MORE RECENT TAX LAW CHANGES

by Andrew D. Schwartz, CPA

Last month, President Bush signed the second major Tax Act of the year into law.  Here are some of the provisions of the Pension Protection Act of 2006 that might affect you.

• Increased Retirement Plan Contribution Limits To Continue Past 2010: The 2001 Tax Act, which increased the allowable contributions into employer sponsored retirement plans and IRAs, was slated to sunset after 2010.  Thanks to the most recent tax law change, the higher annual contribution limits of $5,000 into your IRA and $15,000 into your employer sponsored 401(k) or 403(b) plans are here to stay, and will soon be indexed for inflation.  Same goes for the "catch-up" contributions available to people 50 or older.

• Direct Deposit of Your Tax Refund Into An IRA: On your 2006 tax return, you'll be able to instruct the IRS to directly deposit your tax refund into your IRA.  The IRS has already created Form 8888 that allows you to designate your refund into as many as three different accounts.

• Direct Rollovers Into A Roth IRA No Longer Limited to IRAs:  You can now make a direct rollover from an eligible employer sponsored retirement plan into a Roth IRA.  Previously, you could only convert money held in an IRA to a Roth IRA.  And remember, the previous Tax Act signed into law on May 17, 2006 eliminates the $100,000 income limitation for people looking to convert their IRAs to a Roth IRA, effective in 2010. 

• Expiring Savers Tax Credit Made Permanent:  The Tax Act reinstated and made permanent the Savers Credit which was on track to expire on December 31, 2006.  This year, if your income doesn't exceed $25,000 ($50,000 if married), you're eligible for a tax credit of up to $1,000 by contributing at least $2,000 into an IRA or an employer sponsored retirement plan.  Check out Form 8880 available at www.irs.gov for more information on this tax credit.

• Threshold For Annual 5500-EZ Filing Increased:  One-participant retirement plans will not be required to file a Form 5500-EZ unless total Plan assets exceed $250,000, subject to certain limitations.  The threshold had previously been $100,000 for as long as I remember.

• Qualified Distributions Made From 529 Plans Continue to Be Tax-Free After 2010.  Prior to the 2001 Tax Act, distributions made from a 529 Plan to pay for your child's college education were taxed at your child's tax rate.  Through 2010, qualified 529 distributions would be tax-free, and then the rules were on track to revert back to the pre-2001 rules.  This Tax Act made tax-free distributions from 529 plans permanent.

The Pension Protection Act of 2006 made numerous changes to the U.S. Income Tax rules and will take quite a while for taxpayers and tax professionals to digest.  While many of these provisions will help save you taxes, it looks like tax simplification has once again been overlooked.

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BIG CHANGES TO THE CHARITABLE DONATION RULES

by Andrew D. Schwartz, CPA

Early last month, Congress passed the Pension Protection Act of 2006, and on August 17th, President Bush signed the bill into law. In addition to sweeping changes to the pension plan rules, this Act also makes a few major changes to the tax deduction you can now claim for your charitable donations.

Good or Better

One big change applies to donations of clothing and household items. As of August 17th, you can only claim a deduction for donated goods that are in good condition or better.  If you're  wondering who will be responsible for determining the condition of your donated goods, keep an eye out for the guidelines to be issued by our friends at the IRS.

As always, prior to dropping off your goods to a charity, don't forget to make a list of what you donate, including each item's condition and approximate fair market value, and file that list along with your other tax documents. Keep in mind that unless an item is brand new or in excellent condition, it is probably worth no more than one-quarter to one-third of its original cost.

To better comply with this new standard, consider taking a few photos of the goods donated, and staple those photos to the list you prepared.  If you ever get audited, the IRS will most likely disallow the complete deduction claimed unless you are able to substantiate that the condition of the donated goods was good or better.

To claim a deduction in excess of $500 for donated goods, you need to complete and attach a Form 8283 to your federal income tax return. And if you're looking to claim a deduction in excess of $5,000, you generally need to attach a written appraisal to your tax form as well. More information about non-cash contributions can be found in IRS Publication 526, Charitable Contributions, available at www.irs.gov. Give the IRS time to update this publication to reflect the new rules, however.

Other Changes

This Tax Act also changes a few other of the charitable donation rules as follows:

• Effective August 17th, you must maintain a cancelled check, bank record, or receipt from the charity substantiating the date and amount of any donation you're claiming.

• Through 2007, people 70 or older can withdraw up to $100,000 per year from their IRAs, tax-free, provided they donate that money to a qualified charitable organization. 

What happens if you overstate the amount of your non-cash charitable donation?  The Pension Protection Act of 2006 increases the penalties you might pay.  Expect the IRS to assess a penalty of 20% of the understated tax liability if you overstate your charitable donation by at least 150%, and a penalty of 40% if you overstate the deduction by 200% or more. 

First Cars, Now Clothes

For years, the IRS has been concerned that many taxpayers were routinely exaggerating the deduction they claimed for their non-cash contributions.  So in October 2004, The American Job Creations Act changed the rules for people who donate their vehicles.  Effective January 1, 2005, the amount you can deduct for a donated vehicle is limited to what the charitable organization sells it for, and not its “Blue Book” value. 

This year, the Pension Protection Act of 2006 limits the deduction you can claim for your clothing and household items.  But unlike vehicles that have a secondary market allowing charities to easily establish a value for the donated vehicles, coming up with a standardized system to determine the condition and value of donated clothing and household items will most likely prove to be significantly more challenging.  It will be very interesting to see the guidelines issued by the IRS.

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TAX AND FINANCIAL PLANNING CALENDAR FOR SEPTEMBER, 2006

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2005 & 2006 TAX FACTS

• For 2005, the standard deduction for a single individual is $5,000 and for a married couple is $10,000. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2005, the personal exemption is $3,200. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $94,200 for 2006, up from $90,000 in 2005.
  
• The standard mileage rate is $.485 per business mile as of September 1, 2005 (after being $.405 per mile through August 31, 2005), and will then be $.445 per mile for 2006.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,000 for 2006.  And if you'll be 50 or older by December 31, 2006, you can contribute an extra $5,000 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $4,000 for 2006.  And if you turn 50 by December 31st, you can contribute an extra $1,000 for 2006.  You have until April 15, 2007 to make your 2006 IRA contributions. 

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copyright - 2006 - CPANiche, LLC

Tax and financial planning calendar for September, 2006


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