Year End Planning
Dear Clients and Friends,
This year we have had important changes in the tax law, and Congress hopes to make even more changes. The Tax Increase Prevention and Reconciliation Act changed the age threshold for the “kiddie tax,” extended the lower rates on dividends and long-term capital gains through 2010, and will end in 2010 the $100,000 income limit for converting a traditional IRA to a Roth IRA.
The Pension Protection Act made permanent several provisions that were to expire soon, including Roth 401(k)s, the saver’s credit, the retirement plan start-up credit, the tax-favored treatment of Section 529 college plans, and higher contribution limits to retirement plans. It also changed the rules for charitable contributions.
Constant tax revision makes planning essential if you want to keep your tax bill as low as the law allows. This Letter is being sent to alert you to tax changes and to encourage you to make time now to do some year-end and longer-term tax planning.
Please call if you have questions after reading this Letter or if you would like to get together to review your tax situation. And, by all means, pass this Letter along to friends or associates who might be interested in this tax information.
For a lower 2006 tax bill, make time now for planning. There’s good news and more good news in store for your year-end tax planning. First, if you act now, you still have time to make planning moves that will save you money on your 2006 return. And second, recently enacted tax laws may provide new tax-saving options.
Here are some sensible year-end strategies to consider.
· Track your income
Knowing where you stand can influence the way you recognize income for the remainder of the year. For example, you might choose to postpone income to avoid missing out on certain deductions, credits, and other tax breaks that are limited by adjusted gross income levels.
Directing more of your pay to your retirement account for the last quarter of 2006 can help you claim larger benefits by reducing current-year taxable income. You can deposit as much as $15,000 in your 401(k) for 2006, plus a catch-up contribution of $5,000 if you’re age 50 or older. Contribute to a deductible IRA if you qualify.
Additional methods for postponing income that require advance planning include structuring eligible property sales to qualify for installment treatment and trading one property for another in a like-kind exchange.
· Adjust your investments
Schedule your annual investment rebalancing before year-end to take advantage of tax-saving moves. If you discover you need to sell investments to keep asset allocations in line with your goals, try to offset gains with losses. Remember, you can apply up to $3,000 of capital losses against ordinary income, which can help reduce your tax bill.
Another tax-smart investing tactic: Keep an eye on your holding period when making sales. Gains on certain assets you’ve owned for more than a year are generally eligible for a favorable maximum tax rate of 15%.
Timing investment purchases can also result in savings. For instance, you might consider waiting to purchase shares in a mutual fund until after an expected year-end taxable distribution. Be aware of “wash sale rules” when buying securities, too. When you replace an investment with a substantially identical one within the 61-day period surrounding the sale, any loss is not currently deductible.
· Review charitable giving
Due to a new tax law, as of August 17, 2006, contributions of used clothing, furnishings, electronics, or other household items of minimal value will generally be nondeductible. The new rules state that such items must be in “good” condition to qualify for a charitable deduction. If you’re planning to itemize, you may want to donate cash before year-end instead of these items.
· Check special breaks
A recent change in the charitable contribution rules that provides a potential tax planning opportunity involves your individual retirement account. In 2006 and 2007, if you’re over age 701/2, you can make contributions directly from your IRA to a qualified charity. The amount you donate is not included in your income, but does count as part of your required minimum distribution.
This break means you can meet the annual distribution requirement for your traditional IRA without incurring tax on as much as $100,000. While you won’t get an itemized charitable deduction for these contributions, now’s the time to figure out whether the reduction in income and the related tax is more advantageous.
· Save energy and taxes
Install energy efficient improvements in your main residence by December 31, and you may be able to take a one-time credit of as much as $500 on your 2006 tax return. Qualifying purchases include insulation systems, exterior windows and doors, and metal roofs. There’s also a credit available (up to a maximum of $2,000) for solar water heaters. Check into the credit of up to $3,400 for buying a fuel efficient hybrid vehicle.
· Check your business situation
Accelerating business income into the current year may make sense in certain situations, such as when you could lose deductions due to hobby loss rules. This strategy can also give you more access to breaks such as the manufacturing deduction and the immediate expensing of certain business assets.
Are you on track to make the most of the Section 179 deduction? For 2006 you can write off up to $108,000 of equipment and software that you purchase and use in your business.
What about your deduction for retirement plan contributions? Set up a qualified plan before December 31, and you can make the contribution early next year while still garnering the deduction for 2006.
Paying regular business expenses prior to year-end can help lower your taxable income, too, even if you put them on your credit card in December and write the check in January. While you’re reviewing business expenses, update your corporate minutes to substantiate deductions. Additionally, consider increasing your basis in S corporations or partnerships as necessary to benefit from losses.
· Also consider these moves
If necessary, adjust your withholding before year-end to avoid tax underpayment penalties.
Avoid the marriage penalty. The standard deduction and 15% tax bracket for couples are double those of single taxpayers. But that doesn’t eliminate the marriage penalty for working couples in tax brackets above 15%. If a wedding or divorce is in your year-end plans, you might save taxes by changing the date.
If you turned 701/2 in 2006, you have until December 31 to decide whether to take your first required IRA distribution this year. You can postpone your first distribution until next April, but then you’ll have to take two distributions in 2007. Unless you’re still working, these rules also apply to other retirement plans (except Roth IRAs).
Use this year’s $12,000 gift tax exclusion. If you make annual gifts to family members or others, make sure you complete your gifts for 2006 by December 31.
The information contained on this site should in no way be considered to be professional advice in the form of either tax, accounting, or legal service or consultation. You should always consult with a professional familiar with your individual circumstances before making any specific decisions related to accounting, tax, or legal matters.
