Important Notice Brian DiBella has left the firm. Gary Gomola and all of the other staff
members We are now located at 213 Court Street,
Suite 204, Middletown CT 06457
CLIENT ALERT - WINTER 2001The information contained in this newsletter is designed to keep our clients and friends informed of developments and ideas which we feel are important. Should any subjects be of interest please call one of us. The articles contained in this newsletter are not intended as a substitute for legal, accounting or tax advice. You should seek professional advice on the particular issues which concern you. New Rates and Limits for 2001 As usual the new year brings changes to various rates and limits. Please note that the Social Security wage base has increased from $76,200 in 2000 to $80,400 for 2001. Therefore, the maximum social security tax for 2001 is $4,984.80 (6.2% of $80,400). The Medicare tax of 1.45% is computed on total wages with no ceiling. The maximum 401(k) annual employee deferral amount remains at $10,500 as well as the $170,000 compensation limit for defined contribution pension and profit sharing plans. Allowed annual additions to a defined contribution plan increases to the lesser of 25% of compensation or $ 35,000 (up from $ 30,000 for 2000). The maximum amount of compensation an employee can defer under a SIMPLE plan has increased from $6,000 in 2000 to $6,500 for 2001. The IRS has also announced that the interest rates for tax overpayments and underpayments for the calendar quarter beginning January 1, 2001 will remain at 9% for non-corporate taxpayers. For corporations the overpayment rate will remain at 8% and the underpayment rate will remain at 9% for the first calendar quarter of 2001. For business travel after 2000 the optional mileage allowance for owned or leased automobiles increases to 34.5 cents per mile (up from 32.5 cents a mile for 2000). This is the largest increase in the standard mileage rate in many years, and was caused by the sharp increase in fuel prices during 2000. In addition for 2001, the rate for using an automobile to get medical care or in connection with a move that qualifies for the moving expense deduction jumps to 12 cents a mile, up from 10 cents a mile for 2000. The mileage rate for driving an auto for charitable use during 2001 will remain unchanged at 14 cents a mile. This is a statutory rate not indexed for inflation. Please don’t hesitate to call us if you have any questions. Written by Brian C. DiBella, CPA We Have Moved Remember that we have moved. In December we moved to our new office at 272 South Main Street in Middletown. We are at the corner of South Main Street (Route 17) and Hunting Hill Avenue. The entrance to our private parking lot is actually off of Hunting Hill. Client parking and entrance is in the rear of the building, as you enter the lot. For directions please call or visit our web site. A Dozen Estate Planning Mistakes 1. No Will or Will Not Updated. Most adults need a will. Without as will your estate will be settled based on state law, usually not the way you would have specified. Even if you have a will, it needs to be reviewed periodically and updated for major life events (divorce, marriage, births, etc.) and tax and state law changes. Even if no major changes have occurred your estate plan should be reviewed every 2 to 3 years. 2. Choosing The Wrong Fiduciaries. A very common problem is choosing someone who does not have the time, expertise, or motivation to serve. Another error is naming someone who has a conflict of interest regarding an asset and/or beneficiary. Some parents fail to pick an appropriate guardian. 3. The "I Love You" Will. Leaving all of your assets outright to your surviving spouse is probably the single biggest estate planning mistake. It wastes the unified credit of the first spouse to die, which can cost hundreds of thousands of dollars of unnecessary tax when the second spouse dies. Typical trust techniques can give your spouse the income from assets, while keeping it out of their estate, and ensure that the assets eventually end up in the hands of your choosing. This is very important in second marriages, or where remarriage of the surviving spouse is likely. 4. Overuse of Joint Ownership. Even for those who have thought ahead and set up the recommended trusts, the second biggest problem is not having the correct asset ownership so that each spouse can fund their credit shelter trusts to the maximum advantage. Having assets in joint name with your spouse results in their going directly to the spouse and circumvents any trusts you had intended to use. Resulting in losing control as to their ultimate disposition. Joint ownership is also usually inappropriate in non-spouse situations as well. We often see an older person putting one of their children, or a trusted friend as joint owner of all of their investment accounts for "convenience" or "management" purposes. Their will, and intention, includes a number of other relatives or friends as beneficiaries. However on death all of the assets pass to the joint owner, and "skip" the will. The joint ownership and "I Love You" will blunders can be "fixed", even after death, by the filing of disclaimers. But a lot of things can go wrong with this. The surviving owner could die before filing the disclaimer (subjecting the asset to their will) or dispose of the property in an unintended way. The estate could also be levied by creditors or an estranged spouse. These events, and others, could cause unnecessary tax liabilities. 5. Failure to Use Annual Gift Tax Exclusion. Clients with more assets then they need often fail to use the very valuable $10,000 per year gift tax exclusion. Wealthy individuals should be realistic about how much they will truly need. Obviously, they should not give away more than they comfortably need to support themselves in the manner to which they desire. By not making annual gifts, you are subjecting additional assets, plus their appreciation in value, to unnecessary taxation. 