Tax planning just got a little more simple and a lot more complicated. You've probably heard that Congress has passed another tax cut package. Just before adjourning, Congress approved the $45 billion Tax Relief and Health Care Act of 2006 . Like so many recent tax laws, the new law is huge. It includes tax breaks for individuals and a myriad of different businesses.

The new law simplifies tax planning because it renews a batch of temporary tax incentives, commonly known as tax extenders. These are temporary tax breaks that Congress has been extending every year or so instead of making them permanent. It's budget gimmickry to make the tax cuts seem less expensive over one or two year than if they were permanent.

The extenders passed Congress literally at the last-minute. The House voted to approve the tax bill on December 8 and the Senate on December 9. After that, Congress adjourned.

The temporary nature of the extenders caused a lot of problems this year. Even though Congress extended them, it did so after the IRS printed most of the 2006 tax forms. The IRS is expected to release a special publication about the extenders and, of course, our office is here to answer all your questions about the extenders and the new law at any time.

Tax incentives for individuals

For individuals, the state and local sales tax deduction is one of the most important extensions. Two years ago, Congress changed the tax laws to permit you to deduct either state or local income taxes or state and local general sales taxes as an itemized deduction. That was good news for people in states without a state income tax. However, the deduction was temporary and expired at the end of 2005. The new law extends it through 2007.

Other extenders for individuals are more targeted. If you paid tuition for post-secondary education, you may be eligible for the extended higher education tuition deduction. Teachers and other education workers can deduct up to $250 for some out-of-pocket classroom expenses. First-time homeowners in the District of Columbia get a tax break. All of these tax cuts are extended through 2007.

Congress also created some new tax breaks for individuals. You may be able to deduct premiums for mortgage insurance on your home. If you had incentive stock options and pay AMT, you could be eligible for a refundable credit. The rules for both of these incentives are very complicated. We can help you decipher them.

The news about energy tax breaks for homeowners is mixed. Congress did not extend the tax credit for installing energy-efficient windows, doors and other common items. Instead, it extended the credit for "alternative" energy expenditures. These are more exotic items, such as solar water heaters and fuel cells.

At the last minute, Congress made some important changes to Health Savings Accounts in the new law. These accounts are similar to IRAs. You can save money for future health care expenses. The new law facilitates transfers between health flexible spending accounts (FSAs) or health reimbursement accounts (HRAs) and HSAs. It also allows a one-time rollover of IRA savings into an HSA for qualifying taxpayers. If you don't have an HSA, give our office a call and we'll explore the benefits of these accounts with you. The new law could make them even more valuable for you.

Business tax breaks

The bulk of the tax incentives in the new law are targeted to businesses -- businesses of every type and variety. Employers large and small all benefit from some of the provisions.

Many employers have been clamoring for extension of three temporary tax breaks: the research tax credit, the Welfare-to-Work credit and the Work Opportunity credit. The research credit is designed to encourage U.S. companies to conduct scientific and technical research at home. The Welfare-to-Work and Work Opportunity credits reward employers who hire new employees from economically-challenged groups. These credits have been extended but not made permanent.

Businesses also are eligible for some extended energy tax breaks. Like the energy tax incentive for individuals, these reward very specific energy improvements. The new law also extends incentives to boost domestic production of alternative fuels, such as ethanol, and to encourage renewable energy projects.

Businesses also are eligible for a host of other tax breaks. Employers who hire Native Americans may qualify for a tax break. The new law extends the domestic production activities deduction to U.S. businesses with manufacturing activities in Puerto Rico. Mining companies get a tax break for investing in mine safety equipment and mine safety training. Merchant vessels on the Great Lakes qualify for a tax break. The list goes on and on.

Crackdown on tax protesters

Congress has given the IRS enhanced authority to penalize taxpayers who file frivolous returns and other bogus submissions. These tax protesters claim, for example, that the federal income tax is unconstitutional or that wages are not taxable. The IRS has heard - and rejected - all of these arguments for years. Now, it can impose a penalty of up to $5,000 on individuals who make these false claims.

The new law also permits the IRS to continue to share information with law enforcement agencies to combat terrorism. Individuals who contact the IRS about tax cheaters may be eligible for higher rewards under the new law.

Technical corrections

The new law makes technical corrections to some existing tax laws. These are not substantive changes; that is, they don't create new tax breaks. Rather, they are meant to clarify what Congress intended. The technical corrections in the new law impact tax shelter regulations and controlled foreign corporations.

