Monthly Tax Ideas:

Nov 06, Sept 06, June 06, Mar 06, Jan/Feb 06, Dec 05, Oct, Sep, August, July, June, May, Apr, Mar, Feb, Jan, Dec 04 , Nov 04

November 06 Bean Counter Tax Ideas:

• End of Year Business Planning
• Exposure to Alternative Minimum Tax
• Charitable Donationation Strategies
• Energy Efficient Purchases - Tax Savings
• Year End Investment Planning
• AGI Planning
• Income Deferment & Deduction Acceleration
• Changing Federal Income Tax Withholding
  

End of Year Business Planning
In 2006 businesses should use Section 179 Deduction to maximize tax savings. Under Section 179 business can deduct up to $108,000 of equipment, furniture and other tangible property, subject to a phase-out rule when qualified property purchases exceed $430,000. Business owners can claim this deduction for property placed in service anytime during the tax year, including Dec. 31, 2006.

Exposure to Alternative Minimum Tax
An important part of tax planning is to see if you will be subject to AMT this year. In order to meet the IRS requirements, taxpayers must calculate taxes under both the regular tax and AMT rules and then pay the greater of the two. This year higher AMT exemptions were granted for 2006, but AMT can greatly complicate tax planning as certain strategies that work in regular tax situaitons have adverse consequences for AMT. Certain items can increase your risk of AMT such as recognizing substantial long-term capital gains, exercising incentive stock options, and deducting a significant amount of state and local taxes or miscellaneous itemized deductions (ie., unreimbursed employee business expenses). If you are unsure about your exposure to the AMT see your tax advisor.

Charitable Donationation Strategies
2006 offers some changes to the common year-end planning strategy to increase charitable donations. Taxpayerss who are age 70 1/2 or older may temporarily (in 2006 & 2007) be able to claim tax-free treament for otherwise taxable distributions from traditional IRAs, when the IRA money is paid out directly to a tax-exempt charity. This new 'qualified charitable distribution' is subject to a $100,000 annual cap. Since the qualified charitable distribution is Federal-income-tax-free, there are not any Federal income tax deductions for the contribution. The income exclusion is definitely better than a deduction for seniors who might not otherwise itemize deductions. For donations of used clothing and household items including furniture and furnishings, electronics, appliances, linens, and similar items made after 8/17/2006 must be in 'good' or better condition to be deductible. We suggest keeping a list and a photo of the donated items. You can deduct individual items that appraise for more than $500 even if they are not in 'good condition' but you must attach a qualified written appraisal with your tax return.

Energy Efficient Purchases - Tax Savings
There are 2 new tax credits for 2006 and 2007 available for energy efficient improvements made to your home:

A. Residential Energy Efficient Property Credit. Credit is equal to 30% of expenditures for specific types of equipment: 1. qualified electricity generating solar photo voltaic property (max credit $2,000); 2. qualified fuel cell property (max credit of $500 for each .5 kilowatt of capacity); 3. qualfied solar water heating equipment (limited to a max credit of $2,000). The equipment must be used in a U.S. residence and cannot be used to heat a swimming pool or hot tub. Fuel cells can only be used with a principal residence, but solar credits can be used in any residence.

B. Nonbusiness Energy Property Credit. Usually limited to a $500 lifetime credit as well as other limits. The credit is equal to (1.) 10% of what you pay for qualified energy efficiency improvements, plus (2.) 100% of what you pay for qualified residential energy property (such as efficient heat pumps, hot water heaters, boilers and advanced main air circulating fans) on your principal residence.

Year End Investment Planning
A. Capital Losses. Review your financial portfolio to see whether you have any losers you should sell in order to offset captial gains recognized during the year or to take advantage of the $3,000 limit on deductible net losses against ordinary income.

B. Lower Tax Rates on Capital Gains. For taxpayers in a regular tax bracket of 25% or higher long-term capital gains and qualifying divident income are subject to a tax rate of only 15%, while is is only 5% for taxpayer in the lower regular tax brackets. Given tax rates as high as 35% for other types of income, this a a considerable break. In order to be eligible for the lower 15% (or 5%) capital gain rate, assets must be held for more than a year. Consider deferring the sale of capital assetss so you can meet the greater than one year period.

AGI Planning
Tax breaks are often only available to taxpayers with AGI below certain levels. Common AGI based tax breaks include the child tax credit (phase-out begins at $110,000 for married couples and $75,000 for heads-of-households), the $25,000 rental real estate passive loss allowance (phase-out range of $100,000-$150,000 for most taxpayers), and the exclusion of social security benefits ($32,000 threshold for married filers; $25,000 for other filers). In addition, taxpayers with 2006 AGI in excess of $150,500 begin losing part of their itemized deductions, to the extent of 3% fo the excess. Strategies that lower your income or increasse ccertain deductions might not only reduce your taxable income, but also help increase some of your other tax deductions and credits.

Income Deferment & Deduction Acceleration
Postpone income into 2007 or accelerate deductions from future years into 2006. Cash-basis proprietors should consider delaying year-end billings or accelerating business expenditures. If you itemize your deductions consider paying charitable donations, state and local taxes, and medical expenses in 2006 rather than 2007, to the extent possible.

Changing Federal Income Tax Withholding
Consider bumping up the Federal income taxes (FIT) withheld from your paychecks now through the end of 2006 if you think you are going to owe income taxes for 2006. Try increasing your total tax payments (estimated payments plus withholdings) equal at least 90% of your estimated 2006 liability or, if smaller, 100% of last year's liability (110% if your 2005 AGI exceeded $150,000). On April 16, 2007, you will still have to pay the taxes due less the amount paid in, but you won't owe any interest or penalties.

back to top

September 06 Bean Counter Tax Ideas:

• Pension Protection Act of 2006
• TIPRA Tax Act Contains Breaks & New Changes

Pension Protection Act of 2006 - Tax Incentives to Boost Saving Now Permanent

Pension reform legislation that was the subject of several debates and nearly wrecked by partisan bickering was signed into law on August 17th by President Bush.

