Jupiter

Understanding Health Savings Accounts

A lot is changing in the world of health insurance, but as of right now, an increasingly popular alternative to a traditional health insurance plan is a Health Savings Account (HSA) plan.  An HSA plan starts with the purchase of a high deductible health insurance plan, which in turn makes the insured eligible to contribute to a special account known as a Health Savings Account (HSA).   An HSA is similar to an IRA in that contributions are tax deductible and earnings are tax-deferred.  However, distributions from HSAs are also considered tax free as long as the funds are used to pay for qualified medical expenses.  The HSA therefore provides a triple tax benefit - tax deductible contributions, tax free growth, and tax free withdrawals.  

As noted above, to be eligible for an HSA, you must be covered by a high deductible health plan.  For 2010, a “high deductible health plan” is a plan with an annual deductible of at least $1,200 for self-only coverage, or at least $2,400 for family coverage. For self-only coverage, the 2010 limit on deductible contributions is $3,050. For family coverage, the 2010 limit is $6,150. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $5,950 for self-only coverage or $11,900 for family coverage.

An individual (and the individual’s covered spouse as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions of up to $1,000.  Also, taxpayers who are eligible during the last month of the tax year are treated as having been eligible for the entire year for purposes of computing the annual HSA contribution.

Anyone under the age of 65 who is covered by a qualifying high deductible health plan can open an HSA.  If you are an eligible individual, and your employer contributes to your HSA, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from your gross income up to the deduction limitation.

In regard to distributions from the HSA, qualified medical expenses include those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 10% tax will apply to the withdrawal, unless it is made after reaching age 65, or in the event of death or disability.

Distributions from an HSA exclusively to pay for qualified medical expenses are excludable from the gross income of the account beneficiary even though the beneficiary is no longer an “eligible individual,” e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has a high deductible health plan.

To take full advantage of an HSA, it is best to maximize contributions and minimize distributions in order to build up the value of the account and get as much tax free growth as possible.  But even if someone is not in the financial position to max fund an HSA, the account is still a useful mechanism for making health care related purchases tax deductible.  In other words, the taxpayer can contribute money into an HSA and then immediately take a distribution in order to pay a health care related expense.   Because HSA contributions are an “above the line” deduction and are not subject to the “7.5% floor”, the HSA provides a highly tax efficient approach to paying for out-of-pocket medical expenses. 

If you have questions about this credit or any other tax issue, please feel free to contact our offices at 561-624-2118.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States. 

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Improved Education Tax Credit for 2009 and 2010 - Part 2

The American Opportunity tax credit is also 40% refundable, which means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.

As noted above, the American Opportunity credit is based on the payment of qualified tuition and related expenses. These are the expenses for tuition and academic fees that are required for enrollment or attendance at an eligible educational institution. Qualified tuition and related expenses do not include student activity fees, athletic fees, insurance expenses, room and board, transportation costs and other personal living expenses. They also don’t include the cost of any course or education involving sports, games, or hobbies unless the course or education is part of the student’s degree program. Books are qualified expenses under the American Opportunity tax credit.

The amount of qualified tuition and related expenses taken into account in computing the American Opportunity credit must be reduced by tax-exempt scholarships and fellowships, certain military benefits, and any other tax-exempt payments of those expenses other than gifts or bequests.

The credit is phased out for higher income taxpayers. For 2009 and 2010, the American Opportunity tax credit is phased out for couples with income between $160,000 and $180,000, or singles with income between $80,000 and $90,000. These higher thresholds will allow more taxpayers to qualify for the credit.

If you have questions about this credit or any other tax issue, please feel free to contact our offices at 561-624-2118.
Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.  We provides tax, accounting, and consulting services to clients throughout South Florida, North Palm Beach and Palm Beach County.

Jupiter

Improved Education Tax Credit for 2009 and 2010 - Part 1

The American Opportunity tax credit created a new and improved HOPE credit that may allow you to turn part of the higher education expenses you incur for yourself, your spouse, or your dependents into tax savings.

