tax saving tips for 2006 advice from cpas. tax law changes recent tax law changes retirement plans...

Tax SavingTax SavingTips for 2006Tips for 2006

Advice from CPAsAdvice from CPAs

Recent Tax Law ChangesTax Law Changes

• Retirement Plans

• “Kiddie Tax”

• Charitable Giving

Pension Protection Act of 2006Pension Protection Act of 2006Retirement ProvisionsRetirement Provisions

• Makes permanent higher IRA contribution limits

• Continued “catch up” IRA contributions

• Saver’s credit becomes permanent

Charitable Giving ProvisionsCharitable Giving Provisions

• Charitable contributions directly from IRA

• Documentation required for monetary donations

• Donated items must be in “good” condition

529 Plan Benefits Made 529 Plan Benefits Made PermanentPermanent

• Tax-free withdrawals from 529 Plans are permanent

• Provision was set to expire in 2010

Tax Increase Prevention and Tax Increase Prevention and Reconciliation Act of 2005Reconciliation Act of 2005 New “Kiddie Tax” RulesNew “Kiddie Tax” Rules

•“Kiddie Tax” now in effect until age 18

•Makes income shifting to children less advantageous

IRA ConversionsIRA Conversions

• Convert traditional IRAs to Roth IRAs in 2010

• Qualified retirement plans to Roth IRAs in 2010

• Tax liability can be spread over two years

Tax Breaks for Energy Tax Breaks for Energy EfficiencyEfficiency

• A credit of up to $3,400 for the purchase of hybrid or alternative fuel vehicle

• Energy efficient home improvements may earn $500 credit

• Purchase of solar water heaters may garner a credit of up to $2,000

Extended Tax BreaksExtended Tax Breaks

• Option to deduct sales tax instead of state and local taxes

• Higher education tuition deduction

• Out-of-pocket classroom expense deduction

• Be sure to consult www.irs.gov for more information

Filing Basics Filing Basics Filing StatusFiling Status

• Married filing jointly

• Married filing separately

• Single

• Head of Household

• Qualifying widow(er)

2006 Tax Rates2006 Tax Rates

• 10%• 15%• 25%• 28%• 33%• 35%

Standard DeductionStandard DeductionFiling Standard Status Deduction

Single $ 5,150Married filing jointly $10,300Married filing separately $ 5,150Head of Household $ 7,550Qualifying widow(er) $10,300

Standard DeductionStandard Deduction

Taxpayers 65 and older and/or blind get an additional standard deduction

• Married - $1,000• Single or Head of Household - $1,250

Itemizing DeductionsItemizing Deductions

• An alternative to the standard deduction• Use when these deductions exceed standard deduction• Phase-out rules apply

-- Single/joint/head of household -- $150,500

-- Married filing separately -- $75,250

Personal ExemptionPersonal ExemptionFiling Status Phase-out Phase-out

starts ends

Joint return $225,750 $348,250Head of Household $188,150 $310,650Single $150,500 $273,000Married filing $112,875 $174,125separately

Timing Timing StrategiesStrategies

Control tax bill by –• Deferring income, such as bonuses• Accelerating deductions, such as qualified charitable contributions• Bunching deductions that are based on a percentage of AGI

Tax Strategies for LifeTax Strategies for Life

• Family• Education• Home• Investments• Retirement

• Child Credit• Adoption Credit• Dependent Care Credit• Earned Income Credit• Shifting Income

Family StrategiesFamily Strategies

Child CreditChild Credit

• Child must be under 17 at year end• Child must be claimed as a dependent• $1,000 credit per child• Reduces tax bill dollar-for-dollar• Phase-out for higher income families

Adoption CreditAdoption Credit

• Credit of up to $10,960 per eligible child• Exemption for first $10,960 reimbursed by employer• Parents adopting special needs child get full credit, regardless of actual expenses

Dependent Care CreditDependent Care Credit

• Child must be under 13 and a dependent• Tax credit from 20% to 35% of qualifying expenses• Use up to $3,000 of expenses ($6,000 for two or more dependents) to calculate credit• Not restricted to children

