NEW CLIENTS ARE ALWAYS WELCOME...YOUR REFERRALS ARE ALWAYS APPRECIATED. THANK YOU!
Inside This Issue:
Previous Issues
Retirement and Estate Planning Limitations
Increase for 2006
New limitations are effective in 2006 for various types of retirement plans, gifts, and estate taxes. First of all, although the regular IRA contribution limit remains at $4,000 in 2006 (for individuals with at least that much in earned income), the IRA catch-up contribution amount for taxpayers age 50 and older by year-end increased by $500 to $1,000. So, a qualified individual can save up to $5,000 in an IRA while a qualified married couple can save up to $10,000 as long as one or both of them has at least that much in earned income.
Qualified retirement [401(k), 403(b), and 457] plan deferral (contribution) limits increase by $1,000 to $15,000 in 2006. Taxpayers age 50 or more by year-end are eligible to make an additional catch-up contribution of up to $5,000, an increase of $1,000 from last year. So, it is possible for an eligible employee to sock away up to $20,000, plus any employer contribution, in a qualified plan this year. The 2006 amounts reflect the final increases provided by the 2001 Tax Act. Under current law, only cost-of-living increases are permitted after 2006.
The annual gift tax exclusion increases by $1,000 in 2006 to $12,000, or $24,000 when a married couple makes a gift-splitting election. The estate tax annual exclusion increases by $500,000 to $2 million this year. The estate tax exclusion can be used to transfer up to $2 million to a nonspouse beneficiary and escape taxation. (Transfers to a spouse can generally be made estate tax-free using the unlimited marital deduction.)
The wage base for computing your Social Security contribution under the Federal Insurance Contributions Act (FICA) increases by $4,200, or 4.7%, to $94,200 in 2006. This increase is double the $2,100 in addition we experienced last year. For 2006, the effective FICA tax rate remains at 7.65% (6.2% for Social Security and 1.45% for Medicare) for the employee and employer (15.3% combined), unchanged since 1990. On a salary of $94,200, an employer and employee will each contribute $321 more in FICA taxes during 2006 than in the prior year. Amounts over $94,200 continue to be subject only to the Medicare portion (1.45% each) of the FICA tax.
April17- Besides being the last day to file
(or extend) your 2005 personal return and pay any tax that is due, 2006
first quarter estimated tax payments for individuals, trusts, and calendar-year
corporations are due today. So are 2005 returns for trusts and calendar-year
estates, partnerships, and LLCs, plus any final contribution you plan
to make to an IRA or Education Savings Account for 2005. SEP and Keogh
contributions are also due today if your return is not being extended.
May 1 - If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through March 31 exceeds $500.
-The first quarter Form 941 (Employer's Quarterly Federal
Tax Return) is also due today (except that you have until May 10 to file
if you deposited all taxes for the quarter when they were due).
Update on the Clean Fuel Vehicle
Deduction and Credit
The IRS has certified the 2006 Toyota Prius
Hybrid for the clean fuel vehicle deduction, which means that taxpayers
who purchased a 2006 Toyota Prius new during 2005 are entitled to a $2,000
tax deduction on their 2005 Form 1040. Starting in 2006, the deduction
will be replaced with a tax credit.
Here's a current list
of vehicles that qualify for the clean fuel vehicle deduction. Presumably,
the 2006 models of these vehicles will qualify for the new credit, subject
to certification by the IRS. Ford Escape Hybrid (model years 2005 and
2006), Honda Accord Hybrid (model year 2005), Honda Civic Hybrid (model
years 2003 and 2005), Honda lnsight (model years 2000 through 2005), Lexus
RX 400h (model year 2006), Mercury Mariner Hybrid (model year 2006), Toyota
Highlander Hybrid (model year 2006), and Toyota Prius (model years 2001
through 2006). The $2,000 deduction is for tax years 2005 and earlier.
Tax Incentives for Energy
Conservation
The Energy Policy Act
of 2005 (Energy Act) authorized tax incentives for energy conservation
and production. According to information posted on its website at www.energyincentives.org,
the Tax Incentives Assistance Project (TIAP) was formed to help consumers
and businesses become familiar with the tax incentives for energy efficient
products and technologies authorized by the Energy Act. For consumers,
the TIAP website has information on the tax incentives for insulation,
windows, heating and cooling equipment, solar energy systems, and fuel
cells. Businesses will find information on the tax incentives available
for commercial buildings, commercial vehicles, solar energy systems, fuel
cells, and microturbines. TIAP is supported by a coalition of nonprofit
groups, government agencies, and others. In addition to disseminating
information, TIAP intends to work with the Energy and Treasury Departments
and other government agencies on the implementation of the tax incentives.
Is a C Corporation
Right for Your Business?
One of the initial decisions a new owner faces when starting a business is choosing the most advantageous business form for tax and legal purposes. This is commonly referred to as the choice of entity decision. For these aspiring entrepreneurs, some of the entity options available include a sole proprietorship, a partnership, an S Corporation, and a C Corporation. In this article, we will discuss some of the advantages and disadvantages of operating as a C Corporation.
