TOP 10 TAX TIPS

#10 - THINK ENERGY EFFICIENT THIS YEAR!

Think energy efficient when purchasing new windows or doors and take advantage of the available credits.
For 2006 and 2007
Form 5695 Residential Energy Credits (see attached)
Credit has $500 lifetime limit
Limited by categories
Credits computed as follows
Energy efficient improvements
For insulation, exterior windows, exterior doors, water heaters, heat pumps, central air conditioners, furnaces, hot water boilers and metal roofs
10% of cost with a maximum of $500 (no more than $200 of this amount can be for windows)
Energy property costs (maximum amounts)
Energy efficient building property - $300
Qualified furnace or hot water boiler - $150
Advanced main air circulating fan - $50
Residential energy efficient property credit - all are 30% of cost, with maximum credit of:
Solar panels - $2,000
Water heaters - $2,000
Must be your principal residence!
2 of 5 year rule
Form 8908 Energy Efficient Home Credit
Credit for contractors who construct energy efficient homes
$1,000 or $2,000
Form 8909 Energy Efficient Appliance Credit
Manufacturers of energy efficient appliances are eligible.

#9 - NEW CHARITABLE CONTRIBUTION OPPORTUNITIES
BUT THE IRS IS GETTING STRICTER!

Can take IRA distributions and direct them to a charity
Up to $100,000
For 2006 and 2007 only
Must be 70 ½ and older
Income excluded from Traditional or Roth IRA distributions
Deduction not allowed on Schedule A
Do not qualify if donate to supporting organizations, donor-advised funds and private foundations
Contributions must otherwise be entirely deductible in order to be excludable
Stricter rules
For contributions made after January 1, 2007
Must have a bank record or written communication listing donee name, date of gift and amount
No more “cash” contributions allowed
No more de minimis exception ($250)
Cannot simply keep own written record noting the donation
Noncash items
For contributions made after August 17, 2006
Must be in “good” condition or better
No more low valued items such as socks
If donate single piece of clothing or household item for which a deduction of more than $500 claimed, required to file qualified appraisal with tax return

#8 - THINK RETIREMENT!

Set up and/or contribute to a SEP IRA by March 15th or an IRA by April 15th!
Can have either count for 2006.
Great way to get a deduction on the business after year end.
Rollovers
$100,000 limit gone starting in 2010.
2 year spread allowed for inclusion in income.
ROTH 401KS were new in 2006.
Employers will offer to stay competitive.
S corporations can now create these plans.
LLC’s can create for their employees but not for their members.
Members are not allowed to be an “employee”.

Work like Roth IRAs
Contributions are not deductible.
Advantage is that buildup within the IRA may be free from federal income tax when individual withdraws money from account.
Tax free distributions if qualify.
Qualified distributions
Not included in gross income
Reported on Form 8606
Not subject to additional 10% penalty for early withdrawals
Penalty reported on Form 5329
Must satisfy 5-year holding period
Distribution may NOT be made before the end of the 5-year period beginning with the 1st tax year a contribution was made
5-year period ends on the last day of 5th consecutive tax year after holding period started
Must meet one of four requirements
Made on or after individual attains age 59 ½
Made to beneficiary (or individual’s estate) on or after individual’s death
Attributable to individual’s being disabled, OR
To pay for “qualified 1st-time homebuyer expenses"
Roth IRA contributions are limited to $4,000 per year for 2006 and 2007 ($5,000 in 2008) with a catch-up contribution of $1,000 in 2006 and 2007 for individuals who are 50 years old and older.
Limits apply to all IRAs (traditional and Roth) not for each.
Individuals may make contributions to Roth IRA after age 70 ½.
Loss on Roth IRA can be recognized if all Roth IRA accounts have been distributed and total distributions are less than the unrecovered basis.
Basis is total amount of nondeductible contributions to Roth IRA.
Loss claimed as miscellaneous itemized deduction subject to 2% floor
In a Roth 401(k), you can contribute $15,000 for 2006 ($15,500 in 2007) with a catch-up contribution of $5,000 (same in 2007).
NO AGI LIMITATION like in a Roth IRA!
Roth IRA contributions phased out if AGI is between $95,000 and $110,000 for single filers and $150,000 and $160,000 for joint filers (married filing separately limitation is between $0 and $10,000).
POTENTIAL FOR MATCHING BY EMPLOYER unlike in a Roth IRA!
Eligible contributions
Employee must irrevocably designate amounts as Roth 401(k) contributions when electing to defer compensation.
Employee cannot redesignate as regular 401(k) contribution.
Employees can change or revoke designation only for future deferrals.
Contributions must be included in income at the time the employee would have received the funds had he/she not elected to contribute to the Roth 401(k).
Deferred amounts must be maintained by the plan in a separate, designated Roth account.
For distributions from a Roth 401(k) to be NONTAXABLE, they must occur after the FIVE-YEAR period beginning with the tax year of the employee’s first contribution.
Distributions must be made
On or after the taxpayer attains age 59 ½
After the taxpayer’s death OR
On account of the taxpayer’s disability
Distributions required once employee reaches 70 ½
Roth 401(k) can be rolled over into a Roth IRA (distributions NOT mandatory) and taxpayer can still make Roth IRA contributions even after reaching 70 ½ .
Currently, NO WAY to transfer traditional 401(k) funds to Roth 401(k).
Hopefully, this issue will be resolved in the near future.