Looking ahead

The Tax Relief and Health Care Act of 2006 was the last tax bill of the 109th Congress. When the new Congress convenes in January, Democrats and not Republicans will be in charge. New leaders will bring new priorities. One thing that is certain not to change is lawmakers' interest in tax policy. Many individuals are concerned about the alternative minimum tax. Congress could tackle that issue next year. Businesses are struggling with health care costs. Some tax-related proposals could be introduced to help businesses. Our office will keep monitoring developments in Congress as they unfold and keep you posted.

If you have any questions about the new tax law, give us a call today. We can schedule an appointment to sit down and review the new law in person. You could be eligible for some valuable tax incentives.

The Pension Protection Act of 2006 (H.R. 4) is a 900+ page new law that is about a lot more than pension funding. Tacked-on at the end of the law are some very important changes to the rules for charitable donations. These changes affect everyone who makes gifts to charitable organizations and deducts their gifts on their tax returns. Many of these rules go into effect immediately.

The new law places limits on donations of cash, clothing and household items. It also reforms the rules for donations of easements, fractional interests and other items. Businesses get enhanced deductions for food and books and if you are age 70 or older, you can donate the proceeds of an IRA to charity tax-free. One thing should be noted. The new law does not permit non-itemizers to deduct charitable contributions, even though this change has been proposed many times in Congress.

Limitation on deduction for charitable contributions of clothing and household items. The Pension Act adds a provision, effective for donations made after August 17, 2006, that limits the deduction for charitable contributions of clothing and household items to contributions of items that are in good used condition or better. A deduction may be denied for items with minimal monetary value. Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques; objects of art, jewelry and gems, and collections are specifically excluded from the definition. These limitations do not apply to a single item of clothing or a household item for which a deduction of more than $500 is claimed, supported by a qualified appraisal with respect to the property. For partnerships and S corporations, the limitation is applied at the entity level, except that the deduction shall be denied at the partner or shareholder level. This amendment applies to contributions made after the date of enactment of the Pension Act.

Modification of recordkeeping requirements for certain charitable contributions. The Pension Act adds a new provision that denies a charitable deduction for any contribution of cash, check, or other monetary gift unless you maintain as a record of such contribution a bank record or a written communication from the donee/recipient showing the name of the donee organization, the date of the contribution, and the amount of the contribution. Thus, you will be required to maintain records on all monetary gifts made, regardless of amount. This amendment applies to contributions made in tax years beginning after the date of enactment of the Pension Act.

Cash. In another big change, that is effective starting in 2007, the IRS will no longer permit a deduction for the contributions of cash, check or other monetary gift unless you, as the donor, can show a bank record or a written communication from the charity indicating the amount of the donation, the date the donation was made and the name of the charity. The new recordkeeping requirements give taxpayers no leeway. You must have a bank record or a receipt to substantiate your deduction.

IRAs. If you own an IRA and have reached the age of 70, the new law allows tax-free distributions from IRAs for charitable purposes through December 31, 2007. The maximum amount you can distribute each year for charitable purposes is $100,000. Any distribution made from your IRA will not be included in gross income and, additionally, will not be taken into account in determining your individual deduction for charitable contributions. This is helpful even to taxpayers who do not itemize.

Food and books. Last year, Congress expanded the deductions for donations of food and books in the wake of Hurricane Katrina. All businesses, including S corporations, partnerships and other business entities, can temporarily deduct contributions of food and books. These enhanced deductions are available through December 31, 2007.

Conservation easements. Until December 31, 2007, the new law also raises the deduction limits for qualified conservation easements from 30 percent to 50 percent of adjusted gross income. Additionally, the contributions are not taken into account in determining the amount of other allowable charitable contributions. You are also able to carry over any of the qualified conservation contributions that exceed the 50 percent limitation for the next 15 years.

Appraisals. The new law strengthens the penalties for returns that are filed with valuation misstatements. Return preparers as well as taxpayers risk penalties for incorrect or fraudulent appraisals. Appraisers who make bad appraisals also can be sanctioned.

S corporations. Under the new law, the reduction in a shareholder's basis in the stock of an S corporation resulting from a charitable contribution made the corporation equals the shareholder's pro rata share of the adjusted basis of the contributed property. This treatment applies to contributions made through December 31, 2007.

More changes. The new law also changes the rules for charitable contributions of fractional interests, taxidermy property and facade easements.

