News

Dear Client:

2006 was another banner-year for tax legislation out of Washington and, in large part, that’s the reason why tax planning is so important. At this time of the year, it’s helpful not only to take a look at some traditional planning techniques but also to examine how these techniques are impacted by the new tax laws.

Strategic tax planning is more important today than ever before. Since 2001, we’ve seen a sea-of-changes 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, the Pension Protection Act (PPA) in August and the Tax Relief and Health Care Act of 2006 (TRHCA) in December. 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, the PPA and the TRHCA and also touch on some traditional 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 tax planning can help take some of the sting out of next years federal tax bill.

New tax laws impact you

TIPRA, PPA and the TRHCA — 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 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).
• Extended deduction for state and local sales taxes.
• Extended higher education tuition deduction
• Extended teacher’s classroom expense deduction.
• Health Savings Account (HAS) enhancements.
• 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 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 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, PPA and the TRHCA are effective in 2007 or beyond. At the same time, they may only be temporary. If you don’t take advantage of them in a timely manner, you’ll miss out. That’s why it is so important to let us help you put together a tax strategy that maximizes every tax incentive you are eligible for.

Income shifting can be beneficial

One of the most important traditional 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 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.
• 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.

Don’t put off tax planning any longer. Give our office a call. We’ll review your situation and put together a tax planning strategy that best suits your needs.

Sincerely yours,

Hannis T. Bourgeois, LLP