2006 Year-end Tax Planning

1. 2006 Year-end Tax Planning Presented by: Marc A. Mantelli, CPA, CFPTM Ryan, Sharkey & Crutchfield, LLP Herndon, Virginia

2. What’s New for 2006 Tax Game? What’s new for 2006 & 2007: • New tax credits for energy-saving improvements to residence • IRS’ new announcement for 2007 pension plan limitations • Charitable contributions from an IRA trustee to a charity • New Rules for charitable contributions • IRS concedes telephone excise tax issue and provides method for receiving refunds

3. New Rule for the Race: Credit for Energy-Saving Improvements • A taxpayer may claim a lifetime credit of up to $500 for making energy-saving improvement to an existing home. • Qualified improvements include: exterior windows, doors, metal roofs; $150 for natural gas, propane, oil furnace or hot water boiler; $300 for electric heat pump, water heaters, geothermal heat pumps and central air conditioners.

4. Pension Protection Act (Aug 2006) makes changes for individuals: • 401(k)/403(b) plan deferrals • $15,000 deferral for 2006, $15,500 for 2007. • Additional $5,000 for over age 50 • The limitation for defined contribution plans increased from $44,000 for 2006 to $45,000 for 2007. • The dollar limitation in a top-heavy plan is increased from $140,000 for 2006 to $145,000 for 2007. • Annual compensation limit is increased from $220,000 for 2006 to $225,000 for 2007.

5. As You Skiing Down the Slope of the Pension Protection Act … • After 2007, distributions from retirement plans, tax-sheltered annuities, and government 457 plans can be rolled over directly into a Roth IRA. • Rollover to Roth IRA limited to taxpayers with AGI less than $100,000 until 2010. • Beginning in 2010, $100,000 AGI limit does not apply.

6. Exciting Turns for Pension Protection Act • Post-2006 distribution, non-spouse beneficiaries of retirement plans will be able to make rollovers to inherited-IRA accounts. • Currently, only spouse-beneficiaries of retirement plan can make rollovers to IRAs.

7. Give to Your Favorite Uncle or Your Favorite Charity? • For 2006 and 2007 only: tax-free distribution of IRAs up to $100,000 a year for taxpayers over age 70 1/2. • If paid directly to a qualified charity. • The donated amount can’t be deducted as a charitable contribution. • Distribution counts toward required minimum distribution.

8. New Bars Set for Charitable Contributions • New substantiation requirements: Taxpayers can’t deduct a post-2006 contribution of cash, check or other monetary gift unless they: • maintain as a record of the contribution, • a bank record or • a written communication from the charity with its name, date of contribution and the amount.

9. Jumping New Heights for Certain Contributions • Toughened rules: post-Aug. 17, 2006 contributions of clothing and household items that not in good used condition or better can’t be deducted. • IRS may deny a deduction for any contribution of clothing or a household item with minimal monetary value, such as used socks and underwear.

10. Deduction for a Charitable Donation of Auto • Depends on how the charity uses the donation. • John Smith donates a car with a ‘blue book’ value of $1,000 to ABC charity. 1) the car was sold to a wholesale for $300. How much can John deduct? 2) The car will be used in XYZ’s charitable activities. How much can John deduct?

11. How Much Can John Deduct for His Car Donation? • In the first case, his deduction can’t exceed the gross proceeds from the charity’s sale: $300. • In the second case, he can claim a deduction for the full fair market value of the donated vehicle: $1,000.

12. Time to Stop the Telephone Excise Tax • A taxpayer can request a safe harbor refund without any supporting documentation. • $30 for an individual filing a return with one exemption. • $40 for 1 exemptions • $50 for 3 exemptions • $60 for 4 or more exemptions

13. Year-end Check List • Avoid underpayment penalties! • 100% or 110% of 2005 Federal Tax Liability Safe-harbor. • 100% of 2005 State Tax Liability Safe-harbor. • Increase withholdings if necessary.

14. Year-end Check List • Take advantage of loss positions in investment portfolio. • Consider gifting appreciated securities to children. • Accelerate the disposal of passive activities with passive losses (e.g. rental properties).

15. Year-end Check List • Maximize 401(k)/403(b) plan deferrals • Ask employer to defer bonus payments to 2007 (consider AMT)

16. Year-end Check List • Use credit card to pay deductible expenses (e.g. charitable contributions) • Make energy-saving improvements to your home that qualify for tax credits

17. Year-end Check List • Convert investment income taxable at regular rates (interest) to dividends income: max tax rate is 15%. • Settle insurance or damage claim if this will maximize casualty loss deduction. • Watch out for marriage penalty in regard to year-end marriage or divorce plans

18. Meditate over the Losses • Taking capital losses while maintaining investment position. • Avoiding the wash sale rules. • 30 day rule. • Substantially the same investment. • Consider ETFs or stocks of other companies in same industries.

19. Turn the Losing Game Around • Long-term gains taxed at 15% for 2006. • Short-term gains taxed at up to 35%. • Offset net short-term gains with net long-term losses. • Avoid the reverse affect.

20. State Updates and Planning • D.C. • Estimated tax penalty now automatic. • $3,000 per single return and $6,000 per joint return for 529 Plan Deduction.

21. State Updates and Planning • Virginia • 529 Plan deduction is still $2,000 per plan. • Taxpayers, 70 years or older can deduct all contributions to VA 529 plan accounts.

22. State Updates and Planning • Maryland • 529 Plan deduction is $2,500 per plan. • 7.75% withholding on rollovers of retirement plans subject to mandatory federal withholding.