Janell A. Israel & Associates
March 2007 Tax Newsletter
HAPPY ST. PATRICKS DAY.
What's New in taxes:
Tax Law Update
RECENT TAX LAW CHANGES MAY AFFECT PEOPLE
GIVING TO CHARITY
Individuals
and businesses making contributions to charity should keep in mind several
important tax law changes made last summer by the Pension Protection Act.
The new law offers older owners of individual retirement
accounts a new way to give to charity. It also includes rules designed to
provide both taxpayers and the government greater certainty in determining what
may be deducted as a charitable contribution. Some of these changes include the
following.
New Tax Break for IRA Owners
An IRA owner, age 70 ½ or over, can directly transfer
tax-free, up to $100,000 per year to an eligible charitable organization. This
option is available in tax years 2006 and 2007. Eligible IRA owners can take
advantage of this provision, regardless of whether they itemize their
deductions. Distributions from employer-sponsored retirement plans, including
SIMPLE IRAs and simplified employee pension (SEP) plans are not eligible.
To qualify, the funds must be contributed directly by
the IRA trustee to the eligible charity. Amounts so transferred are not taxable
and no deduction is available for the amount given to the charity.
Not all charities are eligible under this provision. For
example, donor-advised funds and supporting organizations are not eligible
recipients.
Transferred amounts are counted in determining whether
the owner has met the IRA’s required minimum
distribution rules. Where individuals have made nondeductible contributions to
their traditional IRAs, a special rule treats transferred amounts as coming
first from taxable funds, instead of proportionately from taxable and
nontaxable funds, as would be the case with regular distributions.
Rules for Clothing and
Household Items
To be deductible, clothing and household items donated
to charity after Aug. 17, 2006, must be in good used condition or better.
However, a taxpayer may claim a deduction of more than $500 for any single
item, regardless of its condition, if the taxpayer includes a qualified
appraisal of the item with the return. Household items include furniture,
furnishings, electronics, appliances, and linens.
Guidelines for Monetary
Donations
To deduct any charitable donation of money, a taxpayer
must have a bank record or a written communication from the charity showing the
name of the charity and the date and amount of the contribution. A bank record
includes canceled checks, bank or credit union statements and credit card
statements. Bank or credit union statements should show the name of the charity
and the date and amount paid. Credit card statements should show the name of
the charity and the transaction posting date.
Donations of money include those made in cash or by
check, electronic funds transfer, credit card, and payroll deduction. For
payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage
statement or other document furnished by the employer showing the total amount
withheld for charity, along with the pledge card showing the name of the
charity.
Prior law allowed taxpayers to back up their donations
of money with personal bank registers, diaries or notes made around the time of
the donation. Those types of records are no longer sufficient.
This provision applies to contributions made in taxable
years beginning after Aug. 17, 2006. For taxpayers that file returns on a
calendar-year basis, including most individuals, the new provision applies to
contributions made beginning in 2007.
The new law does not change the prior-law requirement
that a taxpayer get an acknowledgement from a charity for each deductible donation
(either money or property) of $250 or more. However, one statement containing
all of the required information may meet the requirements of both provisions.
Smart Strategies For Your Tax Refund
Are you
eagerly awaiting a 2006 tax refund? Hopefully you’ve given some thought
to how you can put the money to good use. While “good use” may be
in the eye of the beholder, you should really consider the following:
* Pay down
debt. If you have high interest credit card balances, consider using your
refund to pay them down. By doing so, you are essentially investing the funds
at a significant guaranteed rate of return. Put another way, paying off a
credit card with an 18% interest rate is equivalent to earning 18% on your
money.
* Invest in
an IRA. If you’re debt-free, you can use the refund to invest in either a
traditional IRA or a Roth IRA. Not all taxpayers will qualify for either type
of IRA, but if you do, making such an investment might save you tax dollars
currently and build a nest egg for your future.
* Invest in
an education account. It’s never too early to plan for your
children’s education. Why not use your refund to start a Coverdell or
“529 Plan” education savings account? Both types of accounts are
tax-savers in the long run.
Here’s
the real issue with refunds: Why receive a big refund at all? Why give the
government an interest-free loan? Instead, consider adjusting your payroll
withholding to put more money in your pocket on a monthly basis. You can then
use those funds to begin an automatic investment plan, such as an IRA or other
savings plan, paying interest to yourself instead of to the government. For
assistance in adjusting your withholding, give us a call.
What's New in
Finance
2007 Brings Changes To 401(k) Plans
Last year's
pension law made some important changes to 401(k) plans, changes you should pay
attention to if this type of retirement savings plan is available to you.
The first
change is that companies are now permitted to automatically enroll workers in
their 401(k) plans. You have the opportunity of opting out of the plan, but you
should think seriously before doing so. Saving for retirement has never been
more important, and a 401(k) is a great way to build a retirement nest egg.
Another
change is the requirement that companies advise plan
participants about the need to diversify investments in their 401(k) and not
overload on company stock (remember the Enron collapse). You can also expect to
see some form of investment advice or recommendations with your 401(k)
statements.
Also changed
in 2007 is the maximum amount you can stash into a 40l(k):
$15,500 if you’re under age 50 and $20,500 if you’re 50 or older.
Avoid These Retirement Blunders
If your goal
is to enjoy a long and financially secure retirement, try to avoid these four
major blunders.
* Not saving
enough. If you’re approaching retirement age and are in reasonable
health, you could expect to live well into your eighties or longer. Make sure
your retirement savings will last that long, especially taking inflation into
account. The secret is to save as much as you can as early as you can, so that
power of compounding can work its magic. Make regular saving, no matter how
little, a part of your lifestyle.
* Falling for
investment scams. The surest way to ruin your retirement is to lose your
savings in an investment scam. If an investment seems too good to be true, it
almost certainly is. A good basic rule is never to buy any investment over the
phone, and never to invest under time pressure. Always demand to see a
prospectus, and take time to read it before you write a check.
* Making
inappropriate investments. Even if you avoid the outright scams, it’s all
too easy to end up with investments that are inappropriate for your age or
financial situation. They may be too risky, too conservative, not properly
diversified, or too expensive. Stay away from unscrupulous advisors.
Don’t confuse salespeople with advisors.
* Leaving
investing to your spouse. If you leave your spouse to do all the planning and
investing for retirement, you’ll be at a loss if he or she dies first. To
avoid this, you should jointly discuss and agree on your investment strategies,
and you should both participate in meetings with your accountant, broker, or
advisor.
Take a Break
Some Food Trivia:
* A can of
Spam is opened every four seconds.
* Olives are
fruits.
* Pineapples
are berries.
* A
* The most
popular Domino pizza topping in
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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.