Useful Information

New Mileage Rates for 2008

Effective January 1, 2008, the standard mileage rate for business use of personal cars is 50.5 cents per mile. Medical and moving expenses will be 19 cents per mile and charitable will be 14 cents per mile.

Social security wage base is 102,000

New Mileage Rates for 2007

Effective January 1, 2007, the standard mileage rate is 48.5 cents per mile. Medical and moving is 20 cents per mile and charitable will be 14 cents per mile.

Social sercurity wage base is 97,500

YEAR-END INCOME TAX PLANNING FOR INDIVIDUALS INTRODUCTION

Each year we work with you to maximize tax savings through year-end planning. Traditionally, we have recommended that you take steps to ensure that your income is taxed at the lowest possible rate, and that you postpone your taxes by deferring taxable income and accelerating deductions. As in the past, these time-honored strategies continue to serve as the foundation for year-end tax planning. However, recent tax legislation presents new tax planning opportunities for 2006. For example, the Energy Tax Incentives Act of 2005 provides important new tax breaks for consumers who install qualified energy-efficient property in their homes or buy qualified energy-efficient vehicles; the landmark Pension Protection Act of 2006 (PPA 2006) changes the rules for contributions to and distributions from qualified retirement plans and revamps the charitable contribution rules; and, the Tax Increase Prevention and Reconciliation Act (TIPRA) extends the lower capital gains and dividends tax rates, provides temporary AMT relief, retroactively increases the age for the kiddie tax, removes the income limits for Roth IRA conversions, modifies the foreign income exclusions, creates a new capital gain election for sales of certain musical compositions, and provides a variety of additional changes.

We are sending you this letter to bring you up-to-date on these and other new tax planning opportunities provided by this new legislation, and to remind you of several traditional year-end tax planning strategies. Please keep in mind that many of the provisions contained in the new tax legislation are first effective in 2006, while others won't be available until 2007, or later years. Consequently, pay careful attention to the effective date of each new provision which we highlight prominently in each segment.

Be Careful! Moving income from one tax year to another may reduce your personal exemptions and itemized deductions. Moreover, strategies suggested in this letter may subject you to the alternative minimum tax (AMT). For example, you might trigger AMT if you exercise incentive stock options, take large capital gains, have a large family, live in a state with high income or property taxes, or incur significant unreimbursed employee business expenses. Consequently, you should not adopt any tax planning strategy offered in this letter without first computing the impact of the strategy on your overall tax liability, including your AMT liability, for 2006 and 2007. Therefore, we suggest that you call our firm before implementing any tax planning technique discussed in this letter. You cannot properly evaluate a particular planning strategy without calculating your overall tax with and without that strategy.

Planning Alert! At the time we completed this letter, Congress had not extended several popular tax breaks that expired on December 31, 2005, including: the $250 deduction for teacher's classroom expenses, the deduction for state and local sales taxes, the deduction for higher education expenses, and the election to treat tax-exempt combat pay as earned income for earned income tax credit purposes. However, it is possible that Congress will retroactively extend these provisions before the 2006 tax filing season. Please call our firm if you need a status report.

Please Note! This letter contains ideas for Federal income tax planning only. State income tax issues are not addressed.

TABLE OF CONTENTS

We have included a Table of Contents with this letter that will help you locate items of interest. The Table of Contents begins on the next page.