The bill, The Pension Protection Act of 2006, H.R. 4, tightens the rules governing how companies fund their pension plans and is designed to keep taxpayers from bailing out of the nation’s pension insurer. Under the legislation, companies would have to fully fund their pension plans within seven years. Companies with pension shortfalls would have to move more quickly. Airlines in bankruptcy proceedings that have frozen their pension plans have an extra 10 years to meet their funding obligations.

Entire Pension Bill H.R. 4 - PDF
Joint Committee on Taxation's Bill Explanation - PDF

Of note on tax issues, the bill allows for direct payment of refunds to individual retirement plans. The proposal requires the IRS to make available a form for a taxpayer to file with the IRS directing the agency to send the refund directly to the taxpayer’s IRA. The proposal requires the IRS to provide the form for taxable years beginning after 2006.

The Act also expands the use of Tax Court practice fees for pro se taxpayers. The Tax Court is authorized to charge practitioners a fee of up to $30 per year and to use these fees to pursue disciplinary matters. The proposal expands the use of these fees to provide services to pro se taxpayers that will assist such taxpayers in controversies before the court. For example, fees could be used for programs to educate pro se taxpayers on the procedural requirements for contesting a tax deficiency before the court. The proposal is effective as of August 17, 2006.

The legislation also makes permanent several tax provisions from the 2001 tax bill. Namely, it makes permanent the higher contribution limit for individual retirement accounts (IRAs). Under current law, the limit increases to $5,000 in 2008. Today’s Act makes this permanent and indexes the income limits for inflation.

"Catch-up contributions" that allow people age 50 and over to make additional $1,000 contributions to IRAs each year and up to $5,000 contributions each year to 401(k) plans to boost their nest eggs were also made permanent. Contributions for a year must be made by April 15th of the following year. The Act also allows individuals who worked for a bankrupt employer whose officers were indicted and whose employer had a least a 50 percent match in the form of employer stock in its 401(k) plan to make an additional IRA catch-up contribution (three times the otherwise applicable catch-up amount). The contributions can be made for each of 2007, 2008, and 2009.

Contribution limits on 401(k) plans will rise to a maximum $15,000 in 2006 and are indexed thereafter. Further, newly created Roth 401(k)s are made permanent. These accounts were originally available only until 2010.

Incentives to encourage automatic savings mechanisms by 401(k) plan sponsors are included in the Act. They include legal protections, known as a "safe harbors," to encourage companies sponsoring plans to implement automatic savings mechanisms for defined contribution plans.

The Act also makes permanent the saver’s tax credit designed to encourage savings for lower income taxpayers and indexes the amount of the credit for inflation. The credit was set to expire in 2006.

Other tax measures that became law include:

• Allowing families to make tax-free withdrawals from their state-sponsored college savings plans for college expenses. This measure is permanent.
• Increased flexibility and favorable tax treatment to allow individuals with annuity and life insurance contracts with a long-term care insurance option to use the cash value of their annuities to pay for long-term care insurance. This will give individuals more options to pay for their long-term care needs and make long-term care insurance more affordable for them.
• The ability to roll over after-tax amounts in 403(b) annuity contracts to a qualified plan, effective for tax years beginning after 2006.
• Allowing direct rollovers from retirement plans to Roth IRAs. Individuals with an AGI of less than $100,000 may roll over money from a traditional IRA to a Roth IRA. The money is subject to tax, but it is exempt from the 10 percent early withdrawal tax. Taxpayers who want to do such a rollover from a qualified plan, 403(b) annuity, or Code Section 457 plan must first roll the money to a traditional IRA, and then do a second rollover to the Roth IRA. The Act allows such direct rollovers effective for distributions after 2007.
• Penalty-free withdrawals from retirement plans for individuals called to active duty for at least 179 days. The Code section 72(t) 10 percent premature distribution tax applies to distributions from plans and IRAs before age 59-1/2, subject to specified exceptions. The proposal creates a new exception from the premature distribution tax for distributions to a reservist (called up between September 11, 2001 and before December 31, 2007 for more than 179 days). The proposal applies to distributions after September 11, 2001, and allows for the money to be paid back within the later of two years after the end of active service or August 17, 2006.
• A waiver of the 10 percent early withdrawal penalty tax on certain distributions of pension plans for public safety employees. Generally, there is a 10 percent premature distribution tax for distributions before age 59-1/2. There are several exceptions, including distributions on separation after age 55. The proposal allows public safety officers to avoid the early distribution penalty for distributions based on separation from service if the officer is at least 50 (rather than 55). The proposal is effective for distributions after August 17, 2006.
• Allowing rollovers by non-spouse beneficiaries of certain retirement plan distributions. Generally, participants and surviving spouses may roll over amounts from qualified plans, 403(b) annuities, and IRAs to another plan or IRA. Non-spouse beneficiaries may not roll over inherited amounts. The proposal allows non-spouse beneficiaries to roll over to an IRA or other plan structured for that purpose amounts inherited as a designated beneficiary. Thus, if the non-spouse beneficiary is required by the plan to take an immediate distribution, the non-spouse beneficiary can delay immediate taxation through the rollover. The rules governing minimum distributions at age 70-1/2 for non-spouse beneficiaries are unchanged. The proposal is effective for distributions after 2006.

Also becoming law are measures aimed at curbing donation abuse. Perhaps the most notable addition for preparers of individual tax returns is the provision that modifies recordkeeping and substantiation requirements for certain charitable contributions. According to the new law, “regardless of the amount, applicable recordkeeping requirements are satisfied only if the donor maintains as a record of the contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. The recordkeeping requirements may not be satisfied by maintaining other written records.”

