New for 2006
Category:Tax Newsletter | Posted: January 08, 2007
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 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.
Mileage Rates
Optional Standard Mileage Rate 44.5 cents (2006) 48.5 cents (2007)
Medical Mileage Rate 18.0 cents (2006) 20.0 cents (2007)
Moving Mileage Rate 18.0 cents (2006) 20.0 cents (2007)
Charity Mileage Rate 14.0 cents (2006) 14.0 cents (2007)
Tax Brackets
Tax brackets for 2006 remain at 10%, 15%, 25%, 28%, 33%, and 35%.
Standard Deduction Amounts
Single $ 5,150 (2006) $ 5,350 (2007)
Married Filing Jointly $10,300 (2006) $10,700 (2007)
Married Filing Separately $ 5,150 (2006) $ 5,350 (2007)
Head of Household $ 7,550 (2006) $ 7,850 (2007)
Personal Exemption Amounts
For 2006, the Personal Exemption Amount is $3,300 and for 2007 the Personal Exemption Amount will be $3,400.
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 (2006) $ 4,000 (2007)
Catch-up amount, age 50 and older $ 1,000 (2006) $ 1,000 (2007)
401(k) $15,000 (2006) $15,500 (2007)
Catch-up amount, age 50 and older (2006) $ 5,000 $ 5,000 (2007)
SIMPLE Plan $10,000 (2006) $10,500 (2007)
Catch-up amount, age 50 and older $ 2,500 (2006) $ 2,500 (2007)
SEP IRA contribution limit $44,000 (2006) $45,000 (2007)
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
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,
Joshua W. Harmening, CPA CFE
New for 2005
Category:Tax Newsletter | Posted: December 26, 2005
Topics:
- Qualified Production Activities Deduction
- Six-Month Automatic Extensions Available for 2005 Tax Returns
- IRA Deduction Expanded
- Elective Salary Deferrals Increased
- Vehicle Donations
- Standard Mileage Rates
- Dependents Can't Claim Exemptions for Dependents
- Katrina Emergency Tax Relief Act of 2005
- Qualified Leasehold and Restaurant Improvement Depreciation Changes
- Estate Provisions
Qualified Production Activities Deduction
The Section 199, qualified production activities deduction, went into effect in 2005 and will benefit any business that produces property in the U.S. It provides a 3 percent deduction for the lesser of: (1) the entity's qualified production activities income for the year, or (2) the entity's taxable income (for an individual, adjusted gross income is used to calculate the limitation), not to exceed 50% of W-2 wages paid by the entity.
Six-Month Automatic Extensions Available for 2005 Tax Returns
The IRS has streamlined the process for extending the due date of individual, small business, and partnership returns. Automatic six-month extensions are now available.
IRA Deduction Expanded
The IRA deduction increased from $3,000 in 2004 to $4,000 in 2005 plus an additional $500 for clients age 50 or older at the end of 2005.
Elective Salary Deferrals Increased
The amount a client can defer under all elective salary deferral plans increased in 2005 to $14,000 ($10,000 in a SIMPLE plan; $17,000 for a Section 403(b) plan if the taxpayer qualifies under a special rule). The catch-up contribution limit for clients 50 or older increased to $4,000 ($2,000 for SIMPLE plans) in addition to the basic contribution. The maximum 401(k) contribution by a client over 50 is $18,000.
Vehicle Donations
The rules for vehicle donations changed in 2005, possibly making such donations less attractive. Under the old rules, clients could deduct the "fair market value" of cars donated to charity. The new rules provide that if the charity sells the car, the donor's deduction is limited to the proceeds received by the charity. If the charity does not sell the vehicle, but uses it in furthering the charity's exempt purpose, the client may be entitled to deduct the vehicle's fair market value.
Standard Mileage Rates
The 2005 standard mileage rate for business use of a vehicle is 40.5 cents for January through August. Beginning in September, that rate increases to 48.5 cents. The 2005 rate for using a vehicle to get medical care or to move is 15 cents a mile for January through August, and 22 cents a mile thereafter. The charitable mileage rate was 22 cents, but changed to 70 percent of the standard rate beginning in September. Effective January 1, 2006, the standard rate will be 44.5 cents per mile.