TABLE OF CONTENTS

HIGHLIGHTS OF THE ENERGY TAX INCENTIVES ACT OF 2005 1 NEW HYBRID MOTOR VEHICLE CREDIT 1

NEW $500 LIFETIME ENERGY-SAVINGS HOME IMPROVEMENT TAX CREDIT 1

NEW RESIDENTIAL ALTERNATIVE ENERGY-GENERATING EQUIPMENT CREDIT 2

HIGHLIGHTS OF RECENT HURRICANE TAX RELIEF LEGISLATION 2

HIGHLIGHTS OF THE PENSION PROTECTION ACT OF 2006 2

TEMPORARY PROVISIONS EXTENDED 2

REMOVAL OF SUNSET RULE FOR POPULAR RETIREMENT SAVINGS INCENTIVES 2

REMOVAL OF SUNSET RULE FOR §401(k) ROTH PROVISIONS 3 REMOVAL OF SUNSET RULE FOR §529 COLLEGE SAVINGS PLAN TAX BREAKS 3

CHANGES TO RETIREMENT PLAN DISTRIBUTIONS AND ROLLOVERS 3

ROLLOVERS FROM ELIGIBLE RETIREMENT PLANS TO ROTH IRAS 3

TRUSTEE-TO-TRUSTEE TRANSFER ALLOWED FROM DECEASED INDIVIDUAL'S RETIREMENT ACCOUNT TO IRA NAMING NON-SPOUSE BENEFICIARY 3

TAX REFUND MAY BE PAID DIRECTLY TO YOUR IRA 4

CERTAIN MILITARY PERSONNEL GRANTED NEW RELIEF FROM EARLY WITHDRAWAL PENALTY 4

MISCELLANEOUS RETIREMENT PLAN PROVISIONS 4

CHARITABLE CONTRIBUTIONS-REFORMS AND INCENTIVES 4

TEMPORARY TAX-FREE IRA PAYMENTS TO CHARITIES 4

NEW RESTRICTIONS ON CHARITABLE CONTRIBUTIONS OF CLOTHING AND HOUSEHOLD ITEMS 5

NEW RECORDKEEPING REQUIREMENTS FOR CONTRIBUTIONS MADE IN CASH OR CHECK 5

MISCELLANEOUS CHARITABLE PROVISIONS 5

TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005 5

REDUCED RATES FOR CAPITAL GAINS AND DIVIDENDS EXTENDED TWO YEARS (THROUGH 2010) 6

QUALIFYING MUSICAL COMPOSERS MAY ELECT CAPITAL GAINS TREATMENT 6

INCREASED AMT EXEMPTION THRESHOLDS EXTENDED THROUGH 2006 6

NONREFUNDABLE PERSONAL TAX CREDITS CONTINUE TO REDUCE AMT THROUGH 2006 6

KIDDIE TAX NOW APPLIES TO CHILDREN UNDER AGE 18 (RATHER THAN AGE 14) 6

INCOME LIMITATION FOR TRADITIONAL-TO-ROTH IRA CONVERSIONS ELIMINATED AFTER 2009 6

CHANGES TO THE FOREIGN INCOME AND HOUSING EXCLUSIONS 7

HIGHLIGHTS OF OTHER RECENT TAX LEGISLATION/DEVELOPMENTS IMPACTING INDIVIDUALS 7

ENHANCED OPPORTUNITY FOR MILITARY PERSONNEL TO FUND IRAS 7

DEDUCTION FOR STATE AND LOCAL SALES TAX 8

DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRCRAFT 8

UNIFORM DEFINITION OF CHILD FOR TAX PURPOSES 8

NEW QUALIFYING CHILD DEFINITION OFFERS POTENTIAL TAX BENEFITS FOR HIGH INCOME FAMILIES 8

IRS ANNOUNCES TELEPHONE EXCISE TAX REFUND 9

TRADITIONAL YEAR-END TAX PLANNING TECHNIQUES 9 PLANNING WITH CAPITAL GAINS AND LOSSES 9

WATCH OUT FOR INCENTIVE STOCK OPTIONS AND AMT 9 YEAR-END CONSIDERATIONS FOR CAPITAL ASSETS 9

STOCK "TRADERS" MAY SAVE TAXES BY ELECTING "MARK-TO-MARKET" 10

POSTPONING TAXABLE INCOME 10

SELF-EMPLOYED BUSINESS INCOME 10

INSTALLMENT SALES 11

LIKE-KIND EXCHANGES 11

REQUIRED DISTRIBUTIONS FROM RETIREMENT PLANS AFTER 70½ OR DEATH 11

RELIEF FOR LATE IRA ROLLOVERS 12 TAKING ADVANTAGE OF DEDUCTIONS 12 ACCELERATING DEDUCTIONS INTO 2006 12

"BUNCHING" ITEMIZED DEDUCTIONS 13 "BUNCHING" MEDICAL EXPENSES 13

DEDUCTION FOR SELF-EMPLOYED HEALTH INSURANCE COSTS 13

NATIONAL GUARD AND RESERVE TRAVEL 13

TAKING ADVANTAGE OF HEALTH SAVINGS ACCOUNTS (HSAs) 13

MAXIMIZING EMPLOYEE BUSINESS EXPENSES 14

CHARITABLE CONTRIBUTIONS 14

MAXIMIZING HOME MORTGAGE INTEREST DEDUCTION 15

TAX-WISE PAYMENT OF STATE AND LOCAL TAXES 15

TAX-WISE PLANNING FOR EDUCATION COSTS 15

COVERDELL EDUCATION SAVINGS ACCOUNTS 15

SECTION 529 PLANS 16

STUDENT LOAN INTEREST 16

HOPE EDUCATION TAX CREDIT 16

THE LIFETIME LEARNING CREDIT 17

TAX PLANNING FOR YOUR HOME 17

HOME SALE EXCLUSION 17 THE HOME OFFICE DEDUCTION 17

PLANNING WITH RETIREMENT PLANS 18

CONSIDER CONTRIBUTING THE MAXIMUM TOWARD YOUR RETIREMENT 18

THE ROTH IRA 18

CONVERTING REGULAR IRA TO ROTH 19

SETTING UP A ROTH IRA FOR A MINOR 19

OTHER ITEMS TO CONSIDER 19

CHILD TAX CREDIT 19

ADOPTION TAX CREDIT 19

MOVING EXPENSES 19

PENALTY FOR UNDER-WITHHOLDING OR UNDER-ESTIMATING 20

FINAL COMMENTS 20

HIGHLIGHTS OF THE ENERGY TAX INCENTIVES ACT OF 2005

On August 8, 2005, President Bush signed the Energy Tax Incentives Act of 2005 (the Energy Act), which created tax breaks (primarily in the form of tax credits) for consumers who install qualified energy-efficient devices in their homes or buy qualified energy-efficient vehicles. Tax Tip. These tax breaks are generally first available in 2006, provided the qualified energy-efficient property was "placed-in-service" after December 31, 2005. "Placed-in-service" generally means that the property is on hand and it is ready and available for use. If you are planning to purchase property that may qualify for any of these new benefits, and you want the tax benefit in 2006, make sure that you complete the installation of qualifying property, or the purchase of a qualifying energy-efficient vehicle, by December 31, 2006. The following are selected tax credits that may be available to you.

