2006 Tax Information As most of you know, on May 17, 2006, President Bush signed the Tax Increase Prevention & Reconciliation Act of 2005 (TIPRA).  In an effort to keep us and you up on the changes in the tax law, Blasé attended a seminar and came back with the following summaries: In the past, dependent children under 14 could have unearned income but was taxes at parents tax bracket.  TIPRA extends this age to 18, effectively eliminating the tax advantage of moving income to your dependent child;   The three (3) percent penalty on itemized deductions that many taxpayers experience with increased incomes has been reduced to two (2) percent;   We will discuss the Alternative Minimum Tax (AMT) later;   Certain credits are rising for inflation (i.e. Dependent care, Child tax and education).  But don’t get too excited, most are only nominal (about $ 50);   A couple of new credits have arisen: First, the residential energy credit is back. With certain restrictions, the credit is 10% to 100% up to $ 500 for energy-efficient improvements to home (weather stripping, insulation, etc) and 30% credit for solar energy improvements. NOTE: only on materials, not on installation labor.  Second, the Alternative Fuel Car credit for Hybrid car purchases.  The credit is based on which car you buy but range from $ 1,950 to 3,100.   Major changes in the deductibility of legal fees paid (call to discuss);   For business clients, we would love to discuss the various ways to set up health care plans.  Just paying the premiums seem archaic compared to some of the creative methods that we were taught (call to discuss);   The Internal Revenue Service is cracking down on certain expenses paid and deducted as itemized deductions (i.e. donated vehicle valuations, medical payments). Most important is home equity loan interest payments where the proceeds of the loan was not used to improve or purchase the home.  This interest is treated differently and will be subject to scrutiny in the future;   Gift tax annual exclusion raised from $ 11,000 to $ 12,000;   Annual IRA contributions levied: ($ 4,000 for both traditional and Roth).  Don’t forget the “catch-up” rules if over age 50;   With certain restrictions, the capital gain rates with remain at 5% and 15%, depending on income level. That concludes the little changes, but some major items surfaced during the week in Virginia. Insurance: There are many ways to pay health insurance, cut costs and give you and your employees’ better coverage.  Also, long-term health care is not something that you should think about when you retire.  The cost may be too prohibited, 50 to 55 is the proper age to discuss. Retirement: Companies need to discuss retirement plans for the owners and key employees, including a one-person 401(k) plan. We need to discuss IRS announcements concerning audits and exposure points.  As many of you already know, “S” corporations are required to pay the officers a fair payroll. There are still some of you who do not want to involve your company in payroll and desire to just “withdraw profits”. If you are audited, the IRS will re-qualify your payment as payroll, make you pay all payroll related taxes, including penalties and interest, and make you amend all related tax returns (corporation and personal).  This could get very expensive so we are suggesting that you pay now instead of later. More IRS news: They are doing “compliance” audits of “S” corporations (5,000 last year and 6,000 more this year).  We have experienced one of these audits where the IRS audits EVERY line item on the tax return. This is extremely costly and time consuming. Even more IRS news: They are cracking down on business expenses (i.e. telephone, home computers, automobile).  These three items are classified as “listed” which means that there is probably some personal use involved.  We are recommending the use of log books for automobile travel and home computer usage.  Telephone usage, although the rules are there, is very difficult to police so we use an estimate for personal usage when we prepare your return. NOTE: All of these IRS changes will result in a more detailed analysis of your books and records. This equates out to you, our client, in more fees charged, not for increased fees but in increased time needed to prepare returns. Let’s discuss everyone’s favorite, Alternative Minimum Tax (AMT).  This tax was intended to impact wealthy taxpayers who had a lot of deductions.  However, over the years, this tax was never adjusted and many more taxpayers are being impacted every year. A few facts to get you angry over this tax: by 2013, it will be cheaper to repeal the regular tax than to repeal AMT; In 2006, 65% of married couples with 2 children and adjusted gross income between $ 75,000 and $ 100,000 will pay AMT and the amount of taxpayers who will be impacted by AMT will increase 440% in 2006 over 2005.  President Bush say fit not to make any major adjustments to this tax since it generates far too much income for the government.  The only change made was to take the minimum threshold from $ 60,000 to $ 62,550. So what do we do: Since the major items involved in AMT are mortgage interest, real estate taxes, state and local taxes, personal exemptions and miscellaneous deductions, we are severely limited on ways around this tax. We could: Not prepay any state, local or real estate taxes; Avoid unreimbursed business expense by having your employer reimburse and tax them on your W-2; Don’t have children (HA HA). On a more serious note, write your congressman and let him know your outrage. Also, by the end of the summer, we will be contacting anyone who had AMT last year to discuss individual options. Last, many of you are interested in 1031 exchanges, a very popular procedure in today’s world.  For those of you who do not know, a 1031 exchange allows you to, when you sell an asset, to exchange it for another like asset and avoid any capital gains. Although the assets sold can be on any class, the largest advantage to 1031 exchanges is in real estate. We are not experts on these exchanges, but we do have someone who is in New Jersey who would be happy to assist for a nominal fee. Just let us know…. OK, this was an extremely quick summary, the details could take a ream of paper. Give us a call if you have any questions or need some projections. The advice contained in this document is not intended or written by the drafter of this document to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer