#10  - THINK ENERGY EFFICIENT THIS YEAR!
 

• Think energy efficient when purchasing new windows or doors and take advantage of the available credits.
• For 2006 and 2007
• Form 5695 Residential Energy Credits (see attached)
  • Credit has $500 lifetime limit
  • Limited by categories
• Credits computed as follows:
  • Energy efficient improvements
    • For insulation, exterior windows, exterior doors, water heaters, heat pumps, central air conditioners, furnaces, hot water boilers and metal roofs
    • 10% of cost with a maximum of $500 (no more than $200 of this amount can be for windows)
  • Energy property costs (maximum amounts)
    • Energy efficient building property - $300
    • Qualified furnace or hot water boiler - $150
    • Advanced main air circulating fan - $50
  • Residential energy efficient property credit - all are 30% of cost, with maximum credit of:
    • Solar panels - $2,000
    • Water heaters - $2,000
• Must be your principal residence!
  • 2 of 5 year rule
• Form 8908 Energy Efficient Home Credit
  • Credit for contractors who construct energy efficient homes
  • $1,000 or $2,000
• Form 8909 Energy Efficient Appliance Credit
  • Manufacturers of energy efficient appliances are eligible.
     

#9  - NEW CHARITABLE CONTRIBUTION OPPORTUNITIES
           BUT THE IRS IS GETTING STRICTER!
 

• Can take IRA distributions and direct them to a charity
  • Up to $100,000
  • For 2006 and 2007 only
  • Must be 70 ½ and older
  • Income excluded from Traditional or Roth IRA distributions
  • Deduction not allowed on Schedule A
  • Do not qualify if donate to supporting organizations, donor-advised funds and private foundations
  • Contributions must otherwise be entirely deductible in order to be excludable
• Stricter rules
  • For contributions made after January 1, 2007
  • Must have a bank record or written communication listing donee name, date of gift and amount
  • No more “cash” contributions allowed
  • No more de minimis exception ($250)
  • Cannot simply keep own written record noting the donation
• Noncash items
  • For contributions made after August 17, 2006
  • Must be in “good” condition or better
  • No more low valued items such as socks
  • If donate single piece of clothing or household item for which a deduction of more than $500 claimed, required to file qualified appraisal with tax return
     

• Set up and/or contribute to a SEP IRA by March 15^th or an IRA by April 15^th!
  • Can have either count for 2006.
  • Great way to get a deduction on the business after year end.
  • Rollovers
    • $100,000 limit gone starting in 2010.
    • 2 year spread allowed for inclusion in income.
• ROTH 401KS were new in 2006.

• Employers will offer to stay competitive.
• S corporations can now create these plans.
• LLC’s can create for their employees but not for their members.

• Members are not allowed to be an “employee”.
   

• Work like Roth IRAs
  • Contributions are not deductible.

• Advantage is that buildup within the IRA may be free from federal income tax when individual withdraws money from account.
• Tax free distributions if qualify.
  • Qualified distributions
    • Not included in gross income
      • Reported on Form 8606
    • Not subject to additional 10% penalty for early withdrawals
      • Penalty reported on Form 5329
    • Must satisfy 5-year holding period
      • Distribution may NOT be made before the end of the 5-year period beginning with the 1^st tax year a contribution was made
      • 5-year period ends on the last day of 5^th consecutive tax year after holding period started
    • Must meet one of four requirements
      • Made on or after individual attains age 59 ½
      • Made to beneficiary (or individual’s estate) on or after individual’s death
      • Attributable to individual’s being disabled, OR
  • To pay for “qualified 1^st-time homebuyer expenses"
• Roth IRA contributions are limited to $4,000 per year for 2006 and 2007 ($5,000 in 2008) with a catch-up contribution of $1,000 in 2006 and 2007 for individuals who are 50 years old and older.
• Limits apply to all IRAs (traditional and Roth) not for each.
• Individuals may make contributions to Roth IRA after age 70 ½.
• Loss on Roth IRA can be recognized if all Roth IRA accounts have been distributed and total distributions are less than the unrecovered basis.
  • Basis is total amount of nondeductible contributions to Roth IRA.
  • Loss claimed as miscellaneous itemized deduction subject to 2% floor

• In a Roth 401(k), you can contribute $15,000 for 2006 ($15,500 in 2007) with a catch-up contribution of $5,000 (same in 2007).

