Monday, October 31, 2005

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

Category: Estate and Inheritance Tax, Tax Law and Planning

From the IRS, a quick summary of some inflation adjustments to 2006 tax planning. Revenue Procedure 2005-70 contains a complete list of all 2006 inflation adjustments.

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

WASHINGTON - Personal exemptions and standard deductions will rise, tax brackets will widen and individuals will be able to make larger tax-free gifts in 2006, thanks to inflation adjustments announced today by the Internal Revenue Service.

By law, a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being modified for 2006. Key changes affecting 2006 returns, filed by most taxpayers in early 2007, include the following:

The value of each personal and dependency exemption, available to most taxpayers, will be $3,300, up $100 from 2005.

The new standard deduction will be $10,300 for married couples filing a joint return, $5,150 for singles and $7,550 for heads of household. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket will be $61,300, up from $59,400 in 2005.

The annual gift tax exemption will be $12,000, up from $11,000 in 2005.
Revenue Procedure 2005-70, containing a complete rundown of inflation adjustments, is posted on the IRS Web site and will appear in Internal Revenue Bulletin 2005-47, dated Nov. 21, 2005.

Friday, October 28, 2005

Judge Orders IRS to Pay $23 Mil in Taxes and Interest

Category: Tax Law and Planning

From Yahoo News....a win, but not exactly for the little guy:

Judge Orders IRS to Pay Buffett's Firm - Yahoo! News: "A federal judge on Friday ordered the Internal Revenue Service to pay billionaire Warren Buffett's investment company more than $23 million in taxes and interest for disallowing certain deductions.

The ruling by U.S. District Judge Lyle Strom ended some three years of legal wrangling between Berkshire Hathaway Inc. and the IRS.

The case stemmed from two lawsuits that alleged the IRS made an 'erroneous, wrongful and illegal' interpretation of the U.S. Tax Code when it denied the deductions."

Thursday, October 20, 2005

Katrina (and other disasters) Tax Relief Act - You can be Generous with Charitable Gifts

Category: Tax Law and Planning

In order to help charities assisting in the Hurricane Katrina relief, Congress recently passed the Katrina Emergency Tax Relief Act (KETRA) which allows unlimited gifts to charity up to a donor's total income until the end of 2005. Normally, there are percentage of income limitations on charitable deductions.

KETRA Qualifying cash gifts must be made between August 28, 2005 and December 31, 2005 to a public charity. For individuals, the contribution does not have to be earmarked for Hurricane Relief.

If you are over 59 1/2 and considering making a large charitable contribution this year, consider withdrawing money from and IRA, 401(k), 403(b), or other qualified retirement account, to make the gift. Generally, withdrawals from qualified retirement accounts are subject to income tax in the year made. Under the normal tax code, the charitable contribution deduction to a public charity is limited to 50% of your income. Accordingly, when you make a withdrawal from a qualified plan and donate the entire amount to charity under the normal rules, you must pay tax on 50% of the withdrawn amount, even though 100% went to charity. Under KETRA, 100% of a qualified plan withdrawal that passes to charted may be deducted.

For more information on Katrina tax relief, see the IRS website.

Wednesday, October 19, 2005

Are you Missing Education Tax Breaks?

Category: Tax Law and Planning

From James Jimenez, CPA of Fass and Associates, CPAs:


A recent report by the Government Accountability Office pointed out that 27% of 1.8 million taxpayers eligible for education-related tax breaks did not take advantage of them on their income tax returns. As a result, they paid from $169 to over $500 more in taxes than necessary.

If the complexity of the tax credits and deductions for education expenses is keeping you from claiming them, you, too, may be paying higher taxes than necessary. With a little effort, you can get the details and advice you need to make the wisest choices for your particular situation. Here’s a brief rundown of what’s available.

* Education savings accounts let you set aside up to $2,000 per year per child in a tax-deferred account for elementary, secondary, or higher education expenses at either private or public schools.

* Section 529 plans include tax-favored college savings plans and prepaid tuition accounts. Tax-free withdrawals can be used to pay for tuition, fees, supplies, equipment, and certain room and board expenses.

* The college expense deduction lets you deduct up to either $2,000 or $4,000 (depending on your income) for tuition and related college expenses. If you qualify, you can deduct these expenses whether or not you itemize

* Student loan interest of up to $2,500 is deductible, subject to income limitations.

* A Hope credit of up to $1,500 per student can be claimed for tuition and fees relating to the first two years of post-secondary education.

* A lifetime learning credit of up to $2,000 per family can be claimed for post-secondary education expenses and certain job-related courses."