The maximum credit allowed is $2,500 per student (for both 2009 and 2010) for the first four years of undergraduate education at an eligible educational institution. Generally, eligible educational institutions are accredited schools offering credit toward a bachelor’s or associate’s degree or other recognized post-high school credential, and certain vocational schools.

The American Opportunity tax credit is available only for the qualified tuition and related expenses of an eligible student, i.e., a student who’s enrolled in a degree or certificate program at an eligible educational institution on at least a half-time basis, and who has never been convicted of a federal or state felony drug offense.

A taxpayer may claim an American Opportunity tax credit and exclude from gross income amounts distributed from a Coverdell education savings account (formerly called an education IRA) or 529 plan for the same student, as long as the distribution isn’t used for the same educational expenses for which a credit was claimed.

In order to be eligible for the American Opportunity tax credit for a tax year, qualified tuition and related expenses must be paid during that tax year for education furnished during an academic period (e.g., semester) that starts within that tax year or within the first three months of the following year. Under this rule, taxpayers have a timing option. For example, for a semester beginning in Jan. of Year 2, a taxpayer may pay the expenses in Year 1 or Year 2. The credit will be available in whichever year the payment is made.

If you have questions about this credit or any other tax issue, please feel free to contact our offices at 561-624-2118. We are located in Jupiter, Palm Beach County. Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States. We provides tax, accounting, and consulting services to clients throughout South Florida, North Palm Beach and Palm Beach County.

Jupiter

First-Time Home Buyers’ Tax Credit Improved

First-Time Home Buyers’ Tax Credit Improved
by Glenn Schanel, CPA - Jupiter, Florida

In an effort to revive the real estate market, in 2008 Congress created a tax credit for “first time home buyers.”  In its original form, this “credit” of $7,500 was in reality an interest free loan that the taxpayer had to repay over a 15 year period.  It soon became evident that this credit/loan was not very “stimulative”, so in 2009 Congress created a new plan that included a true credit.

The new law created a refundable federal tax credit of up to $8,000 ($4,000 for a married taxpayer filing separately) for qualifying first- time homebuyers who purchased a home between April 8, 2008, and December 1, 2009. In order to qualify for the credit, the taxpayer must have not owned a qualifying principal residence in the U.S. during the three-year period before the purchase of the new home.  This credit was phased out for individual taxpayers whose modified adjusted gross income was between $75,000 and $95,000 (between $150,000 and $170,000 for married taxpayers filing jointly).

As a result of the continuing weakness in the real estate market, last month Congress enacted the Worker, Homeownership, and Business Assistance Act of 2009.  This Act extends the $8,000 first-time homebuyer credit for contracts to purchase entered before May 1, 2010, and closed before July 1, 2010. The new law also liberalizes the credit by making it available to higher income taxpayers, as well as to those individuals who are not first-time homebuyers.

Generally, existing homeowners who are qualifying “long-time residents” may qualify for the tax credit if they contract to purchase another principal residence before May 1, 2010, and close before July 1, 2010. The Act provides that any individual who has maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the date of the purchase of a subsequent residence be treated as a “first-time homebuyer”.

However, the maximum credit for long-time residents who qualify under the Act is the lesser of $6,500 ($3,250 for married individuals who file separate returns) or 10% of the purchase price of the principal residence.

The credit now phases out for individual taxpayers whose modified adjusted gross income is between $125,000 and $145,000 ($225,000 and $245,000 for married taxpayers filing joint returns).  In addition, for purchases after November 6, 2009, the first-time homebuyer tax credit cannot be claimed for the purchase of a principal residence if its purchase price exceeds $800,000.

If you qualify, you can claim your credit by attaching a Form 5405 to your income tax return in the year of the home purchase and a copy of your settlement statement.  You can also elect to treat any home purchased in 2009 as if it occurred on December 31, 2008 and a purchase in 2010 as if it occurred on December 31, 2009.  If you choose to do this and have already submitted your prior year’s tax return, you can claim your credit by filing an amended tax return.