To curb abuse, the new law also limits charitable deductions for contributions of clothing and household items. It also expands penalties for nefarious appraisals of donated property.

This portion of the Act also allows:

• Tax-free distributions from individual retirement plans for charitable purposes.
• A charitable deduction for contributions of food inventory.
• A charitable deduction for contributions of book inventory.

During the signing ceremony, Bush alluded to the fact that the pension reform was partly in response to the coming shortfall associated with Social Security. Another stab at reforming the Trust Fund is expected to begin after the mid term election.

“We must also prepare for the impact of the baby boomer generation’s retirement, and what that impact will have on federal entitlement programs like Social Security and Medicare,” he said. “Entitlement programs are projected to grow faster than the economy, faster than the population and faster than the rate of inflation. If we fail to act, spending on Social Security and Medicare and Medicaid will be almost 60 percent of the entire federal budget in the year 2030. And that’s going to leave future generations with impossible choices: staggering tax increases, immense deficits or deep cuts in benefits.

back to top

TIPRA Tax Act Contains Tax Breaks; Adds Revenue Raisers

The new Tax Increase Prevention and Reconciliation Act (TIPRA) retroactively ex­tends a number of popular tax breaks adds several new lax breaks, and includes a number of revenue raisers. Individual taxpayers and business owners should pay attention to the significant provisions of TIPRA.

• TIPRA increases the alternative minimum tax (AMT) exemption amounts.
• TIPRA lowers capital gains and dividend rates.
• TIPRA modifies the Kiddie Tax.
• TIPRA modifies the MAGI ceiling for Roth IRA conversions.
• TIPRA enhances equipment expensing election.
• TIPRA affects domestic production activities deduction/ W-2 wage limitation.
• TIPRA impacts college saving strategies.

TIPRA increases the alternative minimum tax (AMT) exemption amounts. The AMI first appeared in 1970 as a way to ensure that wealthy individuals paid at least sum amount of federal tax on their income and affected ap­proximately 19,000 taxpayers that year. The AMI exemption allows many middle and lower income taxpayers to escape the AMT, but the exemption amounts were scheduled to be reduced in 2006. Without Congressional action to continue the AMT exemption amounts at the levels effective in 2005, it was estimated that up to 15 million additional taxpayers, includ­ing many middle-class individuals, could have been subjected to the AMT in 2006. TIPRA ac­tually increased the AMT exemption amounts for 2006 to provide real, although temporary, tax relief because the increased exemption amounts are only effective for 2006.

TIPRA lowers capital gains and dividend rates. TIPRA extends for two years the 0%, 5%, and 15% tax rates on capital gains through tax years beginning before 2011. These capital gains rates were to expire at the end of 2008 and rates ranging from 8% to 20% were due to come into effect in 2009. TIPRA also extends for the same two-year pe­riod the treatment of qualified dividend income as capital gains.

TIPRA modifies the Kiddie Tax. The kiddie tax is intended to inhibit the sheltering of unearned income (e.g., divi­dends and interest) by transferring income-generating investments from parents to children. A child is subject to the kiddie tax at his or her parents' marginal lax rate on un­earned income over $1,700 (for 2006) if that tax rate is higher them the tax rate the child would otherwise pay on it. Under TIPRA, for tax years beginning after 2005, a child is subject to the kiddie tax if he or she has not attained the age of 18 (previously 14) before the close of the tax year; either parent of the child is alive at the end of the tax year; and the child does not file a joint return for the tax year. TIPRA also created on exception to the kiddie tax for distributions from certain quali­fied disability trusts. The opportunity to lower a family's overall tax bite by transferring cash or income-producing assets to children under 18 is inhibited by the kiddie tax. But, investing a child's funds in savings bonds, municipal bonds, growth stocks, and unimproved real estate can reduce the child's exposure to the kiddie tax. Note that earned income from a job is not subject to taxation under the kiddie tax provision.

TIPRA modifies the MAGI ceiling for Roth IRA conversions. For qualified individuals, Roth IRAs offer benefits like tax-free distributions and no minimum required distributions, features not available with a traditional IRA. Prior to TIPRA, a traditional IRA could be converted to a Roth IRA if, for that tax year, the taxpayer's modified adjusted gross income (MAGI) did not exceed $100,000 and the taxpayer was not a. married individual filing a separate return. The income resulting from the conversion (the transfer amount) was included in taxable income subject to the ap­propriate income tax. However, the 10% pre­mature distribution penalty provision does not apply. For tax years beginning after December 31, 2009, TIPRA eliminates the $100,000 MAGI limitation and permits married taxpayers filing a separate return to convert amounts in a traditional IRA into a Roth IRA. Thus, taxpayers can make such conversions beginning in 2010 without regard to their MAGI. In addition, for 2010 only, the taxes on the conversion amount will be paid 50% in each of the next two years, 2011 and 2012.

TIPRA enhances equipment expensing election. Business owners can elect to expense, rather than depreciate, the cost of certain new or used equipment placed in service within their business during the tax year. The maximum dollar amount that may be deducted annually is $100,000 ($108,000 in 2006 as adjusted for inflation). The maximum expensing amount is reduced on a dollar-for-dollar basis after business equipment purchases exceed $400,000 ($430,000 in 2006, as adjusted for inflation). Prior to TIPRA, the expensing and phase-out amounts were to drop to $25,000 and $200,000, respectively, for equipment placed in service in tax years beginning after 2007. TIPRA extends the $100,000 expense election and the $400,000 phase-out ceiling (as in­flation adjusted) for two additional years to tax years beginning before 2010.

Domestic production activities deduction/ W-2 wage limitation. For business owners, the domestic production activities deduction is generally limited to, among other limitations, 50% of the W-2 wages paid by the taxpayer for the year. Prior to TIPRA, there was nothing in the definition of W-2 wages that required those wages to be allocable or attributable to produc­tion activities. For tax years beginning after the enactment date (May 17, 2006), TIPRA provides that W-2 wages include only amounts that are properly allocable to a qualified production activity.

TIPRA impacts college saving strategies. Under the kiddie tax rules, a dependent child's, unearned income (e.g., interest, dividends, and capital gains) in excess of the applicable threshold, which is S1,700 for 2006, is taxed at the parent's marginal tax rate, not the usually lower child's rate. Before 2006, the kiddie tax rules only applied to a dependent child who had not reached age 14 by year end. Unfortunately, TIPRA changed the magic age to 18, starting with 2006. So if you have a dependent child who will be 17 or younger as of December 31, 2006, the child is a potential kiddie tax victim until the year he or she reaches 18. The unfavorable change requires immediate adjustments to at least two longstanding college saving strategies. Custodial accounts and Crummey trusts that were set up with age 14 as the targeted date for recognizing income should be reevaluated, and the investment policy altered, to defer recognition of income until age 18. To achieve the desired deferral in income recognition, many portfolios will need to be adjusted from an income focus to a growth objective. Traditionally stable investments such as bonds and dividend-paying blue chip stocks may need to be liquidated and replaced with more volatile (i.e., risky) growth stocks that pay little or no dividends and, instead, aim for capital appreciation. Alternatively, tax-efficient mutual funds and exchange-traded funds may be used. Custodial accounts and Crummey trusts have always had one significant drawback as col­lege savings vehicles: they are completed gifts and you lose control over your contributions. Other strategies, such as 529 plans and Educa­tion Savings Accounts, allow you to redirect the funds if circumstances change. Now, in light of the new kiddie tax age of 18, it's clear that custodial accounts and Crummey trusts are less than ideal for college savings plans. If these strategies are already in place, a shift in invest­ment policy to defer interest, dividends, and gains until age 18 may be the best alternative, For newly devised college savings plans, other strategies (e.g., 329 plans) should be pursued.

back to top

June 06 Bean Counter Tax Ideas:

• Do Some Good Deeds and Receive a Tax Credit
• Pub. 15B. Employer's Tax Guide To Fringe Benefits
• Table 16-1. What Is Your Maximum Capital Gain Rate?
• Code Sec. 2010. Unified credit against estate tax.
• 2005 Tax Rate Schedules

Do Some Good Deeds and Receive a Tax Credit

Congress has given employers several tax credits and incentives to help employees. Here are three of the credits to think about:

1. Small employer pension plan start-up cost:
Certain employers (whose employees earn at least $5,000 in compensation) may be entitled to a credit against their federal income tax liability. Employers having 100 employees or less may qualify. The plan must have at least one employee who is not highly compensated (less than $100,000 per year). The credit equals one half of the start-up and administration costs paid during the first three years of the plan’s life. The credit is limited to $500 per year.

2. Childcare:
Employers can take a credit up to $150,000 per year for qualified childcare expenses incurred that benefit their employees. The credit is equal to 25% of the expenses for building a childcare facility, operating a childcare facility, or providing childcare services to employees under a contract with a childcare facility. Plus, employers can receive a credit for 10% of the expenses paid to provide childcare resources and referral services.

3. Disabled individuals:
If you make your business facilities accessible to disabled individuals, your company can receive a tax credit. To be eligible, a business must have gross receipts of one million dollars or less; or employ 30 or less full time employees. The disabled access credit equals 50% or qualified expenses between $250 and $10,250 incurred to remove barriers preventing access to disabled individuals. The expense will include tools, materials, and modifications for individuals with sight or hearing issues. The maximum credit is $5,000 in any one year.

Pub. 15B. Employer's Tax Guide To Fringe Benefits

RULES FOR VARIOUS TYPES OF FRINGE BENEFITS

Table 16-1. What Is Your Maximum Capital Gain Rate?

Code Sec. 2010. Unified credit against estate tax.

Please Note:  Congress is in the process of extending the tax credit until 2010. But until politicians get their act together, use the data below knowing a change may take place.

(c) APPLICABLE CREDIT AMOUNT

For purposes of this section, the applicable credit amount is the amount of the tentative tax which would be determined under the rate schedule set forth in section 2001(c) if the amount with respect to which such tentative tax is to be computed were the appliable exclusion amount determined in accordance with the following table:

(a) Tax Table

The tentative tax rate schedule applicable to taxable estates is set out in Code Section 2001(c)(1). The maximum tax rate for estates of decedents dying in 2001 and earlier years is 55 percent. This maximum rate is phased down starting in 2002, as follows:

2005 Tax Rate Schedules.

Caution! The tax rate schedules are shown so you can see the tax rate that applies to all levels of taxable income. Do not use them to figure your tax!

Schedule X - If your filing status is SINGLE

SCHEDULE Y-1 -- If your filing status is MARRIED FILING JOINTLY or QUALIFYING WIDOW(er)

Schedule Y-2 - If your filing status is MARRIED FILING SEPARATELY

Schedule Y-2 - If your filing status is HEAD OF HOUSEHOLD

March 06 Bean Counter Tax Ideas:

• How to Avoid Tax Time Problems
• Tax Swaps & Exchanges (Code Sec. 1031 & 1035)
• Irrevocable Election of IRAs (Code Sec. 2039)
• IRS Adds New Private Debt Collectors
• New 401(k) Investment Option
• Social Security Number Verification Process

How to Avoid Tax Time Problems (IRS Tax Tip 2006-50)

Are you looking for ways to avoid the last-minute rush for doing your taxes? Here are some stress relieving ideas to help you.

TAX SWAPS & EXCHANGES (Code 1031 & 1035)

WANT TO SWAP SOMETHING?

