Dependency Status

If you provide support for elderly parents, you may be able to claim them as dependents and deduct medical expenses paid for their care.  To qualify as a dependent, three conditions need to be met:

1. The individual must be related to you (parent, grandparent, etc.),

2. You must provide more than half of that individual's support, and

3. The individual must be a US citizen.

You may also be able to claim a personal exemption for the individual if his or her gross income in 2000 is less than $2,800.  

With populations aging, taxpayers are searching for ways to mitigate the growing cost of necessary medical care for themselves and for their families.  This article has outlined some of the best ways to lessen the impact of these expenses.

If you have particular concerns that go beyond this article, call us.  Proper planning is the key to successfully coping with the inevitable cost of growing older.

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What's New In Qualified Retirement Plans?

Business owners love their qualified retirement plans.  Not only are they one of the few remaining tax shelters for business owners, but in these times of record low unemployment and uncertainty about the long-term future of social security, having a plan is critical in attracting and retaining key personnel.

Several recent changes to traditional qualified retirement plans (especially profit sharing plans with an employee deferral, or 401(k) provision) have aroused new interest among employers that want to provide retirement benefits for themselves and their employees.

Now, even employers with difficult goals and objectives can find a plan to meet their needs.

Savings Incentive Match Plans (SIMPLE)

A SIMPLE plan is a "401(k)-like" plan that allows plan participants to contribute up to $6,000 to a SIMPLE IRA or SIMPLE 401(k) plan.  Employer contributions, which are mandatory, can be either in the form of a 2% contribution to all eligible participants or in the form of a matching contribution that is generally 100% of the first 3% of compensation.  No nondiscrimination or top-heavy testing is required.

While not as flexible as a regular 401(k) plan, the SIMPLE IRA requires very little formal administration and benefits the smaller, stable employer who is satisfied with the minimum and maximum contributions that the plan allows.  The IRA plan also benefits employers with lower paid family members who may not be able to achieve the same benefits from other types of plans.

Safe Harbor 401(k) Plans

This new plan combines the flexibility of a traditional 401(k) plan with the option to escape the burdensome nondiscrimination tests.  Those who will benefit most from this plan include employers whose owners or other highly paid employees are subject to refunds of their 401(k) contributions due to failed nondiscrimination tests, or stable employers who may already be making similar contributions to a plan.

The employer must make a 3% contribution to all eligible participants or a matching contribution that may obligate the employer to 4% of compensation.  These contributions must be 100% vested, but the employer avoids nondiscrimination tests that often preclude the owners and highly paid from making the maximum 401(k) contribution ($10,500 for 2000).

The 3% contribution to all eligible employees satisfies the top-heavy minimum profit sharing contribution often required by small plans.  Along with the required contributions that satisfy the nondiscrimination testing, additional matching contributions or profit sharing contributions subject to vesting may also be made.

Age-Weighted Plans

An age-based or age-weighted profit sharing plan combines the flexibility of traditional profit sharing plans with the advantages of other types of pension plans, such as a defined benefit plan, that skew benefits in favor of older employees.  In other words, both age and compensation are used as a basis for allocating employer contributions among plan participants.

The participant's compensation is multiplied by an age factor to arrive at an age-weighted compensation.  The contribution is then based on the ratio of the age-weighted compensation to the total.  Employers may add 401(k) and matching features as well.

Cross-Tested Or Comparability Plans

A cross-tested or new comparability plan maximizes benefits to specific individuals.  Contributions appear to be discriminatory because current contributions are based on a "future benefit" calculation.  The IRS is scrutinizing this type of plan because of its discriminatory appearance, but has not yet disallowed them.  Again, 401(k) and matching features may be added.

We've provided just a sampling of the many options with qualified retirement plans.  If you're not getting everything you want out of your current retirement plan, call us.

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Election Year Bark May Be Worse Than Its Bite

Reminiscent of the last 2 years, members in Congress are once again talking about significant tax legislation.  Whether anything will happen this year, especially in a major election year, is questionable.  Summaries of major tax legislation introduced in this session follow.

Marriage Penalty Relief

The House started off the year with great fanfare passing a marriage penalty relief bill in February.  The bill, which would cost $182 billion over 10 years, seeks to:

While this relief would be welcomed by millions of taxpayers, President Clinton plans to veto the bill, saying it is poorly targeted, expensive, and adds complexity to the tax code.

Estate Tax Repeal

On June 9, 2000, the House passed a bill to repeal the estate tax.  Similar to provisions included in the larger tax cut bill that was vetoed last year, this bill would gradually repeal the estate tax over the next 10 years, costing roughly $65 billion.

The bill gained support because of the damaging impact the estate tax has on small businesses and family-owned farms.  Opponents feel that a complete repeal will give an enormous windfall to the wealthiest taxpayers.

Although many Democrats broke with the party and voted along with Republicans to pass the measure, there may not be enough votes to override a more-than-certain veto from President Clinton.  If that happens, Republicans hope the veto will shed light on the vast ideological differences between the parties heading into the elections.

Education Incentives

The Senate has considered a couple of major education incentives, including:

As in prior years, President Clinton has vowed to veto this legislation because it allegedly diverts resources from public institutions.  However, the companion bill appears to be held up in the House and may never reach the President.

Small Business Relief

The House passed a bill in March that includes the following tax breaks for small businesses:

Procedural issues have held these provisions up in the Senate and it is uncertain whether an agreement will be reached this year.

What Are The Chances?

Typically, the Republicans have had difficulty pushing their tax initiatives through Congress and past the President.  The fact that this is an election year makes it much more difficult because 1) Congress adjourns early this year so everyone can hit the campaign trail; and 2) as opposed to 1997, when everyone was willing to compromise, this year everyone will stick to their ideological guns to win voters.

If the process isn't complicated enough, consider that Congress must also deal with the budget surplus, which is now estimated at over $200 billion, and there is still no long-term answer for the social security dilemma.  With that in mind, 2001 may look like our next best chance for significant tax relief.

Nevertheless, we'll keep you up to date on any developments on Capitol Hill.

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