So if you believe that you would qualify for either the first time home buyer or long-time resident tax credits, this could be the right time to buy a home.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, CPA, accounting, and consulting services to clients throughout South Florida and the United States. Our clients are located in North Palm Beach, Port St. Lucie County, Palm Beach County, West Palm Beach.

The information contained in this communication is intended as general guidance on matters of interest only.  The application and impact of laws can vary widely based on specific facts involved.  Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission.  The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors.  Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Jupiter

The Tax Consequences of a Short Sale or Foreclosure: Vacation Homes (Part 3)

The Tax Consequences of a Short Sale or Foreclosure: Vacation Homes
By Glenn Schanel, CPA, CFP®

(This article is the third in a three part series on the tax consequences of short sales and foreclosures. This installment will cover properties that qualify as vacation residences or second homes.)

A vacation or second home is a residence that is used for personal purposes but which does not qualify as a principal residence. Unfortunately, when it comes to a foreclosure or short sale, a transaction involving a vacation home is the situation most likely to result in an unfavorable tax situation.

Tax on Gains

The gain/loss on a short-sale or foreclosure transaction is calculated as the market price or sale price minus the cost basis. The cost basis on a vacation home is the sum of the purchase price, the purchase costs, and capital improvements. Any gains that result from the transaction must be reported as a taxable capital gain. Losses, however, are not deductible, because a vacation home is considered personal-use property.

Debt Forgiveness Income

Even if a vacation home is sold at a loss through a short sale or foreclosure, the taxpayer may still be subject to debt forgiveness income.

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. As a general rule, debt forgiveness income is taxable as ordinary income, but there are several exceptions. Debt forgiveness income does not need to be included as income if:

(1) the debt discharge occurs as a result of a Title 11 bankruptcy case.
(2) the taxpayer is insolvent at the time of discharge (your liabilities exceed your assets).
(3) the loan is non-recourse (the lender cannot pursue you personally).

There is a catch, however. If a taxpayer elects to avoid taxes on debt cancellation income, other tax benefits (called attributes) must be reduced to the extent that the income is not recognized. In other words, the relief is temporary because it only defers the tax consequences into the future. The taxpayer can choose to reduce the basis of the depreciable property or to follow a prescribed ordering of tax attribute reductions. These include net operating losses, capital loss carryovers and passive loss carryovers.

In summary, the foreclosure or sale of a second/vacation home is likely to result in a very unfavorable tax situation. Capital losses are not deductible, but gains are taxable, and any related cancellation of debt can result in higher taxes now or in the future.

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Jupiter

The Tax Consequences of a Short Sale or Foreclosure: Rental Property (Part 2)

By Glenn Schanel, CPA, CFP®

(This article is the second in a three part series on the tax consequences of a short sale or foreclosure. This installment covers properties that qualify as rentals.)

You may be one of the many South Floridians who purchased one or more investment properties at or near the height of the real estate boom and now are left holding a property that has significantly depreciated in value. Meanwhile, the mortgage, along with insurance, taxes and other costs of ownership are putting a severe strain on your monthly cash flow. Renting the property can help alleviate some of this pressure, but with so many rental properties on the market, the rent can be considerably less than the monthly carrying costs. As a result, you may be considering a short sale arrangement or even a foreclosure.

However, before going forward with a short sale or foreclosure on a rental property, it is not only important to understand the legal implications, but it is also critical to understand all of the potential tax consequences, because they can be significant.

Tax on Capital Gains

The tax law treats both a short sale and a foreclosure of your rental property as a sale. The gain or loss is calculated as the market price or sale price minus your cost basis. In most cases, there will be a loss, and unlike with a personal residence, the loss on a sale of rental property is immediately deductible. This is generally referred to as a Section 1231 loss. This means that the loss is likely to qualify as an ordinary, as opposed to a capital loss. As a result, the tax benefit of the loss is at higher, ordinary tax rates. This is the one primary advantage over properties held for personal use.

