getting your name off the list; they charge $5 to submit your request online, although you can print your request from their site and mail it to them.
  
  
• Remove yourself from unsolicited mortgage and home equity loan offers by visiting the DataQuick website.
  

Take 10 minutes to visit these sites, and you'll be on the way to protecting your identity.

Death Now Less Taxing in Washington

The Washington Supreme Court eliminates state's estate tax

The Supreme Court eliminated the differences between State and Federal rules regarding taxable estates in Washington. You probably remember that the Congress passed legislation in 2001 that raises the threshhold for a taxable estate over the next several years, and eliminates estate taxes in 2010. Washington had never increased their threshhold accordingly, so individuals were having to deal with two different sets of rules for estate taxes. Even though an estate was exempted from federal tax, it could have a Washington liability.

This difference complicated financial planning and prevented Washington residents from enjoying the estate tax relief contemplated by Congress. The Supreme Court decided that Washington was only ever entitled to a portion of the federal tax. If there were no federal tax, Washington had no right to collect the state's portion.

As a result, estates that paid Washington will receive at least a partial refund of their estate taxes. If an estate was completely exempt from Federal tax, it looks like they will receive a full refund from Washington.

This is the type of change that makes a huge difference here in the financial and estate planning community. Differing sets of standards complicate the planning substantially, and simplification will help individuals better understand the rules.

Don't Forget the Sales Tax!

As we've discussed in previous postings, the new Sales Tax deduction is a boon to Washington taxpayers. Just remember to let us know about any major purchases you've made in 2004 that would qualify for an additional deduction. Sales taxes paid on (non-business) purchases of vehicles, boats, planes, and home improvements can be deducted in addition to the base sales tax deduction given by the IRS.

Many clients tell us that they have purchased their home building materials tax-free in Oregon. These expenses aren't deductible -- no tax was paid, so there's no tax to deduct.

We'll be glad to help you with any questions you have on this new deduction!

Tsunami aid donations could be tax-deductible for 2004

Tsunami aid donations could be tax-deductible for 2004 - coshoctontribune.com

The congress has passed a bill that would allow contributions made in January for tsunami relief to be deducted on your 2004 income tax return. Usually, contributions are only deductible in the year that they're made. With the massive size of this disaster, and the timing being so close to year end, Congress wanted to encourage people to contribute to the relief efforts.

The bill has not yet been signed into law, but should be shortly. We'll provide any other relevant details as they're released.

Credit Where Credit Is Due

We all know about the IRS and their tendency to take, take, take. Did you know they also hand out money to businesses? Here's a list of some business credits they award. Are you missing out on any of them?

Work Opportunity Tax Credit - Hire certain food-stamp or SSI recipients, disabled vets, or ex-felons, and you can receive up to $2,400 per employee.

Welfare to Work Credit - Employing individuals who had been on welfare for at least 18 months can get you as much as $8,500 per employee.

Small Employer Pension Plan Credit - Small companies who have expenses related to establishing a new retirement plan can get up to $500 credit if they spend at least $1,000.

Tip Credit - Businesses in the food and beverage industries can claim a credit for payroll taxes the business has paid on tips reported by the employees, under certain circumstances.

Also, credits are available for things like employer-provided child care facilities, research and development, and creating electricity from renewable sources.