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September 2006 Alert: Pension Protection Act of 2006
Tax-Free Investment Earnings for Life!? Find out more
Tax Law Updates: May 2006 Learn about the most important changes due to the new Tax Increase Prevention and Reconciliation Act (TIPRA)
New secure online financial planning survey
2005 Year-End Tax Planning
Energy Tax Credits
New Deduction of Domestic Producers
W-2 Alert
Ancillary Services
Balance Retirement
Retirement 3 Phases
W-4 Alert
Are You in Compliance With the Stark Regulations?
Durable POA Alert
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New Deduction for Domestic Producers

The American Jobs Creation Act of 2004 includes a tax benefit for certain domestic production activities. To offset the loss of the FSC/ETI tax breaks, the new law creates a 9% federal income tax deduction for domestic producers. The new write-off is phased in according to the following schedule: 3% for tax years beginning in 2005 and 2006, 6% for years beginning in 2007–2009, and the full 9% for years beginning in 2010 and beyond. The deduction equals the applicable percentage (3%, 6%, or 9%) multiplied by the lesser of: (1) qualified production activities income for the year or (2) taxable income for the year. However, the deduction cannot exceed 50% of wages for the year.

The new deduction is not limited to C corporations. It’s also available to S corporations, partnerships, sole proprietorships, cooperatives, estates, and trusts with qualifying domestic production activities. Nor is the deduction limited to taxpayers that export to foreign countries. In fact, it’s available to many businesses that will be completely unaffected by the repeal of the FSC/ETI regime.

The definition of “qualified production activities” is very broad. Therefore, many taxpayers will qualify for the new write-off including (but not limited to) those engaged in the following industries in the U.S.: traditional manufacturing of tangible personal property, construction, civil engineering and architectural services for construction projects, software production, and farming.

The main reason for the 2004 Jobs Act was to repeal the existing regime of federal income tax breaks for foreign sales corporations (FSCs) and extraterritorial income (ETI). Repeal was necessary because the World Trade Organization had ruled that the existing FSC/ETI regime amounted to an illegal export subsidy by the U.S. government.

Tax Planning Impact: Because the potential application of the new deduction is so broad, it may be possible for your business to qualify even though it seems unlikely on first blush. If you have questions, please give us a call.

W-2 Alert

With about half the year still to go, now is a good time to check to see if you are on track to have about the right amount of federal income tax withheld from your paychecks for 2005. This issue is more important than in the recent past because interest rates have been rising and may continue going up.

• If you will be significantly underwithheld this year, you risk being hit with an IRS interest rate penalty that has already gone up and might go higher still as the year progresses.

• If you will be significantly overwithheld, you are basically making an interest-free loan to the government when you could be putting that money to work in an interest-bearing account and earning decent rates that may get even better as the year progresses.

Neither situation is good for you. The simplest way to correct for under-withholding or over-withholding is by turning in a new Form W-4 (Employee’s Withholding Allowance Certificate) to your employer. Taking this action will adjust the amount of federal income tax that is withheld from your paychecks for the rest of 2005. Specifically, you can adjust your withholding by increasing or decreasing the number of allowances claimed on your Form W-4. The more allowances claimed, the lower the withholding from each paycheck, and vice versa. If claiming zero allowances for the rest of the year would still not result in enough extra withholding, you can ask your employer to withhold an additional amount of federal income tax from each paycheck.

While filling out a new Form W-4 seems like something that should be easy, it’s not necessarily so—because the tax rules are neither quick nor easy. You may need to complete several worksheets (included in the Form W-4 instructions) to get a reasonably accurate fix on how many allowances should be entered on your Form W-4. (You don’t need to file the completed worksheets with your employer or the IRS; just keep them with your 2005 tax records.)

Alternatively, consider using the online Form W-4 calculator available on the IRS website at www.irs.gov. From the home page, click on the “individuals” link. Then scroll down and click on the “IRS withholding calculator” link. You will see the entry point for online calculator. It’s easy to use once you assemble the needed information about how your 2005 tax return is likely to turn out.

Please understand the IRS calculator is not perfect (it’s free and to some extent you always get what you pay for). However, using the calculator to make withholding allowance changes on a new Form W-4 filed with your employer is probably better than doing nothing if past performance shows you are likely to be significantly underwitheld or overwithheld for this year.

Of course, if you want more precise results, we would be happy to put together a 2005 tax projection for you. At the same time, we can probably recommend some planning moves that would lower this year’s tax bill. Please call us if you have questions or want more information on this subject or on any other tax-related matter.

Ancillary Services

To our medical and dental clients and friends:

From 1980 to 2000 medical practice revenues have declined by 30% while practice expenses have risen. To survive, practices have been required to add ancillary services. Statistical data of best practices indicates that 50% of the most profitable practices acquired equipment in the past year for ancillary services versus slightly above 35% for less profitable practices.

However, as a general rule doctors are not permitted to furnish patients with services that are ancillary to the referring physicians professional services. In the late 1980s the government came to the conclusion that certain ancillary services were likely to be over utilized when physicians had an ownership interest in them (the Stark rules).