As you can see, the new Pension Protection Act of 2006 immediately impacts your decisions regarding charitable contributions. Please contact our office and we would be happy to explore any of the above items in greater detail with you.

The President signed the huge 907-page "The Pension Protection Act of 2006" into law on August 17, 2006. The law includes a number of significant tax incentives to enhance retirement savings and forces employers to shore up their pension plans.

Here's a brief summary of the some of the Pension Protection Act's tax law changes...

1. Permanent Retirement Savings Incentives. The Economic Growth and Tax Relief Reconciliation Act of 2001 substantially increased pension and individual retirement account contribution limits through 2010 as well as other provisions designed to make retirement saving easier. The law makes these favorable changes permanent. The law also indexes the income limits for traditional, spousal and Roth IRAs to prevent these benefits from being eroded by inflation.

2. Minimum Funding Standards. Significant changes in defined benefit funding rules designed to force employers to shore up their pension plans. Many pensions are under-funded, meaning that promised pension benefits could potentially exceed the funds available, leaving pensions strapped for cash.

The new law allows employers to deduct the cost of making additional contributions to fund the pension and imposes a 10% excise tax on companies that fail to correct their funding deficiencies.

3. Automatic Enrollment. The law creates a safe harbor to encourage employers to offer automatic enrollment in employer-sponsored defined contribution pension plans, which will encourage employee participation.

4. Rollover Rules. The law provides new rollover requirements for after-tax rollovers in annuity contracts, direct rollovers from retirement plans to Roth IRAs, and rollovers by non-spouse beneficiaries of certain retirement plan distributions.

This provision lets workers leave benefits to a domestic partner or dependent, not just a spouse. And workers could draw on retirement funds for medical or financial emergencies involving domestic partners or other beneficiaries. For these non-spouses, the tax payment schedule will be tied to the age of the account's former owner.

5. Saver's Credit Made Permanent. The law makes permanent the Saver's Credit of up to $2,000. Without this extension, the credit would not have been available after 2006. The law also indexes the Saver's Credit income limits to prevent this benefit from being eroded by inflation.

6. In-Service Distributions at age 62. The law allows pension plans to provide for distributions to employees who have attained the age of 62 and who have not separated from employment at the time of the distributions.

7. Stricter Rules on Charitable Donations. The law states that taxpayers must keep records of all cash donations. Individuals must show a receipt from the charity, a canceled check, or credit card statement to prove their donation. No tax deduction will be allowed if the taxpayer cannot provide any supporting documentation. The receipts and other supporting documentation doesn't need to be sent with your tax return. Instead taxpayers must keep the records incase of an IRS audit.

This tougher substantiation rule doesn't take effect until 2007, so you don't have to reconstruct all those smaller amounts you gave earlier this year.

8. Direct Donations From IRAs. The law allows taxpayers to make charitable donations directly from their IRA account. The distributions will be tax-free and avoid the penalty on early withdrawals. Taxpayers are allowed to donate up to $100,000 per year from their IRA.

Since the distribution will not be included in taxable income, individuals will not be able to claim a tax deduction for the charitable contribution. However, the ability to keep the money out of your taxable income should help offset the deduction loss.

Congress recently passed the Tax Increase Prevention and Reconciliation Act (Tax Reconciliation Act). Tax legislation is always complicated and the new tax cut package that Congress just passed is no exception. We know that you've heard a lot about the new tax cuts. We want to take a few minutes to explore some of the important tax incentives in the Tax Increase Prevention and Reconciliation Act that could help lower your tax bill.

The new tax cut was a long time coming. Negotiations started in 2005. That's why the new law is officially known as the Tax Increase Prevention and Reconciliation Act . The tax incentives in the new law apply in 2006 and beyond.

Dividends and capital gains. Three years ago, Congress gave investors a valuable tax break when it reduced the maximum dividend tax rate from a high of 35 percent (depending on income tax bracket) to 15 percent and the maximum capital gains tax rate from 20 percent to 15 percent. Congress also created a lower rate of five percent for taxpayers in the 15 and 10 percent brackets. These lower-income taxpayers receive an extra break in 2008 when their dividend and capital gains tax rate falls to zero. However, the rate reductions were temporary. As originally enacted in 2003, they were scheduled to expire on December 31, 2008.

The Tax Reconciliation Act extends the reduced rates for two more years. Under the new law, you can take advantage of the lower dividend and capital gains tax rates through December 31, 2010.

