2005 Standard Mileage Rates Set
Luke
C. Martin, CPA is the Newest Partner at SEK&Co
The
partners of Smith Elliott Kearns & Company, LLC, Certified Public
Accountants and Consultants, are pleased to announce that Luke C. Martin,
CPA was admitted as a partner of the firm effective January 1, 2005. The
firm has offices in Chambersburg, Hanover, and Carlisle Pennsylvania; and
Hagerstown, Maryland, and offers small business accounting and consulting,
tax and payroll services, tax return preparation and planning, auditing,
computer consulting (QuickBooks and Peachtree) and employee benefit plan
design and administration services.
Mr. Martin received his Bachelor of Science degree in
accounting from Shippensburg University in December 1989 and joined Smith
Elliott Kearns & Company in January 1990.
He is a partner in the Chambersburg office’s Tax Department and has
significant experience including accounting, auditing, tax compliance and
consulting services to small businesses.
In addition to tax services, Luke is responsible for conducting and
supervising audits and related services for municipalities.
Luke has served as an instructor for several training courses on
governmental accounting and auditing. He also has experience with
closely-held businesses in construction and manufacturing; preparing
financial statements and related reports on internal controls, compliance
and management advice.
Mr. Martin's professional memberships include the American Institute of
Certified Public Accountants and the Pennsylvania Institute of Certified
Public Accountants.
Luke is active in his community, serving as a board member and
treasurer for the Greater Chambersburg Chamber Foundation and past
president of the Chambersburg Noontime Lions Club and the Franklin County
Leadership. He also holds leadership positions in the King Street United
Brethren Church, as well as past board member of Big Brothers/Big Sisters
of Franklin County.
He and his wife, Chrystal, live in Chambersburg with their son,
Christian.
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A Head Start on
Retirement
Parents
typically encourage their children to save for college, for a house or
simply for a rainy day. Saving for a child’s retirement, however, is a
much less common goal. Too many other expenses are at the forefront. Yet,
helping to plan for a young person’s retirement is a move that many
astute families are making. Individual retirement accounts (IRAs) for
income-earning minors and young adults offer a head start on lifelong
financial planning. Through investing in an IRA, a young person’s
earnings from working part-time at the local video/dvd rental store, or a
summer job loading trucks, can contribute to the quality of life of their
retirement years.
Two types of IRA accounts exist. They are the traditional IRA and the
Roth IRA. To contribute to an IRA, whether its a traditional or a Roth
IRA, an individual must have earned income. This can disqualify many
children.
In general, the maximum annual amount that can be deposited in either
type of IRA is the lesser of earned income or $3,000 in 2004; and $4,000
in 2005 through 2007. (Note: gone are the days when the earned income
limit on contributions was set at 15 percent of earned income, which in
practice removed the effective use of an IRA for most children.)
Traditional IRA. Contributions to
a traditional IRA are tax deductible. Earnings are not taxed until a
distribution is made. If money is withdrawn from a traditional IRA before
the individual reaches age 59½, Code Sec. 72(t) imposes a 10 percent
penalty (with exceptions, noted below). With a traditional IRA, mandatory
withdrawals are required when the individual reaches age 70½.
Roth IRA. Contributions to Roth
IRAs are not tax deductible but all contributions and earnings are
tax-free when the money is withdrawn from the account, if certain
permitted-withdrawals events occur. Tax-free withdrawals are a big
advantage that may outweigh the lack of a tax deduction on contributions,
especially for a child who is usually in a low tax bracket (remember, the
"kiddie" tax does not apply to the extent a child has earned
income). Unlike the traditional IRA, individuals can make contributions to
a Roth IRA even after age 70½.
Roth five-year period. Qualified
distributions from a Roth IRA are not included in the individual’s
income, nor are they subject to the 10 percent early distribution penalty,
if a five-year holding period (discussed below) is met. To satisfy the
five-year holding period, Roth distributions may not be made before the
end of the five tax years beginning with the tax year in which the
individual first made a contribution. Generally, one five-year period
applies to all of the Roth IRAs the individual owns.
Penalty flexibility. Exceptions,
sometimes referred to as the "72(t) exceptions," authorize early
withdrawals, without penalty, if the money is used for:
* college expenses;
* first home purchase (up to $10,000);
* medical insurance in case of
unemployment for a certain amount of time; or
* expenses attributable to disability
(Roth IRA).
