Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

RECENT TAX LAW CHANGES

by Andrew D. Schwartz, CPA

On May 17, President Bush signed the Tax Increase Prevention and Reconciliation Act into law.  While this $70 billion tax cut package extends certain expiring tax breaks, it also includes a few provisions that could increase your tax burden. 

Let's take a look at some of the ways this Tax Act might save you some taxes:

• Reduced Tax Rate on Capital Gains and Dividends Extended Through 2010:  Currently, the maximum tax rate on long-term capital gains (assets held for more than one year before being sold) and corporate dividends is 15%.  For people in the lowest two tax brackets, the rate is 5% through 2007, and then will be 0% in 2008.  Originally scheduled to rise in 2009, the 15% and 0% tax rates on long-term capital gains and corporate dividends will now remain in place through 2010.

• A Little AMT Relief Through 2006:  Due to a variety of factors, more and more middle income taxpayers are being hit with the Alternative Minimum Tax (AMT) each year.  And for 2006, the AMT exemption, which helps minimize the impact of this tax on the middle class, was going to fall from $58,000 to $45,000 for married couples, and from $40,250 to $33,750 for single individuals.  This Tax Act restored the AMT exemption to $62,550 ($42,500 for single taxpayers) for 2006 only.

• Increased Section 179 Deduction Available Through 2009:  Every year, small business owners can elect to write off the business equipment they purchase instead of depreciating the cost of an asset over its useful life of 5 or 7 years.  Effective 2008, the maximum Section 179 deduction was slated to decrease to just $25,000 from its current limit of $108,000 (in 2006).  This Tax Act extended the increased Section 179 limits through 2009.

Like all other tax law changes, This Tax Act contains a few revenue raising items as well.  Let's take a look at some ways this tax package might increase your tax burden:

• "Kiddie Tax" Age Increased to 17:  The Kiddie Tax, introduced as part of the massive Tax Reform Act of 1986, celebrates its twentieth birthday in 2006 by becoming broader.  Basically, any unearned income above a certain threshold earned by a child under the age of 14 is taxed at the parent's tax rate.  Thanks to the recent Tax Act, the Kiddie Tax now applies to children who are 17 or younger and earn more than $1,700 (in 2006) in interest, dividends, capital gains, and other non-wage income.  This change to the rules might make 529 Plans look even more attractive.

• Income Limitation for Roth Conversions Disappears in 2010:  Under the current rules, you can only convert your IRAs to a Roth IRA if your income is less than $100,000.  The same threshold of $100,000 applies to single individuals and to married couples alike.  Starting in 2010, the income limitation disappears, and anyone can convert their IRAs to a Roth IRA.  For 2010 Roth conversions, you'll also have the option to pay the taxes due in 2010, or to spread the tax liability over two years starting in 2011. 

Good Tax Planning Gone Bad:

Tax planning continues to become more challenging.  Even though you need to plan based on the current set of rules in place, future tax law changes might cause even the most prudent planning to backfire. 

Let's look at an example of good tax planning gone bad.  What if you chose not to go with a 529 Plan to save for your child's college education, and instead purchased investments in the child's name with the expectation of selling those investments in 2008.  Based on the pre-May 17th rules, no capital gains taxes would have been due provided your child is at least 14 years of age that year. 

Seems like great tax planning, right?  Well, since the Kiddie Tax now applies to children through the age of 17, those gains will now be taxed at your rate of 15% unless your child is at least 18 years old. 

So what's the solution?  When planning, make sure to include a variable in your calculations that reflects the risk of the tax rules changing.  The longer term your planning, the more likely that either the rates or the rules will change, greatly impacting the taxes you ultimately end up paying.

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CLOCK IS TICKING FOR HYBRID CAR TAX CREDIT

by Andrew D. Schwartz, CPA

With gas prices hovering at $3.00 per gallon, drivers have already begun to migrate from gas guzzling SUVs to fuel efficient hybrids. As a sign of the times, GM recently announced that they plan to discontinue the namesake of the "Hummer deduction" in favor of the smaller Humvee.

In addition to getting better gas mileage, purchasers of hybrids are also rewarded with a sizeable tax credit through 2010.  The new hybrid car tax credit replaces the $2,000 "Clean Fuel" deduction that was in place through the end of 2005.  Please note that this credit is only available in connection with the purchase of a new hybrid vehicle, so leasing one or buying a used hybrid vehicle won't qualify.

The hybrid credit is based on two components.  First there is the Fuel Economy credit that compares the fuel efficiency of each vehicle with 2002 models.  Then there is the Conservation credit which is calculated on the projected fuel savings of the vehicle over its anticipated life.  The hybrid car tax credit you'll claim is the sum of these two credits.

According to the information available on the IRS' website, below are the vehicles currently eligible for this tax credit:

The tax credit for hybrids manufactured by Honda should be available shortly.

Escape Clause

Even though the hybrid credit runs though 2010, the credit won't be available for long on many popular models.  To level the playing field for Ford and other newcomers into the hybrid market, the allowable tax credit starts to disappear for a manufacturer once they have sold 60,000 hybrid vehicles, as follows:

• The full credit is allowed through the end of the quarter following the quarter during which the manufacturer sells its 60,000th hybrid vehicle.

• The credit is cut in half for the subsequent two quarters.

• The credit is then cut to a quarter of the original credit for the subsequent two quarters.

• No credit is allowed for vehicles purchased from that manufacturer thereafter.

Even Energy Efficient Alternatives Lose to the AMT

The good news is that the new hybrid car tax credit is much more valuable then the $2,000 Clean Fuel deduction.  That's because a credit provides you with a dollar-for-dollar reduction in the taxes you owe.

The problem is that the "Alternative Motor Vehicle Credit" won't benefit you once the Alternative Minimum Tax (AMT) kicks in.  And with more and more taxpayers paying this tax each year, there's a good chance you were hit by the AMT last year.  Check out line 45 of your 2005 Form 1040 to see if you paid this tax last year.  If there is an amount greater than zero on that line, you're in the AMT.

Unlike other tax breaks, you're generally not allowed to carry forward this unused credit to a subsequent year.  So if you're hit by the AMT and can't use the credit the year you purchase the vehicle, you lose it. 

Is there any way around the AMT?  Yes, if you purchase the hybrid through your business, you get to carry back the unused "general business credit" to the prior year, and then carry it forward for twenty years.  There's a pretty good chance that one year during this twenty-two year window you'll avoid the AMT and be eligible to claim this tax break.

What Does Green Mean To You?

The color green represents different things to different people.  To some it signifies being environmentally friendly.  To others, green represents money.

Whatever your interpretation, a hybrid is environmentally friendly, will save you some money at the pump, and may even get you a tax refund from the IRS.  Plus, your friends and neighbors driving around in their huge SUVs might even be a little green with envy when they see you in your new hybrid vehicle.

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TAX AND FINANCIAL PLANNING CALENDAR FOR JUNE, 2006

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2005 & 2006 TAX FACTS

• For 2005, the standard deduction for a single individual is $5,000 and for a married couple is $10,000. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2005, the personal exemption is $3,200. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $94,200 for 2006, up from $90,000 in 2005.
  
• The standard mileage rate is $.485 per business mile as of September 1, 2005 (after being $.405 per mile through August 31, 2005), and will then be $.445 per mile for 2006.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,000 for 2006.  And if you'll be 50 or older by December 31, 2006, you can contribute an extra $5,000 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $4,000 for 2006.  And if you turn 50 by December 31st, you can contribute an extra $1,000 for 2006.  You have until April 15, 2007 to make your 2006 IRA contributions. 

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