Question, How can you sell something and not encounter any immediate capital gains tax? Section 1031 will allow taxpayers to use net proceeds from the sale of business property to buy like-kind property of equal or greater value. The deferred recognition of tax is pushed off further down stream. The deferment will not work for the sale of your personal residence or vacation home. But the swap would work for other real or personal property like rental houses, farm land, commercial property, jet planes plus many more. Keep in mind, that real property may not be exchanged for personal property. There needs to be similar kind relationship between the types of property. All property has to be for business or investment purpose. Stocks and bonds are not included.

The most common kind of exchange is called a delayed exchange. You sell your property and temporarily give the proceeds to a qualified intermediary, generally called an accommodator. The accommodator, who works for a fee, will set up and handle both sides of the exchange. If you want to do the complete transaction on your on, be aware of the rules and do not make a mistake. Any error will turn the deferment into a current tax collection situation. You have 45 days of selling your property to identify in writing the like-kind asset you intend to buy. Then you have 135 days to complete the transaction. No tax is due until you either sell the replacement property or do another 1031 exchange. Just remember, the IRS will carefully count the days to upset your transaction.

Here is how it works:

Facts:   You own vacant land with a cost basis of $200,000 and have received a sale offer for $500,000.

          Sale Price       $500,000
          Cost               -200,000
          Selling Cost    - 30,000
          Taxable Gain   270,000

          15% Fed Tax    40,500
          7%  State Tax   18,900
          Total Tax          59,400

A 1031 Exchange will defer the tax and allow you to push the tax downstream.

How about a 1035 Exchange of insurance policies?
With proper planning, selected policies can likewise be utilized to push tax burdens into another time frame.

Here is what the Tax Code has to say in general terms:
(You really need to have a tax consultant working with you!)

Internal Revenue Code Sec. 1035.
Certain exchanges of insurance policies

(a) GENERAL RULES - No gain or loss shall be recognized on the exchange of--

(1) a contract of life insurance for another contract of life insurance or for an endowment or annuity contract; or

(2) a contract of endowment insurance (A) for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or (B) for an annuity contract; or

(3) an annuity contract for an annuity contract.

(b) DEFINITIONS - For the purpose of this section--

(1) ENDOWMENT CONTRACT: A contract of endowment insurance is a contract with an insurance company which depends in part on the life expectancy of the insured, but which may be payable in full in a single payment during his life.

(2) ANNUITY CONTRACT: An annuity contract is a contract to which paragraph (1) applies but which may be payable during the life of the annuitant only in installments.

(3) LIFE INSURANCE CONTRACT: A contract of life insurance is a contract to which paragraph (1) applies but which is not ordinarily payable in full during the life of the insured.

Irrevocable Election for IRAs (Code Sec. 2039)

Failure to make an Election Results in Inclusion of IRA into Estate:

An IRA from which a decedent received payments until his death, became includable in his estate because an irrevocable election was not completed.

Here are the facts: Walter M. retired and he opted to receive a lump-sum settlement from his retirement plan. The funds were transferred into an IRA-Rollover account. From January 1983 until his April 1999 death, the IRA paid out $1,000.00 per month to Walter.  The IRA agreement did not indicate Walter’s election to receive the monthly annuity on an irrevocable basis. As such the agreement stated that Walter was to reserve to himself sole management of the custodial account.

Walter’s Estate Tax Return initially included the IRA and paid to the IRS $33,632. The executrix later filed an amended return excluding the IRA and asked for the $33,632 to be refunded.  The IRS denied the request saying the IRA was created from a rollover of funds from a pension plan and does not qualify for exclusion from the estate. This dispute moved into the court system.

The estate put forth the position that the annuity value receivable is excluded from the estate. In addition, the estate argued that it was Congress’s intent to treat everyone fairly by enacting the tax Reform Acts of 1984 and 1986. The IRS position said that if Walter had retained the funds in a qualified plan, the funds would then be excluded; however, the funds were rolled into an IRA. The Court held the funds were includable within the estate. The Court also said the TRA 86 transition rule applied only to qualified plans and not to an IRA. For the benefit not to be includible within the estate, Walter had to make an irrevocable election to the form of the benefit. The election was not done; therefore, it is part of the estate.
Sherrill v. United States, No. 2:04-CV-509

New 401(k) Investment Option

As of January 1, 2006, employers are able to offer a new retirement savings program entitled the Roth 401(k).  The new account will follow the features of a Roth IRA to be incorporated into the setting of a 401(k) account. But there are no income restrictions as with the Roth IRA. Contributions can be made with after-tax dollars, but the account will grow tax free. Withdrawals can also be tax free, providing the owner is over 591/2 years old.

KEY POINT: The plan must be inexistence or held for 5 years.

Roth 401(k) accounts will be subject to the same contribution limits as regular 401(k) plans. In 2006, this means a contribution limit of $15,000 or $20,000 for individuals age 50 and over. The contribution limits apply to regular and Roth 401(k) plans combined. That is, an individual could not put $15,000 into a regular 401(k) and a Roth 401(k) plan. Only one total $15,000 (or $20,000) as the case maybe. Still the opportunity is there to put money into a plan that will have tax-free withdrawal ability. In 2006, the contribution limit for a regular Roth IRA is $4,000 or $5,000 if 50 and older. If the employer matches the employee’s contribution to a Roth 401(k), the match will be made with pre-tax dollars in a regular 401(k) account. Withdrawals will be as ordinary income.

Social Security Number Verification Process

The Social Security Number Verification Service (SSNVS), set up by the Social Security Administration, allows employers to use the internet to match their records of employee names and social security numbers with the Government’s data file before submitting W-@ Forms.

You can access the SSNVS at:
www.socialsecurity.gov/bso/bsowelcome.html
This is faster and easier method to use than the submitting request to SSA by other means, including the telephone verification option.

