Welcome to the May 2001

ONLINE ADVI$OR

Our monthly online newsletter provides useful tax, business, and financial strategy information as part of our firm's commitment to total client service.

The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

For more information on anything in ONLINE ADVI$OR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office at 513-248-9210.

Major Tax Deadlines

May 15 Deadline for calendar-year exempt organizations to file 2000 information returns.
May 31 Deadline for IRA/SEP/SIMPLE/Roth IRA/Education IRA/MSA trustees to file annual statements (Form 5498) with the IRS, with copies to participants.

Note: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business. For information on the tax deadlines that apply to your business, contact our office.

What's New in Taxes

Did you make these common mistakes?

Many taxpayers pay more tax than necessary because they claim the standard deduction instead of itemizing their deductions. The General Accounting Office estimates that over 510,000 taxpayers failed to itemize their deductions in 1998, even though claiming mortgage interest payments alone would have saved taxes. This one oversight is estimated to have cost these taxpayers over $311 million, or $610 per return.

Overpaying social security taxes is another common error taxpayers make. If you worked for more than one employer last year and you earned more than the social security base limit of $76,200, you overpaid your social security taxes. That's because each employer is required to withhold social security taxes until you've reached the limit on their payroll. In order to receive a refund, you must report the overpayment on Form 1040.

If you made either of these common errors, it's not too late to correct your mistake. You generally have up to three years to amend your return and request a refund. If you've discovered these or other income or deductions that should have been reported on your original return, give us a call. We can help you set the record straight.

Don't tax it, "swap" it

Instead of selling your commercial or investment property, consider swapping it for another piece of property. An exchange postpones the tax consequences. That allows you to keep your money invested instead of turning it over to the IRS.

Here’s how a simple exchange works. You hire a firm to act as your qualified intermediary (QI). They coordinate the sale paperwork and hold the sale proceeds from your property. After the sale, you have 45 days to identify replacement property and 180 days to purchase it. Your QI coordinates the purchase paperwork and forwards your money to the closing agent to complete the exchange.

Let’s compare a sale with an exchange.

John owns a commercial lot that he purchased in 1995 for $100,000. It is now worth $200,000. If John sells the lot, the tax on his $100,000 gain would be $20,000. He has $180,000 to invest in his next venture. (This example ignores selling expenses.)

Now let’s see what would happen if John swapped the property instead of selling it. He hires a QI to process the exchange. John locates a duplex for $250,000. He has $200,000 to put toward the acquisition of the duplex, $20,000 more because he followed the exchange rules.

There are several different types of exchanges. Here are some examples.

A delayed exchange means that the sale of your existing property and the acquisition of a new one take place at different times.
A reverse exchange means that you purchase a replacement property before you sell your existing property.
A multi-property exchange means that you trade one property for several properties, or you consolidate several pieces of property into a single property.

Only investment property or property used in your business qualifies for an exchange. Generally, you must replace the property with more expensive property to achieve a totally tax-deferred exchange. Finally, your property must be traded for property that is of "like-kind" or similar in nature. For example, you can trade your rental house for a commercial building, but you couldn’t trade it for Microsoft stock.

Though exchanges require careful planning and professional assistance, they can result in significant tax savings. We are here to help you. Give us a call.

New Business

Consider arbitration before you head to court

Whether you have one employee or fifty, the day may come when you and one of your workers have a major disagreement. You can take steps now to help prevent a potential lawsuit. A recent U.S. Supreme Court ruling gives businesses the green light for requiring employees to go through arbitration to settle workplace disputes rather than going to court.

With arbitration, you and your employee both present your case to a neutral third party who then decides the outcome of your dispute. The benefits of arbitration compared to the formal legal process include its low cost, its speed, and the ability to keep your dispute relatively private.

If you decide to use an arbitration agreement, you should work with your attorney to draw up one that will stand up in court. Your employees will need to read, understand, and sign the agreement.

While you are thinking about this issue, consider adding arbitration clauses to your standard customer and vendor contracts. Your attorney can advise you as to what may work best in your type of business.

Smart Business

Will your business survive?

A business without a succession plan might be a business without a future. A succession plan allows your business to continue if you leave the business for any reason: your retirement, disability, death, or just your decision to move on.

Here are some basic steps you should take to help ensure the survival of your business:

Determine who will succeed you. Will it be family members, your business partners, your employees, or an outside buyer? Each choice requires a different plan. For example, if you are not the sole business owner, a buy-sell agreement may allow a smooth transition when a co-owner leaves.
Prepare a timeline. Barring death or disability, when and how do you plan to exit the business? Well in advance of your planned departure, equip your successors with the skills and experience necessary to take over.
Maintain complete and accurate financial records. Your company’s financial history is essential to preparing a fair business valuation. An accurate valuation is important for several reasons:
- You deserve a fair price for your business.
- A buyer and his creditors will want evidence that the purchase price is fair.
- Your company’s valuation may have to withstand IRS scrutiny.
Create a financing plan. Your plan might include life and disability insurance, an employee stock ownership plan, or a stock redemption plan. Whatever your plan, it should take your future financial needs into account and provide a method for your successors to meet those needs.
Surround yourself with a team of advisors. Your accountant, your attorney, your banker, and your insurance agent can each have an important role to play in completing your plan.

What's New in Financial Strategies

Make the most of falling interest rates

The latest drop in interest rates could affect you in several ways. Take a look at your debt and your investments to see if it’s time for you to take action. Here are some areas to consider:

How can you ease the pinch on your savings account? Passbook savings accounts hit a 15-year low recently, with rates around 1.5%. Perhaps it’s time for you to move your savings into a money market account or certificate of deposit to earn a higher interest rate.
Should you refinance your mortgage? Whenever interest rates drop, homeowners may have the opportunity to save money. However, refinancing might not save money if you plan on selling your home in the near future. It can take several years to recover the costs a lender typically charges to refinance your mortgage.
Should you take out a home-equity loan? A home-equity loan may offer a lower interest rate, and the interest may be tax-deductible. It will also put your home at risk if you can’t keep up with the loan payments.
Will your credit card interest rate drop? If your rate hasn’t automatically dropped, try calling your credit card company to negotiate a lower rate.

Let us help you review how interest income and/or interest expense affect your financial well being. Give us a call.

Put your mutual funds to the test

Like the majority of Americans, you probably own mutual funds. If so, you should take the time to review your holdings. As you do your review and analysis, here are some key points to consider.

How have your funds performed? To get a handle on performance, compare your funds to other funds with similar objectives and investment style. Look at performance data for at least three to five years, and don’t put too much weight on current-year numbers. If your fund generally has performed in the top half of its peer group, that’s a good sign. But if your fund consistently has trailed the pack, consider switching to another fund.
The SEC estimates that income taxes cut more than 2.5% from the average stock fund's annual performance. To help investors make an apple-to-apple comparison among funds, new federal rules require mutual funds to report their "after-tax" returns. All funds must comply with this new rule by February 15, 2002. However, some funds have already started to report after-tax performance to investors. Keep this in mind as you review performance data.
Have there been any changes in top management? Chances are you bought your fund at least partly because of its good performance record. But what if the manager responsible for that record has left the fund? There’s no need to panic, but it’s time to closely monitor fund performance. If your fund falls behind its peers for two years or more, consider selling.
Have your funds changed their style? Every stock and bond mutual fund has an investment style. For example, one fund might target small company stocks, while another fund might invest in longer, high-quality bonds. Even if the fund manager hasn’t changed, your fund’s investment style may have shifted. If you don’t feel comfortable with the new style, consider another fund with a more compatible style.
What’s happening inside your funds? Some funds perform well when they’re relatively small, but stumble as they grow large. Check your fund’s "net assets" to see whether there’s been a major change in its size. Some funds are managed efficiently, while other funds spend too much, ultimately reducing your investment return. Your fund’s "expense ratio" can reveal whether yours is a miser or a spendthrift.
Is your portfolio up to date? Foreign stocks used to be exotic investments. Now, you may want to consider having at least a portion of your mutual fund portfolio in non-U.S. companies. You can buy a fund that invests in companies around the world, in certain regions, or in individual countries.
Have you changed? Perhaps you recently got married or had a child. Or maybe your income has increased or decreased dramatically. After a major life event, or simply as you get older, you might want to fine-tune your mutual fund holdings.

If we can be of assistance to you in your review, give us a call.

Chuckle of the Month
Don't expect levels of personal debt to stop climbing any time soon. The majority of Americans like being in hock better than the alternative. As one comedian explained, "Most of us don't live within our income because we don't consider that living."