This year we have had important changes in the tax law, and Congress hopes to make even more changes. The Tax Increase Prevention and Reconciliation Act changed the age threshold for the “kiddie tax,” extended the lower rates on dividends and long-term capital gains through 2010, and will end in 2010 the $100,000 income limit for converting a traditional IRA to a Roth IRA.
The Pension Protection Act made permanent several provisions that were to expire soon, including Roth 401(k)s, the saver’s credit, the retirement plan start-up credit, the tax-favored treatment of Section 529 college plans, and higher contribution limits to retirement plans. It also changed the rules for charitable contributions.
Constant tax revision makes planning essential if you want to keep your tax bill as low as the law allows. This Letter is being sent to alert you to tax changes and to encourage you to make time now to do some year-end and longer-term tax planning.
Please call if you have questions after reading this Letter or if you would like to get together to review your tax situation. And, by all means, pass this Letter along to friends or associates who might be interested in this tax information.
For a lower 2006 tax bill, make time now for planning. There’s good news and more good news in store for your year-end tax planning. First, if you act now, you still have time to make planning moves that will save you money on your 2006 return. And second, recently enacted tax laws may provide new tax-saving options.
Here are some sensible year-end strategies to consider.
· Track your income
Knowing where you stand can influence the way you recognize income for the remainder of the year. For example, you might choose to postpone income to avoid missing out on certain deductions, credits, and other tax breaks that are limited by adjusted gross income levels.
Directing more of your pay to your retirement account for the last quarter of 2006 can help you claim larger benefits by reducing current-year taxable income. You can deposit as much as $15,000 in your 401(k) for 2006, plus a catch-up contribution of $5,000 if you’re age 50 or older. Contribute to a deductible IRA if you qualify.
Additional methods for postponing income that require advance planning include structuring eligible property sales to qualify for installment treatment and trading one property for another in a like-kind exchange.
· Adjust your investments
Schedule your annual investment rebalancing before year-end to take advantage of tax-saving moves. If you discover you need to sell investments to keep asset allocations in line with your goals, try to offset gains with losses. Remember, you can apply up to $3,000 of capital losses against ordinary income, which can help reduce your tax bill.
Another tax-smart investing tactic: Keep an eye on your holding period when making sales. Gains on certain assets you’ve owned for more than a year are generally eligible for a favorable maximum tax rate of 15%.
Timing investment purchases can also result in savings. For instance, you might consider waiting to purchase shares in a mutual fund until after an expected year-end taxable distribution. Be aware of “wash sale rules” when buying securities, too. When you replace an investment with a substantially identical one within the 61-day period surrounding the sale, any loss is not currently deductible.
· Review charitable giving
Due to a new tax law, as of August 17, 2006, contributions of used clothing, furnishings, electronics, or other household items of minimal value will generally be nondeductible. The new rules state that such items must be in “good” condition to qualify for a charitable deduction. If you’re planning to itemize, you may want to donate cash before year-end instead of these items.
· Check special breaks
A recent change in the charitable contribution rules that provides a potential tax planning opportunity involves your individual retirement account. In 2006 and 2007, if you’re over age 701/2, you can make contributions directly from your IRA to a qualified charity. The amount you donate is not included in your income, but does count as part of your required minimum distribution.
This break means you can meet the annual distribution requirement for your traditional IRA without incurring tax on as much as $100,000. While you won’t get an itemized charitable deduction for these contributions, now’s the time to figure out whether the reduction in income and the related tax is more advantageous.
· Save energy and taxes
Install energy efficient improvements in your main residence by December 31, and you may be able to take a one-time credit of as much as $500 on your 2006 tax return. Qualifying purchases include insulation systems, exterior windows and doors, and metal roofs. There’s also a credit available (up to a maximum of $2,000) for solar water heaters. Check into the credit of up to $3,400 for buying a fuel efficient hybrid vehicle.
· Check your business situation
Accelerating business income into the current year may make sense in certain situations, such as when you could lose deductions due to hobby loss rules. This strategy can also give you more access to breaks such as the manufacturing deduction and the immediate expensing of certain business assets.
Are you on track to make the most of the Section 179 deduction? For 2006 you can write off up to $108,000 of equipment and software that you purchase and use in your business.
What about your deduction for retirement plan contributions? Set up a qualified plan before December 31, and you can make the contribution early next year while still garnering the deduction for 2006.
Paying regular business expenses prior to year-end can help lower your taxable income, too, even if you put them on your credit card in December and write the check in January. While you’re reviewing business expenses, update your corporate minutes to substantiate deductions. Additionally, consider increasing your basis in S corporations or partnerships as necessary to benefit from losses.
· Also consider these moves
If necessary, adjust your withholding before year-end to avoid tax underpayment penalties.
Avoid the marriage penalty. The standard deduction and 15% tax bracket for couples are double those of single taxpayers. But that doesn’t eliminate the marriage penalty for working couples in tax brackets above 15%. If a wedding or divorce is in your year-end plans, you might save taxes by changing the date.
If you turned 701/2 in 2006, you have until December 31 to decide whether to take your first required IRA distribution this year. You can postpone your first distribution until next April, but then you’ll have to take two distributions in 2007. Unless you’re still working, these rules also apply to other retirement plans (except Roth IRAs).
Use this year’s $12,000 gift tax exclusion. If you make annual gifts to family members or others, make sure you complete your gifts for 2006 by December 31.
The information contained on this site should in no way be considered to be professional advice in the form of either tax, accounting, or legal service or consultation. You should always consult with a professional familiar with your individual circumstances before making any specific decisions related to accounting, tax, or legal matters.
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