Although designed for retirement planning, this flexibility makes IRAs
very attractive for young adults.
It is important to note, however that while using the traditional IRA
to pay for higher education expenses avoids the 10 percent early
distribution penalty, regular income tax on the distribution is not
avoided.
Working for parents
To contribute to an IRA, a child or young adult must have earned
income. In other words, the child generally needs a W-2 or a Form 1099.
Although occasional baby-sitting or lawn-mowing is generally ignored as
income (and exempt for FICA/"Nanny" taxes), the money made from
those jobs can qualify as earned income if adequate receipts and records
are kept.
Some parents, who own a business, are taking the "kiddie IRA"
concept one step further. Their sons and daughters come to work for the
family business. The child earns income, making him or her eligible to
contribute to an IRA. The parents, as the employer, must issue a W-2 (and
pay FICA taxes unless the child is under 18 and working for an
unincorporated family business). They can also take a business deduction
for the child's wages, just like for any other employee. Parents should be
mindful that the wages the child earns for the work performed is
comparable to the going rate. If the child's wages are too generous, the
IRS will disallow the deduction.
Let's make a deal
The tough part of the plan may be getting the young person to
"lock away" his or her hard-earned cash. After all, retirement
seems so far away when you're a teenager and is much harder to imagine
compared to more pressing, front-burner issues like college expenses or
buying a car.
Some parents, however, are convincing their kids to put their earnings
to work for their future in an IRA by promising to match (or partially
match) the child's pay.
There's no rule that restricts the origin of the IRA contribution, so
long as the owner earned at least that amount and the contribution doesn't
exceed the cap for that year. However, parents should avoid the temptation
to add a "little extra" to the child's IRA. Annual contributions
to either a traditional IRA or a Roth in excess of the allowable amounts
($3,000 in 2004 and $4,000 in 2005) are subject to a cumulative six
percent tax.
One potential hazard
IRAs for children and young adults are an important part of family
financial planning. However, one potential hazard must be recognized. The
money in the IRA belongs to the child. The owner of the IRA can do
whatever he or she wishes with its assets, including making a withdrawal
for a new car or a trip.
Parents do not "own" the IRA, even if they match their
child's contributions. Families who utilize IRAs for their offspring will
have to consider that risk.
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The Better Way
Hi Bracket,
while snowbirding the winter in Florida, heard his buddies at the club
talking up the great tax deductions they got by donating used cars to
charity. They didn't have to advertise the car, haggle with buyers,
replace tires, make repairs or even interact with the friendly people at
the Motor Vehicle Administration. All they had to do is look up the car's
value on KellyBlueBook.com. (maybe that car was in good shape) and claim a
charitable contribution. Heck, they even got public recognition from the
charity.
Just when Hi thought he had really found a good deal, he learned the
rules had changed after 2004. Now, the deduction was limited to what the
charity sold the car for and, guess what, they didn't care about getting
top dollar. Foiled again!
The Better Way would be to rely on one of the exceptions to the general
rule. If the charity uses the vehicle or makes material improvements to
it, the old valuation method still works. It might not be easy to find a
charity that wants to use such a high quality vehicle, but it is possible.
Alternatively, the vehicle could be donated to a technical school
qualifying as a charity for the purpose of training automotive repair
students. This could constitute use for the charitable purpose as well as
material improvements being made ready for sale. The tax deduction is
back!
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2005 Standard Mileage Rates
Set
The standard mileage rate
for business use of autos during 2005 has increased from 37.5 cents to
40.5 cents per mile. Taxpayers may base their deduction on either the
standard mileage rate (plus business-associated parking fees, tolls, and,
to the extent allowable, interest and taxes) or deduct their actual
expenses incurred for business use of an auto.
Employers may use the standard mileage rate when computing payments for
employees' auto expenses incurred under a reimbursement or expense
allowance arrangement and thereby substantiate the amount of such
expenses, if the accountable plan requirements are satisfied.
| Standard Mileage Rates |
| Type |
2005 rate |
| Expense |
(per mile) |
|
| Business |
40.5 cents |
| Charitable |
14 cents |
| Medical/Moving |
15 cents |
|
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