TRADITIONAL IRAs
Combined limitations with Roth IRAs
Amounts earned in a traditional IRA are not taxed until distributions are made.
Contributions are generally deductible.
If individual or spouse is active participant in employer-maintained retirement plan, deduction REDUCED or ELIMINATED depending on AGI
2006 Phase-out between
$150,000 and $160,000 for joint returns
$50,000 and $60,000 for single returns
$0 and $10,000 for married separate returns
$75,000 and $85,000 for joint IF BOTH COVERED
2007 Phase-out between
$156,000 and $166,000 for joint returns
$52,000 and $62,000 for single returns
$0 and $10,000 for married separate returns
$83,000 and $103,000 for joint IF BOTH COVERED
Considered active participant EVEN IF DID NOT PARTICIPATE.
Nondeductible contributions may be made.
Reported on Form 8606
As in Roth IRA, contributions may be made until APRIL 15.
If contribution is over limit, 6% tax charged until correction made.
Use Form 5329 to reflect 6% tax
Distributions must begin no later than APRIL 1 FOLLOWING calendar year owner reached age 70 ½
If contributions made were all DEDUCTIBLE, distributions are FULLY taxable.
Any nondeductible contributions made are NONTAXABLE.
Early distributions
If individual under age 59 ½, distribution subject to 10% penalty.
Reported on Form 5329
Exceptions to 10% penalty
Medical insurance premiums
Eligible if received unemployment for 12 consecutive weeks (or deemed to have if self-employed)
Qualifying premiums
Deductible premiums for medical care of unemployed individual, spouse and dependents
7.5% floor ignored
Distributions must be received in year unemployment received
Ceases to apply after reemployment for 60 days
Qualified Higher Education expenses
For you, spouse, child or grandchild of you or spouse
Qualified expenses
Tuition at post-secondary institution
Books
Fees
Supplies
Equipment
First-time homebuyer expenses
Limited to $10,000 lifetime withdrawal
Qualified expenses
Acquisition costs
Settlement charges
Closing costs
Home may be for you or spouse, child, grandchild or ancestor of you or spouse
2 year rule
Return of Nondeductible Contributions

SEP Plans (Simplified Employee Pensions)
If you are a shareholder of your S corporation, you may create these plans.
Issue is you must also plan for any employees you have.
If no employees, there is no issue – you may create for yourself.
Retirement plan in which an employer makes contributions to IRAs of employees.
As a shareholder, you must be taking a salary.
Contributions must be the lesser of:
25% of compensation - $220,000 maximum for 2006 ($225,000 in 2007), or
$44,000 ($45,000 in 2007)
Create by completing Form 5305-SEP
This form is not filed with IRS; rather, it is retained by employer.
Copy must be given to eligible employees.
Must complete by due date, including extensions, for income tax return for year intended.
Contributions can be deducted if made by due date, including extensions, of tax return.

#7 - DO I HAVE TO PAY QUARTERLY TAXES?

