Another bumper year for tax law changes...
Here is a plain language run-down of some of the more important
provisions in the new laws. Be sure to ask a qualified tax professional if
you have questions about these or other tax matters.
IRS Mileage rate goes back DOWN
for 2006
Beginning January 1, 2006, the
standard mileage rate for business use of a car will be 44.5 cents
per mile driven. This is down from the post-Katrina amount of 48.5
cents, but more than the 40.5 cents that applied from January -
August 2005.
In 2006, charitable miles will be
worth 14 cents each and medical and moving miles can be charged at
18 cents per mile. Keep records of business, moving, medical and/or
charitable miles - they can really add up!
Energy efficient improvements
- wait till 2006 for government credit on "sealing the envelope"
Starting in the new year, taxpayers
may be able to claim a credit of up to $500 on their 2006 and/or
2007 Federal taxes for energy-efficient improvements and upgrades.
Lots of taxpayers erroneously believe
they can get a tax break for buying dishwashers, clothes washers and
refrigerators. Nope. The companies who *make* these things can get a
tax break.
Homeowners, however, can claim a
credit based on 10% of energy conservation improvements to the
"building envelope" of an existing building - insulation and certain
roofing - that sort of thing. Materials count for the credit; not
labor.
They can also claim a credit based on
100% of the cost of three kinds of appliances:
Improvements to a vacation home are
not eligible.
Businesses don't get a credit. They
get a deduction, instead. The deduction is based on energy-efficient
improvements made in 2006 or 2007 to commercial properties (not
residential).
Extra credits apply if you "go solar"
or switch to fuel cells at home!
Wait till 2006 for that Prius
You can take a valuable deduction in
2005 for purchase of an energy-efficient car like a hybrid Civic or
Prius. But the benefit is larger if you wait till 2006, when a
credit of between $400 and $3400 may apply.
If you buy a fuel cell vehicle, the
credit is as much as $12,000!
New type of retirement plan
option in 2006 - big opportunity for many workers
Starting in 2006, companies can
offer "designated Roth accounts" as part of 401(k) or 403(b) plans.
If your company chooses to offer such accounts, you should seriously
considering taking part. Here's why:
Money you put into a designated Roth
account is NOT taken off your taxable pay like a regular retirement
plan contribution. That's lame - you give up a tax break now.
But you can get far more on the back
end! The money grows tax-deferred in the account and when you take
it out you need not pay tax on it then, either - no matter how much
it has grown! Contrast this with the traditional deal, where you
generally must pay tax on the full amount of withdrawals from your
retirement plan, and you will see that the savings could be quite
significant.
Lot of clients already know that I am
a big fan of the Roth IRA, which works much the same way as these
designated Roth accounts. But you are not allowed to contribute to a
Roth IRA if you make more than $110,000 ($160,000 for married
taxpayers filing jointly). You *can*, however contribute to these
new-fangled designated Roth accounts as part of your 401(k) or
403(b) plan, no matter how much you make! Also, you can put up to
$15,000 into a designated Roth account for 2006 ($20,000 if you are
over 50). That's a lot more than the $4,000 allowed as a Roth IRA
contribution next year.
Other clients know that I also like
the Solo 401k for self-employed clients. Guess what: you will be
able to offer designated Roth accounts within a Solo 401k for robo-savings.
Check with your plan administrator to see how this can be done...
If you have already decided a Roth IRA
is appropriate for you, then you can bet a designated Roth account
would be even better. Generally, if you have more than ten years
till retirement, the Roth arrangement is likely to benefit you.
You can roll money out of a designated
Roth account into a Roth IRA if you retire or change jobs. Roth IRAs
retain certain advantages in how you get at the money, so this will
make sense for lots of people.
Retirement plan contributions
- 2006
Everyone asks - so here goes: how much
you can contribute to common retirement plans in 2006:
Traditional IRA
$4,000
Roth IRA
$4,000 (mix and match with traditional IRA)
401k/403b - maximum that worker can
put in $15,000
401k/403b - total that worker and boss
can put in $44,000
SIMPLE IRA $10,000
SEP IRA up to 25% of salary
for workers; up to 20% of profit for self employed - but no
more than $44,000
Catch up amount if you are over 50 (in
addition to the amounts given above):
Traditional and Roth
IRAs $1,000
SIMPLE IRA
$2,500
401k and 403b plans
$5,000
Tax break: folks with modest income
can get a tax credit of up to $1000 for putting money away for
retirement! Companies who start new plans can claim a smaller
credit...
AMT - the manatee in the hot
tub
More and more taxpayers will be
subject to the special, parallel tax system known as "Alternative
Minimum Tax" or AMT in 2005 and 2006. The AMT was originally
designed to prevent rich Americans who take lots of write offs from
paying no tax. The threshholds triggering AMT have not been adjusted
for inflation, however, so more and more people who are far from
rich are getting caught in its coils. In fact, the richest Americans
rarely pay AMT any more, due to other changes in the tax code.
If you are required to pay AMT,
basically you lose the benefit of many deductions, including big
ones like state income tax and property tax, as well as exemptions
for dependents. You do still get a benefit for charitable
contributions, most mortgage interest and most business expenses.
Pressure is growing on Congress to do
something about this. Lots of their budget plans involve the rosy
assumption that taxpayers will fork over billions in AMT in the
coming years; if they raise the AMT threshold or eliminate AMT
altogether, look for higher deficits - or higher taxes in other
ways!
Check your 2004 return to see if you
are in or near the AMT. Look on Form 1040 line 44. This is where AMT
was reported last year. If your tax situation is similar in 2005 to
2004, you may well owe AMT again this year.
To see if you are near the threshold,
look at Form 6251, which is usually included in tax returns we
prepare for you. Compare Lines 31 and 34. The closer they get, the
closer you are to owing AMT. (For many taxpayers with simple returns
and modest income, AMT is not going to apply.) Or ask us.
Business tax break phases in -
manufacturing
Starting in 2005, business that make
things in the US may be able to take a special deduction. This
deduction rises in 2006. The deduction is supposedly aimed at
manufacturers, but it is very broad. Architects and software
developers can claim it in some cases. We will be looking for this
tax break for you in the years to come.
IRS ramping up enforcement -
promises lots more Corporation and Schedule C audits
Small business taxpayers had unusually
sunny weather the last few years. Between 2001 and 2004, according
to the Treasury Department, only 0.19 percent of S Corporation
returns were audited. Only 0.32 percent of small C Corporation
returns were audited in the same period.
The IRS is ramping up its enforcement
activities, with special focus on small businesses who underreport
income.
Rest assured that we are ready to help
with possible government review of our clients' returns. We have a
very good track record of defending tax positions taken on taxpayer
returns, and of negotiating fair settlements with the IRS and state
tax authorities. We have repeatedly closed audits of client returns
where no change at all was made to the client's tax bill. Audits
need not be scary. They are a sometimes-unavoidable part of being in
business. The most important thing about any tax bill or audit -
don't ignore it. If dealt with, any tax problem can be resolved. If
ignored, it will only get worse.