Dependents Can't Claim Exemptions for Dependents
Starting in 2005, an individual that can be claimed as a dependent on someone else's return cannot claim any exemptions for dependents.
Katrina Emergency Tax Relief Act of 2005
The Katrina Emergency Tax Relief Act of 2005 (the Act) provides a variety of tax incentives for those affected by the hurricane and those helping those affected.
Charitable donations
The Act removed limitations on some charitable contributions, allowing generous donors to substantially reduce their 2005 taxable income. Contributions need not be related to Hurricane Katrina to qualify.
The Act allows your client to elect to have the 50 percent income limitation rule not apply to cash contributions starting on August 28, 2005, through December 31, 2005, to charitable organizations (other than private foundations). Since this provision expires at the end of 2005, clients should consider accelerating any planned giving into 2005, if possible.
For corporations, the 10 percent of income limitation is waived for cash contributions to charitable relief efforts related to Hurricane Katrina made before 2006. In addition, these contributions are not considered in applying the charitable donation carryover rules to other contributions.
The Act increased the standard mileage rate for individuals providing Hurricane Katrina relief to 29 cents per mile from August 25 through 31, 2005, and 34 cents per mile for the rest of 2005.
Emergency Access to Retirement Plans
The Act includes special provisions relating to "qualified Hurricane Katrina distributions."
For persons affected by Hurricane Katrina, the Act waives the 10 percent tax on early distributions from IRAs and pensions after August 25, 2005 and before January 1, 2007. Eligible individuals may withdraw a maximum of $100,000 from their IRAs and pensions without incurring the 10 percent penalty tax. Amounts withdrawn will not be taxed at all if they are repaid to the retirement account within 3 years.
A distribution from a 401(k) plan, 403(b) annuity, or IRA to buy a home in the Hurricane Katrina disaster area can be re-contributed to the plan, annuity, or IRA if it was to be used to purchase a residence in the affected area but the residence is not purchased or constructed because of Hurricane Katrina.
Employer and employee tax relief
The Act extends the work opportunity tax credit to "Hurricane Katrina employees" (individuals who, before Hurricane Katrina, resided in portions of the disaster area that are now eligible for federal assistance) beyond the cut-off date of December 31, 2005. Employers located in such an area may claim the credit for Hurricane Katrina employees hired over the next two years. Employers located outside the Hurricane Katrina disaster area may claim the credit for Hurricane Katrina employees hired through the end of 2005.
Small employers (those with an average of less than 200 employees) located in a disaster area that is eligible for assistance may claim a tax credit through the end of the 2005 calendar year if they retain an eligible employee on their payroll. The tax credit equals 40 percent of the first $6,000 of wages paid to the employee between August 28, 2005, and January 1, 2006.
Deduction for housing assistance
A $500 exemption deduction is provided for individuals who provide rent-free housing in their principal residences for at least 60 days to dislocated persons. The deduction is $500 per person housed, with a maximum of $2,000, and can be claimed in either 2005 or 2006, but not in both years for same person.
Additional relief provided by the Act includes:
(1) exclusion from income for certain forgiveness of debt;
(2) a full deduction for personal casualty losses (i.e., elimination of the $100 and 10 percent floors); and
(3) increased time to replace property involuntarily converted.
Qualified Leasehold and Restaurant Improvement Depreciation Changes
Qualified leasehold and improvement property and qualified restaurant property placed in 2005 may be depreciated over 15 years. However, such property placed in service after 2005, must be depreciated over 39 years.
Estate Provisions
For decedents dying after 2004, a deduction is allowed to the estate for any death taxes, (any estate, inheritance, legacy, or succession taxes) paid to any state or the District of Columbia, on property included in the gross estate of the decedent. For earlier years, these taxes were usually creditable against the federal estate tax (up to a limit).
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