Debt Forgiveness Income

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. While Congress did provide tax relief for debt forgiveness income related to a principal residence, debt forgiveness income continues to be taxable for rental properties. However, there are two basic exceptions to this general rule:

(1) When the amount forgiven/deficiency is included in a bankruptcy filing.

(2) When you are insolvent at the time the debt is forgiven.

One more exception applies if your rental qualifies as Section 1231 property. In this case, you may be able to reduce the cost basis of the rental property without being insolvent. The result is that you don’t report the income from the debt forgiveness but you have a lower loss on the “sale’ of your property. To use this strategy, you must make an election and the debt forgiven must be “qualified acquisition indebtedness,” (i.e. debt incurred to acquire, construct or improve a property.)

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Jupiter

The Tax Consequences of Short Sales and Foreclosures: Principal Residences

By Glenn Schanel, CPA, CFP®

(This article is the first in a three part series on the tax consequences of a short sale or foreclosure. This installment will cover properties that qualify as a principal residence.)

The last thing a person involved in a foreclosure or short sale needs is a crushing tax bill, so it is important to understand and be aware of potential tax consequences. When it comes to a qualified principal residence, taxes can be avoided in most, but not all, circumstances.

A principal residence for tax purposes is a home that a taxpayer has owned and lived in for at least two of the past five years. Keeping that definition in mind, we will consider both the capital gains tax and the tax on debt forgiveness income that could result from a short sale or foreclosure.

Tax on Capital Gains

The gain/loss on a short-sale or foreclosure transaction is calculated as the market price or sale price minus the taxpayer’s cost basis. In the event there is a loss, there is nothing to report for tax purposes, because a loss on a principal residence or any personal property is not deductible. If there is a gain on the residence, then the taxpayer is eligible to exclude up to $250K (or up to $500K for a married couple that files married filing jointly) of this gain.

Therefore, when it comes to a foreclosure or short sale on a principal residence, unless the capital gain exceeds the exclusion maximums, there will be no capital gains tax.

Debt Forgiveness Income

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. As a general rule, debt forgiveness income is taxable, but there are some exceptions.

The Mortgage Forgiveness Relief Act of 2008 says that debt forgiveness income can be excluded if the debt can be considered “Qualified Principal Residence Indebtedness” (QPRI). QPRI is any debt that is secured by a principal residence and was incurred to acquire, construct or improve a principal residence.

Therefore, a potential income recognition problem does exist if a taxpayer had refinanced and used any “cash-out” proceeds for some purpose other than home improvement. In that case, the income would be taxable unless the taxpayer qualifies for an exclusion under the bankruptcy or insolvency exceptions.

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Jupiter

The Need For Buy-Sell Agreements in Small Business

THE NEED FOR A BUY-SELL AGREEMENT IN SMALL BUSINESSES
By Glenn G. Schanel, CPA

All your working life you have strived to develop a successful business. The investment you make in your business is much more than just money or capital. It includes a substan tial amount of your time and hard work.

Over the years, the small business you started will grow based on your hard work. As a reward of this growth, a business’s income will increase and be available to you. In addition, the value of the business will also increase over time.

However, following your death, the business will have to be valued and that value will be added to your estate to compute the estate taxes due. The real question at this point is how to convert this illiquid business interest into cash to pay the estate taxes and other estate administration costs.

The general solution appears to be to simply sell the business or liquidate. Liquidation is not an attractive alternative because it is unlikely the liquidation value is equivalent to the business’s full fair market value. The better alternative is for the estate is to sell the business. But who will buy a closely held business interest? What is a fair price? When will the sale be made? Where will the funds come from?

This “dispositio n dilemma” is easily resolved when a buy-sell agreement is established. This agreement provides that:

• someone (e.g., the business entity, the surviving owners, or a key employee) will purchase a deceased owner’s interest, minimizing the possibility that the business might fall into the hands of outsiders
• at an agreed -upon price, minimizing the possibil ity that the parties involved will not be able to agree on a proper value for the business, and
• the deceased owner’s estate is obligated to sell the interest at that price, minimizing the chances that the parties may not live up to their agreement.

