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Newsletter
- Fall/Winter 2006
The
Fall/Winter Tax Client Newsletter brings you up-to-date on a number
of important tax law changes for 2006, As a result of 2006 tax
legislation, there are a number of significant tax law changes
affecting you this year and into 2007.
On
May 17, 2006, Congress passed and the President signed into law
the Tax Increase Prevention and Reconciliation Act of 2005, TIPRA,
and on August 17, 2006, President Bush signed into law the Pension
Protection Act of 2006. In addition to these two mammoth pieces
of tax legislation, other laws enacted during 2006 impact your
taxes and there is still time for Congress to act again before
the end of the year.
Call
my office to set an appointment should you have any question or
concern about your taxes and how your taxes may be affected by
this legislation.
Tax Increase Prevention and Reconciliation Act of 2005 - TIPRA
Taxpayer's
who invest in stock are the broadest group of beneficiaries of
the Act. The 15% favorable tax rate on long-term capital gains
and qualifying dividends is extended through 2010. The Act also
raises the amount of income exempted from the Alternative Minimum
Tax (AMT). The amount of income exempted from the AMT is increased
to $62,500 for married couples filing jointly, up from $58,000
in 2005. The exemption for single filers will be raised to $42,500
for 2006, up from $40,250 in 2005. TIPRA also extended through
2006 the provision allowing taxpayers to use non-refundable personal
credits to offset AMT liability including the Dependent Care Credit,
Credit for Elderly and Disabled and the Hope and Lifetime Learning
Credits. Internal Revenue Code Section 179, Expensing of Business
Property, was extended through 2009 by the American Jobs Creation
Act of 2004. In 2006, the maximum amount that may be expensed
is $108,000 of qualifying property, reduced by the amount by which
the cost of qualifying property exceeds $430,000. Without the
extension in the TIPRA, the amounts would have dropped to $25,000
on a $200,000 cap after 2007.
With
these provisions to prevent additional taxation, Congress enacted
the following provisions into TIPRA in order to facilitate "revenue
neutral" legislation. The Act provides for increasing the
age limit of the "kiddie tax" to children under 18 years
of age which is up from the previous under age 14. If a child
under 18 has investment income, the first $850 is tax-free and
the next $850 is typically taxed at the child's tax rate. "Unearned"
income above $1,700 is taxable at the parents' top tax rate. This
change in the law is retroactive back to January 1, 2006. TIPRA
also eliminates the $100,000 adjusted gross income test for converting
a traditional IRA to a ROTH IRA. The change is effective for tax
years after 2009.
Hero
Act
On
May 28, 2006, President Bush signed into law the Hero Act, allowing
non-taxable combat pay to be deemed earned income to qualify for
an IRA contribution. The Act is deemed effective for years 2004,
2005 and future years allowing those taxpayers who qualify to
make IRA contributions for the years of 2004, 2005, 2006 and beyond
the normal contribution date. The contribution due date has been
extended for qualifying taxpayers until May 28, 2009.
The
Pension Protection Act of 2006
This
new law includes almost 1,000 pages and includes more than 100
tax provisions. Enacted primarily to create some pension security
for workers the provisions of the new law are far more wide-ranging.
529 Plans were made permanent by the Pension Protection Act. This
means that the exemption from income tax for distributions used
to pay qualified higher education costs will continue indefinitely
for 529 Plans. The Act made the Retirement Saver's Credit permanent.
This credit encourages individuals of modest income to make contributions
to 401(k) plans as well as IRAs by allowing them to claim a double
tax break; the tax credit as well as the tax deferral for the
elective deferrals to the 401(k) plan or the deduction for the
IRA contribution. Beginning in 2007, the legislation allows non-spouse
beneficiaries to roll over qualified retirement benefits to an
IRA. Beneficiaries will be able to take required distributions
from the IRA over their life expectancy. The Act provides for
automatic enrollment in 401(k) Plans. Automatic enrollment, which
ensures nondiscrimination, entitles owners and other highly-compensated
employees to take full advantage of contribution opportunities.
The legislation also requires the Internal Revenue Service to
create rules to allow withdrawals from 401(k) plans for hardships
and unforeseen financial emergencies with respect to any beneficiary.
The
Pension Protection Act also made some changes to charitable giving,
with some specific changes directed at closing loopholes perceived
to exist. Those taxpayers age 70 ½ and older who are taking
required minimum distributions from IRAs can opt to do so on a
tax-free basis by rolling over the funds to charity. While no
charitable contribution deduction will be allowed for the rollover,
by avoiding the taxable impact of the distribution, the taxpayer's
adjusted gross income will be reduced, thereby avoiding over twelve
potentially negative results to the tax calculation on the tax
return. The ability to claim an itemized deduction for donations
of items that are "not in good condition" has been restricted.
For donations after August 17, 2006, no deduction can be claimed
unless an item is in at least "good" used condition.
Currently, cash donations of $250 or more must be substantiated
with a written acknowledgment from the charity. Beginning in 2007,
cash donations of any amount will need to be substantiated with
either a canceled check, bank statement or a receipt from the
charity. Additionally, in 2007, individuals will be able to combine
annuities with long-term care protection. Beginning in 2007, insurance
companies will be able to issue annuity policies with a long-term
care rider. Earnings from the annuity will be used to provide
long-term care insurance for nursing home and in-home care. The
effect of this provision will not be implemented until 2010.