Verification of data is important for both the employer and its employees. Correct names and numbers are critical to successful processing of wage reports, and unmatched records can cause additional processing cost for the employer. From the employees’ standpoint, verified names and numbers allow Government to properly credit employees’ earnings records. Any uncredited earnings can adversely affect future eligibility for Social Security retirement, disability, and survivors programs.

New Debt Collection Action by the IRS equals new players in the "pond"

IRS Selects Three Firms to Take Part in Delinquent Tax Collection Effort

IR-2006-42, March 9, 2006
WASHINGTON — The Internal Revenue Service today awarded contracts to three firms to participate in the first phase of its private debt collection initiative.
The firms are:

• The CBE Group Inc., Waterloo, Iowa.
• Linebarger Goggan Blair & Sampson, LLP, Austin, Texas.
• Pioneer Credit Recovery, Inc., Arcade, N.Y.

A total of 33 firms took part in the competitive bidding process that resulted in today’s contract awards.

“The vast majority of states use private firms to help collect delinquent taxes. The new authority that Congress gave to the federal government allows us to use private firms as well,” said IRS Commissioner Mark W. Everson. “We have carefully considered all of the concerns expressed about this project, which involves work traditionally done by the government. As a result, we are putting tough safeguards in place to protect taxpayer rights and privacy. We will be closely monitoring contractor performance to make sure they’re following the law as well as our own internal standards.”

To assist the IRS in its collection of back taxes, the 2004 American Jobs Creation Act authorizes the IRS to hire private firms to collect federal tax debts. This particular portion of the law was carefully crafted and includes several limitations to ensure the private firms will be subject to the same stringent taxpayer protection and privacy rules that IRS employees work under. In addition, private firms cannot subcontract the work. The IRS expects to assign uncollected liabilities to the firms beginning this summer.

The IRS has also developed its own guidelines for the private firms, including background checks on all private firm personnel associated with the project as well as a mandatory, IRS-directed training program for company personnel.

Private firms will not be authorized to take enforcement actions such as liens, levies or seizures.  In addition, private firms will not be authorized to work on technical issues such as offers in compromise, bankruptcies, hardship issues or litigation.  Rather, the IRS will assign to the private firms cases in which the taxpayer has not disputed the liability. The private firms will contact taxpayers to make payment arrangements. “Redirecting relatively simple cases to private firms will permit the IRS to focus its existing collection and enforcement personnel on more complex tax issues,” Everson said.

In the second phase of the private debt collection project, scheduled for 2008, the IRS intends to contract with up to 10 firms. Over the course of 10 years, the IRS expects the private firms to help it collect an additional $1.4 billion in outstanding taxes.

IRS Fact Sheet 2006-18: (url link below)
Safeguards Included in Private Debt Collection Initiative

Jan/Feb Bean Counter Tax Ideas:

• Tax Notes for 2005 and 2006
• Profit Motive - Code Section 162
• IRS Filing Address Changes for 2005 Return
• Home Office Expense Deductions

TAX NOTES for 2005 and 2006

FEDERAL HOLIDAY (IRS CLOSED) SCHEDULE:

IRA CONTRIBUTIONS:

Contributions for '05 and '06 for those under 50 is $4,000.

Age 50 and over the additional contribution for 2005 is $500; however, this will increase $1,000 in 2006.

IRS MILEAGE RATES:

Business:

Charitable Volunteers:

Medical and Moving Expenses:

PROFIT MOTIVE - Code Section 162
When you start up a new business, your operation model must include a profit motive. Here is an example when you plan incorrectly.

Walter worked for a west coast company as a field supervisor. He was in charge of all aspects of the on-site job management. The employer did not have a formal written vehicle expense policy. Their plan was only a verbal one that paid $25.00 a day for expenses. Walter wanted more and decided to rent his vehicle to his employer. Walter filed 2 years tax returns including the "rental business" on Schedule C as a Sole-Proprietor. He reported business income (the flat fee times number of days worked) and business expenses on the Schedule C and it generated business losses.
Upon examination, the IRS denied all of his business losses. Walter argued that he was in business of leasing his truck to his employer and his resulting losses were includable in his return.

The Tax Court held that Walter's vehicle expenses were unreimbursed employee business expenses that should be reported on Schedule A and these expenses are subject to the 2% floor limitation. The court focused on whether he entered into a contract with the intent to earn a profit or not. It also noted the Walter's business did not lease any other vehicles or have any other customers. The Court concluded that Walter did not demonstrate or have the necessary profit motive when he used his personal vehicle in furtherance of the employer's business. [Alley v. Commissioner, T.C. Summary 2006-4]

FILING ADDRESS CHANGES FOR 2005 RETURNS
The IRS announced that as taxpayers begin to prepare their tax returns, some taxpayers may be sending their returns to a different service center than last year. The IRS said that, for taxpayers who received an instruction booklet from the IRS in the mail and use the labels included in the booklet, the return will go to the correct address.

For tax year 2005, the mailing changes will affect returns with or without payments, from the District of Columbia and eleven states. They are: Colorado, Delaware, Kansas, Maryland, Mississippi, Nebraska, New Mexico, Ohio, South Dakota, Virginia, and West Virginia. Taxpayers should send:

1. Returns from Delaware and Virginia to the IRS Service Center in Atlanta, Georgia;
   
   
2. Returns from the District of Columbia and Maryland to the IRS Service Center in Andover, Massachusetts;
   
   
3. Returns from Ohio to the IRS Service Center in Kansas City, Missouri;
   
   
4. Returns from Kansas, Mississippi, and West Virginia to the IRS Service Center in Austin, Texas;
   
   
5. Returns from Colorado, Nebraska, New Mexico, and South Dakota to the IRS Service Center in Fresno, California.

IRS IR-2006-16

DEDUCTING EXPENSES FOR HOME OFFICES:
Expenses of a home office are usually deductible if the office meets certain criteria. Costs associated with maintaining a home office (for example, rent, utilities, insurance, repairs, and depreciation) may be deductible. However, the deduction can be lost if an office space is also used for personal uses. Nonetheless, qualifying mortgage interest and property tax expenses are deductible no matter whether the home office qualifies for other deductions.

