December 2006 Tax Newsletter
Major Tax Deadlines
For December 2006
December 15 – Fourth estimated tax payment is due for calendar-year corporations.
December 31 – Last day to set up a Keogh retirement plan for 2006. Deductible contributions for 2006 can be made any time up to the filing deadline for your 2006 return. (Last business day may be Friday, December 29.)
December 31 – Deadline for taking required minimum distributions from IRAs and other retirement accounts. (Last business day may be Friday, December 29.)
December 31 – Deadline to complete 2006 tax-free gifts of up to $12,000 per recipient.
December 31 – Deadline for paying expenses you want to be able to deduct on your 2006 income tax return.
NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.
Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees’ pay and both the employer’s and employees’ share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.
Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.
For more information on tax deadlines that apply to your business, contact our office.
New in Taxes: More wages are subject to social security tax in 2007
The Social Security Administration has published the maximum amount of earnings that will be subject to social security taxes next year. The amount increases to $97,500, up from $94,200 for 2006.
Employees will have a 6.2% social security tax withheld from their paychecks on wages up to $97,500. Their employers will pay an additional 6.2% on these wages. Self-employed taxpayers will pay both employee and employer share for a total 12.4% tax on earnings up to $97,500.
The maximum a wage earner will pay in social security tax in 2007 will be $6,045, up from $5,840.40 in 2006. A self-employed taxpayer will pay a maximum of $12,090.
All wages in 2007 are subject to a 1.45% Medicare tax; all self-employment earnings pay a 2.9% Medicare tax.
Those receiving social security will get a 3.3% cost of living increase in benefits for 2007.
Two 2006 laws may offer tax planning opportunities
If you can name the two new tax bills passed by Congress this year, you might be a master of trivia. But there is nothing trivial about the Tax Increase Prevention and Reconciliation Act and the Pension Protection Act. These laws could have an impact on your taxes.
* Retirement planning
Those who have been shut out of the Roth IRA conversion strategy because of the $100,000 income limitation can now take another look at converting. Beginning in 2010, all taxpayers, regardless of their income level, can convert their traditional IRA to a Roth IRA. Although the conversion is taxable, the income and the resulting tax can be averaged over two years.
Starting in 2007, inherited retirement plans can be rolled over tax-free into a new IRA to defer distributions. Previously, only surviving spouses were allowed this option. Nonspousal beneficiaries had to accept the distributions — and pay the taxes due — within five years. A 2001 tax law set higher contribution limits for IRAs, SIMPLEs, SEPs, 401(k)s, and 457 plans. But these larger contribution amounts were set to expire after 2010 along with most of the other provisions in the 2001 law. The Pension Act makes these higher contribution limits permanent and generally indexes the limits for inflation in the future.
The saver’s credit that provides for a credit of up to $1,000 annually for lower-income individuals’ contributions to retirement plans is made permanent. The income-based phase-out ranges for the credit will be indexed for inflation, a change that will make the credit available to more taxpayers.
The tax credit for small businesses that start a new retirement plan (up to $500 per year for three years) is made permanent.
* College savings
Distributions from Section 529 plans used to pay for college expenses were scheduled to lose their tax-free status after 2010. The Pension Act makes the tax-favored treatment for 529 plans permanent.
The age at which a child’s excess unearned income is no longer taxed at the parents’ rate has been raised from 14 to 18. Besides costing you more tax, this change might also modify how you fund your child’s college education. Instead of shifting income-producing assets to a child, you may need to consider other options.
* Charitable donations
Another new rule promises to make IRAs powerful tools for charitable gift planning. Taxpayers age 70½ and older will be allowed to make charitable donations directly from their IRA (up to $100,000 annually) without paying tax on the distribution. What’s more, the charitable payments satisfy the required annual distribution obligation. Be aware that the law is valid only for 2006 and 2007.
Rules for cash donations have been modified. The old law specified that charitable gifts over $250 must be documented by the charity. Beginning in 2007, cash, check, and other monetary donations of any amount can be deducted only if substantiated by a bank record or written documentation from the charity.
Also, new rules govern donations of used clothing or household items. Now you can claim a deduction only if the items are in “good” condition. Unfortunately, the law doesn’t define what is meant by “good.”
* Other provisions
Many of the provisions of the recently passed bills either extended or made permanent rules that you may have taken for granted, such as the 15% capital gains tax rate and the Roth 401(k). Other important provisions include automatic enrollment into 401(k) plans, changes in retirement plan rollover rules, and rules that increase federal oversight of charitable organizations. Call us today to review your tax and financial situation under these recent changes.
