2005 U.S. Year End Tax Planning for Individuals and Expatriates

The period from now until the end of 2006 holds unique opportunities for you to save taxes. It is the ideal time of year for tax planning for at least three reasons:

You finally have a good fix on what your taxable income and expenses are shaping up to be for 2006 and for several months into 2007, allowing you to effectively use acceleration or deferral techniques to maximize your overall tax savings between 2006 and 2007.
Time still remains to take advantage of new-for-2006 tax laws before the door to do so for the 2006 tax year shuts tight behind you.
Last, but not least, you can use this time to fully prepare for new tax breaks that will begin immediately on January 1, 2007.

Shifting income and expenses

Having only a few months left to the year, you usually can forecast fairly well what income and deductions you will be reporting on your 2006 tax return next April if things continue the way they have been. You can also forecast fairly well your income and expense situation for the first few months of 2007. Therein lies a golden opportunity to shift some income or expenses into one year or the other depending on what will save you the most overall taxes.

Income and expense shifting is the "bread and butter" of year-end tax planning. It requires information gathering and a proactive approach in determining your final tax bill. It allows you to do something about your taxes rather than "just writing the check out" to the IRS at tax time.

The year-end techniques that may be used to accelerate or defer income and/or expenses are as varied as there are situations to be addressed. Some of the more frequently used strategies include:

Smoothing out taxable income between 2006 and 2007 by accelerating and postponing transactions that either produce income or yield deductible expenses;
Matching long and short term capital gains with losses to lower overall capitals gains tax and possibly maximize the $3,000 amount of capital losses that can offset other income;
Bunching deductible expenses into one or the other year depending upon whether the standard deduction may be taken in one of the years, or whether the adjusted gross income limits for medical (7.5 percent) or miscellaneous itemized deductions (2 percent) may be more easily met;
Maximizing the tax law limits on annual contributions to your retirement plan accounts, since one year's limits cannot be added to the next year's when not taken in time;
For businesses, taking advantage of the full $108,000 expensing deduction for 2006 and the $112,000 deduction available for 2007; and
If you're an S corp shareholder, making certain that your stock basis is high enough to entitle you to any available loss deductions.

2006 opportunities and pitfalls

The tax law changes constantly. New tax breaks -- and pitfalls -- come and go all the time. 2006 is no exception. Literally scores of changes have been made to the tax law that impact 2006 tax year returns. Among those most notable for impacting the largest groups of taxpayers are:

Start of the extended "kiddie tax" under which a child's income is taxed at a parent's tax rate, under age 18 (up from age 14 and applied retroactively from January 1, 2006);
Start of the hybrid vehicle credit available to purchasers, along with its reduction once a manufacturer sells more than 60,000 units (which is already the case for Toyota hybrids starting October 1, 2006);
Start of the residential energy credits of $500 for residential energy improvements, $2,000 for solar equipment and $500 for fuel cells per half kilowatt capacity, restricted to 2006 and 2007 only;
Start of strict limitations on the quality of clothing and household items that are entitled to a charitable deduction, beginning August 17, 2006;
Start of the new (and generally unfavorable) limitations on the housing allowance for those working abroad, retroactive to January 1, 2006; and
Start of allowing direct, tax-free charitable contributions from IRAs for those 70 1/2 and older, for 2006 and 2007 only.

2007 opportunities and pitfalls

Despite the number of new provisions that began this year, 2006 does not have a lock on recent changes. 2007 is set to inaugurate several changes of its own, even before tax legislation in 2007 will likely produce still more changes. Here's a list of some of the major ones:

Starting in 2007, cash donations of any size must to be backed up by paperwork that includes either a cancelled check or a written note from the charity indicating amount, date and the name of the charity;
Starting in 2007, businesses will face a more generous, but stricter, domestic production activities deduction that includes a rise in the deduction cap from three percent to six percent and a restriction of the W-2 wage limitation to manufacturing activities only;
Starting in 2007, heretofore fixed contribution limitations on individual retirement accounts will be inflation adjusted, including Roth IRAs income limits of $156,000 (formerly 150,000) for married individuals filing jointly and $99,000 (formerly $95,000) for most others;
Starting in 2007, inflation adjustment of the Saver's Credit for lower income taxpayers means higher income levels will qualify (for example, joint filers will get a 50 percent credit with income up to $31,000, 20 percent up to $34,000 and 10 percent up to $52,000).

