Janell A. Israel & Associates
December 2006 Tax Newsletter
What's New in taxes:
More Wages Subject To Social Security Tax In 2007
The Social Security
Administration has published the maximum amount of earnings that will be
subject to social security taxes next year. The amount increases to $97,500, up
from $94,200 for 2006.
Employees will have a 6.2%
social security tax withheld from their paychecks on wages up to $97,500. Their
employers will pay an additional 6.2% on these wages. Self-employed taxpayers
will pay both employee and employer share for a total 12.4% tax on earnings up
to $97,500.
The maximum a wage earner
will pay in social security tax in 2007 will be $6,045, up from $5,840.40 in
2006. A self-employed taxpayer will pay a maximum of $12,090.
All wages in 2007 are
subject to a 1.45% Medicare tax; all self-employment earnings pay a 2.9%
Medicare tax.
Those receiving social
security will get a 3.3% cost of living increase in benefits for 2007.
Two 2006 Laws May Offer
New Tax Planning Opportunities
If you can name the two new
tax bills passed by Congress this year, you might be a master of trivia. But
there is nothing trivial about the Tax Increase Prevention and Reconciliation
Act and the Pension Protection Act. These laws could have an impact on your
taxes.
* Retirement planning
Those who have been shut out
of the Roth IRA conversion strategy because of the $100,000 income limitation
can now take another look at converting. Beginning in 2010, all taxpayers,
regardless of their income level, can convert their traditional IRA to a Roth
IRA. Although the conversion is taxable, the income and the resulting tax can
be averaged over two years.
Starting in 2007, inherited
retirement plans can be rolled over tax-free into a new IRA to defer
distributions. Previously, only surviving spouses were allowed this option. Nonspousal beneficiaries had to accept the distributions
— and pay the taxes due — within five years.A
2001 tax law set higher contribution limits for IRAs, SIMPLEs,
SEPs, 401(k)s, and 457 plans. But these larger
contribution amounts were set to expire after 2010 along with most of the other
provisions in the 2001 law. The Pension Act makes these higher contribution
limits permanent and generally indexes the limits for inflation in the future.
The saver’s credit
that provides for a credit of up to $1,000 annually for lower-income
individuals’ contributions to retirement plans is made permanent. The
income-based phase-out ranges for the credit will be indexed for inflation, a
change that will make the credit available to more taxpayers.
The tax credit for small
businesses that start a new retirement plan (up to $500 per year for three
years) is made permanent.
* College savings
Distributions from Section
529 plans used to pay for college expenses were scheduled to lose their
tax-free status after 2010. The Pension Act makes the tax-favored treatment for
529 plans permanent.
The age at which a
child’s excess unearned income is no longer taxed at the parents’
rate has been raised from 14 to 18. Besides costing you more tax, this change
might also modify how you fund your child’s college education. Instead of
shifting income-producing assets to a child, you may need to consider other
options.
* Charitable donations
Another new rule promises to
make IRAs powerful tools for charitable gift planning. Taxpayers age 70½ and
older will be allowed to make charitable donations directly from their IRA (up
to $100,000 annually) without paying tax on the distribution. What’s
more, the charitable payments satisfy the required annual distribution
obligation. Be aware that the law is valid only for 2006 and 2007.
Rules for cash donations
have been modified. The old law specified that charitable gifts over $250 must
be documented by the charity. Beginning in 2007, cash, check, and other
monetary donations of any amount can be deducted only if substantiated by a
bank record or written documentation from the charity.
Also, new rules govern
donations of used clothing or household items. Now you can claim a deduction
only if the items are in “good” condition. Unfortunately, the law
doesn’t define what is meant by “good.”
* Other provisions
Many of the provisions of
the recently passed bills either extended or made permanent rules that you may
have taken for granted, such as the 15% capital gains tax rate and the Roth
401(k). Other important provisions include automatic enrollment into 401(k)
plans, changes in retirement plan rollover rules, and rules that increase
federal oversight of charitable organizations. Call us today to review your tax
and financial situation under these recent changes.
New
Business:
IRS Announces Mileage
Rates For 2007
The IRS has issued the 2007
standard mileage rate that businesses can use to calculate the deductible costs
of driving an automobile for business.
