December 31, 2006
Dear Client:
Another year has gone
by!!! We are very pleased to announce that we have moved (for the final time
for a long while)! We are finally in our permanent home. Thanks for your
patience during our two moves within a year. There have been some additional
tax changes in 2006 and we expect a few more before 2006 income tax preparation
time begins. Here is an overview of some changes that will affect many of you:
-
Standard deductions change to: $10,700 for married filing jointly;
$7,850 for head of household; and $5,350 for single.
-
New law – “Tax Increase Prevention & Reconciliation Act of 2005” or
“TIPRA”
-Alternative Minimum Tax increased exemption amount to $62,550 for married
filing joint for 2006 only.
-Section 179 deduction for fixed assets up to maximum of $108,000 for 2006
(phased out at $432,000). The amount returns to $25,000 in 2010.
-Extended the maximum tax of 15% for qualified dividends and capital gains.
From 2008 through 2010, if taxpayer is in the 15% tax bracket, qualified
dividends and capital gains will be zero tax. Starting 2011, qualifying
dividends go back to the maximum of 20% tax.
-Payers of tax-exempt interest are now required to issue 1099s.
-New rules on Roth IRA conversions. Please call us first if you are thinking of
converting your Traditional IRA to a Roth IRA and we will let you know the new
tax rules.
-
New law – “Pension Protection Act of 2006”
-In 2006 & 2007 the act provides an exclusion
from income of qualified charitable distributions on IRAs. Individuals 70-1/2
or older can distribute up to $100,000 of their IRA balance to charitable
organizations without recognizing income and without taking a charitable
deduction. The distribution counts towards the required minimum distribution.
-IRS has been instructed to make available a
direct deposit on refunds to a taxpayer’s IRA account starting 2007. IRS has
announced a new form (#8888) that would allow you to divide your refund check
into three direct distributions to US financial institutions (checking accounts,
savings & retirement accounts).
-Taxpayer may elect to contribute up to $3000
in IRA if their employer went bankrupt and the taxpayer participated in the
employer’s 401(k) or similar retirement plan starting 2007.
-New rules provide favorable tax treatment for
a long-term care insurance contract this is provided by a rider on or as part of
an annuity or life insurance contract. Charges against cash values will go
against the “investment” of the contract, not an income item. You will not be
able to claim any medical deduction. Taxpayer will be able to receive a
qualified long-term care insurance contract in exchange for an annuity,
endowment, or life insurance contract without recognizing gain or loss. One
long-term care insurance contract can be exchanged tax-free for an annuity
contract and visa-versa.
-Up to $3000 a year of otherwise taxable
distributions from a governmental pension plan may be excluded from income if
used to pay for qualified health insurance premiums of retired public safety
officer starting 2007. Also, new rules for public safety employees that take
early retirement withdrawals – no 10% early withdrawal penalty after age 50.
-Qualified reservist distribution from
retirement plan (if reservist ordered to active duty for at least 6 months) can
take the withdrawal without the 10% penalty. This provision ends 12-31-07.
-The Treasury has been directed to issue
regulations within six months of 8-17-06 to provide greater flexibility for
purposes of hardship or unforeseeable financial emergency distributions for
401(k), similar plans and nonqualified deferred compensation plans. There are
regulations in place for spouse or dependents but not for participant’s
beneficiary.
-Distribution from a deceased person’s
retirement plan to a non-spouse beneficiary may be rolled over tax-free into an
IRA via trustee-to-trustee transfer. Payouts must follow the minimum
distribution rules that apply to non-spouse beneficiaries effective 12-31-06.
-The new law has given more flexibility for
rollover of funds from one plan to another, but it is also more complex. They
have also made the reporting simpler for small retirement plans.
-Deductions for charitable contributions of
clothing or household items are limited to items in good used condition or
better. Also, the IRS by regulation may deny charitable deductions for items of
minimal value. An exception exists for single items if the claimed deduction
exceeds $500 in value and a qualified appraisal is included with the tax
return. (Effective 8-17-06).