New Hybrid Motor Vehicle Credit.

For qualifying vehicles placed-in-service after December 31, 2005, the Energy Act created several new energy-efficient vehicle tax credits. By far, the most commonly used is the hybrid motor vehicle credit. The amount of the hybrid credit for 2006 varies with the fuel efficiency of the vehicle and, according to recent IRS releases, the credit can be as low as $250 (e.g., the GMC Sierra 2WD hybrid pickup truck), and as high as $3,150 (e.g., the Toyota Prius). Planning Alert! Starting in 2006, once a specific auto manufacturer's sales of hybrid vehicles reach 60,000, the energy credits for hybrid vehicles purchased from that manufacturer are reduced. Toyota and Lexus exceeded this 60,000 vehicle threshold during the second quarter of 2006. Therefore, for any qualified Toyota or Lexus hybrid vehicle purchased after September 30, 2006, the hybrid credit is reduced. For example, the hybrid credit for the 2006 Toyota Prius is reduced 1) by 50% (from $3,150 to $1,575), if purchased after September 30, 2006, 2) by 75% (from $3,150 to $787.50), if purchased after March 31, 2007, and 3) is eliminated altogether, if purchased after September 30, 2007. All other Hybrids manufactured by Toyota and Lexus (e.g., Highlander Hybrid, Lexus RX400h, Camry Hybrid, Lexus GS 450h) are subject to the same phase-out schedule. None of the other manufacturers of qualifying hybrids (e.g., Honda, Ford, GM, etc.) sold enough hybrids in 2006 to cause the credits for their vehicles to be reduced if purchased on or before December 31, 2006. Tax Tip. Before buying a hybrid vehicle, be sure to check with the manufacturer to determine the amount of the credit available for that vehicle. Planning Alert! This hybrid auto tax credit does not reduce your alternative minimum tax (AMT). If you are considering the purchase of a hybrid automobile, please call our office. We will help you determine whether the AMT will reduce or eliminate the tax benefit from the credit.

New $500 Lifetime Energy-Savings Home Improvement Tax Credit.

If you place qualified energy-savings property in service with respect to your "principal residence" in 2006 or 2007, you can qualify for a credit of up to $500. The $500 is a lifetime limitation, not an annual limitation. Your principal residence can include a manufactured home that conforms to certain Federal construction and safety standards. Vacation homes, second homes, rental property, and foreign homes do not qualify. Dollar Caps and Percentage Limitations. In addition to the overall $500 lifetime limitation, there is a $200 lifetime limit for energy-saving windows; a $50 limit for advanced main air circulating fans; a $150 limit for any qualified natural gas, propane, or oil furnace or hot water boiler; and a $300 limit for energy efficient electric heat pumps, water heaters, and central air conditioners. Also, some expenditures qualify dollar-for-dollar for the credit (e.g., qualified energy-efficient advanced main circulating fans, hot water boilers, and heat pumps) while only 10% of each dollar spent toward other improvements qualify for the credit (e.g., qualifying energy-efficient exterior windows, doors, metal roofing). For example, you must spend at least $2,000 for energy efficient windows to qualify for the maximum $200 credit for windows. Planning Alert! IRS says that drywall and siding generally are not qualifying energy property. However, IRS says siding installed after 2005 and before December 1, 2006 may qualify. To determine whether your energy-efficient home improvements qualify, IRS says that you can generally rely on: 1) a written manufacturer's credit certification contained in the property's packaging, or 2) a certification in printable form on the manufacturer's website. Also, exterior windows or skylights that bear the Energy Star label are qualifying property, if installed in the region identified on the label. Tax Tip! For 2006, the maximum $500 energy-savings credit will offset both the AMT and regular tax. If you are considering the purchase of this type of energy-efficient property for your home and you think that you might be subject to AMT in 2007, you should purchase and place the property in service by December 31, 2006. Unless Congress changes the law, the $500 credit will not offset AMT in 2007.

New Residential Alternative Energy-Generating Equipment Credit.

If you place "qualified alternative energy-generating equipment" in service with respect to your U.S. residence in 2006 or 2007, you may qualify for a new 30% tax credit. The two most common classifications of qualifying "alternative energy-generating equipment" are: 1) solar water heaters used in your principal or secondary residence that meets certain certification requirements (this credit may not exceed $2,000 for a taxable year), and 2) modular solar panels, commonly known as photovoltaics, PV panels, or PVs, that provide either a supplemental or exclusive source of electricity to your principal or secondary residence (this credit is also limited to $2,000 for a taxable year). Planning Alert! Expenditures related to swimming pools or hot tubs (e.g., solar equipment to heat water or run electrical pumps) do not qualify. Tax Tip! For 2006, this 30% credit will offset both the AMT and regular tax. If you are considering the purchase of this type of qualifying solar-energy property for your home and you think that you might be subject to AMT in 2007, you should purchase and place the property in service by December 31, 2006. Unless Congress changes the law, this credit may not offset AMT in 2007.

HIGHLIGHTS OF RECENT HURRICANE TAX RELIEF LEGISLATION

On September 23, 2005, President Bush signed the Katrina Emergency Tax Relief Act of 2005, granting various forms of tax relief to victims of Hurricane Katrina (many of which were later extended to certain victims of Hurricanes Rita and Wilma). On December 21, 2005, the President signed the Gulf Opportunity Zone Act of 2005, which contains additional relief for victims of Hurricanes Katrina, Rita and Wilma in the Gulf Opportunity Zone (also referred to as the GO Zone). Most of the tax relief is geared toward the hurricane victims in areas of Florida, Alabama, Mississippi, and Louisiana that qualified for individual or individual and public assistance from the Federal government. You can find a listing of these areas (and the GO Zone) at www.irs.gov.

The following are selected tax breaks provided by the above legislation that could impact your 2006 return even though you were not directly affected by Hurricanes Katrina, Rita or Wilma: 1) a $500 deduction for housing qualified hurricane evacuees, and 2) an increased mileage deduction for the use of your vehicle in certain hurricane relief efforts. In addition, if your principal residence was located in the Hurricane Katrina, Hurricane Rita, or Hurricane Wilma disaster areas and you sustained an economic loss because of the hurricane, the following tax benefits may be available to you: 1) you may be able to borrow larger amounts from your qualified retirement plan, and 2) you may be able to receive penalty-free distributions from your retirement plan. In addition, individuals who had property destroyed by Hurricane Katrina, may receive an extension of time to reinvest insurance gains resulting from the destruction of the property. Planning Alert! If you wish to know more about these tax benefits, please call our firm.

HIGHLIGHTS OF THE PENSION PROTECTION ACT OF 2006

On August 17, 2006, President Bush signed the landmark Pension Protection Act of 2006 (PPA 2006), a more than 900 page bill that not only makes dramatic changes to qualified retirement plans, but also reforms major portions of the charitable contribution rules. The following summary highlights selected provisions of the Act impacting individuals.

Temporary Provisions Extended

Removal Of Sunset Rule For Popular Retirement Savings Incentives. The Economic Growth and Tax Relief Reconciliation Act of 2001 created many new tax incentives to encourage retirement savings, including higher contribution limitations for IRAs, SEPs, SIMPLE plans, §401(k) plans, etc., and increased portability for retirement accounts. Unfortunately, the 2001 Act also provided that each of these retirement plan incentives would terminate for tax years beginning after 2010. PPA 2006 removes this sunset! Therefore, these retirement plan benefits provided by the 2001 Act will no longer automatically terminate after 2010.

Removal Of Sunset Rule For §401(k) Roth Provisions.

