Tax Tip for
Year-end 2006
Year End Tax
Planning Strategies
The 4th
quarter is the ideal time to discuss year-end tax planning strategies and
consider recent tax law changes.
Tax Law Changes.
2006 was a
busy year for new tax laws.
The month of May brought us the
Tax Increase Prevention and Reconciliation Act
of 2006, and
August brought us the Pension Protection Act of 2006. In addition,
the Energy Tax Incentives Act of 2005 became effective January 1,
2006. Please review the highlights of these three new tax laws located on the
Tax Tip section of our website,
www.patinella.com.
Some of the items that you may want to pay special attention to are as follows:
1)
Charitable
contribution reform. The new law (a) allows for tax-free distributions from IRAs
for charitable purposes of up to $100,000, effective for 2006 & 2007; (b)
prohibits deductions for contributions of clothing and household items unless
they are in “good used condition or better”. We recommend taking pictures to
document the nature and condition of the donated items; (c) requires that in the
case of a charitable contribution of money, regardless of the amount, the donor
must maintain a cancelled check, bank record or receipt from the donee
organization. Therefore, if making cash contributions to churches, temples,
etc., we recommend using envelopes with your name and address so you can request
a statement at the end of the year.
2)
Kiddie Tax.
The age limit below which a child's income from investments is taxed at the
parents' rates has been raised from 14 to 18.
3)
Roth IRA.
Under current law, only taxpayers with $100,000 or less in modified adjusted
gross income (MAGI) can convert a regular IRA into a Roth IRA. Beginning in
2010, taxpayers with more than $100,000 of MAGI will also be able to convert a
regular IRA into a Roth IRA. To make such conversions more attractive in 2010,
the new law permits taxpayers who convert in 2010 to spread the income and
resulting tax payments on the converted funds over two years—2011 and 2012.
4)
New
tax credits for (a) solar and
fuel-cell equipment, and (b) energy efficient improvements.
5)
Telephone
excise tax refund.
As detailed in our October 2006 Tax Tip on
www.patinella.com, the IRS will be issuing one-time refunds in the form of a
refundable tax credit on 2006 tax returns, for certain telephone excise taxes
collected. Individuals will be able to claim a safe harbor credit ranging from
$30 - $60 depending on the number of personal exemptions claimed on their 2006
income tax return. As an alternative, individuals may claim the actual amount of
tax paid for nontaxable services by reviewing their telephone bills from Feb.
28, 2003, through Aug. 1, 2006. Businesses (including sole proprietors,
corporations, and partnerships, as well as trusts and estates) and tax-exempt
organizations may use an IRS provided formula to estimate the amount of their
telephone excise tax refunds. Please refer to the
October 2006 Tax Tip
for details.
Year-end Planning.
Year-end planning may turn out to be more of a “last minute” challenge this year
than most because many deductions that expired at the end of 2005 may be
retroactively extended by Congress in time for you to capitalize on them before
the end of 2006. These expired tax breaks include the above-the-line deduction
for educators, the above-the-line deduction for higher education expenses, and
the election to deduct state and local general sales taxes instead of state and
local income taxes. Some other year-end tax planning strategies to consider:
-
Depreciation: Consider purchasing before year-end furniture and equipment
which will be used for business purposes. Internal Revenue Code (IRC) section
179 allows businesses to elect to expense (rather than depreciate over several
years) in the year of purchase up to $108,000 of the cost of qualifying fixed
assets. Note that this section 179 allowance has recently been extended through
2009.
For SUVs weighing more than 6,000 lbs and less than
14,000 lbs, IRC 179 depreciation is limited to $25,000. As always, please
contact us prior to making major purchases so we can ensure that you receive the
maximum tax benefit.
-
Postpone income until 2007 and accelerate
deductions into 2006 to lower your 2006 tax bill. Postponing tax generally is a
primary goal of year-end tax planning. It's particularly effective if it helps
you to claim larger deductions, credits, and other tax breaks that are phased
out over varying levels of adjusted gross income. These include Roth IRA
contributions, conversions of regular IRAs to Roth IRAs, child credits, higher
education tax credits, and deductions for student loan interest.
One
opportunity for accelerating deductions that is often overlooked is to pay your
anticipated Arizona tax liability before year-end. By paying your state tax
liability prior to year-end, you accelerate into 2006 the itemized deduction for
state taxes paid, rather than having to wait to claim the deduction on your 2007
tax return.
-
Bunch deductible expenses such as medical expenses, charitable
contributions, mortgage interest and investment expenses into one year to
maximize your itemized deductions.
-
Harvest capital losses. If you are holding onto stocks or mutual funds in
nonqualified accounts (i.e. not a retirement account, annuity, or other tax
deferred account), and have lost value since original purchase, consider selling
before year-end to capture the capital losses for tax purposes.
-
Take advantage of the Arizona School Tax Credits. Qualifying
contributions made before December 31, 2006 will generate a dollar-for-dollar
state tax credit as well as a federal charitable contribution itemized
deduction. The total available credits have increased for 2006. Maximum
donations to a qualifying private school are $500, or $1,000 if married
filing jointly (MFJ). Maximum donations to a qualifying public school are
$200, or $400 if MFJ.
-
Take advantage of the Arizona Charitable Tax Credit. Similar to the
School Tax Credits, qualifying contributions made before year-end can generate a
state tax credit as well as a federal charitable contribution itemized
deduction. The total available credit is $200, or $400 if MFJ. Contributions
made to charities that assist the Working Poor qualify. A list of these
charities appears on the Arizona Department of Revenue website at
http://www.azdor.gov/Refunds and Credits/charitablecredits.htm. The one twist to this
credit is that in order to qualify, your total 2006 charitable contributions
must exceed your baseline year (typically 1996) charitable contributions.
Other planning areas that we
can assist with throughout the year include:
-
Stock Option Planning
-
Retirement Planning
-
Mortgage Planning
-
College Planning
-
Estate Planning
The tax planning strategies
mentioned in this letter are general suggestions that may not apply to every
taxpayer.
By doing year-end tax
planning now, we can take a proactive approach to reducing your taxes, rather
than just being reactive. Please call us if you have any questions or if we can
be of further assistance.