• NO AGI LIMITATION like in a Roth IRA!
  • Roth IRA contributions phased out if AGI is between $95,000 and $110,000 for single filers and $150,000 and $160,000 for joint filers (married filing separately limitation is between $0 and $10,000).
• POTENTIAL FOR MATCHING BY EMPLOYER unlike in a Roth IRA!

• Eligible contributions

• Employee must irrevocably designate amounts as Roth 401(k) contributions when electing to defer compensation.
  • Employee cannot redesignate as regular 401(k) contribution.
  • Employees can change or revoke designation only for future deferrals.
• Contributions must be included in income at the time the employee would have received the funds had he/she not elected to contribute to the Roth 401(k).
• Deferred amounts must be maintained by the plan in a separate, designated Roth account.

• For distributions from a Roth 401(k) to be NONTAXABLE, they must occur after the FIVE-YEAR period beginning with the tax year of the employee’s first contribution.

• Distributions must be made
  • On or after the taxpayer attains age 59 ½
  • After the taxpayer’s death OR
  • On account of the taxpayer’s disability
  • Distributions required once employee reaches 70 ½

• Roth 401(k) can be rolled over into a Roth IRA (distributions NOT mandatory) and taxpayer can still make Roth IRA contributions even after reaching 70 ½ .

• Currently, NO WAY to transfer traditional 401(k) funds to Roth 401(k).

• Hopefully, this issue will be resolved in the near future.
   

• TRADITIONAL IRAs
  • Combined limitations with Roth IRAs
  • Amounts earned in a traditional IRA are not taxed until distributions are made.
  • Contributions are generally deductible.
    • If individual or spouse is active participant in employer-maintained retirement plan, deduction REDUCED or ELIMINATED depending on AGI
      • 2006 Phase-out between
        • $150,000 and $160,000 for joint returns
        • $50,000 and $60,000 for single returns
        • $0 and $10,000 for married separate returns
        • $75,000 and $85,000 for joint IF BOTH COVERED
      • 2007 Phase-out between
        • $156,000 and $166,000 for joint returns
        • $52,000 and $62,000 for single returns
        • $0 and $10,000 for married separate returns
        • $83,000 and $103,000 for joint IF BOTH COVERED
      • Considered active participant EVEN IF DID NOT PARTICIPATE.
    • Nondeductible contributions may be made.
      • Reported on Form 8606
  • As in Roth IRA, contributions may be made until APRIL 15.
  • If contribution is over limit, 6% tax charged until correction made.
    • Use Form 5329 to reflect 6% tax
  • Distributions must begin no later than APRIL 1 FOLLOWING calendar year owner reached age 70 ½
    • If contributions made were all DEDUCTIBLE, distributions are FULLY taxable.
    • Any nondeductible contributions made are NONTAXABLE.
    • Early distributions
      • If individual under age 59 ½, distribution subject to 10% penalty.
      • Reported on Form 5329
      • Exceptions to 10% penalty
    • Medical insurance premiums
      • Eligible if received unemployment for 12 consecutive weeks (or deemed to have if self-employed)
      • Qualifying premiums
        • Deductible premiums for medical care of unemployed individual, spouse and dependents
        • 7.5% floor ignored
      • Distributions must be received in year unemployment received
      • Ceases to apply after reemployment for 60 days
    • Qualified Higher Education expenses
      • For you, spouse, child or grandchild of you or spouse
      • Qualified expenses
        • Tuition at post-secondary institution
        • Books
        • Fees
        • Supplies
        • Equipment
    • First-time homebuyer expenses
      • Limited to $10,000 lifetime withdrawal
      • Qualified expenses
        • Acquisition costs
        • Settlement charges
        • Closing costs
      • Home may be for you or spouse, child, grandchild or ancestor of you or spouse
      • 2 year rule
    • Return of Nondeductible Contributions
       