Also noteworthy, starting in 2010 there will be no maximum income level to restrict conversion of regular IRAs into Roth IRAs. Maximizing that opportunity, however, can begin immediately for those taxpayers presently over that limit. This strategy calls for making annual contributions to a nondeductible IRA that can then be converted into a Roth IRA in 2010 when the income cap is lifted.

11th-hour legislation

Congress has had an extremely active year already, already passing two major tax bills: the Tax Increase Protection and Reconciliation Act and the Pension Protection Act . Its tax revision activities, however, may not be over. That creates a particularly urgent need for this office to continue to monitor the situation in Washington and prepare you for quick action should Congress act in a way that affects you directly.

In that regard, there are several key provisions now under consideration in Congress:

Estate and gift tax repeal or raising the exemption to $5 million;
Retroactive extension back to January 1, 2006 of the state and local sales tax itemized deduction option;
Retroactive extension back to January 1, 2006 of the above-the-line higher education tuition deduction and the teacher's classroom expense deduction;
Extension and/or modification of a host of tax breaks for business, including the Work Opportunity and Welfare-to-Work tax credits, Archer Medical Savings Accounts; the research tax credit; and
Further closing of the SUV purchase loophole that has continued to allow up to a $25,000 expensing deduction in the first year of business use.

AMT relief is temporary

The alternative minimum tax (AMT) was designed to ensure that wealthy taxpayers were not able to escape taxation by exploiting deductions. However, the AMT has not been appropriately indexed for inflation, which means that it affects a growing number of taxpayers every year. Congress has passed a few legislative "patches" to keep it from hitting too many people, the latest in 2006 to cover 2006.

While the patch maintains the status quo, that situation does not prevent a growing number of taxpayers of falling victim to the AMT each year. 2006 and 2007 will prove to be "record years" for the IRS's collection of AMT.

To make sure you don't wind up paying AMT if you can avoid it, start by projecting your income for the rest of this year and next, at the least. That will help figure out how likely it is that you need to address the situation. Some of the items to consider regarding AMT are:

State and local taxes;
Home equity loans and other mortgage interest not incurred in buying, building or improving your principal residence;
Incentive stock options -- these may generate AMT income even when sold at a loss;
Private activity bonds; and
Other itemized deductions.

Give our office a call

All of the tax opportunities and considerations at this time of year can be a lot to remember, and the details of all these provisions can make it even more complicated. Fortunately, you won't have to remember all of them by yourself -- that's why you hire a tax professional. The two most important pieces of tax advice to keep for any year are to keep good records and ask questions. We look forward to hearing from you.

2006 Year-End Tax Planning for Businesses

Running a successful business is a 24/7 job. Not only do you have to juggle sales, marketing, personnel, and payroll, you also have to recognize the huge role that taxes play in the success of your operations. At this time of year, it's wise to spend some time thinking about year-end tax planning for your business.

Year-end tax planning is always a challenge. While we can be reasonably sure about existing tax cuts and incentives, there's always the possibility there will be more. This year, there's a very good chance that Congress will return to work in a lame duck session after the November elections and extend some popular but temporary tax breaks. If you've taken advantage of these temporary business tax incentives in the past, you know how valuable they can be.

All this uncertainty has to be factored into your tax planning. Fortunately, it's not something you need to do on your own. We're here to help.

In this letter, we'll take a look at some traditional year-end tax planning strategies and also examine how recent federal tax legislation may impact your planning. Because every business is unique, we'll look at the "big picture" in this letter. Remember, our office can help you put together a year-end tax strategy that maximizes every available tax incentive and sets a motion a fluid and dynamic strategy that will deliver results.

First, let's take a look at some steps you can take before the end of the year to possibly generate tax savings:

Employee benefits. If you've been thinking about establishing an employee benefit plan or expanding an existing plan, now is a good time to set your plans into motion. Establishing employee benefit plans, qualified retirement plans and medical or health reimbursement plans can provide tax savings to both you and your employees. Health savings accounts (HSAs) are one popular option. These accounts allow employees and their employers to contribute to tax-free income-producing accounts when the employee has coverage under a High Deductible Health Plan (HDHP) only.

