Huddleston Tax Accounts - CPA Tax Issue: August 2005

What's New:Check out the tax credits in the new energy bill

On August 8, President Bush signed the Energy Policy Act of 2005, a bill that makes numerous changes to the tax code. Among the provisions that could save you tax dollars are the following:

Beginning in 2006, the current $2,000 tax deduction for the purchase of a hybrid vehicle will be replaced by a tax credit of up to $3,400. A tax credit is more valuable than a tax deduction since it reduces your tax liability dollar for dollar.

For energy-saving improvements to your home done in 2006 and 2007, you may qualify for a tax credit of up to 10% of the cost, with a $500 lifetime limit.

A tax credit of up to 30% of the cost of solar-powered hot water systems is available. The credit does not apply to hot water used for hot tubs and swimming pools.

The new law also provides credits for contractors who build energy-efficient homes and for manufacturers of energy-efficient appliances.

For details on the new credits and other provisions in the law that could affect you or your business, contact our office.

© copyright 2005
HTC Seattle Bellevue Tax Accountant

Seven steps to cut your 2005 tax bill

Here are some things you can do between now and year-end to cut your 2005 tax bill.

1. Track down those reinvested dividends for any stock you sell in 2005. They'll add to your stock basis and reduce taxable gain.

2. Donate a vehicle to charity. Generally, you can take a charitable deduction for the gross proceeds the organization receives from selling the vehicle.

3. Start a pension plan for your small business. Business owners can take a credit of up to $500 in each of the first three years of establishing a pension plan.

4. Put money into a health savings account (HSA). Money placed into HSAs can be deducted, and the funds can be used tax-free to pay unreimbursed medical expenses.

5. Teachers: Take this break. Educators can deduct up to $250 for classroom materials purchased with their own money.

6. Pay education expenses. Consider prepaying early 2006 college fees in order to take advantage of the Hope and lifetime learning education credits in 2005.

7. Plan year-end equipment purchases. Current tax law provides a $105,000 deduction for business equipment acquired this year. So plan to place needed new equipment into service before year-end.

These are only a few steps you can take to reduce your 2005 tax bill. To discuss the best moves in your situation, give us a call.

© copyright 2005
HTC Seattle Bellevue Tax Accountant

New Business: IRS targets S corporations for audits

The IRS recently announced its intention to audit 5,000 randomly selected Subchapter S corporations for tax years 2003 and 2004. The audits, scheduled to begin by the end of this year, are being conducted to identify S corporation compliance issues.

It has been more than 20 years since the IRS has done compliance audits on S corporations as a group. The dramatic increase in S corporations was cited by the IRS as a reason for the current project. The number of S corporations increased from 724,749 in 1985 to 3,154,377 in 2002.

© copyright 2005
HTC Seattle Bellevue Tax Accountant

How to make smarter hiring decisions

Hiring and training new employees is one of the toughest jobs you face as a manager or business owner. Even when there are plenty of applicants, finding the right one is still time-consuming. Here are some tips for each stage of the process — from identifying your requirements to interviewing candidates.

1. Identify the job requirements by meeting with the manager or those who will be co-workers of the new hire, and talk through exactly what skills are important to do the job well. For some positions such as line production positions, the job requirements are clear. You may need specific technical skills or certain work experience. In other cases, the important skills required for the job may be less obvious. This is especially true in small companies where employees may have to perform several functions.

2. Set up a standard application form to capture prior work history and other information. This will make it easier to compare candidates.

3. When you conduct interviews, let the candidate do much of the talking. Ask free-form questions which make the candidates choose and prioritize exactly what they are going to tell you. Questions such as, "What did you like most about your last job?" can produce revealing answers. Follow with, "Now tell me what you liked least about your last job." Letting candidates do most of the talking will tell you a great deal about their attitudes and priorities.

4. Structure the interview so the candidates talk about themselves first, and you talk about the job and the company later. Otherwise they're likely to tailor their answers to fit the job you have just described.

5. Set up a meeting between finalists and their future co-workers. Describe it as a "get to know you" meeting. You'll be surprised what people will discuss in a less formal setting. You might also be surprised at what your other employees will notice about their future co-worker. This is still part of the hiring process, so make sure your employees attending the meeting are aware of questions they can and cannot ask.

6. Follow up on references, and check police or driving records if appropriate.

Taking the time to find the right employee for a job opening will pay off in the long run. You'll avoid the frustration and expense of excessive employee turnover.

© copyright 2005
HTC Seattle Bellevue Tax Accountant

What's New: New bankruptcy law goes into effect soon
Major changes to the laws governing bankruptcy go into effect next month. Here's an overview of the changes individuals need to know.

Previously, you could file for Chapter 7 bankruptcy and wipe out most of your unsecured debts. Under the new law, you will have to pass a means test to qualify for a Chapter 7 bankruptcy. If your income is too high, you'll have to file under Chapter 13 and pay off your debts under a court-approved repayment plan.

The new law requires you to complete a credit-counseling course before you can obtain bankruptcy relief.

Your retirement accounts and education savings accounts (such as Section 529 plans and education IRAs) will generally be safe from creditors, with some limits.

© copyright 2005
HTC Seattle Bellevue Tax Accountant

Invest with an eye on inflation

Like the boy who cried, "wolf," experts' warnings of inflation have been largely ignored over the last decade. Now, with the recent spike in fuel prices and rising interest rates, people are starting to take notice again. Inflation, even at modest levels, can seriously reduce real investment return. Is your portfolio structured to succeed in periods of inflation? Consider these fresh ways to combat an old foe.

TIPS. A popular investment vehicle used to battle inflation has actually been around since 1997. Treasury Inflation Protected Securities (TIPS) are U.S. government bonds that adjust payout rates in accordance with rises in the Consumer Price Index (CPI). So if you have a low tolerance for risk, but seek protection from rising interest rates, this might be the bond for you.

Corporate bonds. Another option is the inflation-indexed corporate bond. Patterned after the popular TIPS program, these bonds also offer rates that move in tandem with the CPI. The interest rates are higher than TIPS, but they carry the credit risk of the company that issues them.

Tax issues. There are tax issues to consider as well. Inflation-indexed corporate bonds are fully taxable. TIPS, on the other hand, are exempt from state and local tax. Corporate bonds hold a slight edge in that interest rate increases are reflected immediately in the monthly payment. TIPS, instead, reflect rate increases in the principal balance received at maturity. What's more, these increases are immediately taxable, even though you have to wait until redemption to reap the extra earnings. This timing difference could make TIPS better suited for your IRA or 401(k), where interest is not taxed until withdrawn.

I bonds. If your portfolio is in a taxable account, you might consider I bonds instead of TIPS. I bonds are U.S. savings bonds with inflation protection. Like TIPS, I bonds are exempt from state and local income tax. But, unlike TIPS, federal income tax can be deferred until the bond is redeemed.

CDs. Even an old standby, the bank certificate of deposit, is getting into the inflation protection game. Some banks now offer CDs with a fluctuating interest rate. Keep in mind that these investments are fully taxable, and they offer an initial interest rate that is lower than a conventional CD. But during periods of swelling interest rates, these CDs will return higher overall income.

Laddering. Even if your bank does not offer flexible CDs, you can still protect yourself by laddering your CD portfolio with a range of maturity dates. Then, if interest rates climb dramatically, you won't be tied up with one low-yielding certificate.

Inflation can threaten your investment return at any time, so stay alert for ways to protect your portfolio.

© copyright 2005
HTC Seattle Bellevue Tax Accountant

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