-Charitable donations of cash must be
substantiated either with a bank record (cashed check) or written communication
from the donee, regardless of the amount of the donation. The receipt or letter
must list the organization name, date of contribution and amount. If these
records are not kept, the donation will not be allowed. (Effective 8-17-07).
-The “saver’s credit” that was due to expire in
2006 has been made permanent starting 8-17-06. The income limitations have been indexed for inflation.
-
Four new tax credit for Alternative Motor Vehicles when purchasing
new vehicles starting 2006
-Fuel cell motor vehicle credit
-Advanced lean-burn technology motor vehicle credit
-New qualified hybrid motor vehicle credit
-Alternative fuel motor vehicle credit
-
Energy Savings Tax Act of 2005 (Effective 2006)
-This act is an incentive for building owners to upgrade their systems and for
those building new structures to design them in an energy-efficient
manner. Must receive energy
savings certificate to get the deduction and we will need a copy of it.
-Creates a new tax credit for home builders and manufacturers of $2000 and
$1000.
-Also creates a tax credit for residential home owners. Contact us if you
are planning on
making changes to your home.
-Permanent Estate Tax Relief Act of 2006 – This bill would eliminate transfer
taxes for most individuals and greatly reduce them for others after 2010. The
proposed exemption amount is $5 million per person, and lower the tax rate on
the first $25 million to 20% (currently 30%, set to increase to 40% in 2011
unless extended).
-Movement to replace 401(k), IRAs, and other accounts with fewer, simpler
choices.
-Higher rates for Part B Medicare starting 2007 for individuals with higher than
$80,000 income. Surcharge amount from $12.50 - $68.60 per month
depending on income.
-Telephone excise tax refunds amounts (safe harbor refunds): $30 for
individuals, $40 for two exemptions, $50 for three exemptions, and $60 for four
or more exemptions. If you want to deduct actual amount paid, add up the excise
tax you paid via your phone bills (landline & cell) for 3-1-03 through 7-31-06.
If excise taxes are charged after 7-31-06, you must get refund from the phone company. For those taxpayers that
do not have to file a tax return, IRS is designing new Form 1040EZ-T which can
be used for refund claims.
-Federal payroll taxes can be paid via credit card over the phone or internet
for a credit card fee. Taxpayer can pay up to three prior quarters. If
interested, please contact us.
-IRS is planning more audits this year. Some areas officials are expected to
focus on are “abusive” tax shelters; people making $100,000 a year or more;
self-employed workers who deal largely in cash, have no taxes withheld, and
whose income isn’t reported separately to the IRS. The emerging audit issues
are suspected unreported income (not enough money reported to support taxpayer’s
financial status); gross profit appears too low (cost of goods is high or
exceeds gross income); inventory not correct or omitted; and 50% of meals not
computed.
-Businesses need to supply us information by year-end on personal miles driven
in company vehicles; health insurance and other fringe benefits paid on behalf
of a 2% or more shareholder; dependent care benefits; and any other information
that needs to be put on an employee’s W-2. We need this information to
correctly prepare the W-2s for your business even if we do not have your books
by then. IRS will be sending out more penalties for incorrect filing of W-2s
and 1099s including not reporting correct social security numbers matching with
names.
Due to the volume of work
coming in our offices normally during January, appointments will be made on a
first-come, first serve basis. If you haven’t brought in your bookkeeping all
year – the same applies. Remember deductible gifts for business
clients/employees limited to $25, and that bonuses paid to employees are subject
to normal payroll tax withholdings.
Please call for your
individual tax appointment after February 1st. We will try to
accommodate your schedule as much as possible.
Have a safe and happy
Holiday! We look forward to seeing you again in the New Year. If you have any
questions, please call.
Sincerely,
Denise, Julie, and Lori
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