Expensing. Are you taking full advantage of the Code Sec. 179 small business expensing deduction? The Code Sec. 179 deduction for capital purchases that would otherwise have to be depreciated stands at $108,000 for 2006 and is projected to rise to $112,000 in 2007 when adjusted for inflation. When used strategically, the Code Sec. 179 expensing deduction can yield significant tax savings.

Domestic production activities deduction. This tax break is surprisingly off the radar for many businesses and it shouldn't be. The Code Sec. 199 domestic production activities deduction applies not only to traditional manufacturers. It is very wide in scope and your business activity may qualify for it even if it is outside traditional manufacturing. The Code Sec. 199 deduction amounts to a percentage of either taxable income derived from a qualified production activity or all taxable income, whichever is less. There are limits and the rules can get complex. Don't let the complexity of this valuable deduction scare you. Our office will examine your business activity and if it qualifies for the deduction, you could realize some tax savings.

Hybrid vehicles. Have you considered investing in hybrid vehicles for your business? Not only would you realize some fuel savings, you also may be eligible for a federal tax break. The tax incentives differ depending on the type of vehicle you purchase. If you are thinking of a hybrid or alternative fuel vehicle, give our office a call before you make a purchase. We can explain the tax savings in greater detail and help you get the biggest tax break.

Customizing on both individual and business levels. Although distinguishing between planning for small businesses and planning for individuals has its benefits, most small business owners are keenly aware that there is little actual difference for them. As they often stand last in line for the fruits of their businesses, tax savings at either the business or individual level can have a significant impact on what remains for the small business owner. We can help you customize a strategy that maximizes savings on both levels.

These are just a sample of steps you can take to implement your year-end tax planning strategy. Next, we'll highlight some of the important tax provisions in two tax laws that Congress passed this year: the Tax Increase Prevention and Reconciliation Act (TIPRA) and the Pension Protection Act (PPA).

Pension Protection Act.Your business may offer a traditional pension plan. If it does, we encourage you to give our office a call. The reforms in the PPA that impact traditional pension plans are far too numerous and too complex to discuss in this letter. You need to know about them and be ready to implement them.

If you don't offer a traditional pension plan but offer a 401(k) or similar arrangement, you still need to be aware of many important changes in the PPA. Many of these are employee-friendly. Changes include permanent higher contributions for 401(k)s, IRAs and other savings vehicles. The new law also makes Roth 401(k)s permanent and enhances fiduciary protection for plans that offer automatic enrollment in 401(k)s and similar arrangements.

TIPRA.TIPRA is best known for extending the lower capital gains and dividend tax rate cuts. These had been scheduled to expire after 2008. They are now extended through the end of 2010. Besides extending the capital gains and dividend tax rate cuts, TIPRA also extends some business-friendly Subpart F treatment, requires federal, state and local governments to withhold three percent on payments for services or property provided by a taxpayer effective in 2011 and makes some significant changes to the foreign housing allowance rules.

Waiting in the wings. As we mentioned earlier, Congress may extend a host of temporary business tax cuts before the end of the year. These include the Welfare-to-Work and Work Opportunity tax credits, the research tax credit and many others. Don't make the mistake of believing these tax breaks are permanent. They are not. If Congress votes to extend them, we'll be sure to let you know and incorporate them, if possible, into your year-end tax planning strategy. If they're not extended, we'll develop an alternative strategy.

Please give our office a call to all the valuable year-end tax planning strategies. More than ever, the complexity of the Tax Code requires proactive planning. Don't miss out of potential tax savings for the year-end and the opportunity to get the ball rolling on tax savings for 2007.

Further 2006 Year-End Tax Planning for Individuals

2006 was another banner-year for tax legislation out of Washington and, in large part, that's the reason why year-end tax planning is so important. At this time of the year, it's helpful not only to take a look at some traditional year-end planning techniques but also to examine how these techniques are impacted by the new tax laws. Of course, tax planning is never stagnant and since there's talk of a lame-duck session of Congress after the November elections, it's important to build some flexibility into your tax planning.

