Janell A. Israel & Associates
September Tax Newsletter
HAPPY LABOR DAY!
What's
New in taxes:
New Pension Law
Changes Some Tax Rules
In early August, Congress
passed a major new law on pension plans. But buried in the fine print were some
unexpected tax provisions. Some could affect your ability to claim
deductions for charitable contributions starting in 2007. And others change
the tax rules for retirement savings.
If you make charitable
contributions and claim them as itemized deductions, be aware of two changes:
* New rules apply to
contributions you make by cash or check, regardless of the amount. Starting in
2007, you'll need either a formal receipt from the charity,
or evidence such as a cancelled check or an entry in your bank records.
Previously, for amounts up to $250, you could rely on your own written records
provided they met certain standards.
* From now on you can
claim a deduction for used clothing or household items only if they are in
"good" condition. Unfortunately, the new law doesn't define
"good." To back up your deduction, you might want to snap a
photograph of the items using your digital camera or cell phone. Print it out
and keep it with the receipt.
Other changes affect
retirement saving. For example, if you change jobs, you might find yourself
automatically enrolled in the new company's 401(k). You'll have the ability to
opt out, of course, but it's part of a plan to
encourage higher participation. The new law also extends the ability to make
certain hardship withdrawals from 401(k) plans, and allows active-duty members
of the Reserves to make penalty-free withdrawals from IRAs and other plans.
If you think these
changes might affect you, please contact our office. We'll be happy to provide
more information tailored to your specific situation.
Take Action Now To
Trim 2006 Taxes
The end of the year will
be here before you know it. That means you should put some tax planning on your
agenda now. Here are some ideas you might consider to trim your 2006 taxes.
* Invest in
dividend-paying stocks. Because of the favorable 5% and 15% tax rates on
dividend income, holding stocks that pay dividends can reduce your taxes
immediately. This might make such investments more attractive than
interest-generating securities, such as bonds.
* Hold stocks long-term.
Dividends aren’t the only type of income given favorable tax treatment.
Long-term capital gains are also taxed at a maximum 15% tax rate. So when you
decide to sell stocks, bonds, or other investments, remember that meeting the
12-month holding period for long-term gains provides significant tax savings.
* Save for your
retirement. Make sure to take advantage of the more liberal contribution limits
to tax-deferred retirement accounts. By contributing to your employer-sponsored
retirement plan, such as a 401(k), 403(b), or 457 plan,
you’ll reduce your taxable income, and you’ll defer taxes on the
account until you take future distributions. With the 2006 contribution limits
raised to $15,000 for most plans, you could slash your tax bill simply by
saving for the future. And don’t forget: If you’re age 50 or older
in 2006, you can make an additional $5,000 “catch-up” retirement
contribution.
* Make your home
energy-efficient. New in 2006, you may claim a lifetime credit of up to $500
for making qualifying energy-saving improvements to your home. Qualifying
expenditures include installation of certain energy-efficient insulation
materials, exterior windows and doors, electric heat pumps, and central air
conditioning.
* Go solar. Also new for
2006, you may claim a 30% credit (with certain dollar limits) for installing
solar water-heating, photovoltaic, or fuel-cell equipment in your home. No
credit is allowed for equipment used to heat a swimming pool or hot tub.
* Buy an energy-efficient
car. A tax credit is available for a variety of alternative fuel vehicles. New
hybrid vehicles are eligible for a tax credit of up to $3,400, depending on the
vehicle’s fuel-efficiency. However, this credit is limited to the first
60,000 vehicles sold this year per auto manufacturer.
These are just a few
ideas that you should consider to cut your 2006 taxes. Contact our office for a
review of tax-cutters to consider in your particular situation.
New
Business:
Roth IRA Change
Important For Your Company's 40l(k) Plan
A new rule in 2006 lets 40l(k) plans offer employees the option of designating plan
contributions as Roth IRA contributions. The benefit of a Roth is that, though
the contribution isn't tax-deductible, qualifying distributions are completely
tax-free.
Many employers have been
reluctant to revise their 40l(k) plans to permit Roth
contributions by employees because Roth IRAs were scheduled to end after 2010.
Pension legislation
signed by President Bush on August 17 made Roth IRAs permanently available. So
if your company offers a 40l(k) to employees but you
haven't added the Roth option, you might want to reconsider. The new law means
Roth 401(k)s are here to stay.
What's
New in Finance: No estate tax change yet
The latest attempt to modify
the law on estate taxes failed to pass Congress last month. In an effort to
make the bill more acceptable, Congress had included an increase in the minimum
wage and extension of several expired and expiring tax breaks. Despite these
"sweeteners," the bill failed to attract the needed votes.
That leaves a confused
outlook for estate taxes over the next few years. Currently up to $2 million of
any individual's estate is exempt from tax. Above that amount, a top tax rate
of 46% applies. The exemption will increase to $3.5 million in 2009, and in
2010 there will be no estate tax. But only for that year.
Beginning in 2011, rates and exemptions are scheduled to return to more onerous
2001 levels.
Nobody thinks Congress
will let that happen. Expect another attempt to pass estate tax legislation in
the months ahead. For example, the recent proposal called for increasing the
exemption amount to $5 million for an individual, or
$10 million for a married couple. Above that exclusion amount, estates up to
$25 million would be taxed at the capital gains rate (currently 15%). These
numbers may change in any new proposal.
Meanwhile, don't ignore
estate planning completely. Even if your estate is small, you still need
certain basic estate planning documents. These include a will or trust, medical
directives, and guardianship directives for your minor children. Make sure
these items are up to date and let Congress worry about the tax rates.
Take
a Break
Carrying A Grudge
From Buddy Hackett. . ."Don't carry a grudge. While you're
carrying a grudge, the other guy's out dancing."
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The information
contained in this newsletter is of a general nature and should not be acted
upon in your specific situation without further details and/or professional
assistance. For more information on anything in the ONLINE ADVISOR, or for
assistance with any of your tax, business, or financial
strategy concerns, contact our office.
Notice required by
U.S. Treasury Regulations: Be aware that this communication is not intended to
be used, and it cannot be used, for the purpose of avoiding penalties under