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Tax Plan 2007
Tax Planning
It is that time of the year when we need to review your tax situation to reduce surprises next April. During this year there were new laws passed and old laws have provisions that come into effect for 2006 and 2007. This memorandum is to provide a list of items that I feel will affect my clients and prospective clients. It is not intended to cover all of the provisions in the laws.
Heroes Earned Retirement Opportunities Act provides:
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Combat zone veterans to treat non-taxable combat pay as compensation for purpose of calculation of IRA contributions. There
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is a three (3) year grace period to make the contributions.
Tax Increase Prevention and Reconciliation Act provides:
- A two (2) year extension of reduced tax rates on long term capital gains and dividends (i.e. maximum rate is 15%.)
- Increase the AMT exemption levels.
- Allows the maximum $500 energy-savings credit and the residential alternative energy-generating credit to offset both the regular and alternative minimum tax.
- Minor children (to age 18) who received unearned income of $1,700 or more for 2006 will be taxed at the parents' rates. The age increase is from 14 to 18.
- Tax exempt interest and dividend income will have to be reported on your return.
- Section 179 depreciation is indexed through 2010. The amount allowed in 2006 is $108,000.
- The Domestic Production wage limitation is 50% of all wages for 2006 and is changed for years starting after May 17, 2006 to only wages that are properly allocable to domestic production receipts. This is a provision that allows a special deduction for production in the United States.
- Offers in Compromise now require a "good faith" payment of 20% of any lump sum offer. If it is an installment agreement, you must comply with your terms while the IRS considers the offer. It also specifically says that the offer is considered accepted if there is no decision within two (2) years of submission.
Pension Protection Act eliminated some of the sunset provisions of older laws.
- the percent of compensation limits is increased from 15% to 25% for defined contribution plans ($44,000 for 2006)
- an increased contribution limit of $175,000 for defined benefit plans
- increased elective deferrals under 401K plans
- increased employee contributions to SIMPLE plans
- increased IRA limits, and catch-up provisions
- a $500 credit for plan start costs for qualifying small employers
- a provision allowing 401K plan contributions to go into a Roth 401K . The amount deferred would be taxable.
- the "sunset" provisions of Section 529 plans have been repealed. The IRS is contemplating some changes to the regulations to prevent "misuse".
- Only a spouse can rollover a deceased person's retirement account tax free. There are specifics as to how the account must be transferred and titled. Anyone else will be taxable upon distribution. There is a way around this, but it must be handled carefully.
- You can have a federal refund deposited into up to three (3) bank accounts including an IRA account automatically.
- New requirements for employers that have retirement plans include a requirement for regular reports to participants and providing "qualifying" investment advice to the participants.
- Charitable contributions also were affected by this law as follows:
- A direct contribution of up to $100,000 can be made by an IRA account of a person over 70 1/2. This is only good for 2006 and 2007.
- Donations of clothing and household items after August 17, 2006, must be in "good used condition or better". The IRS is to define this phrase.
- Easements granted on certified historic structures have some new rules. Among them is a requirement that if the claimed deduction exceeds $10,00, a $500 fee must accompany the return or there is a disallowance of the declaration automatically.
- There are numerous other provisions that I am not detailing here.
Energy Incentives Act of 2005 has items that affect 2006
Motor vehicle credits have some common requirements but each has a few specific items
- Hybrid Motor Vehicle Credit has varying amounts depending on size of vehicle, cost and the incremental fuel savings. There is also a limitation based on the number of vehicles sold.
- Advanced lean-burn technology is for an internal combustion engine that has an economy of 125% of 2002 model year city fuel economy.
- Fuel Cell Motor Vehicle credit is for vehicles creating chemical energy using oxygen and hydrogen fuel.
- Alternative fuel credit for vehicles using such items as LNG, CNG or any liquid which is at least 85% methanol. Mixed fuel vehicles can qualify for a reduced credit.
- Energy savings home improvement credits are capped at a lifetime total of $500 for principal residences. There are limitations inside this credit.
- Residential Alternative Energy -Generating credits are effective for 2006 and 2007.
- Contractors that build a qualifying energy efficient residence which is sold in 2006 and 2007.
Arizona has some benefits for Arizona tax return filers. The credits to charitable organizations also qualify as federal tax deductions and credits against Arizona income tax, dollar for dollar.
- First, the tax credit for public school extra curricular activities is worth up to $250.00.
- Contributions that support private school scholarships can be worth up to $625.
- Another credit supports charities that provide assistance to the working poor. The calculation is more complex, but can be done.
- There are energy plus solar energy credits available for individuals.
As I stated at the beginning of this memorandum, it is intended to "pique" your interest.
There are many other points and far more detailed explanations than I could ever hope to put into a summary
like this. If you have questions, please feel free to contact my office directly at 602-264-9331.
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