• SEP Plans (Simplified Employee Pensions)
  • If you are a shareholder of your S corporation, you may create these plans.
  • Issue is you must also plan for any employees you have.
    • If no employees, there is no issue – you may create for yourself.
  • Retirement plan in which an employer makes contributions to IRAs of employees.
  • As a shareholder, you must be taking a salary.
  • Contributions must be the lesser of:
    • 25% of compensation - $220,000 maximum for 2006 ($225,000 in 2007), or
    • $44,000 ($45,000 in 2007)
  • Create by completing Form 5305-SEP
    • This form is not filed with IRS; rather, it is retained by employer.
    • Copy must be given to eligible employees.
    • Must complete by due date, including extensions, for income tax return for year intended.
  • Contributions can be deducted if made by due date, including extensions, of tax return.
     

#7 - DO I HAVE TO PAY QUARTERLY TAXES?
 

• Schedule SE (see attached)
  • Filed with Form 1040
  • To reflect social security and Medicare taxes that would otherwise have been paid if employee
  • File if self-employed and had income on Schedule C of MORE THAN $400
  • If NET PROFIT x 92.35% = LESS THAN $400, you do not need to file.
  • HOBBY LOSS RULES
    • Hobby losses allowed to extent of income
    • Taxes, interest, casualty losses deductible anyway
    • Reduce income then operating expenses then depreciation
    • Expenses to extent of income subject to 2% floor miscellaneous itemized deductions
    • NOT hobby if profits in any 3 of 5 CONSECUTIVE tax years ending with tax year in question
    • Activity involving horses (breed, train, show, race) use 2 of 7 years
  • Self-employment tax
    • If NET PROFIT x 92.35% = $90,000 or LESS, multiply by 15.3% to calculate tax
    • If NET PROFIT x 92.35% = MORE THAN $90,000, multiply by 2.9% and add $11,160 to calculate tax
    • Tax reported on line 58 of Form 1040 (as additional tax on page 2)
  • DEDUCTION for ½ of self-employment tax entered on line 27 of Form 1040 (as subtraction on page 1)
  • Maximum amount of self-employment income subject to social security tax is $94,200 for 2006 and $97,500 for 2007
  • If you have more than one business, net earnings from self-employment is combination of all businesses.
  • Income and losses NOT included in net earnings from self-employment include:
    • Salaries subject to social security and Medicare tax received as an employee
    • Fees received for services performed as a NOTARY PUBLIC.
    • Income received as a retired partner under written partnership plan.
    • Income from real estate rentals if did not receive in course of trade or business as a real estate dealer (use Schedule E)
    • Income from farm rentals if, as landlord, you did not materially participate in production or management of production of farm products on land
    • Dividends if you did not receive income in course of trade or business as dealer
    • Gains and Losses (use Form 4797 or Schedule D)
    • Net operating losses
       

#6 - DON’T FORGET THE TELEPHONE TAX CREDIT!
 

·         IRS conceded to Department of Justice to no longer collect excise taxes on long-distance telephone services