Beginning January 1, 2007,
the standard mileage rate for business driving will be 48.5 cents a mile. This
represents an increase in the mileage rate from the 44.5 cents a mile allowed
in 2006. The rate increase is due to higher vehicle and fuel prices for the
year ending October 2006.
| Standard Mileage Rates | 2006 | 2007 |
| Business | $0.445 | $0.485 |
| Medical and Moving | $0.18 | $0.20 |
| Charitable | $0.14 | $0.14 |
If you have questions about
deducting vehicle expenses in your business, give us a call.
Don’t Overlook These
Business Tax Deductions
As a small business owner,
you probably don’t need one more thing to do during the busy holiday
season. But before you say goodbye to 2006, consider adding this: a search for
missing business tax deductions. Finding one of these deductions might give you
real tax savings.
Where do you start? First,
think about the things you use in your daily work life. Are you taking full
advantage of the home office deduction rules? If you use a portion of your home
exclusively and regularly as your principal place of business, you might
qualify. Similarly, the business use of your personal vehicle can be deducted.
While keeping track of business miles can be tedious, it can be worth the
effort come tax time.
Deductions you might not
have thought of include the business use of a personal cell phone and the
business portion of your monthly Internet access fee. Qualifying meals and
entertainment expenses are also deductible, including the cost of entertaining
at home — just as long as there is a legitimate business purpose.
Document your business
expenses. Knowing how an expense is deducted is also important. Some expenditures are only partially deductible as itemized
deductions, but may be fully deductible against self-employment income.
Examples include legal bills, tax return preparation fees, and work-related
publications. A word of caution: business expenses must be fully documented.
Proper accounting records are essential to take advantage of these write-offs.
Self-employed taxpayers
should also remember that 100% of health insurance premiums paid for themselves
and their families can generally be deducted from their business income.
If you are considering a
major business purchase, you might want to act before year-end. In 2006, up to
$108,000 of qualifying property can be expensed immediately. (If you operate in
a Hurricane Katrina-related Gulf Opportunity Zone, the limit is higher.)
One important way to save
taxes is to maximize your self-employed retirement plan contributions.
Otherwise, you might be leaving money on the table. And certain retirement plan
contributions can be made as late as the due date of your return, even with
extensions.
During this busy holiday
season, take time to give yourself a break — a tax break! Call us for a
year-end review to help you find those tax deductions you might otherwise miss.
What's
New in Finances:
Using Credit May Be
Getting Too Easy
If you’re concerned
about your financial well-being, you should probably think twice about using
your credit card for purchases under $25.
Credit card companies are
beginning to allow no-signature credit card purchases of less than $25 at
fast-food restaurants, movie theaters, pharmacies, and convenience stores.
While using your credit card for these small purchases may be extremely
convenient for both you and customers waiting in line behind you, they can add
up to significant amounts. Unless you always pay off your credit card in full
each month, these kinds of credit purchases can add to your debt load and
monthly interest charges.
According to CardWeb.com,
the average balance on credit cards has increased by 76% over the past ten
years.
Another thing to consider:
When you use your credit card for numerous small charges with no signature
required, you may find it hard to detect fraud when you review your monthly
credit card statement. Paying cash may be the wiser choice, and if you
don’t have the cash, maybe you shouldn’t make the purchase at all.
Give Financial Gifts This
When planning gifts for
children on your holiday list, you might want to think beyond the traditional
retail offerings. Consider financial gifts that can bestow benefits for many
years to come.
Some financial gift options
you might consider:
* IRAs (regular or Roth).
For 2006, you can contribute the lower of $4,000 or the earned income of the
child. An early financial start can produce amazing benefits from compounded
interest accumulated over several decades.
* Stocks or mutual funds.
Equities are a good way to introduce a child to the investment world. If you
give appreciated securities to a child or grandchild who is 18 or older, it
could allow the child to enjoy a lower capital gains rate when the shares are
sold.
* Collectible stock
certificates. Vibrant framed certificates are available for many companies. A
Disney, Dream Works, or Coca-Cola stock certificate can provide a colorful
reminder of the importance of investing for the future.
* Collectibles. Postage
stamps or coin collection kits can provide years of enjoyment and form the
basis for some life-long hobbies. An interesting gift idea is an official
Please call us if you would
like to review the tax issues related to any of these financial gift options,
especially if you are considering a larger amount.
Take
a Break
U.S Population Growth
According to the Census
Bureau’s POPClock, the
It’s estimated that
the population will hit 400 million in 2040.
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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.