Recent Tax Law Changes are Numerous, Confusing

Recent Tax Law Changes are Numerous, Confusing

1 February, 2007

According to acclaimed genius Albert Einstein, "The hardest thing in the world to understand is the income tax," and the tax laws have changed yet again. In fact, there were three tax law changes in 2006, one of which contained more than 900 pages.

Congress passed the Tax Increase Prevention and Reconciliation Act of 2005 in May, the Pension Protection Act of 2006 passed in August, and the Tax Relief and Healthcare Act
of 2006 in December.

What does this mean for you? While many of the changes took effect in 2006 and affect future years, it is mostly good news for taxpayers. Even some of the "revenue raisers" may be a benefit for you.

For individuals, the alternative minimum tax exemption amounts increased, and you can still claim nonrefundable personal tax credits against alternative minimum tax, as well as regular tax. The favorable 15 percent tax rate for long-term capital gains and qualified dividends will remain in place through the end of 2009.

Many provisions scheduled to sunset at the end of 2010 are now permanent. Higher dollar amounts for IRA contributions and defined contribution plans stay along with catch-up contributions for older workers. The tax benefits for Section 529 qualified tuition programs received a permanent extension. Section 179, the provision for expensing business property, remains at its enhanced amount through 2009.

There is also good news for those investing for retirement. Many of the rules for contributions,
rollovers and distributions have been relaxed to encourage retirement savings, and the IRS will now permit direct deposits of tax refunds into IRAs. Income limits, for both traditional and Roth IRAs, will be indexed for inflation after 2006. Set for elimination after 2009 though is the $100,000 AGI limit on conversions of traditional IRAs to Roth IRAs. Non-spouse beneficiaries of inherited qualified plans are now able to roll the qualified plan account into an IRA. Employees victimized by employer bankruptcies may be eligible to make extra IRA contributions. In addition, there are many new options and protections for qualified plan participants.

Charities will benefit under some of the new provisions. Individuals who are 70 1⁄2 years old or older can transfer up to $100,000 from their IRA to charity. The distribution will be tax-free and will qualify as part of the required minimum distribution. The law now has provisions in place that will encourage individuals to donate real property to charity for conservation purposes. And, the deduction for food and book inventory contributions has been extended through 2007 for businesses that qualify.

Unfortunately, several changes to charitable giving are not so beneficial. The IRS continues to crack down on perceived potential abuses by modifying record keeping requirements for charitable contributions. There will be no deductions for any contribution of cash, check or other monetary gift after Jan. 1, 2007, unless the donor can show a bank record or written communication from the charity indicating the amount of the contribution, the date of the contribution and the name of the charity. Effective immediately, there is no longer a deduction for used clothing and household items unless the items are in "good" condition. In addition, a "qualified appraiser" must now appraise any property contributions over $5,000 where an appraisal is required.

In December, the lame-duck Congress extended many tax benefits that expired at the beginning of 2006 including: the research and experimentation credit, the welfare-to-work and work opportunity credits, the expense deduction for elementary and secondary school teachers, deduction for tuition, deduction of state and local sales tax and many others.

Contact your Rea team member for additional information on the new tax laws and
their impact on your financial situation. After all, the tax law confused even Albert Einstein.