Starting in 2006, employers may adopt provisions in their §401(k) plans offering employees the option to contribute all or a portion of their §401(k) elective deferrals into a §401(k) Roth account. Any employee who chooses this option will be taxed on the amount of the elected deferral, but "qualifying" distributions (e.g., at retirement) from the account will be "tax free." This §401(k) Roth option was scheduled to sunset after 2010. PPA 2006 removes the sunset date. Tax Tip. As discussed in more detail later, the new §401(k) Roth option provides higher-income taxpayers the opportunity to utilize the Roth retirement option. For 2006, contributions to traditional Roth IRAs may not be made by individuals filing jointly with modified adjusted gross income in excess of $160,000 ($110,000 if single). However, there is no income limit for electing the §401(k) Roth option.

Removal Of Sunset Rule For §529 College Savings Plan Tax Breaks.

In 2001, Congress made several pro-taxpayer changes to §529 college savings plans, including the ability of §529 plans to make "tax-free" distributions for qualified higher education expenses. However, these changes were scheduled to sunset after 2010. PPA 2006 removes the sunset rule so that these favorable changes will not automatically expire after 2010.

Changes To Retirement Plan Distributions And Rollovers

Rollovers From Eligible Retirement Plans To Roth IRAs. Currently, if your modified adjusted gross income (whether filing joint or filing as single) does not exceed $100,000, you may convert your traditional IRA account into a Roth IRA without paying the 10% premature distribution penalty. However, you are taxed on the taxable portion of the converted IRA for the year of the conversion. In contrast, distributions from a qualified retirement plan cannot be directly rolled over into a Roth IRA. Effective for distributions after 2007, distributions from qualified retirement plans (including §401(k) plans, §403(b) annuities, and governmental §457 plans) can be rolled over into a Roth IRA. Planning Alert! For tax years beginning prior to 2010, in order to roll your traditional IRA or your eligible retirement plan account (after 2007) into a Roth IRA, your modified adjusted gross income must not exceed $100,000 and, if married, you must file a joint return. However, as discussed later in this letter, for all conversions after 2009, the $100,000 threshold and the joint return requirement are eliminated. Starting in 2010, this change will give higher-income taxpayers access to Roth IRA benefits that are not currently available. Planning Alert! If you anticipate your 2006 AGI will be $100,000 or less, and you are considering converting your traditional IRA into a Roth this tax year, you must actually complete the conversion by December 31, 2006 (you do not have until the due date of your 2006 tax return). Please call our firm before transferring amounts from a regular IRA or another retirement plan to a Roth. There are many factors that you should consider. If you transfer retirement funds to a Roth and you do not qualify for the conversion, the amounts transferred will be taxed, the Roth IRA will not be recognized, and there may be a penalty on the amount transferred to the Roth.

Trustee-To-Trustee Transfer Allowed From Deceased Individual's Retirement Account To IRA Naming Non-Spouse Beneficiary.

If a retirement plan participant or IRA owner dies, the surviving spouse is the only beneficiary who may roll over the deceased owner's account tax-free into an IRA. Thus, if a non-spouse beneficiary receives a distribution from a decedent's qualified retirement plan or IRA, he or she is taxed on the distribution in the year received. On the other hand, if the non-spouse beneficiary leaves the funds in the decedent's qualified retirement plan or IRA, the non-spouse beneficiary can generally take distributions over a period which may be as long as the non-spouse beneficiary's life expectancy. Effective for distributions after 2006, PPA 2006 allows a tax-free trustee-to-trustee transfer from a qualified retirement plan (e.g., a §401(k) plan, a profit-sharing plan) to an IRA for the benefit of a non-spouse beneficiary. This option is currently available for IRA distributions, but not for distributions from qualified plans. Under PPA 2006, the transferee IRA will be treated as an "inherited IRA," and the beneficiary will be subject to the same minimum required distribution rules as apply to any non-spouse beneficiary. Tax Tip. Many qualified plans (e.g., profit-sharing plans and pension plans) require the distribution of amounts in an employee's account within a certain period after the employee's death. For example, some plans require a lump-sum distribution and others require distributions over 5 years. Currently, only a surviving spouse beneficiary can defer tax on the distribution by rolling the distribution into an IRA. The new law does not allow a non-spouse beneficiary who receives a distribution from a decedent's plan to roll it into an IRA. However, beginning in 2007, the non-spouse beneficiary may defer the tax by having the qualified plan trustee transfer the distribution directly to an IRA for the benefit of the non-spouse beneficiary, using a trustee-to-trustee transfer. In most cases, this will allow the beneficiary to distribute and pay tax on his or her share of the decedent's account balance over the beneficiary's life expectancy. Planning Alert! The rules for taxing distributions from IRAs and other retirement plans are extremely complex. Please call us before the distribution is made so we can help you determine your options.