Schedule SE (see attached)
Filed with Form 1040
To reflect social security and Medicare taxes that would otherwise have been paid if employee
File if self-employed and had income on Schedule C of MORE THAN $400
If NET PROFIT x 92.35% = LESS THAN $400, you do not need to file.
HOBBY LOSS RULES
Hobby losses allowed to extent of income
Taxes, interest, casualty losses deductible anyway
Reduce income then operating expenses then depreciation
Expenses to extent of income subject to 2% floor miscellaneous itemized deductions
NOT hobby if profits in any 3 of 5 CONSECUTIVE tax years ending with tax year in question
Activity involving horses (breed, train, show, race) use 2 of 7 years
Self-employment tax
If NET PROFIT x 92.35% = $90,000 or LESS, multiply by 15.3% to calculate tax
If NET PROFIT x 92.35% = MORE THAN $90,000, multiply by 2.9% and add $11,160 to calculate tax
Tax reported on line 58 of Form 1040 (as additional tax on page 2)
DEDUCTION for ½ of self-employment tax entered on line 27 of Form 1040 (as subtraction on page 1)
Maximum amount of self-employment income subject to social security tax is $94,200 for 2006 and $97,500 for 2007
If you have more than one business, net earnings from self-employment is combination of all businesses.
Income and losses NOT included in net earnings from self-employment include:
Salaries subject to social security and Medicare tax received as an employee
Fees received for services performed as a NOTARY PUBLIC.
Income received as a retired partner under written partnership plan.
Income from real estate rentals if did not receive in course of trade or business as a real estate dealer (use Schedule E)
Income from farm rentals if, as landlord, you did not materially participate in production or management of production of farm products on land
Dividends if you did not receive income in course of trade or business as dealer
Gains and Losses (use Form 4797 or Schedule D)
Net operating losses

#6 - DON’T FORGET THE TELEPHONE TAX CREDIT!

· IRS conceded to Department of Justice to no longer collect excise taxes on long-distance telephone services

o It should not apply to long distance only local

o Not taxable effective March 1, 2003

o Tax collection ceased after July 31, 2006

· Refundable credit

· 2006 only

· Individuals

o $30 if single

o $40 if MFJ

o $50 if MFJ with one dependent

o $60 if MFJ with two dependents

o Or can gather 41 months of statements to calculate actual tax paid

· Businesses

o May use actual amount or formula

o Form 8913 to request refund

· Can get refund even if not required to file a return

o Use Form 1040-EZ-T

#5 - UH-OH! CONGRESS EXTENDED THESE PROVISIONS
BUT THE FORMS ARE ALREADY DONE

3 items on 2006 return – higher education tuition and fees (up to $4,000), educator expenses (up to $250) and state and local sales tax deduction.
Expired under prior law but extended by the Tax Relief and Health Care Act of 2006
Allowed to be taken, however, forms released prior to Congress extending the provisions.
IRS revised forms assuming that these provisions were gone.
IRS will not be revising due to extension of these provisions.
You must force on 1040 and use codes
Tuition and fees deduction - put on line 35 on page 1 and mark (T)
Mark (B) if taking both this and domestic production activities deduction and attach breakdown
Educator expenses - put on line 23 on page 1 and mark (E)
Mark (B) if taking both this and Archer MSA deduction and attach breakdown
Sales tax deduction - put on line 5 as “State and local income taxes” of Schedule A and mark (ST)

#4 - MILEAGE RATES

· As an employee, if you are not reimbursed for mileage by your employer, you can deduct mileage as an UNREIMBURSED BUSINESS EXPENSE ITEMIZED DEDUCTION.

· As a business owner, you can deduct mileage as a CAR EXPENSE ON YOUR SCHEDULE C or ENTITY RETURN.

· For 2006, the mileage rate is 44.5 cents.

· For 2007, the mileage rate is 48.5 cents.

#3 - TIMING IS EVERYTHING!

Consult your tax advisor (and attorney and financial planner for that manner) before doing anything or making any changes. It’s hard to help after the action has been taken!

o Capital gains rates – rates extended through 2010

§ Continue at 15%

§ If in 10% or 15% tax bracket, rate is 5%

§ If in 10% or 15% tax bracket in 2008, rate is ZERO

o Phaseouts

§ Itemized deduction and exemption phase outs are “phasing out”

§ Phase out reduced 1/3 per year

§ In 2010, no phaseouts

Standard deduction

2006

$5,150 for single and married filing separately

$7,550 for head of household

$10,300 for married filing jointly and surviving spouses

2007

$5,350 for single and married filing separately

$7,850 for head of household

$10,700 for married filing jointly and surviving spouses

$1 OVER standard deduction, you can itemize.

Mortgage insurance

Itemized deduction for cost of PMI on qualified personal residence

2007 only

Kiddie Tax

Age limit now 18 instead of 14

Effective for 2006

529 plans now more popular

KIDDIE TAX RULES

Form 8814 (see attached)

Use to report child’s income on parents’ return.

Child does not need to file return.

If a child has UNEARNED INCOME OVER $1,700 in 2006 (same for 2007), then the income ABOVE that amount is taxed at THE PARENTS’ RATE.

The child can EARN $850 in investment income and pay no tax on that amount and the other $850 will be taxed at the CHILD’S LOWER TAX RATE.

