Morre & Company, LLP
Certified Public Accountants
Six Hamilton Landing, Suite 220
Novato, California 94949
415-382-5600 Fax: 415-382-5605
November 2006
Dear Clients and Friends:
The period from now until the end of 2006 holds a unique opportunity for you to save taxes. It is the ideal time of year for tax planning for at least three reasons:
1. You have a good idea about what your taxable income and deductions will be for 2006 since 10 months of the year are now known.
2. There is still time to take advantage of new 2006 tax laws before the door shuts behind you.
3. You can use this time to prepare for new tax laws that begin in 2007.
Having a few months left in the year gives you a great opportunity to review your 2006 and 2007 income and expenses and shift some income or expenses from one year to the next depending on your tax situation.
2006 Opportunities and Pitfalls
Some of the strategies you can use to shift income and expenses include:
1. Accelerate or postpone transactions that either produce income or yield deductible expenses. These include:
a. Prepaying expenses before year end such as state income and property taxes and paying January’s mortgage payment
b. Buying new business equipment before year end
c. If you are self employed and report on the cash basis; postponing invoicing clients so you are not paid until 2007
2. Match capital gains with capital losses. If you have loss carryovers from previous years to use it may be a good time to sell stock that will produce a gain to offset the losses. Or conversely, if you’ve sold stock at a gain it may be a good time to sell losers in your portfolio
3. Bunch up deductible expenses into one year or the other. There are adjusted gross income limitations with both medical expenses and miscellaneous itemized deductions. If you are expecting some large doctor and dental bills by paying them all either this year or next you will more easily exceed the income limitations and get a larger tax deduction. The same goes for employee business expenses, investment expenses and tax preparation fees. Pay both 2006 and 2007 costs this year to maximize your deduction.
4. Maximize the tax law limits on your retirement plan contributions. There’s still time to contribute to an IRA or to your company pension plan.
5. For business owners, you can expense up to $108,000 of new equipment and $25,000 of new business vehicles with gross vehicle weights over 6,000 pounds.
6. If you are an S-Corp make sure your stock basis is high enough to allow you to utilize any business losses and deductions. You can do so by making a capital contribution to the corporation.
The tax law is constantly changing, and the year 2006 has been no exception. Some of the more notable tax law changes this year include:
1. Extend the “Kiddie tax” from age 13 to age 17. Beginning January 1, 2006 a child’s income is taxed at their parent’s rate until they are 18 years of age. But, for California purposes the Kiddie tax applies only through 13.
2. Start of the hybrid vehicle credit available to purchasers of hybrid vehicles.
3. Start of the residential energy credits of $500 for residential improvements and $2,000 for solar equipment
4. Start of strict limits on the qualification of clothing and household items that are donated. The items donated must now be in “good or better” condition. Make sure you have an itemized listing of what you donated and the condition of the items.
5. Start of allowing direct tax-free charitable contributions from IRAs for those that are 70 ½ or older.
AMT Tax Relief is Temporary
The alternative minimum tax (AMT) was designed to make sure that wealthy taxpayers were not able to escape taxation by exploiting deductions. Although you may not consider yourself wealthy, you may be wealthy by the government’s standards. The AMT has not been adequately indexed for inflation, which means that it affects a growing number of taxpayers every year. Congress has passed a few legislative “patches.” While the patches help they will not prevent a large number of taxpayers from falling victim to the AMT each year. 2006 and 2007 will be record years for the IRS’s collection of AMT tax. Some of the items that will increase your chances of paying AMT taxes are:
1. High state income and property tax deductions
2. Home equity loans and other mortgage interest not used to buy or improve your home
3. Exercise and hold incentive stock options
4. Private activity municipal bonds
5. Miscellaneous itemized deductions such as a large amount of employee business expenses or investment expenses. Make sure investment management fees on IRA accounts are paid directly from the IRAs.
6. Income over $150,000 on a joint return or $115,000 for singles.
We can help! Call us!
All of the tax opportunities and considerations at this time of year can be a lot to remember and the details of all of these provisions can make it even more complicated. Fortunately you won’t have to remember them all by yourself – that’s why you hire us. The two most important pieces of tax advice are to keep good records and ask questions. We look forward to hearing from you.