Tax Refund May Be Paid Directly To Your IRA.

Whether you file by mail or electronically, you may instruct the IRS to deposit your Federal income tax refund directly into your checking, savings, or investment account. Typically, you receive your refund more quickly if you choose the direct deposit option. PPA 2006 provides that you may direct the IRS to deposit all or a portion of your tax refund directly into your traditional or Roth IRA beginning with your 2006 Federal tax refund. To be deductible on your 2006 return, your IRA contribution must be deposited by April 16th of 2007. Therefore, you need to file your 2006 return early enough so that your refund will be deposited into your IRA account by the IRS no later than April 16, 2007. You must establish the IRA at a bank or other financial institution before you request the direct deposit. Also, you must notify your IRA custodian that the direct deposit is to be treated as a 2006 contribution. Otherwise, the custodian may presume that it is a contribution for the 2007 tax year. Tax Tip. IRS says that you may also direct the deposit to your health savings account (HSA), Archer medical savings account (MSA), or your Coverdell education savings account.

Certain Military Personnel Granted New Relief From Early Withdrawal Penalty.

PPA 2006 provides that a "qualified reservist" called to active duty after September 11, 2001 and before December 31, 2007 may take a taxable distribution from an IRA, §401(k) plan, or §403(b) annuity without paying the 10% early distribution penalty. To qualify, you must be a reservist or a National Guardsman called to active duty for a period in excess of 179 days or for an indefinite period. In addition, the distribution must occur during the period beginning on the date of your active duty order and ending on the close of that active duty period. Tax Tip. If you qualify for this penalty-free distribution, you also have a two-year period after the end of your active duty to make a contribution of all or a portion of the qualifying distribution to an existing or new IRA. This contribution is exempt from the normal IRA contribution caps and will constitute additional tax basis in the IRA. However, no deduction is allowed for the contribution. The two-year contribution period will not end before two years following August 17, 2006 (i.e., August 16, 2008). Planning Alert! Please call our firm if you think you qualify for a refund of the 10% penalty paid with respect to qualifying distributions made after September 11, 2001. The new law extends the time for obtaining a refund of the 10% penalty until one year following August 17, 2006 (i.e., August 16, 2007). For example, if you paid the 10% penalty on your 2001 or 2002 return, you may not be able to obtain a refund of that penalty after August 16, 2007.

Miscellaneous Retirement Plan Provisions

PPA 2006 contains many other retirement plan provisions not covered in this letter. The following are a few of those provisions: Public safety employees granted new relief from early withdrawal penalties; New diversification requirements for defined contribution plans investing in employer securities; New "working retirement" distributions for participants in certain pension plans; Expanded "hardship" distributions; Increased IRA contributions in certain bankruptcy cases; and Indexed income limits for IRAs and saver's credit. Please call us if you would like more details.

Charitable Contributions-Reforms And Incentives

Temporary Tax-Free IRA Payments To Charities. Effective for 2006 and 2007, if you have reached age 70½, you may have your IRA trustee contribute up to $100,000 each year from your IRA directly to a qualified charity and exclude the distribution from your income. The payment to the charity is not included in your income, however, you receive no charitable contribution deduction for the payment. This distribution to charity also counts toward any "minimum required distribution" that you would otherwise be required to take during the year of the contribution. This new rule only applies to the "taxable portion" of the IRA. Furthermore, to qualify, the contribution must be made by the IRA trustee "directly" to a qualifying 50% charity. Planning Alert! Contributions to "donor-advised funds" and certain "supporting organizations" do not qualify. In addition, this special rule does not apply to distributions from SEP or SIMPLE IRAs. Tax Tip. The following are some of the possible benefits of this new provision: 1) since the IRA distribution to the charity is excluded from income, taxpayers who do not itemize deductions get the equivalent of a charitable contribution deduction by making the contribution directly from their IRA; 2) taxpayers who itemize deductions can avoid the 50% of AGI limitation for the charitable donation made from the IRA; and 3) since the contribution made from the IRA is not included in income, this has the effect of reducing AGI and thereby increasing itemized deductions that are reduced as AGI increases. Reducing AGI may also reduce the amount of Social Security benefits that may be taxable. Planning Alert! You should compare various options before disbursing IRA funds to charity. For example, you may benefit more from a contribution of substantially appreciated capital gain property since 1) the appreciation (gain) is not included in income, and 2) a charitable contribution deduction is allowed for the full fair market value of the property. Please call our firm before you transfer any IRA funds to a charity.