o        It should not apply to long distance only local

o        Not taxable effective March 1, 2003

o        Tax collection ceased after July 31, 2006

·         Refundable credit

·         2006 only

·         Individuals

o        $30 if single

o        $40 if MFJ

o        $50 if MFJ with one dependent

o        $60 if MFJ with two dependents

o        Or can gather 41 months of statements to calculate actual tax paid

·         Businesses

o        May use actual amount or formula

o        Form 8913 to request refund

·         Can get refund even if not required to file a return

o        Use Form 1040-EZ-T
 

• 3 items on 2006 return – higher education tuition and fees (up to $4,000), educator expenses (up to $250) and state and local sales tax deduction.
• Expired under prior law but extended by the Tax Relief and Health Care Act of 2006
• Allowed to be taken, however, forms released prior to Congress extending the provisions.
• IRS revised forms assuming that these provisions were gone.
• IRS will not be revising due to extension of these provisions.
• You must force on 1040 and use codes
  • Tuition and fees deduction - put on line 35 on page 1 and mark (T)
    • Mark (B) if taking both this and domestic production activities deduction and attach breakdown
  • Educator expenses - put on line 23 on page 1 and mark (E)
    • Mark (B) if taking both this and Archer MSA deduction and attach breakdown
  • Sales tax deduction - put on line 5 as “State and local income taxes” of Schedule A and mark (ST)
     

#4 - MILEAGE RATES
 

·         As an employee, if you are not reimbursed for mileage by your employer, you can deduct mileage as an UNREIMBURSED BUSINESS EXPENSE ITEMIZED DEDUCTION.

·         As a business owner, you can deduct mileage as a CAR EXPENSE ON YOUR SCHEDULE C or ENTITY RETURN.

·         For 2006, the mileage rate is 44.5 cents.

·         For 2007, the mileage rate is 48.5 cents.
 

#3 - TIMING IS EVERYTHING!
 

• Consult your tax advisor (and attorney and financial planner for that manner) before doing anything or making any changes.  It’s hard to help after the action has been taken!

o        Capital gains rates – rates extended through 2010

§         Continue at 15%

§         If in 10% or 15% tax bracket, rate is 5%

§         If in 10% or 15% tax bracket in 2008, rate is ZERO

o        Phaseouts

§         Itemized deduction and exemption phase outs are “phasing out”

§         Phase out reduced 1/3 per year

§         In 2010, no phaseouts

• Standard deduction

• 2006

  • $5,150 for single and married filing separately

  • $7,550 for head of household

  • $10,300 for married filing jointly and surviving spouses

• 2007

  • $5,350 for single and married filing separately

  • $7,850 for head of household

  • $10,700 for married filing jointly and surviving spouses

• $1 OVER standard deduction, you can itemize.

• Mortgage insurance

  • Itemized deduction for cost of PMI on qualified personal residence

  • 2007 only

• Kiddie Tax

  • Age limit now 18 instead of 14

  • Effective for 2006

  • 529 plans now more popular

  • KIDDIE TAX RULES

    • Form 8814 (see attached)

      • Use to report child’s income on parents’ return.

      • Child does not need to file return.

    • If a child has UNEARNED INCOME OVER $1,700 in 2006 (same for 2007), then the income ABOVE that amount is taxed at THE PARENTS’ RATE.

    • The child can EARN $850 in investment income and pay no tax on that amount and the other $850 will be taxed at the CHILD’S LOWER TAX RATE.
       

#2 - WHERE SHOULD I PUT MY TAX REFUND?
 

·         Direct deposit of refunds can now be made to 3 different accounts

• Savings, checking, mutual funds, retirement, brokerage firms, credit unions

• IRS concerned about savings

• Form 8888 (see attached)

• For IRAs, must designate for current or following year

• Exception

§         Cannot be deposited into more than one account if Form 8379 Injured Spouse has been filed.

o        Special rules if errors on return and refund changed
 

#1 - DEDUCT YOUR HOME OFFICE!
 