The two-year extension opens the door to many tax planning opportunities. Because of the extension, you now are able to take a significantly lower view on long-term investments. Our office can help you review your portfolio and make some important strategic decisions on how to maximize your tax savings because of the extension. Moreover, and this is very important, the lower rates do not apply to all dividends and capital gains. We can help you determine if your dividends or capital gains qualify for the lower rates.

Kiddie tax. The "kiddie" tax is designed to prevent income-shifting from parents to children to circumvent the tax laws. Under the old rules, children under the age of 14 were taxed at their parent's marginal tax rate. For 2006, the "kiddie" tax kicks-in when the child has more than $1,700 in passive (unearned) income and other criteria are met.

The new law raises the age limit from 14 to 18. This change is effective immediately. Because it is effective immediately, you need to revisit your tax planning for 2006. This is especially important if you are saving for a child's college or other post-secondary school educational expenses.

AMT relief. The alternative minimum tax (AMT) is quickly becoming the "regular" tax for many two-income couples with children and others supporting large families. The AMT was originally intended to prevent very wealthy individuals from evading taxes. That was more than 30 years ago. Because the AMT was not indexed for inflation, and because of some other factors, it now ensnares many middle-income taxpayers.

Congress could make some fundamental changes to the AMT so it goes back to its original purpose. So far, it has not; in a way, it is too used to the tremendous tax revenues that the AMT brings in. Instead, however, Congress has given taxpayers some temporary incentives designed to cushion the blow of the AMT.

The Tax Reconciliation Act raises the AMT exemption levels. The AMT exemption for single taxpayers rises to $42,500 for 2006. The AMT exemption for married couples filing jointly jumps to $62,550 for 2006. The amounts are slightly higher than in 2005 to account for inflation over the past few years.

Although many Washington observers expected that Congress would extend the AMT exemption amounts for at least one more year, the inflation adjustments are a welcome surprise.

Taxpayers also will continue to be able to use the nonrefundable personal credits against regular and AMT liability. These include the dependent care, elderly and disabled, the new consumer energy credits, and the Hope and Lifetime Learning tax credits.

The AMT is not only complex, it is often unintelligible to the average taxpayer. Our office can help you understand the basic concepts behind the AMT and execute a tax strategy that may help minimize your tax bill. The incentives in the new law certainly help reduce the AMT burden and may benefit you.

Roth IRAs. Roth IRAs, like traditional IRAs, are excellent vehicles to save for retirement. They also have many rules that impact how much you can save and when you can withdraw your savings. Under current rules, individuals with modified adjusted gross incomes of more than $100,000 could not convert a traditional IRA to a Roth IRA. The Tax Reconciliation Act removes this limitation starting in 2010.

Even though 2010 is four years away, now is the time to start a Roth IRA conversion plan. You should consider possibly rolling over 401(k) balances to IRAs when leaving employment or starting traditional IRAs, which you will convert to Roth IRAs. Although contributions to a Roth IRA are not tax deductible, unlike contributions to a traditional IRA, your savings in a Roth IRA grow tax-free. Give our office a call to learn more about converting a traditional IRA to a Roth IRA. The tax break in the new law may work to your advantage.

Foreign earned income and housing costs. Qualifying taxpayers may be able to exclude certain foreign earned income and foreign employer-provided housing costs from their income for U.S. tax purposes. Under the Tax Reconciliation Act, indexing the exclusion cap for inflation is moved forward. The new law also sets the tax brackets for any income in excess of the exclusion amount and makes some other changes.

Offers-in-compromise. Many taxpayers who are burdened with large tax debts seek to negotiate an offer-in-compromise with the IRS. The IRS is notoriously unenthusiastic about offers-in-compromise. Under the new law, taxpayers are required to make partial payments of their liability in addition to any user fee now imposed by the IRS. However, the user fee will be applied to the outstanding liability. The new law also affects taxpayers who want to make lump sum offers and installment offers. In one piece of good news, if the IRS fails to process an offer within two years, the offer will be deemed to be accepted.

More developments. The Tax Reconciliation Act also changes the capital gain treatment for self-created musical works. The new law also expands the Veterans' Mortgage Bond Program. In addition to the incentives described in this communication, which are targeted to individuals, the new law also gives business taxpayers some significant breaks, such as enhanced small business expensing.

If you have any questions about these valuable new tax cuts, give our office a call. We can explore in much more detail how some of them could result in future tax savings.