Family Size Maximum Credit

Two or more $4,536children

One child $2,747

Earned Income CreditEarned Income Credit

Shifting IncomeShifting Income

• Consider gifts to children – up to $12,000 without being subject to gift tax

• Hire your children• First $5,150 earned by each child is tax free• Not subject to kiddie tax

• Hope Credit worth up to $1,650 per student, per year

• Applies to first two years of college only

• Phase-out applies

Single -- $45,000 -- $55,000

Joint -- $90,000 -- $110,000

Education StrategiesEducation StrategiesTax CreditsTax Credits

Tax CreditsTax Credits

• Lifetime Learning Credit of up to $2,000 per year• Applies to undergraduate, graduate and professional courses• Phase-out applies

Student Loan DeductionStudent Loan Deduction

• Deduct up to $2,500• No need to itemize• No limit on repayment period length• $50,000 to $65,000 – phase-out range for single filers• $105,000 to $135,000 – phase-out range for married filing jointly

Higher Education Tuition Higher Education Tuition DeductionDeduction

• Deduct up to $4,000• Phase-out limits apply

Single: $65,000 -$80,000Married: $130,000 - $160,000

• No need to itemize• Visit www.irs.gov for more information

Homeowner Strategies Homeowner Strategies DeductionsDeductions

• Mortgage interest on first and second homes• Up to $100,000 in home equity loan or line of credit interest• Points paid on mortgage or refinancing• Real estate property taxes

Selling Your HomeSelling Your Home

• Exclude up to $250,000 in capital gains from sale of home; $500,000 for joint filers• Must own and use home as principal residence for two out of five years• Eligible only once every two years• Reduced exclusion available

Investment Strategies Investment Strategies DividendsDividends

• Top dividend tax rate of 15%• Rate is 5% for taxpayers in 10% and 15% brackets• Check ex-dividend date• Does not apply to interest payments

Capital Gains TaxCapital Gains Tax

• Maximum tax rate on long-term gains is 15%• 5% for taxpayers in 10% and 15% brackets• Asset must be held more than one year• Does not apply to collectibles

Offset Capital Gains with LossesOffset Capital Gains with Losses

• Capital losses offset capital gains• $3,000 ($1,500 for married, filing

separately) in net capital losses can be deducted against ordinary income

• Beware of wash sale rule

Retirement StrategiesRetirement StrategiesEmployer-Sponsored PlansEmployer-Sponsored Plans

• Contributions help reduce tax bill• Take advantage of employer matches• $15,000 is 2006 maximum contribution• $5,000 additional contribution for age 50 and older• New for 2006 – “Roth 401(k)”

IRAsIRAs

• $4,000 is maximum 2006 contribution• $1,000 additional catch-up contribution for age 50 or older• Phase-out applies• Open by April 16, 2007

• C Corporation• S Corporation• Partnership• Limited Liability Company• Sole proprietor

Business StrategiesBusiness StrategiesStructureStructure

Expensing DeductionExpensing Deduction

• Deduct up to 100% of the cost of up to $108,000 in property• Applies to new or used property• Equipment must be put into service by December 31, 2006• Now applies to software• Phase-out rules apply

Additional Business StrategiesAdditional Business Strategies

• Deduct 100% of health insurance costs if self-employed• Defer income and accelerate deductions• Write off bad debt• Make the most of business-related deductions – travel, auto, meals and entertainment and interest expenses

Year-End TipsYear-End TipsCharitable DeductionsCharitable Deductions

•Donate appreciated property and avoid capital gains tax

•Donate clothing, household goods, furniture in good condition and deduct fair market value

•Volunteer your time and deduct qualified travel and related expenses

Flexible Spending AccountsFlexible Spending Accounts

• Reduce taxable income• Use up remaining 2006 balances• Over-the-counter drugs are now allowable

Avoid AMTAvoid AMT

AMT triggers:• Higher than average dependency exemptions• Large deductions for state and local income taxes and real estate taxes• High miscellaneous itemized deductions and medical expenses• Incentive stock options

• Focus on tax savings year-round

• Consider year-end opportunities • Get help if you need it

Planning for SuccessPlanning for Success