• Form 8829 (see attached)
• Home must be principal place of business
  • Consider the relative importance of the activities performed at each place where you conduct business
  • Consider the amount of time spent at each place where you conduct business
  • Home office will qualify as your principal place of business if:
    • You use it EXCLUSELY and REGULARLY for administrative or management activities of your trade or business AND
    • You have no other fixed location where you conduct SUBSTANTIAL administrative or management activities of your trade or business.
• Deductions
  • MORTGAGE INTEREST
    • Remainder to Schedule A
    • No Schedule A phase-out since business expense
  • REAL ESTATE TAXES
    • Remainder to Schedule A
    • No Schedule A phase-out since business expense
  • UTILITIES
    • Gas, electric
  • HOMEOWNERS INSURANCE
  • DEPRECIATION
• How is the deduction calculated?
  • Square footage of office divided by square footage of entire house
• Employees
  • If you are an employee but you use your home office as your PRIMARY office, the expenses can be included as an UNREIMBURSED BUSINESS EXPENSE MISCELLANEOUS ITEMIZED DEDUCTION subject to the 2% AGI floor.
  • The business use of the home MUST BE FOR THE CONVENIENCE OF YOUR EMPLOYER to qualify.
• Itemized deductions
  • You can itemize even if you do not own a home.
    • Large amount of medical bills
    • Large sales tax bill
    • Large amount of charitable contributions
    • Large amount of miscellaneous deductions above the 2% AGI limit.
• Special Rules for DAYCARE FACILITY
  • If you use space in your home on a regular basis for providing daycare, you may be able to deduct the business expenses for that part of your home EVEN THOUGH you use the same space for NONBUSINESS purposes.
  • To qualify for this exception to the exclusive use rule, you must meet BOTH requirements:
    • You must be in trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves, AND
    • You must have applied for, been granted, or be exempt from having, a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law.  If your application was rejected or license revoked, you do not meet this requirement.
  • You do not have to meet the exclusive use test if you use part of your home as a daycare facility
    • Exclusive use test
      • You must use a SPECIFIC area of your home ONLY for your trade or business.
  • If you use part of home EXCLUSIVELY for daycare, deduct all allocable expense subject to deduction limit.
  • If use of part of home as daycare facility is regular, BUT NOT EXCLUSIVE, you must figure what part of available time you actually use it for business.
    • You do not need to keep records to show specific hours.
    • You may use occasionally for personal reasons.
    • Room does not qualify is occasionally for business reasons.
    • Compare TOTAL TIME used for business to TOTAL TIME part of home used for ALL purposes (by week or by year)
  • MEALS
    • If you provide food, DO NOT include HERE, rather claim it as a separate deduction on Schedule C.
    • Cannot deduct food consumed by you or family
    • Deduct 100% of food consumed by recipients
    • Deduct 50% of food consumed by employees (or 100% if de minimis)
    • Reimbursements received from sponsor under Child and Adult Food Care Program of Dept. of Agriculture TAXABLE ONLY to extent exceed expenses for food for eligible children.  If reimbursements MORE THAN/LESS THAN expense, INCOME/EXPENSE on Schedule C.
    • Can use STANDARD meal and snack rates instead of actual costs to compute deductible cost of meals and snacks
      • 2005 Standard Meal and Snack Rates (other than Alaska and Hawaii)
        • $1.04 – breakfast
        • $1.92 – lunch
        • $1.92 – dinner
        • $0.57 – snack
      • Can use the standard meal and snack rates for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day.
      • NEW RATES FOR 2006 ARE NOT AVAILABLE
    • If use standard meal and snack rates for a particular tax year, must use the rates for all your deductible food costs for eligible children during that tax year.
    • If use standard meal and snack rates in any tax year, can use actual costs to compute the deductible cost of food in any other tax year.
    • If use standard meal and snack rates, must maintain records to substantiate the computation of the total amount deducted for the cost of food provided to eligible children.
    • Records kept should include the name of each child, dates and hours of attendance in the daycare, and the type and quantity of meals and snacks served.
      • FAMILY DAYCARE PROVIDER MEAL AND SNACK LOG (see attached)
    • Do not include non-food supplies used for food preparation, service, or storage, such as containers, paper products, or utensils.
      • Separate deduction on your Schedule C
  • Form W-10 Dependent Care Provider’s Identification and Certification (see attached)
    • Your client’s may request this to be filled out so that they may include on Form 2441 of their return

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