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Income Tax Update

Income Tax Update. Illinois Association of Aggregate Producers May 18, 2006. Presented by Eck, Schafer & Punke, LLP. Canned Opening Gibberish …. Make eye contact. Establish relevancy of topic to audience. Get audience involvement. Use humor as appropriate.

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Income Tax Update

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  1. Income Tax Update Illinois Association of Aggregate Producers May 18, 2006 • Presented by Eck, Schafer & Punke, LLP

  2. Canned Opening Gibberish … • Make eye contact. • Establish relevancy of topic to audience. • Get audience involvement. • Use humor as appropriate.

  3. Tax Increase Prevention Act • Signed into law May 2006. • 70 billion in “net” tax cuts. • “Trailer bill” still to come.

  4. Alternative Minimum Tax • Separate tax calculation. • Eliminates benefit of many itemized deductions. • Should be called “Mandatory Maximum Tax”

  5. Alternative Minimum Tax • Taxpayer required to pay the higher of “AMT” or regular tax calculation. • Effects Millions.

  6. Alternative Minimum Tax • Exemption bumped to $62,550 if married. • $42,500 if single. • For 2006 only. • Will keep 15 million from paying “AMT”.

  7. Dividend & Capital Gain Rate Cuts • 15% and 5% rates extended. • For 2 years. • Through 2010.

  8. Small Business Expensing • 2006 expense limit of $108,000. • On total additions under $ 430,000 • Expense would have dropped to $25,000 after 2007.

  9. Section 179 Expense Limit • $25,000 limit for SUV’s • Entity must have “trade or business” income. • NOTE: W-2 wages count as “trade or business” income for individuals.

  10. Small Business Expensing • Increased expensing allowance extended for 2 years. • Amounts are indexed. • Through 2009.

  11. ROTH IRAs … currently • No deduction for contributions. • Qualified distributions from a ROTH IRA are entirely tax free. • There are no “required distributions” at age 70 ½ as with a traditional IRA.

  12. ROTH IRAs … currently • Prohibit “conversions” at $100,000 of adjusted gross income (“AGI”) • Phase out contributions beginning at $150,000 of “AGI”

  13. ROTH IRAs … New Law • $100,000 “AGI” ceiling on conversions after 2009 is removed. • Conversions in 2010 may be taxed over 2 subsequent years. • No 10% Penalty

  14. ROTH IRAs … Planning • Fund Maximum non-deductible IRA contributions through 2009 • Convert traditional IRAs to ROTHs in 2010 • Avoid tax on all future appreciation.

  15. Kiddie Tax • Requires “unearned income” (int, div) of children in excess of $1,700 to be taxed at parents’ tax rate. • Minimizes the opportunity for “income shifting”.

  16. Kiddie Tax • Under old law this applied if child was under age 14 at year end. • Under new law it applies if child is under age 18 at year end.

  17. “Trailer” Bill … may extend • State and local sales tax deduction. • Teacher’s classroom expense deduction. • R&D provisions. • Employment tax credits.

  18. Other Changes in 2006 … • IRA Deduction Increased. • Deduct up to $4,000. • $5,000 if age 50 or over. • Phase outs begin at $75,000 or $150,000 if you or your spouse are covered under a qualified retirement plan.

  19. Other Changes in 2006 … Domestic Production Activities Deduction. • Deduct 3% of Qualified Production activity Income. • Increases to 6% in 2007-2009. • Increases to 9% in later years.

  20. Domestic Production Activities Deduction • Deduction is based on the lesser of “Qualified Production Activity Income” or “Taxable income”. • Deduction can’t exceed 50% of W-2 wages paid.

  21. What Qualifies … • Sale of tangible personal property, computer software, certain sound recordings, Manufactured, Produced, Grown or Extracted in the U.S. • Construction activities (erection or substantial renovation of real property) in the U.S. • Architectural and Engineering services related to construction activities in the U.S. • Farming and raising livestock will qualify.

  22. “Real Property” includes … • Residential and commercial buildings. • Land improvements. • Infrastructure.

  23. “Infrastructure” includes … • Roads • Power Lines • Water Systems • Sewers • Sidewalks

  24. Domestic Production Activities Deduction • Sole Proprietors, S Corps, C Corps, Partnerships, LLC’s can qualify. • Reported on Form 8903.

  25. IL Manufacturer’s Purchase Credit • Earnthe credit on the purchase of exempt manufacturing machinery & equipment. • Credit equals 50% of the tax that would have been paid.

  26. IL Manufacturer’s Purchase Credit • Usethe credit against sales or use tax paid on production related tangible personal property. • Used or consumed in a production related process. • Unused credit may be carried forward 2 years.

  27. Examples … include • Fuel, oil, lubricants & cleaners. • Hand tools, Protective apparel & safety equipment.

  28. IL Manufacturer’s Purchase Credit • June 30th deadline for claiming credit on all 2005 purchases. • File form ST-16 to establish the amount of your credit.

  29. IL Manufacturer’s Purchase Credit • “Spend” your credit on current taxable purchases. • Fill out form ST-16-C with seller. • Seller keeps top half. • You keep bottom half.

  30. IL Manufacturer’s Purchase Credit • June 30th deadline for reporting credit “spent” in the prior year. • File form ST-17 to report the total amount of credit used. • Use info from all prior yr. Form ST-16-C’s

  31. Basic Estate Planning • Each individual currently (2006-2008) has a $2.0 million estate tax exclusion. • In theory a married couple should be able to have $4.0 Million in assets and not pay estate tax.

  32. Basic Estate Planning • Need to review your wills to make sure both spouses will take advantage of their 2.0 million dollar exemption. • This is often accomplished with a “Credit Shelter Trust”. • Owning everything as “JTWROS” can work against you.

  33. Estate Planning Techniques • Use Annual Gift Exclusion Amount. • You may gift up to $12,000 per person for 2006 ($24,000 if married) without gift or estate tax liability.

  34. Estate Planning Techniques • Payment of Tuition made directly to school does not count towards $12,000 annual gift limit. • Grade School, High School & College Tuition all qualify. • TAX TIP – Practice working this fact into conversation with wealthy relatives.

  35. Payment of Medical expense made directly to hospital or insurance provider, on behalf of another, does not count towards $12,000 annual gift limit.

  36. Summary • Numerous 2006 changes provide opportunities. • Roth IRA changes. • U.S. Production Activities Deduction. • Illinois MPC. Eck, Schafer & Punke, LLP

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