JUMP, SCUTELLARO AND COMPANY

CERTIFIED PUBLIC ACCOUNTANTS

SEPTEMBER 2008

Out of all the types of retirement plans available to small business owners, the SIMPLE plan is the easiest to setup and least expensive to manage.

They are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don't want to spend time and high administration fees associated with more complex retirement plans.

SIMPLE plans really shine for self-employed business owners, here's why...

Self-employed business owners contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLEs calculate contributions in two steps:

1. Employee out of salary contribution
The limit on this "elective deferral" is $10,500 in 2008, after which it can rise further with the cost of living.

Catch up. Owner-employees age 50 or over can make a further $2,500 deductible "catch up" contribution as employee in 2008.

2. Employer "matching" contribution
The employer match equals 3% of employee's earnings.

Maximum combined contribution of $21,000 for 2008.

Example: An owner-employee age 50 or over in 2008 with self-employment earnings of $40,000 could contribute and deduct $10,500 as employee plus a further $2,500 employee catch up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $14,200.

The SIMPLE plan is good for the home-based business and can be ideal for the moonlighter — the full-time employee, or the homemaker, with modest income from a sideline self-employment business.

With living expenses covered by your day job (or your spouse's job), you could be free to put all your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

A Truly Simple Plan

The SIMPLE plan really is simpler to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules — in investment options, spousal rights, creditors' rights — don't have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.

What's Not So Good About SIMPLEs

Other plans can do better than SIMPLE once self-employment earnings become significant.

Example: If you are under 50 with $50,000 of self-employment earnings in 2008, you could contribute $10,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $12,000. A Keogh 401(k) plan would allow a $25,500 contribution.

With $100,000 of earnings, it would be a total of $13,500 with a SIMPLE and $35,500 with a 401(k).

Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and will in practice have fewer investment options than if you were your own trustee, as you could be in a Keogh.

It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with SEPs. Generally, to make a SIMPLE plan effective for a year it must be set up by October 1st of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

There's this problem if the SIMPLE is for a sideline business and you're in a 401(k) in another business or as an employee: The total amount you can put into the SIMPLE and the 401(k) combined can't be more than $15,500 (2008 amount)--$20,500 if catch up contributions are made to the 401(k) by one age 50 or over.

So someone under age 50 who puts $8,000 in her 401(k) can't put more than $7,500 in her SIMPLE, in 2008. The same limit applies if you have a SIMPLE while also contributing as an employee to a "403(b) annuity" (typically for government employees and teachers in public and private schools).

How to Get Started in a SIMPLE

You can set up a SIMPLE on your own by using IRS Form 5304-SIMPLE or 5305-SIMPLE, but most people turn to financial institutions.

SIMPLES are offered by the same financial institutions that offer IRAs and Keogh master plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an "effective date" — the beginning date for payments out of salary or business earnings. That date can't be later than October 1 of the year you adopt the plan, except for a business formed after October 1st.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

Keoghs, Seps and SIMPLES Compared

The purpose of life insurance is to provide a source of income, in case of your death, for your children, dependents, or other beneficiaries. (Life insurance can also serve certain estate planning purposes, which we won’t go into here.)

Whether you need to buy life insurance depends on whether anyone is depending on your income. If you have a spouse, child, parent, or some other individual who depends on your income, you probably need life insurance.

Life insurance protects your family in the event of death. Most people do not have the right amount of insurance. It is important to determine the amount that suits your needs. There are two basic types, term and permanent.

Term insurance is simply insurance you pay for coverage for a specified period of time. If you die within this period, your beneficiary receives the insurance benefit. Term policy premiums usually increase with age.

Permanent insurance, such as universal life, variable life and whole life insurance, contains a cash value account or an investment element to the insurance.

A Few Basic Rules of Thumb

The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.

Tip: If the family cannot afford to insure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap.

If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance on the life of the wage earner.

If your spouse could live comfortably without your income, then you will still need life insurance, but you will need less than someone who has dependents.

Tip: At a minimum, you will want to provide for burial expenses and paying off your debts.

If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.

Related Financial Guide: LIFE INSURANCE: How Much and What Kind To Buy

Many companies are asking “What to do about an employee’s home when he or she is moved to a new job location? This is an increasing tough and costly question with the real estate market tightening throughout much of the country.

Typically, the employer wants to protect the employee against financial loss on a "forced" sale of the home. Here are the most common ways to do that, and their consequences to the employee:

Employer reimburses employee’s financial loss. Here the employer has the home appraised and agrees to pay employee the difference between that appraised fair market value and any lesser amount the employee gets on sale. Such reimbursement would cover the employee’s costs of sale.

Note: The financial loss here is not the same as a tax loss. The financial loss is the home’s value less what the employee collects under "forced sale" conditions. In the current real estate market, the value is not always clearly determined. Relocating employee might think the home is worth more based on an earlier appraisals or market sales. A tax loss is the property’s tax basis (cost plus capital investments) less what’s collected on sale.

If the employee has a gain on the sale (amount collected on sale exceeds basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). Tax loss on sale of one’s residence is not deductible.

The employer’s reimbursement of the employee’s financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may “gross up” the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $14,575 for an employee in the 35% bracket—more, where social security taxes or state taxes are also grossed up.