In order for a self-employed taxpayer to deduct the costs of maintaining a home office the home office must be used regularly and exclusively as a place of principal business. The home office can also be a place to meet or deal with clients and customers in the normal course of business. The home office can also be used in connection with a business if the space is in a separate structure apart from the residence such as a detached garage or mother-in-law apartment. In summary, any separately identifiable area can serve as an office even if the home office does not need to be a separate room or permanently partitioned portion of a room.

To meet the definition of regular and exclusive use the home office must be used on a continuing basis and the space only can be used for business purposes. In order for a space to be deductible both regular and exclusive use of the home office must occur. Be careful because personal use, even after business hours, causes the costs of maintaining the office to become nondeductible. Of course there are two exceptions to the exclusive use rule. The first exception is the storage of inventory such as product samples and the second exception relates to certain daycare facilities. When space in the home is used for these two purposes then the space can also be used for personal purposes.

Home office deductions can also be claimed by employees. The business use of the home must be for the employer's convenience and the space must be used exclusively and regularly for job-related activities. Often employees find it hard to pass these tests.

Structuring the business so that the home qualifies as a principal place of business may also yield additional deductible transportation expenses, since the cost of commuting from the principal place of business (including a home) to other workplaces is deductible.

December Bean Counter Tax Ideas:

• 2005 Year End Tax Planning
• IRA Deduction Expanded
• 2006 IRA Contributions
• Car Donations
• 2005 Energy Act Includes Business Incentives

2005 Year End Tax Planning

A. Extensions
Tax Extensions for the late filers have been streamlined. The IRS will now allow individuals and non-corporate entities up to a 6 month time extension. The current 2 step process will be eliminated. This change will apply to returns filed after December 31, 2005. All one will have to do is mail in a form to receive the automatic 6 month extension. Make sure that all taxes are paid by April 15th however. Otherwise interest and penalty cost could or will be charged. Taxpayers will continue to use form 4868 and drop the second request form 2688.

B. Donations
Last minute donations to your favorite charities need to be completed by December 31st. The Katrina Emergency Relief Tax Act will allow you to increase your tax donations for this year only. Beginning August 28 and continuing thru December 31, 2005, your donations to a qualified charity will qualify for certain limitation relief. For individuals and partners, the distributive share of qualified contributions are not limited by either the 50 percent adjusted gross income limitation nor the limitation on itemized deductions. You can now donate away your adjusted gross income (computed without regard to any net loss carry back) exceeds the deduction for charitable contributions.

C. Timing
Will you client be in a lower tax bracket next year? Slow down this year's income or speed up this year's deductions. Sound simple? See your tax consultant!!

IRA Deduction Expanded
The IRA deduction is increased from $3,000 to $4,000 ($4,500 is age 50 or older at the end of 2005). A taxpayer may now deduct an IRA, if covered by a retirement plan provided their modified adjusted gross income is lass than $60,000 for a single person or $80,000 for a married couple.

2006 IRA Contributions
The catch up provision for those individuals over 50 will increase from $500 to $1,000. The Current IRA $4,000 limitation will remain for 2006.

Car Donations
The amount a taxpayer can deduct for an auto donation has changed. Up until now, one could deduct the fair market value of the car donated to a charity. From now on, if the charity sells the auto, the taxpayer is limited to the proceeds received by the charity. Should the charity not sell the auto and instead uses the auto with in it's chartiable operation, then the taxpayer may be able to deduct its fair market value. In short, the junk car loophole has been somewhat closed.

2005 Energy Act Includes Business Incentives
Tax incentives for builders of energy efficient homes, commerical building developers and manufacturers of applicances now exist as a result of the Energy Tax Incentive Act of 2005.

Qualified energy-saving improvements to commerical buildings in the US are now eligible for an immediate deduction. The maximum deduction is generally limited to $1.80/sq/ft on a lifetime basis. Improvements must consist as part of interior lighting systems; heating, coolling and ventilation systems; hot water systems; or the building envelope. To qualify, the improvements must meet a 50% reduced energy consumption standard. A reduced deduction amount of $.60/sq/ft may apply in some circumstances. The deduction is available for qualified energy-efficient commerical building property placed in service after 12/13/05 and before 2008.

Energy-efficient manufacturers of appliances are eligible for tax credits. A business tax credit to manufacturers of qualifying energy-efficient dishwashers, clothes washers, and refrigerators in the U.S. The credit is available for appliances manufactured after 12/31/05 and before 2008. this credit goes directly to the appliance manufacturers, and consumers will only benefit to the extent manufacturers pass along their tax savings.

October Bean Counter Tax Ideas:

• 2005 Business Planning - Year End Tax Planning
• Attorney Lost a Contested Liablity - Code Section 61
• Non-Qualified Deferred Compensation after 2004
• 1% 'Option Arm' Home Mortgage

2005 Year End Business Tax Planning

The year end tax planning cycle is now upon us. Whether you are an entity or individual, wise tax planning can save dollars - tax wise.

Asset purchase and their cost recovery:
Being able to recover some of your cost of newly acquired, non real estate, fixed assets is an important tool. When you purchase them and how you depreciate them can make a difference.

Watch your timing. The half year depreciation rule will allow a full one half depreciation on items purchased and placed into service within the last six months of the year. There are also special depreciation allowances that could add to the first year cost recovery. If the aggregate cost of assets placed into service during the last three months of your year exceeds 40% of the year's purchases, then they are treated as mid quarter purchases. Consult your advisor if there are questions.

Section 179 of the IRS Tax Code, will allow you to write off in 2005 up to $105,000, assuming the entity has sufficient income. You do not have to worry about when, time of the year, the purchases were made. Also, this does not apply to real estate property.