A properly drafted buy-sell agreement also minimizes the possibility that funds will be unavailable to make the purchase, and provides a deceased owner’s estate with needed liquidity by converting an illiquid asset into cash. It’s easy to see why a buy-sell agreement is so valuable. It helps assure business continuity for the surviving owners and fair treatment of the deceased owner’s heir(s).

The advantages of implementing a Buy-Sell plan are somewhat obvious: continuity of management; to create a ready market for the business interest; to provide a fair and reasonable price; and to peg the value of the business interest for federal estate tax purposes.
There are several types of Buy-Sell Agreements. Which one to use depends on several factors,including the number of business owners, the relative ages and health status of the owners,concern about the Alternative Minimum Tax, and whether a step-up in cost basis is desired by the surviving owners. Some of the most common types of Buy-Sell Agreements are the Entity or
Stock Redemption, Cross Purchase, Wait-and-See, Mixmaster, and the One Way Buyout.

Once the type of plan is chosen, it is very important to decide how the liability for the purchase price will be funded. Several possibilities exist:

• Surplus, which consists of an existing fund of the purchaser
• Sinking Fund, also known as a savings account or savings plan
• Borrowing, obtaining financing from a third party, such as a bank
• Installment Sale, financing from the seller
• Life Insurance, which may provide a death benefit and a sinking fund

Each of these funding options has advantages and disadvantages. However, the disadvantages generally outweigh the advantages in all of them except for the use of life insurance, which by its nature provides the cash, in the amount needed, at exactly the time it’s needed, usually without taxation. For this reason, life insurance is most often the preferred funding vehicle in buy-sell planning. The annual premium provides an ascertainable cost and the policy provides a benefit no other plan accomplishes — guaranteed funds in the event of a premature death. The policy, if a whole life policy, may also act as a savings or sinking fun since the cash value in the policy is accumulated on a tax deferred basis. And the death benefit is income tax free!

In sum, life insurance meets the client’s objectives. First, it not only has an ascertainable cost, but it also is the least expensive. Second, the availability of the funds is certain in the case of a premature death. It may also act as a sinking fund.

Lastly, the use of the insurance allows the surviving owner to continue the business free and clear. It also allows the deceased owner’s family to receive the cash for the decedent’s interest, since they are paid in full and there is no installment sale, borrowing, or a shortfall of funds.

Glenn G Schanel, CPA and Associates, PA

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Glenn G. Schanel of Glenn G Schanel, CPA and Associates, PA represents American General Life Insurance Company (AGL), with securities offered through American General Securitie s Incorporated (AGSI), 2727 Allen Parkway, Houston, Texas, 77019. Member NASD and SIPC. AGL and AGSI are member companies of American International Group, Inc. (AIG). Glenn G Schanel, CPA and Associates, PA is a separate entity from any member of AIG. Mr. Schanel can be reached by calling (561) 624-2118.

The U.S. Chamber of Commerce has endorsed for its members the products and services of member companies of American International Group, Inc. (AIG), the leading U.S.-based international insurance and financial services organization. American General Life Insurance Company, a member company of AIG, provides a broad portfolio of top-tier financial products for businesses, families and individuals.

The comments in this article are those of the presenter and not necessarily those of AIG American General. Neither AIG American General nor its agents provide legal or tax advice. You should always consult with your tax and legal advisors about the appropriateness of this concept to your business, and ask your life insurance representative for the best product with which to fund this plan.

AIG American General is the marketing name for the life insurance companies and affiliates of American International Group, Inc. (AIG), that comprise AIG’s Domestic Life Operations, including American General Life Insurance Company.