Employer buys the home. Few employers directly buy and sell employees’ homes. But many do this indirectly, effectively becoming the homes’ owners, through use of relocation firms acting as the employers’ agents. A IRS ruling shows how to do this with no tax on the employee:

Option 1. The relocation firm as employer’s agent buys the home for its appraised fair market value, and later resells it. The firm collects a fee from the employer, which will cover sales costs and any financial loss to the firm on resale. IRS now says that this fee is not taxable to the employee. Also, the employee’s gain on sale to the relocation firm qualifies for the tax exemption under the limits ($250,000 etc.) described above.

Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker he or she chooses from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm’s fee and gain is tax exempt under the above limits.

Tip: Either option works for the employee, letting him or her realize full value on sale of the home (with possibly greater value through Option 2), without an element of taxable pay.

Caution: If the deal is structured so that the relocation firm facilitates a sale from employee to a third party buyer (rather than to the relocation firm), the employer’s payment of the relocation firm’s fee is taxable to the employee.

The Employer’s Side:

Reimbursing the employee’s loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.

Note: Fully deductible, but maybe more costly, before and after taxes, than buying the home for resale through the relocation firm.

Note: Paying the relocation fee only, without buying the home, as in the WARNING above, is also fully deductible, as would be any gross up amount on that fee.

Buying the home. The change in the IRS rule was good news for employees, but gave nothing to employers, whose tax treatment wasn’t covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.

Tip: Where employee relocation is in prospect—and that can include relocating new hires—employee and employer need to consult their professional advisers for the wisest financial and tax course.

Related Financial Guide: EMPLOYEE BENEFITS: How To Handle Them

If you filed a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, you can still receive an Economic Stimulus Payment for 2008.

For those who filed for an extension, the deadline for filing a tax return is Oct. 15, 2008. Extension filers must use either Form 1040 or 1040A.

Filing the tax return is also the way to claim your economic stimulus payment, if you’re eligible for one. It will generally take a minimum of eight weeks after you file your return to get your stimulus payment.

If you’re due a refund, you can choose to receive it by direct deposit into a financial account, in which case your stimulus payment will later be deposited electronically to the same account. You can choose direct deposit even if you’re not due a refund or your return shows a balance due. If you don’t choose direct deposit, you will receive a paper check.

If you have a tax liability, you probably qualify for an economic stimulus payment. Even if you don’t, you qualify if you receive certain kinds of income. There is no change to the calculation of the economic stimulus payment for extension filers.

Generally, most income you are taxed on income that is available to you regardless of whether it is actually in your possession, constructive receipt of income. But there are some situations when certain types of income are partially taxed or not taxed at all. A complete list is available in IRS Publication 525, Taxable and Nontaxable Income.

Some common examples of items that are not included in your income are:

• Adoption Expense Reimbursements for qualifying expenses
• Funding of your Health Savings Account with a one-time direct transfer from your individual retirement plan, health reimbursement account or health flexible spending account.
• Child support payments
• Gifts, bequests and inheritances
• Workers' compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer

Examples of items that may or may not be included in your income are:

• Life Insurance.
  If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.

• Scholarship or Fellowship Grant.
  If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.

These examples are not all-inclusive.

Please call us for more information about what income is taxable.

If you changed your home or business address, notify the IRS to ensure that you receive any refunds or correspondence. While the IRS uses the Postal Service’s change of address files to update taxpayer addresses, notifying the IRS directly is still a good idea.

There are several ways to do this.

• On your tax return. You may correct the address legibly on the mailing label that comes with your tax package or write the new address in the appropriate boxes on your tax return when you file.

• Form 8822. You may use Form 8822, Change of Address, to submit an address or name change at any time during the year.

• Verbal Notification. If an IRS employee contacts you about your account, you may verbally provide a change of address.

• Written Notification. To give written notification, write to the IRS center where you file your return and provide your new address. The addresses for the IRS centers are listed in the tax instructions. In order to process an address change, the IRS will need your full name, old and new addresses, and your social security number or employer identification number, and signatures. If you filed a joint return, you should provide the same information for both spouses. If you filed a joint return and have since established separate residences, you each should notify the IRS of your new addresses.

It's a good idea to notify your employer of your new address so that you can get your W-2 forms on time.

If you change your address after filing your return, don't forget to notify the post office at your old address so your mail can be forwarded.

You should also notify the IRS if you make estimated tax payments and you change your address during the year. You should mail a completed Form 8822, Change of Address, or write the IRS center where you file your return. You can continue to use your old pre-printed payment vouchers until the IRS sends you new ones. However, do not correct the address on the old voucher.

If you gave any one person gifts in 2008 that valued at more than $12,000, you must report the total gifts to the Internal Revenue Service and may have to pay tax on the gifts.

The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

• Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone's benefit

• Gifts to your Spouse

• Gifts to a Political Organization for its use

• Gifts to Charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift.

For more information, call us or get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709 or 709-A, United States Gift Tax Return, and Instructions for Form 709.

Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration. A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.

• For recently married taxpayers, the tax scenario begins when the bride says "I do." If she takes her husband's last name, but doesn't tell the SSA about the name change, a complication may result. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the Social Security Number.

• After a divorce, a woman who had taken her husband’s name and made that change known to the SSA should contact the SSA if she reassumes a previous name.

It's easy to inform the SSA of a name change by filing Form SS-5 at a local SSA office. It usually takes two weeks to have the change verified. The form is available on the agency's Web site, www.ssa.gov, by calling 1-800-772-1213 and at local offices. The SSA Web site provides the addresses of local offices.

Generally, taxpayers must provide SSNs for each dependent claimed on the tax return. For adopted children without SSNs, the parents can apply for an adoption taxpayer identification number, or ATIN, by filing Form W-7A with the IRS. The ATIN is used in place of the SSN on the tax return.