6. Non-Citizen Spouse. No marital deduction is allowed when the surviving spouse is not a United States Citizen. This could cause the estate to be taxable on the first death. It is often not obvious to your estate planning professional that one or both of you are non-citizens. If we do not ask, be sure to mention it. 7. Wrong Beneficiary Designations. It is not unusual to see clients whose beneficiary designations are not coordinated with their estate plans. We have seen dead relatives and ex-spouses still designated as beneficiaries on life insurance and retirement plans. Many people fail to list backup or contingent beneficiaries. Improper beneficiaries on life insurance and retirement plans can undo a good portion of the careful work done in your wills and trusts. 8. Inadequate Records. Executors and trustees often complain that the decedent left their financial records in a mess. This causes emotional stress, delays in administration, and unnecessary costs. We always recommend that your financial records be organized, but in addition you should leave a list of your assets and where the records can be found. There are some good books available to help you do that. In addition we recommend that you leave a letter of wishes or instructions. These are non-binding items of advice to your personal representatives in winding up your affairs. It could be very helpful to someone who is trying to guess your intentions while acting on your behalf. 9. No Disability Planning. A proper estate plan must consider the possibility of one or both spouses becoming disabled. In addition to the obvious disability insurance needs, clients should have durable financial power of attorney documents, and health care directives. Also, disability can trigger various buy/sell agreement clauses of closely held businesses. 10. No Business Succession Plan. If you are an owner of a small business you need to address the special estate planning, retirement planning, funding, and psychological family issues involved. You should have a handle on the value of your business. Business continuation agreements, including buy/sell and transfer restriction clauses are also necessary. 11. Lack of Attention to Life Insurance. If the majority of your assets are illiquid, or in qualified retirement accounts you are very likely under-insured. Most clients are shocked at the amount of estate tax they would have to pay if both spouses were to pass away. It often results in the estates having to sell assets that were intended to go to family to pay the tax. Even worse, if any of those assets are in retirement accounts, income tax can also be triggered. And for those who do have adequate insurance, it is often improperly structured. Life insurance trusts, family partnerships, and other simple techniques can keep the proceeds out of your estate. 12. Overlooking Post-Mortem Opportunities. When death occurs, the executor should meet as early as possible with their estate attorney and accountant. Defects in the estate plan can sometimes be fixed with disclaimers, special use and alternative valuations, retirement plan payout options, administrative expense elections, partial QTIP elections, and others. State law and the Internal Revenue Code impose time limits on many of these. We would be happy to meet with you to review your estate plan. Written by Gary R. Gomola, CPA, CVA - based on a seminar and material copyrighted by Larry Stein, CPA, J.D., LL.M, CFP of Tamarac, FL. Sport Utility Vehicle Tax Benefits Are you considering purchasing a new business vehicle? Did you realize that most cars owned and used for business have their depreciation deductions limited? Depreciation is the deduction for the purchase of a depreciable asset which is spread out over the specified life of the asset. Usually the sooner you can depreciate the asset, the better the tax advantage. Automobiles are considered "five-year property" meaning that normally you may depreciate the vehicle’s cost over the five years, until you’ve expensed the entire cost. However, under the so-called "luxury auto" rules, these deductions are artificially capped. For example, if you purchased a new car for business in the year 2000 your deduction for that year can not exceed $3,060, no matter what the car cost you. These caps do not apply, however, to many popular sport utility vehicles ( SUVs.) . That’s because the annual depreciation caps don’t apply to trucks or vans (and that includes SUVs) that weigh more that 6,000 pounds. So, for example, if you bought a heavy SUV in the year 2000 for $35,000 you could have written off $23,000 of its cost on the 2000 return (Section 179 expense election plus depreciation). This assumes that the vehicle is used 100% for business purposes. If not, the deductions would be reduced to reflect the actual business use percentage. If your business usage of the SUV doesn’t exceed 50% then the vehicle would have to be depreciated via straight line and wouldn’t be eligible for Section 179 expensing. As you can see, purchasing a heavy sport utility vehicle or truck as your next business vehicle may actually get you larger tax writeoffs. Of course there are a number of non-tax issues to consider, including the higher cost of acquisition, maintenance, and fuel. In addition your depreciation deductions would differ if you traded in your current vehicle instead of selling it. Please contact our office if you would like to discuss the options you have when purchasing or leasing a vehicle, or have any further questions. Written by Tania M Crosby, CPA - Senior Accountant The articles contained in this newsletter are not intended as a substitute for legal, accounting or tax advice. You should seek professional advice on the particular issues which concern you. Edited by Gary R. Gomola, CPA, CVA January 2001 Home | About Us | Our Staff | Newsletters | Links |
