SPECIAL YEAR-END ISSUE!
On Target Tax Planning Tips and Strategies

Many people do not think about their tax situation until they are forced to do so. However, waiting until 2007 before acting will be too late. Some careful tax-planning before December 31, 2006, can produce meaningful tax savings for many filers. In this special year-end issue, TaxView offers its annual collection of tips, suggestions and reminders, which readers may find useful in their tax planning.

Acceleration or Deferral of Income and Deductions
The first topic that every taxpayer should examine is whether they expect changes in their income and expenses in 2007. If you expect increased income in 2007, you may want to postpone deductible expenses that you had planned to pay in 2006 into next year. Conversely, if you expect your 2007 income will be lower, you should consider deferring income into 2007 or accelerating deductible expenditures in the current tax year (e.g., paying state and local income or real estate taxes before December 31).

Marginal tax rates will remain unchanged in 2007, so the decision to accelerate or defer income or deductions represents a time-value issue for taxpayers who expect to remain in the same tax bracket from year to year. The major caveat is that taxpayers need to determine the effect that expense and income acceleration or deferral would have in exposing them to the alternative minimum tax (AMT) for the tax year in question. The most common expenses that may trigger the AMT are real estate taxes, state and local income taxes and itemized deductions subject to the 2% limit. The best way to determine if paying your real estate or state and local taxes before December 31 is a good idea is to do a side-by-side comparison between your regular tax and AMT.

Timing of Capital Gains and Losses
In keeping with the philosophy of turning “lemons into lemonade,” investors whose portfolios include underperforming assets should consider selling them before the end of the year. Securities sold at a loss, such as stocks and bonds, can be used to offset other capital gains. Furthermore, any remaining loss can be deducted from ordinary income up to $3,000 for federal income tax purposes in the year in which the sale occurs. If your loss exceeds $3,000, it may be carried forward to future years. One important fact to remember when selling a depreciated security at a loss: Don’t run afoul of the “wash sale” rule. The rule disallows deductibility of a loss on the sale of a security if the taxpayer acquires “substantially identical” securities within 30 days before or after the date of the sale.

Charitable Contributions
Accelerating payment of cash contributions to charity into the current year is a common year-end tax planning strategy to increase deductions. If the charitable contribution is made with a personal check, the contribution is considered for tax deductibility purposes to have been made on the date the check is mailed to the charity (assuming the check eventually is cashed and cleared). Gifts of appreciated marketable securities to a qualified charity are deductible in the amount of the fair market value of the security, regardless of the taxpayer’s cost basis, as long as the stock was held for at least one year and one day. This strategy avoids the capital gains tax that would have resulted had the security been sold and the cash proceeds donated to charity. This strategy is beneficial when donating shares of stock with little or no cost basis since it eliminates a future capital gains tax. The taxpayer is free to repurchase shares of the same security immediately on the open market, thus stepping up the tax basis of that security in the taxpayer’s portfolio.

As noted above, this strategy should only be used if the appreciated marketable security was held for more than one year. If it has been held for a shorter time, the deduction is limited to an amount equal to the adjusted cost basis of the appreciated security. President Bush and Congress enacted the Pension Protection Act of 2006 (Pension Act), which made some important changes to tax laws governing charitable giving. Under the new law, taxpayers aged 70½ or older can donate as much as $100,000 directly from an Individual Retirement Account (IRA) to a qualified charity without including it in their taxable income. However, the amount contributed to the charitable organization cannot be taken as a charitable deduction. This can save income taxes for those taxpayers who are subject to the “phase-outs” of their allowable deductions and/or exemptions at higher income levels, as well as residents of states that limit or do not permit charitable deductions for state income tax purposes. For example, a Connecticut resident in a 35% federal and 5% state income tax bracket could save $3,950 in combined taxes through this provision. Another added benefit of the Pension Act is that the direct payment from the IRA to the qualified charity counts toward the taxpayer’s required minimum distribution from the IRA for that year. This new break is available for distributions in 2006 and 2007.

Maximizing Retirement Plan Contributions
Taxpayers should review their contributions to tax-qualified employer-sponsored retirement plans with an eye toward maximizing them. For 2006, eligible participants may make tax-deductible contributions up to $15,000 for 2006. In addition, those aged 50 or older may contribute an additional $5,000 in 2006 as an age-based catch-up contribution. The traditional and Roth IRA contribution limit for 2006 is $4,000. IRA owners aged 50 and older can make a catch-up contribution of $1,000 for 2006. (See the accompanying article on the Pension Protection Act for more details.)

Section 179 Write-Offs
Under IRC Section 179, small businesses are eligible to take deductions for purchases of “personal property” worth up to $108,000 in 2006. “Personal property” includes items such as computers, furniture and office equipment, but not land, buildings or improvements to buildings. The total amount of the deduction allowed is reduced if purchases total more than $430,000 in 2006, and individual taxpayers cannot deduct more than their taxable income from a business. This write-off is scheduled to continue through at least 2007 under legislation passed by Congress in October 2004.

Gift Tax Exclusion
Individual taxpayers are entitled to give gifts of up to $12,000 per donee, and married couples can double the gift to $24,000 to any number of recipients in 2006 without incurring any gift tax liability, thanks to the Gift Tax annual exclusion. The maximum combined estate, gift and generation-skipping transfer tax rate drops to 46% in 2006 from 47% in 2005. The rate drops further in 2007-2009 to 45%, and to 35% after 2009. The cumulative exclusion amounts increase from $2 million in 2006-2008 to $3.5 million in 2009 for estate and generation-skipping transfer tax purposes. For gift tax purposes the cumulative tax-free transfers remain at $1 million.

