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MORE RECENT TAX LAW CHANGES
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.
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
BIG CHANGES TO THE CHARITABLE DONATION RULES
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
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
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.
This Tax Act also changes a few other of the charitable donation rules as
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
First Cars, Now Clothes
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.
TAX AND FINANCIAL PLANNING CALENDAR FOR
Saving and Investing
3rd qtr estimates due 9/15/06
If you participated in the NIH LRP during 2005, you have
until 9/30/06 to submit the paperwork to get back any additional taxes
owed to you by the NIH. One of the
MDTAXES CPAs can help you with this paperwork
- 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
- 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.
copyright - 2006 - CPANiche, LLC
Tax and financial planning calendar for September, 2006
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