Jupiter

IRS Announced 2006 Retirement Limits

IRS ANNOUNCES NEW RETIREMENT SAVINGS
CONTRIBUTION LIMITS FOR 2006

The following is a summary of the annual contribution limits for retirement savings plans for 2006:

Plan Type	Contribution Limit	Age 50 & Older “Catch Up”
Traditional and Roth IRA	$4,000	$1,000
SIMPLE Plans	$10,000	$2,500
401(k) and 403(b)	$15,000	$5,000
SEP Plans	Lesser of 25% of compensation, or $44,0000	N/A
Defined Contribution Plans	Lesser of 100% of compensation, or $44,000	N/A

Please contact our office at (561) 624-2118 if you have any questions.

Jupiter

Year End Tax Planning 2006

GLENN G. SCHANEL, CPA AND ASSOCIATES , PA
YEAR-END TAX PLANNING STRATEGIES FOR 2006
Fall 2006

As this year enters the home stretch, there is still time to plan to reduce your 2006 federal income taxes. Adding to existing  tax-saving strategies are some new ones presented by recent tax legislation. On the other hand, the uncertain fate of several popular tax breaks that expired at the end of 2005 could make 2006 year-end planning more difficult.

Tried and True Strategies

Here are some proven strategies that may help you reduce your taxes once again this year. Of course, before applying any of these strategies to your personal situation, consult with one of our tax professionals.

Deductible Interest. Consider making your January 2007 mortgage payment (which includes December’s interest) in late December 2006 , so that the mortgage interest will be deductible on your 2006 return (applicable only if you itemize deductions on your income-tax return).

Medical and Miscellaneous Itemized Expenses. Your deductions are limited to the amounts that exceed 7.5% of adjusted gross income for medical expenses and 2% of adjusted gross income for miscellaneous expenses.Bunching two years of your or your
family’s unreimbursed medical or miscellaneous itemized expenses (such as certain job-related expenses and investmen t expenses) into one year may allow you to surpass the deduction floors and help you gain an itemized deduction for part of your expenses.

Charitable Contributions. If you are planning to make a charitable donation in early 2007, consider a 2006 year-end donation instead. Contributions charged on your credit card in 2006 count as 2006 deductions, even if you don’t receive or pay the credit card bill until 2007.

However, if you are a high earner facing a limitation on your itemized deductions or if you expect to be in a much higher tax bracket in 2007, accelerating these payments into 2006 may not be your best course of action. In addition, if you claim high deductions in 2006, you may be subject to the alternative minimum tax. See us for more details.

Income Deferral. Review any opportunities you may have to push taxable income into a later tax year. Deferral strategies are specially effective if you expect to be in the same or a lower tax bracket in the year in which you will be reporting the income on your tax return. Any of these strategies may help cut your 2006 taxes:

• Ask your employer to defer paying your 2006 year-end bonus until early 2007.
• Maximize 2006 contributions to any tax-deferred retirement savings plan in which you participate , such as a 401(k) plan or a 403(b) tax-sheltered annuity. If you are age 50 or older, you may be able to make additional “catch up” contributions to your
• plan.
• If you are self-employed and use the cash method of accounting for income-tax purposes, time late 2006 customer billings so that payment won’t be received until 2007.

Self-employed business owners who do not already have a tax-deferred retirement plan should consider starting one before year-end. Options to examine include a so-called “solo 401(k)” plan, a Simplified Employee Pension (SEP) plan, or a SIMPLE plan.

Investment Strategies . If you have investments with “paper losses” and you are thinking about selling any of these poor performers before the end of the year, remember that capital losses offset the capital gains you may have realized.Any net loss is deductible against up to $3,000 of ordinary income per year.

Consider selling appreciated stock or other investments on which you have “paper gains” before year-end to absorb any capital losses that exceed $3,000. If this is not desirable, any unused capital losses may be carried forward for deduction in future years, subject to limitations.

Remember, too, that the maximum tax rate on 2006 qualifying dividends and net long-term capital gains is 15%. Ordinary income tax rates range as high as 35%.

New Strategies

Prepare for a Roth Conversion . Earlier this year, a new law removed the income limit for high earners who want to convert their traditional Individual Retirement Account to a Roth IRA. But this change isn’t effective until 2010.