For example, you as the owner of ABC Company have been told by your accountant, that he expects your operation to earn $155,000 after taxes. This is unquestionably a nice earning. However, it is not your desire to pay the required tax on this income. You as the owner have decided that the company will need new computers and office equipment next year. Also it is a good time to acquire that very large desk that you have wanted.

Projected purchases:
Computers $35,000
Office Equipment 70,000
Desk 10,000
Total $115,000

If the purchase is pushed off until 2006, you will pay tax on the full amount of income for 2005. Tax savings: purchase the equipment now in 2005 and elect section 179 treatment. The projected taxable income will drop to $50,000. (155,000 - 105,000) ignoring any required depreciation adjustment.

Additional notes:
Under a recent tax law change, off-the-shelf computer software is eligible for section 179 treatment. But starting in 2008, the software will not be eligible. Keep in mind, the section 179 election is an annual election providing the entity has sufficient income.

TAX CREDITS:

Deductions and exemptions will lower your taxable income. A tax credit will usually reduce your tax dollar for dollar. Now is the time to start tax planning. For example, if you have a new child, make sure the child has a Social Security Number. Without a number, you will not be able to claim the child care credit and if applicable, credit for child care and dependent care expenses. To claim credit for child care or dependent care, you will need the name, address and taxpayer identification number of the care provider.

Paying college tuition for your child's first semester of 2006 in 2005 could increase this year's credit for higher education expenses (Hope Scholarship or Lifetime Learning credit).

Attorney Lost a Contested Liability- Code Section 61

When a person transfers a balance from one credit card to another, and acknowledges the amount transferred, the taxpayer is precluded from claiming a dispute when debt is forgiven or written off.

During 1996, an attorney carried a Visa with a balance in excess of $28,000. With the change in interest rates, the owed funds were transferred from his Visa card to a new MasterCard. The appropriate acknowledgements were issued by the card companies. The attorney never got around to paying off this account. Interest charges began to accrue. The balance outstanding grew to $32,566.00 the attorney contested all finance charges and refused to pay.

The credit card company settled the outstanding amount for $12,700. The attorney felt he achieved a good deal. In his mind he was ahead of the card company by $19,866.00. However, the card company issued a Form 1099-C, Cancellation of Debt, reporting the debt discharge to the IRS. When the appropriate Income Tax return was sent in, the 1099-C form was not included.

Some time later, the IRS issued various collection letters. The case entered to the court system. Generally, under Code Section 61(a)(12), income includes discharge of indebtedness income. There are certain exceptions to this rule. For example, a discharged debt is not treated as income if the taxpayer contests the debt.

Out attorney argued that he did not have any additional income because the debt was settled with the card company. Likewise, it was settled because of a dispute.

The Tax Court ruled with the IRS. The Tenth Circuit affirmed the Tax Court and held that taxpayer must pay. The Court's reasoning, the debt was not a contested liability because the taxpayer acknowledged his debt upon transfer between credit cards. Further, no creditable evidence showing a dispute was presented to the Court. Be careful how you use your credit cards!

Non-Qualified Deferred Compensation - Not What It Used to be After the American Jobs Creation Act of 2004

Executive Benefits Basics
Companies have long known that in order to attract talented executives to their businesses, competition required the offering of specialized retirement benefits. Once on board, these benefits are used to motivate, reward and retain the key employees of the company. Companies have gravitated to "traditional" NQDC arrangements because such plans offer a flexible design, allowing a enough variability within a single plan to meet the needs of a number of individuals while at the same time provide a selective fringe benefit - that is, management may single-out specific executives and treat them uniquely.

Traditional NQDC plans are funded with corporate-owned life insurance. Life insurance has become the vehicle of choice because the earnings on the cash value within the life insurance policy are not subject to current tax and thus grow on a pre-tax compounded basis. In addition, the cash value may be accessed on a tax-free cash flow basis by borrowing against the policy in future years to fund the retirement obligation of the company. Moreover, in the event of an early death of the participant, the policy provides a current death benefit to allow the company to meet its obligation and potentially recover its costs for the plan.

Traditional NQDC arrangements have a number of drawbacks. From a company's perspective, a traditional NQDC arrangement is quite expensive. While it is a certainty that the company, as the owner of the life insurance policy, will eventually receive the death benefit at some future date when the key employee dies; the company still has to fund the NQDC plan in a non-tax deductible manner and then wait sometimes more than 30+ years for a key employee to die before being repaid.

If the company is funding $100,000 a year into a traditional NQDC plan, each year the company loses $35,000 in the 35% corporate tax bracket due to the inability to deduct the premium payment into the NQDC life insurance policy owned by the company. Notwithstanding the drawbacks to traditional NQDC arrangements, they have been hugely successful principally due to the lack of meaningful alternatives.

American Jobs Creation Act of 2004

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (P.L. 108-357). This new law makes dramatic changes to the tax rules impacting virtually all NQDC arrangements for all amounts deferred there under on or after January 1, 2005. The Act created a new tax code section, IRC §409A. In sweeping fashion, the new law provides that all current and prior deferrals of compensation of any sort by anyone will be taxed if the terms of such plan under which the deferrals were made do not comply with the terms of the new rules. In particular, the new law creates limitations on payout elections, as well as creates greater restrictions on events of death, disability, termination and hardship. Significantly, the new law prohibits the ability to accelerate benefits as follows: No "haircut" or penalty provision permitting early withdrawal; No petitions for early distributions; No contract renegotiations or benefits restructures; No plan terminations or liquidations.

The new law affects NQDC in a number of other ways, including the timing of deferral elections, the rules impacting changes in the time and form of payout, elimination of offshore trusts, elimination of financial/health triggers and, of course, an increase in IRS reporting requirements.

On December 20, 2004, the Treasury Department and the IRS iss