New Restrictions On Charitable Contributions Of Clothing And Household Items.

Effective for contributions made after August 17, 2006, no deduction will be allowed for charitable contributions of clothing or household items, unless the items are in "good used condition or better." The term "household items" includes furniture, furnishings, electronics, appliances, linens, and other similar items. It does not include food, paintings, antiques, and other objects of art, jewelry, gems or collections. Congress has instructed the IRS to issue guidance as to what constitutes "good used condition or better." This new limitation will not apply if you are claiming a deduction of more than $500 for a single clothing or household item and you obtain a qualified appraisal with regard to that item. Tax Tip. You should consider contributing your clothing and household items to charitable thrift shops that have a policy of accepting only items that are in good condition. Planning Alert! Partnerships and corporations are also subject to these new restrictions.

New Recordkeeping Requirements For Contributions Made In Cash Or Check.

Effective for contributions made in tax years beginning after August 17, 2006, in order to deduct a charitable contribution made in cash, check, or other monetary means, the contribution must be supported by 1) a bank record (e.g., a cancelled check), or 2) a receipt, letter or other written communication from the charity showing the name of the donee organization, the date of the contribution, and the amount of the contribution. Tax Tip. Without these records, you are allowed no deduction at all, regardless of amount. Since a cancelled check satisfies these new requirements, you should consider replacing your cash contributions with a check. Planning Alert! If the contribution is for $250 or more, you will also need a written receipt as required under current law, including a statement indicating whether or not goods or services were received in return for the contribution.

Miscellaneous Charitable Provisions.

PPA 2006 contains many other charitable contribution provisions not covered in this letter, including: Increased limitations for conservation easements; Tightened charitable contribution rules for facade easements on certified historic structures; New rules for charitable contributions of fractional interests in tangible personal property; New recapture provisions for charitable contributions of tangible personal property; New limitations on charitable contributions of taxidermy property; and new restrictions on donor-advised funds. Please call us if you would like more details.

TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005

On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). This $70 billion tax cut bill not only extends tax breaks that were scheduled to expire, but also creates several new tax relief provisions. The following is a summary of selected TIPRA provisions:

Reduced Rates For Capital Gains And Dividends Extended Two Years (Through 2010).

In 2003, Congress reduced the maximum tax rate on most long-term capital gains and qualified dividends to 15%. Although these lower rates were scheduled to expire after 2008, TIPRA extends them through 2010. Tax Tip. If your capital gain or dividend income would otherwise be taxed in the 10% or 15% tax brackets, your tax rate drops to 5% through 2007, and to zero in 2008 through 2010. This creates a tax incentive for high income taxpayers to give capital gain or dividend paying property to lower income family members (e.g., children) to take advantage of the lower 5% or zero tax rates. Planning Alert! For this strategy to work for gifts to children, as discussed in more detail later in this letter, the child must be over age 17 by the end of the tax year to avoid the so-called kiddie tax. Observation. With this legislation, all of the tax rate cuts since 2001 (i.e., top individual, estate, gift, generation-skipping, capital gain, and qualified dividend tax rates) are now scheduled to sunset after 2010, making 2010 a watershed tax year. Planning Alert! Before agreeing to an installment sale of long-term capital gain property, consider that any payments received after 2010 may be taxed at a higher tax rate if Congress does not extend these lower capital gain rates beyond 2010.

Qualifying Musical Composers May Elect Capital Gains Treatment.

Generally, if you sell the copyright to a painting, book, or song that you created, the resulting gain is taxed at "ordinary income" tax rates. Effective for sales or exchanges in tax years beginning after May 17, 2006 and before 2011, if you sell a copyright in a musical work created by your personal efforts, you may "elect" to treat the gain as capital gain. Thus, if you are a calendar year taxpayer, you have a qualifying sale after 2006 and before 2011, and you meet the requisite 12-month holding period, you may elect for your gain to be taxed at the favorable long-term capital gain rates.

Increased AMT Exemption Thresholds Extended Through 2006.

TIPRA increases the alternative minimum tax (AMT) exemption levels for 2006 to $62,550 for joint filers and $42,500 for single filers. For 2005, the exemption amounts were $58,000 for joint filers and $40,250 for single filers. Absent Congressional action, these exemption amounts will be reduced to $45,000 for joint filers and $33,750 for single filers after 2006. Tax Tip. The items that commonly trigger AMT for higher-income taxpayers include: high state and local taxes, an unusually large number of dependents, large medical expenses, or the exercise of an incentive stock option. If you anticipate incurring significant amounts of any of these items, contacting us early will increase our chances of helping you minimize your AMT exposure.