If the income limit applies to you and you are interested in a Roth IRA, you might want to consider making contributions to a traditional IRA now with the intent of converting that IRA to a Roth IRA in 2010. Even if you cannot make deductible IRA contributions (due to you or your spouse being an active participant in an employer -sponsored retirement plan and exceeding certain income limits ) , you can make nondeductible contributions to a traditional IRA now. On conversion in 2010, only the IRA earnings on the nondeductible contributions would be taxed, and any Roth IRA earnings from then on would be nontaxable (assuming tax law rules are met). See us for more details.

Charitable Gifts from IRAs. If you are age 70½ or older, you can contribute as much as $100,000 a year from your IRA directly to one or more qualified charities without paying federal income tax on the distribution. So, if you are a charitably inclined eligible taxpayer, you can benefit your favorite charity with IRA money without having to receive a taxable distribution from your IRA. This tax break is only available for 2006 and 2007.

Charitable Gifts of Clothing or Household Items. New rules apply to contributions of clothing and household items made after August 17, 2006. In general, the items must be in “good used or better” condition. However, you can still deduct the value of an item that isn’t in good or better condition if the value of the donation is more than $500 and you  include a qualified appraisal with your tax return.

Kiddie Tax. To minimize income shifting from parents to their young children in lower tax brackets, the tax law requires children who have more than a small amount of unearned income ($1,700 in 2006) to pay tax on that excess income at their parents’ marginal tax rate. A new law increases the age of  children to whom this “kiddie tax” applies. Effective for 2006, the kiddie tax applies to children under age 18 (formerly, age 14). Due to this change, higher -income parents should consider investing any assets put aside for their under-age-18 children in investments that generate little or no current taxable income (such as U.S. savings bonds, municipal bonds, or growth stock index funds).

Energy Tax Breaks. Tax credits are available for energy efficient and alternative energy home improvements. Among the items for which credits are available: energy efficient exterior windows and doors, furnaces and central air conditioning units, and solar water heaters. Also, credits are available for the purchase of certain hybrid and alternative fuel vehicles.

Uncertain Tax Breaks

As we write this, Congress is still debating extending to 2006 certain tax breaks that expired at the end of 2005. Among those breaks: the itemized deduction for state and local sales taxes, the above-the-line deduction for the teacher’s out-of-pocket expenses for supplies used in the classroom, and the above-the-line deduction for higher education expenses. Be prepared in your
planning if these items are not extended.

For More Details

Want to learn more about these and other strategies that might cut your 2006 tax bill? Talk to us. Our tax planning know-how can benefit you.

Jupiter

June 2007 Tax Alert

TAX ALERT
NEW LAW INCLUDES BUSINESS/PERSONAL TAX CHANGES

A portion of a supplemental spending and minimum wage bill recently signed into law included several tax provisions that may have an impact on you and your business. The Small Business and Work Opportunity Tax Act of 2007 contains $4.8 billion in small
business tax breaks -but also includes $4.4 billion in revenue raisers.

We have briefly summarized below just two of the changes that may affect you

Section 179 Expensing Deduction .The new law increases both the maximum annual expensing amount and the threshold phaseout amount. For tax years beginning in 2007, the practical impact of these changes is to increase the annual expensing limitation from $112,000 to $125,000 and to increase the phaseout amount from $450,000 to $500,000.

Kiddie Tax. In general, the revenue code imposes taxes on a young child’s unearned income in excess of $1,700 at the child’s parents’ tax rate. A 2006 tax law increased the age at which the kiddie tax applies, from under age 14 to under age 18. Now, the new law modifies that change so that the kiddie tax applies generally to children under 19 years old, effective in tax year 2008. More importantly for many taxpayers, the law will also apply the kiddie tax if the child:

• Is over age 18 (but under age 24) and
• Is a full-time student and
• Has earned income that does not exceed one half of the student’s total support.

Summary

With the business tax changes and the new kiddie tax rules, your tax planning may need a tune-up. Why not contact us today to find out more about how the new tax law may affect your situation.