Tax Saving

Tips for 2006 Advice from CPAs

Recent Tax Law Changes

• Retirement Plans • “Kiddie Tax” • Charitable Giving

Pension Protection Act of 2006 Retirement Provisions

• Makes permanent higher IRA contribution limits • Continued “catch up” IRA contributions • Saver’s credit becomes permanent

Charitable Giving Provisions

• Charitable contributions directly from IRA • Documentation required for monetary donations • Donated items must be in “good” condition

529 Plan Benefits Made Permanent

• Tax-free withdrawals from 529 Plans are permanent • Provision was set to expire in 2010

Tax Increase Prevention and Reconciliation Act of 2005 New “Kiddie Tax” Rules

• “Kiddie Tax” now in effect until age 18 • Makes income shifting to children less advantageous

IRA Conversions

• Convert traditional IRAs to Roth IRAs in 2010 • Qualified retirement plans to Roth IRAs in 2010 • Tax liability can be spread over two years

Tax Breaks for Energy Efficiency

• A credit of up to $3,400 for the purchase of hybrid or alternative fuel vehicle • Energy efficient home improvements may earn $500 credit • Purchase of solar water heaters may garner a credit of up to $2,000

Extended Tax Breaks

• Option to deduct sales tax instead of state and local taxes • Higher education tuition deduction • Out-of-pocket classroom expense deduction • Be sure to consult www.irs.gov

for more information

Filing Basics Filing Status

• Married filing jointly • Married filing separately • Single • Head of Household • Qualifying widow(er)

2006 Tax Rates

• 10% • 15% • 25% • 28% • 33% • 35%

Filing Status Standard Deduction Standard Deduction

Single Married filing jointly Married filing separately Head of Household Qualifying widow(er) $ 5,150 $10,300 $ 5,150 $ 7,550 $10,300

Standard Deduction Taxpayers 65 and older and/or blind get an additional standard deduction

• Married - $1,000 • Single or Head of Household - $1,250

Itemizing Deductions

• An alternative to the standard deduction • Use when these deductions exceed standard deduction • Phase-out rules apply -- Single/joint/head of household - $150,500 -- Married filing separately - $75,250

Personal Exemption Filing Status Phase-out starts Phase-out ends

Joint return Head of Household $188,150 Single $150,500 Married filing separately $225,750 $112,875 $348,250 $310,650 $273,000 $174,125

Timing Strategies Control tax bill by –

• Deferring income, such as bonuses • Accelerating deductions, such as qualified charitable contributions • Bunching deductions that are based on a percentage of AGI

Tax Strategies for Life

• Family • Education • Home • Investments • Retirement

Family Strategies

• Child Credit • Adoption Credit • Dependent Care Credit • Earned Income Credit • Shifting Income

Child Credit

• Child must be under 17 at year end • Child must be claimed as a dependent • $1,000 credit per child • Reduces tax bill dollar-for-dollar • Phase-out for higher income families

Adoption Credit

• Credit of up to $10,960 per eligible child • Exemption for first $10,960 reimbursed by employer • Parents adopting special needs child get full credit, regardless of actual expenses

Dependent Care Credit

• Child must be under 13 and a dependent • Tax credit from 20% to 35% of qualifying expenses • Use up to $3,000 of expenses ($6,000 for two or more dependents) to calculate credit • Not restricted to children

Earned Income Credit

Family Size Two or more children One child Maximum Credit $4,536 $2,747

Shifting Income

• Consider gifts to children – up to $12,000 without being subject to gift tax • Hire your children • First $5,150 earned by each child is tax free • Not subject to kiddie tax

Education Strategies Tax Credits

•

Hope Credit

worth up to $1,650 per student, per year • Applies to first two years of college only • Phase-out applies Single - Joint - $45,000 -- $55,000 $90,000 -- $110,000

Tax Credits

•

Lifetime Learning Credit

of up to $2,000 per year • Applies to undergraduate, graduate and professional courses • Phase-out applies

Student Loan Deduction

• Deduct up to $2,500 • No need to itemize • No limit on repayment period length • $50,000 to $65,000 – phase-out range for single filers • $105,000 to $135,000 – phase-out range for married filing jointly

Higher Education Tuition Deduction • Deduct up to $4,000 • Phase-out limits apply Single: $65,000 -$80,000 Married: $130,000 - $160,000 • No need to itemize • Visit www.irs.gov

for more information

Homeowner Strategies Deductions

• Mortgage interest on first and second homes • Up to $100,000 in home equity loan or line of credit interest • Points paid on mortgage or refinancing • Real estate property taxes

Selling Your Home

• Exclude up to $250,000 in capital gains from sale of home; $500,000 for joint filers • Must own and use home as principal residence for two out of five years • Eligible only once every two years • Reduced exclusion available

Investment Strategies Dividends

• Top dividend tax rate of 15% • Rate is 5% for taxpayers in 10% and 15% brackets • Check ex-dividend date • Does not apply to interest payments

Capital Gains Tax

• Maximum tax rate on long-term gains is 15% • 5% for taxpayers in 10% and 15% brackets • Asset must be held more than one year • Does not apply to collectibles

Offset Capital Gains with Losses

• Capital losses offset capital gains • $3,000 ($1,500 for married, filing separately) in net capital losses can be deducted against ordinary income • Beware of wash sale rule

Retirement Strategies Employer-Sponsored Plans

• Contributions help reduce tax bill • Take advantage of employer matches • $15,000 is 2006 maximum contribution • $5,000 additional contribution for age 50 and older • New for 2006 – “Roth 401(k)”

IRAs

• $4,000 is maximum 2006 contribution • $1,000 additional catch-up contribution for age 50 or older • Phase-out applies • Open by April 16, 2007

Business Strategies Structure

• C Corporation • S Corporation • Partnership • Limited Liability Company • Sole proprietor

Expensing Deduction

• Deduct up to 100% of the cost of up to $108,000 in property • Applies to new or used property • Equipment must be put into service by December 31, 2006 • Now applies to software • Phase-out rules apply

Additional Business Strategies

• Deduct 100% of health insurance costs if self-employed • Defer income and accelerate deductions • Write off bad debt • Make the most of business-related deductions – travel, auto, meals and entertainment and interest expenses

Year-End Tips Charitable Deductions

• Donate appreciated property and avoid capital gains tax • Donate clothing, household goods, furniture in good condition and deduct fair market value • Volunteer your time and deduct qualified travel and related expenses

Flexible Spending Accounts

• Reduce taxable income • Use up remaining 2006 balances • Over-the-counter drugs are now allowable

Avoid AMT AMT triggers:

• Higher than average dependency exemptions • Large deductions for state and local income taxes and real estate taxes • High miscellaneous itemized deductions and medical expenses • Incentive stock options

Planning for Success

• Focus on tax savings year-round • Consider year-end opportunities • Get help if you need it