Energy Tax Incentives
Many of the tax provisions contained in the Energy Tax Incentives Act of 2005 (P.L. 109-58) became effective in 2006. Several credits are available for individual taxpayers, although they are not allowed for AMT, and they are not subject to any phase-outs for high net-worth individuals. A few examples are:

• A nonrefundable tax credit equal to 30% of qualified expenditures of solar water-heating, photovoltaic equipment and fuel cell property for residential use, up to a maximum credit of $2,000.
• A nonrefundable credit for the purchase of fuel-efficient vehicles, including hybrid vehicles, ranging from $650 to $3,400, depending on weight class and fuel economy.
• A nonrefundable tax credit for the non-business purchase of energy-efficient improvements (furnaces, hot water heaters, etc.) meeting certain specifications for use in existing homes. This credit has two components: a credit of 10% of the cost for improvements to the building and a credit ranging from $50 to $300 for the purchase of certain specific improvements. The lifetime maximum credit for all tax years cannot exceed $500, and no more than $200 of the credit can be for expenditures on windows.

For more information, please contact Sherry Reisch at sreisch@gellerco.com.

FEDERAL
The Pension Act Toughens Rules for Charitable Deductions While Sweetening Retirement Plan Provisions

One of the more important laws enacted by Congress this session is the Pension Protection Act of 2006 (Pension Act). The stimuli for enactment of the law were the bankruptcies of numerous large corporations, including Enron and Worldcom, in which employees and retirees saw their underfunded defined benefit retirement plans terminated and taken over by the federal Pension Benefit Guaranty Corporation (PBGC). While most of the Pension Act’s features are designed to strengthen private pension plans, the Act also provides or extends more than 20 tax benefits for other retirement savings and sets some new rules for charitable giving. The highlights of the Pension Act are:

• As mentioned in “On Target Tax Planning Tips and Strategies,” contribution limits to retirement plans rose this year. For workers under age 50, the new maximum contribution to IRAs is $4,000 for 2006 and 2007 and $5,000 in 2008. After 2008, the limit will be indexed to inflation. For those over age 50, catch-up contributions can be as much as $1,000 for IRAs, $2,500 for SIMPLE-IRAs and $5,000 for 401(k) plans. Congress also dropped the income ceiling for conversions of traditional IRAs to Roth IRAs, beginning in 2010. Until then, high net-worth individuals should consider making nondeductible IRA contributions with the expectation of converting them to a Roth IRA in 2010.
• The Act extends some of the tax benefits enjoyed by spousal beneficiaries of a retirement plan to non-spousal beneficiaries. Now, non-spousal beneficiaries can rollover assets inherited from a qualified retirement plan into an IRA, thereby postponing taxes until the assets are withdrawn from the IRA. This change will enhance the flexibility of retirement and estate planning for non-spousal beneficiaries. This benefit is available for distributions on or after January 1, 2007.
• Several provisions affect Roth retirement savings plans, which enable taxpayers to make after-tax contributions to a retirement plan (up to plan limits). Upon retirement, the Roth funds can be withdrawn tax free. The first change enables taxpayers to rollover assets from a 401(k) directly to a Roth IRA; the rollover is treated as a Roth conversion and is taxable. For tax years beginning after December 31, 2009, the $100,000 AGI limit and filing status requirement to convert a traditional IRA to a Roth IRA is eliminated. In such cases, the amount rolled over will be included in the individual’s income as a distribution (except to the extent it represents after-tax contributions), but the 10% additional tax for early withdrawals will not apply. Individuals who convert from a traditional IRA to a Roth IRA in 2010 will recognize the conversion in income ratably in 2011 and 2012, unless they elect to recognize the income in full in 2010.
• The law increases bookkeeping requirements for charitable gifts. Previously, a receipt or written acknowledgement from a charity was only required on gifts larger than $250. For any monetary gift made in tax years beginning after August 17, 2006, a receipt, such as a cancelled check, credit card statement or written communication from the charity with its name, date and gift amount, must be kept with your records in case the IRS requires it.
• Rules surrounding charitable gifts of clothing and household goods were stiffened in order to counteract inflated valuations claimed by some taxpayers. Under the new law, clothing and household goods must be in “good or better” condition to qualify for a deduction. While the act does not define “good,” taxpayers should keep detailed records, including photos, of their donations in case the IRS raises questions. Donations of items with “minimal commercial value” can be denied. However, these restrictions do not apply to deductions of more than $500 claimed for a single article of clothing or household item if the taxpayer includes a qualified appraisal of the item with the tax return. The provision governing clothing and household goods applies to any gifts made after August 17, 2006.
• The Pension Act allows taxpayers aged 70½ or older to donate up to $100,000 per year directly to a charity from an IRA without incurring taxes or penalties for early withdrawals. The direct payment qualifies as the taxpayer’s required minimum distribution. However, taxpayers will not be able to claim a tax deduction for the charitable contribution.
• All or a portion of a taxpayer’s refund may be deposited in a taxpayer’s IRA (or the taxpayer’s spouse in the case of a joint return). The provision does not modify the rules relating to IRAs, including the rules relating to timing and deductibility of contributions. The provision is effective for taxable years beginning after December 31, 2006.
• The Pension Act contains many provisions not discussed above that overhaul the funding and disclosure rules for defined benefit plans, conversions of pension plans to cash balance plans, payout and rollover rules and a host of other changes relating to pension plans and their beneficiaries.

For more information, please contact Sherry Reisch at sreisch@gellerco.com.

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The information contained in TaxView is for general purposes only and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by Geller & Company to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs. Therefore, the information should not be used as a substitute for consultation with professional accounting, tax, or other competent advisors.