Where possible, business owners will want to protect their personal assets from the legal liabilities incurred by their business. A major advantage of operating as a corporation is the limited liability of the shareholders and of the business itself. Because a corporation is a legal entity separate and apart from its shareholders (owners), its creditors and claimants generally cannot gain access to shareholders' personal assets to satisfy legal liabilities resulting from lawsuits filed by customers and contract lawsuits filed by suppliers. However, incorporating a professional practice (such as a veterinarian) usually will not protect the professional's personal assets from legal liabilities related to his or her own professional malpractice. Nevertheless, it is still advisable to set up a liability-limiting entity to protect the professional's personal assets from business-related liabilities, such as those caused by employees.
An advantage of operating as a C Corporation is the potential to minimize federal employment taxes. For example, taking a salary of $50,000 from a C corporation with $100,000 in net income will result in $7,650 ($50,000 x 15.3%) of employment taxes being paid. Contrast that with the $14,130 ($100,000 x .9235 x 15.3%) in self-employment tax for an individually owned sole proprietorship (often referred to as a Schedule C business) with a net income of $100,000. (The Schedule C business owner would owe a large self-employment tax bill whether or not he or she withdraws any cash from the business.)
Unfortunately, for federal income tax purposes, C Corporations are potentially subject to a form of double taxation because the corporation pays tax on its income and its shareholders pay income tax on the dividends they receive. However, in certain circumstances, this double taxation can actually be less costly than single taxation, due to the current 15% maximum federal income tax rate on qualifying dividends.
When the threat of double taxation is a problem, the graduated federal income tax rates for C Corporations can often minimize or eliminate the negative effects. Here's how. Individuals reach a tax rate of 35% when their taxable income exceeds $336,550 (for 2006). C Corporations do not reach the 35% tax bracket until their taxable income exceeds $10 million. Therefore, leaving some income inside the C Corporation can minimize the tax hit thanks to the favorable graduated corporate rates. A strategy of splitting income with a corporation and its shareholders can be quite effective under today's federal income tax rate structure.
A distinct disadvantage of operating as a C Corporation is the threat of two penalty taxes: (1) the accumulated earnings tax and (2) the personal holding company tax. The accumulated earnings tax comes into play when a corporation accumulates excessive earnings without a business purpose or potential use and does not pay dividends (theoretically avoiding the double taxation mentioned above). The personal holding company tax comes into play if the corporation has too much passive or portfolio income (such as interest, dividends, and rents). However, with sufficient notice and planning, a tax professional can help the owner minimize or eliminate these two penalty taxes.
Please contact us to discuss the most, advantageous
entity form for your new or existing business.
Donor-advised
Funds Make Charitable Giving Easy
Donor-advised funds are
a cost-effective alternative to private foundations. They can be established
with minimal start-up costs and allow a donor to make a tax-deductible
charitable contribution to a specific public charity or community foundation.
Donor-advised funds are widely available through charities, universities,
mutual fund companies and other financial institutions. Initial contributions
can be as low as $10,000.
The assets (e.g., cash or stock) contributed to the donor-advised fund are placed in a separate account by the custodian (e.g., mutual fund company) and are invested according to the donor's wishes (e.g., aggressively or conservatively). After the contribution is made, the fund handles all the administrative requirements. Until the contribution principal is distributed to a charity, it earns income and can continue to grow tax-free. Assuming the invested funds grow, the donor will be able to grant more to the designated charities than initially invested. However, the opposite is also true: if the invested funds decline, there is less available for the charities.
The donor retains the right, generally during his or her lifetime, to make recommendations for using the separate fund's income and principal. However, since the fund is "advised" rather than directed, the donor can only make recommendations; the fund may ignore donor requests. As the advisor receives grant requests, funds are disbursed for qualified charitable endeavors. In effect, the fund acts as a conduit for the donor's charitable contribution. In most cases, donor recommendations are honored. So, as a practical matter, donors enjoy a significant amount of control over how their contributions to a donor-advised fund are invested and distributed. Their recommendations on which charity should ultimately receive the funds are typically only rejected in rare cases, such as when the designated charity is not tax-qualified by the IRS.
Contributions to donor-advised
funds are tax-deductible immediately even if the fund does not disburse
money to charity right away. Thus, a donor may claim a tax deduction when
he or she is in a higher marginal tax rate, while actual payouts from
the account can be deferred until later, allowing the account to grow
in the meantime. If the donor contributes appreciated securities (e.g.,
stock) that have been held for more than a year, the full current market
value can be deducted subject to the 30% AGI limitation. Also, capital
gains tax on the appreciation is avoided. Finally, the contributions reduce
the value of the donor's taxable estate, which may reduce estate taxes.
The
Tax and Business Alert is designed to provide accurate information regarding
the subject matter covered. However, before completing any significant
transactions based on the information contained herein, please contact
us for advice on how the information applies in your specific situation.
Tax and Business Alert is a trademark used herein under license.
© Copyright 2006