2005
Energy Bill
In
August 2005, President Bush signed into law the Energy Policy
Act of 2005. The 2005 Energy Act provides new credits for energy
efficient improvements made to personal residences. To qualify,
home improvements must be made to your principal residence and
not to a second home. A $500 lifetime credit is available for
certain energy-saving expenditures for your personal residence.
One of the most significant features of the 2005 Energy Act is
a new incentive for the purchase of new hybrid vehicles. The Act
only rewards the original owners of hybrids. The former deduction
of a maximum $2,000 has now been replaced with a new tax credit
which may be as high as $3,400. This new credit for hybrid cars
and trucks is made up of two parts, a fuel economy credit and
a conservation credit. The Energy Credit for hybrids is a limited
credit and Toyota has already reached its limit of selling 60,000
qualifying hybrid automobiles. The credit will diminish over the
next several months after the manufacturer reaches the sales limit
of 60,000.
Other
2006 Provisions
For
taxpayers making too much in income and loosing the deductibility
of their itemized deductions and personal exemptions, known as
the phase out, 2006 will see the beginning of the phase out of
the phase out. Taxpayers in 2006 will loose only 2/3 of the deductions
and exemptions they lost in 2005. In 2007 they will only loose
1/3 and in 2008 they will loose nothing. The phase out will no
longer exist after 2007.
The
filing of your 2006 Federal Income Tax Return will include applying
for the Federal Excise Credit. The credit will be representative
of Excise Taxes charged on long-distance telephone service for
the last three years. The credit will also include interest. The
Internal Revenue Service, in conjunction with the U. S. Department
of the Treasury has calculated a safe-harbor amount which can
be claimed in lieu of requiring the rigorous exercise of compiling
the taxes paid.
Beginning
in 2006, refunds on your Federal Income Tax Return can be automatically
deposited in up to three different bank accounts, including an
account that holds your Individual Retirement Account.
2006
Mileage Rates
| Optional
Standard Mileage Rate |
44.5
cents |
| Medical
Mileage Rate |
18.0
cents |
| Moving
Mileage Rate |
18.0
cents |
| Charity
Mileage Rate |
14.0
cents |
The
IRS has announced that it will delay the release of the 2007 mileage
rates until the end of the year.
Tax
Brackets
Tax
brackets for 2006 remain at 10%, 15%, 25%, 28%. 33% and 35%.
Standard
Deduction Amounts
| Single |
$
5,150 |
| Married
Filing Jointly |
$10,300 |
| Married
Filing Separately |
$
5,150 |
| Head
of Household |
$
7,550 |
Personal
Exemption Amounts
For
2006, the Personal Exemption Amount is $3,300.
Retirement
Plan Contributions for 2006 and 2007
In
order to maximize the tax benefits of your retirement contributions
the following amounts reflect the maximum contributions for the
respective years:
Type
of Retirement Plan
|
2006
|
2007
|
| Individual
Retirement Account (IRA) |
$4,000 |
$4,000 |
| Catch-up
amount, age 50 and older |
$1,000 |
$1,000 |
| |
|
|
| 401(k) |
$15,000 |
$15,500 |
| Catch-up
amount, age 50 and older |
$5,000 |
$5,000 |
| |
|
|
| SIMPLE
Plan |
$10,000 |
$10,500 |
| Catch-up
amount, age 50 and older |
$2,500 |
$2,500 |
| |
|
|
| SEP
IRA contribution limit |
$44,000 |
$45,000 |
Estate
and Gift Tax Rules
For
2006, the value of an estate less than 2 million dollars escapes
federal estate tax. The indexing of this value continues over
the next several years until in 2010 all decedents will escape
the estate tax. However, on January 1, 2011 the estate tax will
again have the threshold of 1 million dollars.
$12,000
is the annual gift limit escaping, tax-free, from gift tax. The
$12,000 is per beneficiary and can increase to $24,000 in the
case of joint gifts from married couples.
Gifts
to college savings 529 Plans permit five years worth of gift giving
in a single year. In 2006, provided no other gifts have been made
to the beneficiary, a total of $60,000 in gifts can be made to
the 529 Plan. In the case of joint gifts from a married couple
the amount would increase to $120,000.
Social
Security
-
The
COLA increase for 2007 is 3.3%. In 2006 the COLA increase
was 4.1%.
-
In
2007 Medicare Part B premiums will be indexed according to
income.
-
In
2007 the maximum taxable payroll earnings for Social Security
will increase from the $94,200 in 2006 to $97,500.
Conclusion
Although
2006 may go down as a record year for tax law enactments, two
particular provisions remain without extension. The $250 adjustment
to income known as the "Educator Deduction" and the
deductibility of Sales Tax as an itemized deduction both expired
on December 31, 2005 and have yet to be extended. After the mid-term
elections it is generally thought that both of these issues will
be addressed in other legislation to be passed by years end.
As
with any tax planning, you and your particular issues are in the
forefront of our thoughts. It is wise to review your tax issues
and address them in advance of year-end. I look forward to speaking
with your regarding any personal concerns or questions you might
have.
Sincerely.
TOTAL TAX SERVICE
Diane M. Polangin
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