#2 - WHERE SHOULD I PUT MY TAX REFUND?

· Direct deposit of refunds can now be made to 3 different accounts

Savings, checking, mutual funds, retirement, brokerage firms, credit unions

IRS concerned about savings

Form 8888 (see attached)

For IRAs, must designate for current or following year

Exception

§ Cannot be deposited into more than one account if Form 8379 Injured Spouse has been filed.

o Special rules if errors on return and refund changed

#1 - DEDUCT YOUR HOME OFFICE!

Form 8829 (see attached)
Home must be principal place of business
Consider the relative importance of the activities performed at each place where you conduct business
Consider the amount of time spent at each place where you conduct business
Home office will qualify as your principal place of business if:
You use it EXCLUSELY and REGULARLY for administrative or management activities of your trade or business AND
You have no other fixed location where you conduct SUBSTANTIAL administrative or management activities of your trade or business.
Deductions
MORTGAGE INTEREST
Remainder to Schedule A
No Schedule A phase-out since business expense
REAL ESTATE TAXES
Remainder to Schedule A
No Schedule A phase-out since business expense
UTILITIES
Gas, electric
HOMEOWNERS INSURANCE
DEPRECIATION
How is the deduction calculated?
Square footage of office divided by square footage of entire house
Employees
If you are an employee but you use your home office as your PRIMARY office, the expenses can be included as an UNREIMBURSED BUSINESS EXPENSE MISCELLANEOUS ITEMIZED DEDUCTION subject to the 2% AGI floor.
The business use of the home MUST BE FOR THE CONVENIENCE OF YOUR EMPLOYER to qualify.
Itemized deductions
You can itemize even if you do not own a home.
Large amount of medical bills
Large sales tax bill
Large amount of charitable contributions
Large amount of miscellaneous deductions above the 2% AGI limit.
Special Rules for DAYCARE FACILITY
If you use space in your home on a regular basis for providing daycare, you may be able to deduct the business expenses for that part of your home EVEN THOUGH you use the same space for NONBUSINESS purposes.
To qualify for this exception to the exclusive use rule, you must meet BOTH requirements:
You must be in trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves, AND
You must have applied for, been granted, or be exempt from having, a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. If your application was rejected or license revoked, you do not meet this requirement.
You do not have to meet the exclusive use test if you use part of your home as a daycare facility
Exclusive use test
You must use a SPECIFIC area of your home ONLY for your trade or business.
If you use part of home EXCLUSIVELY for daycare, deduct all allocable expense subject to deduction limit.
If use of part of home as daycare facility is regular, BUT NOT EXCLUSIVE, you must figure what part of available time you actually use it for business.
You do not need to keep records to show specific hours.
You may use occasionally for personal reasons.
Room does not qualify is occasionally for business reasons.
Compare TOTAL TIME used for business to TOTAL TIME part of home used for ALL purposes (by week or by year)
MEALS
If you provide food, DO NOT include HERE, rather claim it as a separate deduction on Schedule C.
Cannot deduct food consumed by you or family
Deduct 100% of food consumed by recipients
Deduct 50% of food consumed by employees (or 100% if de minimis)
Reimbursements received from sponsor under Child and Adult Food Care Program of Dept. of Agriculture TAXABLE ONLY to extent exceed expenses for food for eligible children. If reimbursements MORE THAN/LESS THAN expense, INCOME/EXPENSE on Schedule C.
Can use STANDARD meal and snack rates instead of actual costs to compute deductible cost of meals and snacks
2005 Standard Meal and Snack Rates (other than Alaska and Hawaii)
$1.04 – breakfast
$1.92 – lunch
$1.92 – dinner
$0.57 – snack
Can use the standard meal and snack rates for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day.
NEW RATES FOR 2006 ARE NOT AVAILABLE
If use standard meal and snack rates for a particular tax year, must use the rates for all your deductible food costs for eligible children during that tax year.
If use standard meal and snack rates in any tax year, can use actual costs to compute the deductible cost of food in any other tax year.
If use standard meal and snack rates, must maintain records to substantiate the computation of the total amount deducted for the cost of food provided to eligible children.
Records kept should include the name of each child, dates and hours of attendance in the daycare, and the type and quantity of meals and snacks served.
FAMILY DAYCARE PROVIDER MEAL AND SNACK LOG (see attached)
Do not include non-food supplies used for food preparation, service, or storage, such as containers, paper products, or utensils.
Separate deduction on your Schedule C
Form W-10 Dependent Care Provider’s Identification and Certification (see attached)
Your client’s may request this to be filled out so that they may include on Form 2441 of their return