Click
here for 2007 Newsletter (pdf format)
Hello All,
The period from now until the end of 2006 holds unique
opportunities for you to save taxes. It is the ideal time
of year for tax planning for at least three reasons:
- You finally have a good
fix on what your taxable income and expenses are shaping
up to be for 2006 and for several months into 2007, allowing
you to effectively use acceleration or deferral techniques
to maximize your overall tax savings between 2006 and
2007.
- Time still remains to
take advantage of new-for-2006 tax laws before the door
to do so for the 2006 tax year shuts tight behind you.
- Last, but not least,
you can use this time to fully prepare for new tax breaks
that will begin immediately on January 1, 2007.
Having only a few months left to the year, you usually
can forecast fairly well what income and deductions you
will be reporting on your 2006 tax return next April if
things continue the way they have been. You can also forecast
fairly well your income and expense situation for the first
few months of 2007. Therein lies a golden opportunity to
shift some income or expenses into one year or the other
depending on what will save you the most overall taxes.
Income and expense shifting is the "bread and butter" of
year-end tax planning. It requires information gathering
and a proactive approach in determining your final tax
bill. It allows you to do something about your taxes rather
than "just writing the check out" to the IRS
at tax time.
The year-end techniques that may be used to accelerate
or defer income and/or expenses are as varied as there
are situations to be addressed. Some of the more frequently
used strategies include:
- Smoothing
out taxable income between 2006 and 2007 by accelerating
and postponing transactions that either produce income
or yield deductible expenses;
- Matching
long and short term capital gains with losses to lower
overall capitals gains tax and possibly maximize the
$3,000 amount of capital losses that can offset other
income;
- Bunching
deductible expenses into one or the other year depending
upon whether the standard deduction may be taken in one
of the years, or whether the adjusted gross income limits
for medical (7.5 percent) or miscellaneous itemized deductions
(2 percent) may be more easily met;
- Maximizing
the tax law limits on annual contributions to your retirement
plan accounts, since one year's limits cannot be added
to the next year's when not taken in time;
- For
businesses, taking advantage of the full $108,000 expensing
deduction for 2006 and the $112,000 deduction available
for 2007; and
- If
you're an S corp shareholder, making certain that your
stock basis is high enough to entitle you to any available
loss deductions.
The tax law changes constantly. New tax breaks—and
pitfalls—come and go all the time. 2006 is no exception.
Literally scores of changes have been made to the tax law
that impact 2006 tax year returns. Among those most notable
for impacting the largest groups of taxpayers are:
- Start
of the extended "kiddie tax" under which a
child's income is taxed at a parent's tax rate, under
age 18 (up from age 14 and applied retroactively from
January 1, 2006);
- Start
of the hybrid vehicle credit available to purchasers,
along with its reduction once a manufacturer sells more
than 60,000 units (which is already the case for Toyota
hybrids starting October 1, 2006);
- Start
of the residential energy credits of $500 for residential
energy improvements, $2,000 for solar equipment and $500
for fuel cells per half kilowatt capacity, restricted
to 2006 and 2007 only;
- Start
of strict limitations on the quality of clothing and
household items that are entitled to a charitable deduction,
beginning August 17, 2006;
- Start
of the new (and generally unfavorable) limitations on
the housing allowance for those working abroad, retroactive
to January 1, 2006; and
- Start
of allowing direct, tax-free charitable contributions
from IRAs for those 70 1/2 and older, for 2006 and 2007
only.
Despite the number of new provisions that began this year,
2006 does not have a lock on recent changes. 2007 is set
to inaugurate several changes of its own, even before tax
legislation in 2007 will likely produce still more changes.
Here's a list of some of the major ones:
- Starting
in 2007, cash donations of any size must to be backed
up by paperwork that includes either a cancelled check
or a written note from the charity indicating amount,
date and the name of the charity;
- Starting
in 2007, businesses will face a more generous, but stricter,
domestic production activities deduction that includes
a rise in the deduction cap from three percent to six
percent and a restriction of the W-2 wage limitation
to manufacturing activities only;
- Starting
in 2007, heretofore fixed contribution limitations on
individual retirement accounts will be inflation adjusted,
including Roth IRAs income limits of $156,000 (formerly
150,000) for married individuals filing jointly and $99,000
(formerly $95,000) for most others;
- Starting
in 2007, inflation adjustment of the Saver's Credit for
lower income taxpayers means higher income levels will
qualify (for example, joint filers will get a 50 percent
credit with income up to $31,000, 20 percent up to $34,000
and 10 percent up to $52,000).
Also noteworthy, starting in 2010 there will be no maximum
income level to restrict conversion of regular IRAs into
Roth IRAs. Maximizing that opportunity, however, can begin
immediately for those taxpayers presently over that limit.
This strategy calls for making annual contributions to
a nondeductible IRA that can then be converted into a Roth
IRA in 2010 when the income cap is lifted.
Congress has had an extremely active year already, already
passing two major tax bills: the Tax Increase Protection
and Reconciliation Act and the Pension Protection Act .
Its tax revision activities, however, may not be over.
That creates a particularly urgent need for this office
to continue to monitor the situation in Washington and
prepare you for quick action should Congress act in a way
that affects you directly.
In that regard, there are several key provisions now under
consideration in Congress:
- Estate
and gift tax repeal or raising the exemption to $5 million;
- Retroactive
extension back to January 1, 2006 of the state and local
sales tax itemized deduction option;
- Retroactive
extension back to January 1, 2006 of the above-the-line
higher education tuition deduction and the teacher's
classroom expense deduction;
- Extension
and/or modification of a host of tax breaks for business,
including the Work Opportunity and Welfare-to-Work tax
credits, Archer Medical Savings Accounts; the research
tax credit; and
- Further
closing of the SUV purchase loophole that has continued
to allow up to a $25,000 expensing deduction in the first
year of business use.
The alternative minimum tax (AMT) was designed to ensure
that wealthy taxpayers were not able to escape taxation
by exploiting deductions. However, the AMT has not been
appropriately indexed for inflation, which means that it
affects a growing number of taxpayers every year. Congress
has passed a few legislative "patches" to keep
it from hitting too many people, the latest in 2006 to
cover 2006.
While the patch maintains the status quo, that situation
does not prevent a growing number of taxpayers of falling
victim to the AMT each year. 2006 and 2007 will prove to
be "record years" for the IRS's collection of
AMT.
To make sure you don't wind up paying AMT if you can avoid
it, start by projecting your income for the rest of this
year and next, at the least. That will help figure out
how likely it is that you need to address the situation.
Some of the items to consider regarding AMT are:
- State
and local taxes;
- Home
equity loans and other mortgage interest not incurred
in buying, building or improving your principal residence;
- Incentive
stock options -- these may generate AMT income even when
sold at a loss;
- Private
activity bonds; and
- Other
itemized deductions.
Give our office a call (702) 658-9535
All of the tax opportunities and considerations at this
time of year can be a lot to remember, and the details
of all these provisions can make it even more complicated.
Fortunately, you won't have to remember all of them by
yourself — that's why you hire a tax professional.
The two most important pieces of tax advice to keep for
any year are to keep good records and ask questions.
We look forward to hearing from you.
Sincerely yours,
Jake Worline,
J W Enterprises, LLC |