IRS announces mileage rates for 2007
The IRS has issued the 2007 standard mileage rate that businesses can use to calculate the deductible costs of driving an automobile for business.
Beginning January 1, 2007, the standard mileage rate for business driving will be 48.5 cents a mile. This represents an increase in the mileage rate from the 44.5 cents a mile allowed in 2006. The rate increase is due to higher vehicle and fuel prices for the year ending October 2006.
If you have questions about deducting vehicle expenses in your business, give us a call.
Don’t overlook these business deductions
As a small business owner, you probably don’t need one more thing to do during the busy holiday season. But before you say goodbye to 2006, consider adding this: a search for missing business tax deductions. Finding one of these deductions might give you real tax savings.
Where do you start? First, think about the things you use in your daily work life. Are you taking full advantage of the home office deduction rules? If you use a portion of your home exclusively and regularly as your principal place of business, you might qualify. Similarly, the business use of your personal vehicle can be deducted. While keeping track of business miles can be tedious, it can be worth the effort come tax time.
Deductions you might not have thought of include the business use of a personal cell phone and the business portion of your monthly Internet access fee. Qualifying meals and entertainment expenses are also deductible, including the cost of entertaining at home — just as long as there is a legitimate business purpose.
Document your business expenses. Knowing how an expense is deducted is also important. Some expenditure is only partially deductible as itemized deductions, but may be fully deductible against self-employment income. Examples include legal bills, tax return preparation fees, and work-related publications. A word of caution: business expenses must be fully documented. Proper accounting records are essential to take advantage of these write-offs.
Self-employed taxpayers should also remember that 100% of health insurance premiums paid for themselves and their families can generally be deducted from their business income.
If you are considering a major business purchase, you might want to act before year-end. In 2006, up to $108,000 of qualifying property can be expensed immediately. (If you operate in a Hurricane Katrina-related Gulf Opportunity Zone, the limit is higher.)
One important way to save taxes is to maximize your self-employed retirement plan contributions. Otherwise, you might be leaving money on the table. And certain retirement plan contributions can be made as late as the due date of your return, even with extensions.
During this busy holiday season, take time to give yourself a break — a tax break! Call us for a year-end review to help you find those tax deductions you might otherwise miss.
Using credit could be getting too easy
If you’re concerned about your financial well-being, you should probably think twice about using your credit card for purchases under $25.
Credit card companies are beginning to allow no-signature credit card purchases of less than $25 at fast-food restaurants, movie theaters, pharmacies, and convenience stores. While using your credit card for these small purchases may be extremely convenient for both you and customers waiting in line behind you, they can add up to significant amounts. Unless you always pay off your credit card in full each month, these kinds of credit purchases can add to your debt load and monthly interest charges.
According to CardWeb.com, the average balance on credit cards has increased by 76% over the past ten years.
Another thing to consider: When you use your credit card for numerous small charges with no signature required, you may find it hard to detect fraud when you review your monthly credit card statement. Paying cash may be the wiser choice, and if you don’t have the cash, maybe you shouldn’t make the purchase at all.
Smart financial gifts this holiday season
When planning gifts for children on your holiday list, you might want to think beyond the traditional retail offerings. Consider financial gifts that can bestow benefits for many years to come.
Some financial gift options you might consider:
U.S. savings bonds. Savings bonds are used by many families to introduce children to the savings concept. I bonds are indexed for inflation and can provide some attractive rates of return.
* IRAs (regular or Roth). For 2006, you can contribute the lower of $4,000 or the earned income of the child. An early financial start can produce amazing benefits from compounded interest accumulated over several decades.
* Stocks or mutual funds. Equities are a good way to introduce a child to the investment world. If you give appreciated securities to a child or grandchild who is 18 or older, it could allow the child to enjoy a lower capital gains rate when the shares are sold.
* Collectible stock certificates. Vibrant framed certificates are available for many companies. A Disney, Dream Works, or Coca-Cola stock certificate can provide a colorful reminder of the importance of investing for the future.
* Collectibles. Postage stamps or coin collection kits can provide years of enjoyment and form the basis for some life-long hobbies. An interesting gift idea is an official U.S. mint proof coin set for the year the child was born.
Please call us if you would like to review the tax issues related to any of these financial gift options, especially if you are considering a larger amount.
U.S population growth
According to the Census Bureau’s POPClock, the U.S. population hit 300 million at precisely 7:46 EDT on October 17, 2006.
It’s estimated that the population will hit 400 million in 2040.