Strategic tax planning is more important today than ever before. Since 2001, we've seen a sea-change in the ways federal taxes impact individuals. Cuts in existing taxes and new incentives have been made in almost every category of federal taxation. In 2006, Congress passed the Tax Increase Prevention and Reconciliation Act (TIPRA) in May and the Pension Protection Act (PPA) in August. Once again, the new laws create many exciting opportunities for tax planning.

In this letter, we'll explore some of the important tax cuts and incentives in TIPRA and the PPA and also touch on some traditional year-end tax planning strategies. Because we can only highlight some of the many tax provisions in the new laws and existing strategies, it's important that you take a few minutes and give our office a call. We'll set up a time that's convenient for you to go over how proactive year-end tax planning can help take some of the sting out of next's year federal tax bill.

New tax laws impact you

TIPRA and the PPA -- like all tax bills -- contain good news and not-so-good news depending on your personal situation. Fortunately, for many taxpayers the news is good. However, there are traps for those who are not in the know, especially when it comes to the effective dates of many tax breaks. We'll talk about those traps later and how to avoid them.

Some of the highlights of the new tax laws that could impact your year-end tax planning are:

Permanent retirement savings tax incentives, such as higher IRA and 401(k) contribution limits, taxpayer-friendly rollovers and many other pro-taxpayer changes.
Extended lower capital gains and dividend tax rates.
Extended "kiddie tax" under which a child's income is taxed at a parent's tax rate, under age 18 (up from age 14 and applied retroactively from January 1, 2006).
Direct, tax-free charitable contributions from IRAs for individuals age 70 1/2 and older (for 2006 and 2007 only).
Heightened substantiation rules for gifts of cash to charity and reform of the rules for donations of clothing and household items (some changes effective immediately; others in future years).
New limitations on the housing allowance for taxpayers working abroad (retroactive to January 1, 2006).

Besides the tax incentives in the new laws, there are many existing, yet still relatively new tax breaks that could be valuable when planning your year-end tax strategy. Let's take a look at just a few:

Hybrid vehicle credit available to purchasers, along with its reduction once a manufacturer sells more than 60,000 units (which is already the case for Toyota hybrids starting October 1, 2006).
Residential energy credits of $500 for residential energy improvements, $2,000 for solar equipment and $500 for fuel cells per half kilowatt capacity (restricted to 2006 and 2007 only).
AMT "patches," temporary relief that could help lower your AMT liability.
Educational tax incentives, such as the HOPE and Lifetime Learning tax credits.

Before we move on to traditional year-end tax planning, let's take a few minutes to talk about very serious pitfalls for the unwary: the effective and expiration dates of many of the most valuable tax incentives. First, you can't assume that a new tax break is effective immediately. Many of the tax incentives enacted in TIPRA and the PPA are effective in 2007 or beyond. At the same time, they may only be temporary. If you don't take advantage of them timely, you'll miss out. That's why it is so important to let us help you put together a year-end tax strategy that maximizes every tax incentive you are eligible for.

Income shifting can be beneficial

One of the most important traditional year-end tax planning strategies is income-shifting. You may have tried one or two income-shifting techniques in the past. Some of the more frequently used strategies are:

Smoothing out taxable income between 2006 and 2007 by accelerating and postponing transactions that either produce income or yield deductible expenses.
Matching long and short term capital gains with losses to lower overall capitals gains tax and possibly maximize the $3,000 amount of capital losses that can offset other income. There are many facets to this strategy that may come into play depending on how your portfolio performed in 2006, which for many investors was a challenging year.
Bunching deductible expenses into one or the other year depending upon whether the standard deduction may be taken in one of the years, or whether the adjusted gross income limits for medical (7.5 percent) or miscellaneous itemized deductions (two percent) may be more easily met.
Maximizing the tax law limits on annual contributions to your retirement plan accounts, since one year's limits cannot be added to the next year's when not taken in time;

Waiting in the wings

The year isn't over and there is a possibility that Congress could enact some more tax incentives before 2007. The popular state and local sales tax deduction (in lieu of deducting state and local income taxes) has expired. So have the teacher's classroom expense deduction and many business tax incentives. All -- or some of these -- could be renewed before 2007. If Congress does extend them, we'll be sure to let you know and incorporate them into your tax planning.