We all face many of the same financial questions. Here are a few questions and answers that we at BGBC Partners often hear from our clients. To recommend topics to include on this page, please submit your questions to topics@bgbc.com.

Frequently Asked Questions

Individual

  • What methods may be applied to deduct business use of a car? Answer
  • Is interest on a student loan deductible? Answer
  • When is it necessary to give a worker a 1099? Answer
  • Are points paid for refinancing a mortgage deductible? Answer
  • When are estimated tax payments due for individual taxpayers? Answer
  • Are there tax consequences when reinvesting proceeds from the sale of a mutual fund? Answer

Business

  • Is business use of a home deductible? Answer
  • What forms should new employees complete and how should they be filed? Answer
  • What are the standard mileage rates for the years 2004 & 2005? Answer

Miscellaneous

  • Is it better to lease or buy a car? Answer
  • How long should tax records be saved? Answer

Estate

  • When gifting money, is the gift made when the check is written or when it is cashed? Answer

Pension

  • What constitutes a "Highly Compensated Employee" or HCE for purposes of pension plans and contributions? Answer

Answers
What methods may be applied to deduct business use of a car?
Costs of operating a car for business are deductible to the extent it is used for business, not personal use. Two cost methods are available – use of a standard mileage rate or the actual expense method. The standard mileage rate for 2004 was .375 cents. The standard mileage rate for 2005 is .405 cents per mile. You may include expenses for parking and tolls if you choose to use the standard mileage rate. With the actual expense method, you are allowed deductions for the cost of oil, gas, repairs, tires, insurance, licenses, garage rent, parking, tolls and depreciation. Each method requires expenses to be properly documented with adequate records, and special rules apply to the use of either method, including rules for leased vehicles or the extent that depreciation is allowable. We can help you consider the benefits of each option to decide which method will maximize your deduction. Top

Is interest on a student loan deductible?
If you obtained a student loan for yourself, your spouse, or a dependent to attend an eligible institution, you may deduct the amount of interest you paid in 2004 or 2005 up to $2,500. Special rules related to your filing status,  phase-outs, and other items must be considered to determine the deductibility of interest, so be sure to call us for advice. Top

When is it necessary to give a worker a 1099?
Generally, if you pay an individual who is not an employee $600 or more in a year for their services, you should issue them a 1099. The rules are different based on the type of payment that is made. See us for the specific rules. Top

Are points paid for refinancing a mortgage deductible?
Unlike the original mortgage on that property, any points paid when refinancing must be deducted over the life of the loan. Top

When are estimated tax payments due for individual taxpayers?
An individual taxpayer required to make estimated tax payments should pay Federal and Indiana estimated payments on April 15, June 15, and September 15 of the current tax year, and on January 15 of the following year. Taxpayers who itemize deductions on their Federal return may want to consider paying the 4th quarter Indiana estimate by December 31 of the current year to enable them to deduct it on the Federal return. Top

Are there tax consequences when reinvesting proceeds from the sale of a mutual fund?
Yes, you will pay taxes on any gain if the mutual fund is not being held in a tax advantaged retirement plan. The amount of capital gains tax you pay will depend on your basis and the length of time you have held the fund. A common mistake we see is that too often, an investor does not keep track of all the dividends and capital gains that have been credited and reinvested along the way. All these amounts need to be added to your original purchase to figure your cost basis. Top

Is business use of a home deductible?
As a general rule of thumb, if the part of your home designated for business is also used for personal use, you cannot take a business deduction for a home office. Two exceptions for this rule are for day-care providers and for storage of inventory of products and samples used in business. Aside from these exceptions, if part of your home is used regularly and exclusively for business,
you may be eligible for a deduction. Other rules must be taken into consideration for determining the allowability and the amounts of home-office deductions. Home office deductions are highly scrutinized, so call our office for expert advice and planning in this area. Top

What forms should new employees complete and how should they be filed?
Every new employee should complete the following:
Federal Form W-4 This form is used to determine the amount of Federal income tax to be withheld from the employee’s pay. If a new employee does not give you a completed Form W-4, you should withhold tax as if the employee is single with no withholding allowances.
Indiana Form WH-4 This form indicates the number of withholding exemptions to be used when calculating Indiana and local income tax withholding. It also determines the county of residence for local income tax purposes.
U.S. Department of Justice Form I-9 This is to be completed by all employees at the time of hire to verify employment eligibility. The employer must also complete a section of the form after examining certain employee-provided documents as specified in the form instructions.

All completed forms should be kept by the employer. A copy of Form W-4 should be submitted to Indiana Department of Workforce Development within 20 business days of a new employee’s hire date. A copy of Form W-4 must also be sent to IRS only if the employee claims (1) more than 10 withholding allowances or (2) exemption from withholding and their wages would normally be more than $200 per week. If you have any questions, call us. Top

What is the standard mileage rates for the year 2004 & 2005?
That standard mileage rate goes up from $.375 for the year 2004 to $.405 for the year 2005. Top

Is it better to lease or buy a car?
There are financial calculators that can tell you how much your lease payments and purchase payments would be on the same vehicle given the anticipated financing terms. Unfortunately, there is no mathematical formula that can tell you if it is better to buy or lease a car. You should base your decision on your lifestyle and on your expectations of future events, not necessarily on which number is lower. The first step in answering this question is to ask a few more questions. How long do you anticipate keeping the vehicle? How much money do you have to put down? Do you mind always having a monthly payment? Do you put a lot of miles on your vehicle? Do you maintain your vehicles reasonably well? Would you invest your monthly cost savings? Obviously, if you tend to keep your vehicles for a number of years and put a lot of miles on them, you will almost always be better off buying your car, even though there will be more up-front costs and usually a higher monthly payment. If you only keep your cars for a couple of years, don’t drive a lot of miles, and don’t mind always having a payment, leasing will most likely be the way to go. If you need some guidance in this area, call us. Top

How long should tax records be saved?
When asked this question, we usually reply, "How big is your house?" Unfortunately, the answer to this question depends on a number of factors. It depends on various federal, state, and local taxing agencies. We have an informational guide that you are welcome to. Just call our office or e-mail us and we will be happy to give you this guideline.  A downloadable PDF version of this guide is also available here. Top

When gifting money, is the gift made when the check is written or when it is cashed?
The gift is made when the check is cashed, not when it is written. If you give a relative a check on December 10th, and he/she does not cash it until January 3rd of the next year, the gift is considered to be made in the next year. Make sure when gifting money, that you tell the recipient to make sure he/she cashes the check in the same year! Top

What constitutes a "Highly Compensated Employee" or HCE for purposes of pension plans and contributions?
In determining an employee’s HCE status for any given year, the HCE limit for the previous year is the figure that is actually used. Thus, when determining which employees are HCEs for the year 2005, qualified plans must compare 2005 compensation against the $95,000 limit which is in effect for 2005, with the $90,000 limit for 2004.  There are other factors to consider with HCEs, so please consult us for more information or advice. Top