Examples of ancillary services include clinical lab.

Balance Retirement

Recent studies have shown that 35% of retirees suffer from severe depression. If location, location, location is essential for real estate, balance, balance, balance is crucial in retirement.

To ensure a fulfilling and happy retirement you should seek to provide balance in several areas. These areas include:

Your physical health
Your mental health
Maintaining a proper diet
Getting regular exercise
Maintaining personal relationships
Having social interactions
Getting intellectual stimulation
Maintaining a spiritual balance

By seeking balance in retirement you can ensure your retirement years will be happy years. If you or a loved one would like to discuss this further or learn more about our Prime Plus Services.

Retirement 3 Phases

Have you taken the time to adequately prepare for your retirement? Retirement planning is a hot topic these days. With life expectancies on the rise and health care costs skyrocketing a well thought out retirement plan is essential. To better plan for retirement it makes sense to separate the retirement years into three distinct phases.

ACTIVE PHASE

The active phase is a time for you to chase your dreams that the working years did not allow. Many refer to this phase as a second childhood without supervision. During these years you will find yourself doing those things that you dreamed about in your working years. This is a busy time and can be somewhat expensive.

PASSIVE PHASE

After the active phase retirees find themselves in the passive phase. This is a less frantic time but considered to be quite enjoyable. Retirees in this stage find themselves settling down and enjoying the quiet pleasures. During these years retirees’ expenses are lower than during the active phase.

FINAL PHASE

Retirees will eventually move into what is called the final phase. This is a time when medical and health concerns become the predominant challenge. The basic budget during these years becomes subsistence and medical costs. These years can be expensive in terms of cost. Proper planning is essential to ensure that enough funds are available for this time period. Long-term care insurance can help defray some of the costs.

W-4 Alert

If you will be significantly underwithheld this year, you risk being hit with an IRS interest rate penalty that has already gone up and might go higher still as the year progresses.
If you will be significantly overwithheld, you are basically making an interest-free loan to the government when you could be putting that money to work in an interest-bearing account and earning decent rates that may get even better as the year progresses.

Neither situation is good for you. The simplest way to correct for under-witholding or over-withholding is by turning in a new Form W-4 (Employee’s Withholding Allowance Certificate) to your employer. Taking this action will adjust the amount of federal income tax that is withheld from your paychecks for the rest of 2005. Specifically, you can adjust your withholding by increasing or decreasing the number of allowances claimed on your Form W-4. The more allowances claimed, the lower the withholding from each paycheck, and vice versa. If claiming zero allowances for the rest of the year would still not result in enough extra withholding, you can ask your employer to withhold an additional amount of federal income tax from each paycheck.

Are You in Compliance with the Stark Regulations?

The only industry more highly regulated than the medical profession is the nuclear industry. Physicians and dentists must comply with HIPAA rules, Stark I and Stark II, and anti-kickback regulations. The penalties for non-compliance can be severe. Stark II regulations became effective on July 26, 2004.

The Stark regulations apply to all physicians including dentists, optometrists, chiropractors as well as medical doctors. The anti-kickback rules apply to all of the above including nurses and other related practitioners. The anti-kickback rules are so broad that even receiving drug samples in return for the referral of patients to use the drugs is a violation.

The Stark Law prohibits a physician from referring a Medicare patient for any "designated health service" ("DHS") to an entity with which the physician (or an immediate family member) has a financial relationship (i.e., an ownership or compensation arrangement), unless an exception applies. Furthermore, an entity that receives a prohibited referral cannot bill the Medicare program for that service.

Durable Power of Attorney Alert

We’re sure you know the importance of having a valid will. However, as life expectancies increase, planning for a disability or incapacity is equally important. A durable power of attorney (POA) is a very useful tool for this. A POA is a simple, relatively inexpensive, legal document in which you appoint another person as attorney-in-fact, or agent, to manage your financial or other affairs. A POA may be general, granting broad authority to make decisions concerning investments, tax matters, property transactions, and long-term care and health issues, or it may be limited, granting authority only to perform one or more specific duties such as closing the sale of a client’s house on a date the client will be out of town.

Often, the power is not effective until the individual granting it becomes incapacitated. Thus, until that point, the POA has no effect. However, if you do become unable to make decisions, having the POA ensures that your assets will be managed and financial plans and responsibilities will be fulfilled. Without a POA, your family may have to undergo the costly and time-consuming process of court supervision of your affairs.

Although the POA is a relatively simple document, there are many factors you should consider when deciding exactly what powers will be granted, who will be named as agent, and how the POA will become effective. A POA should be drafted by an attorney experienced in this area. We would be glad to discuss this issue with you in more detail, or to review any existing POAs you may have granted. We look forward to working with you and your attorney to ensure that your planning in this vital matter is complete and effective.

This information is also available at www.stappfinancial.com. If you do not want to receive future e-mail news from Stapp Financial, link to our subscription form, or send an e-mail to bstapp@stappfinancial.com. Before acting on any advice it is recommended to seek appropriate counsel applicable to your individual circumstances.