Nonrefundable Personal Tax Credits Continue To Reduce AMT

Through 2006. Certain nonrefundable personal credits (including the dependent care, elderly and disabled, Hope, Lifetime Learning, and D.C. home buyer credits) are not generally allowed to reduce AMT. However, Congress previously allowed these credits to temporarily offset your regular and AMT liability through 2005. TIPRA extends this treatment through 2006.

Kiddie Tax Now Applies To Children Under Age 18 (Rather Than Age 14).

Prior to 2006, children who had not reached age 14 by the end of the tax year were taxed on their unearned income (e.g., interest, capital gains, and dividends) at their parents' marginal tax rates, if the unearned income exceeded a threshold amount ($1,600 for 2005; $1,700 for 2006). Effective for tax years beginning after 2005, TIPRA increases the age of children subject to this tax to those under age 18. However, this so-called kiddie tax does not apply to a child who is married and files a joint return for the taxable year, or to distributions from certain qualified disability trusts. Tax Tip. Since "earned" income is exempt from the kiddie tax, paying reasonable wages to children under age 18 from a family business becomes an even more valuable tax strategy.

Income Limitation For Traditional-To-Roth IRA Conversions Eliminated After 2009.

Currently, whether you file joint or single, you are not allowed to convert (rollover) your traditional IRA into a Roth IRA unless your modified adjusted gross income is $100,000 or less. In addition, if you are married, you must file a joint return with your spouse. Effective for tax years beginning after 2009, TIPRA removes this income threshold and the joint return requirement. Thus, you will be able to convert your regular IRA to a Roth IRA after 2009, without regard to your income or your filing status. If you convert in 2010, unless you elect out, you will report the income triggered by the conversion pro rata in 2011 and 2012. This two-year spread is not available for conversions after 2010. Planning Alert! Remember, TIPRA does not change the existing rule that prohibits you from making regular contributions to a Roth IRA if your modified AGI exceeds $160,000 on a joint return, or $110,000 if single. The new law only eliminates the income requirement for converting your traditional IRA into a Roth IRA, and this does not occur until 2010. Tax Tip. Regardless of your income level, you can currently contribute to a traditional nondeductible IRA, and convert that nondeductible IRA to a Roth IRA after 2009. You could continue making nondeductible IRA contributions after 2009 and rolling them over into a Roth IRA periodically. However, if you convert a nondeductible IRA to a Roth, the earnings are taxed. Caution! If you contribute to a nondeductible IRA and then convert the nondeductible to a Roth after 2009, you must pay tax on the taxable portion of the distribution. The amount of the distribution that is taxable is calculated by aggregating all of your IRAs except Roth IRAs. Traditional deductible IRAs, nondeductible IRAs, SEP IRAs, and SIMPLE IRAs are treated as one IRA in determining the "taxable amount" upon the conversion of an IRA to a Roth.

Changes To The Foreign Income And Housing Exclusions.

Before TIPRA, if you were a U.S. citizen living abroad, you could have qualified to exclude up to $80,000 of your foreign earned income from your taxable income if you met a foreign presence test. You could also elect to exclude a certain portion of your employer-paid foreign housing costs. Effective for tax years beginning after 2005, the new law makes three changes to these rules. First, the $80,000 income exclusion is indexed for inflation starting in 2006 (rather than 2008 under prior law). Therefore, the maximum exclusion amount for 2006 is $82,400. Second, by virtue of a new formula, TIPRA generally caps the foreign housing expense exclusion at 14% of the maximum foreign earned income exclusion ($11,536 for 2006). Third, taxable income, after the exclusions, is now taxed at the marginal tax rates that would have been applicable had you not been entitled to the exclusion. Tax Tip. Congress granted the IRS the authority to increase the caps for the foreign housing allowance exclusion (above $11,536) for U.S. citizens working in certain high cost foreign cities. The IRS has recently released a list of cities that have been granted substantially increased foreign housing allowance exclusions (e.g., London, Tokyo, Paris, Hong Kong, and many more). If you are currently working abroad, or plan to do so in the near future, we will be glad to fill you in on the details of these new rules.

HIGHLIGHTS OF OTHER RECENT TAX LEGISLATION/DEVELOPMENTS IMPACTING INDIVIDUALS

Over the past two years, we have witnessed a series of other tax bills that impact 2006 tax planning, including: the Heroes Earned Retirement Opportunities Act of 2006, the American Jobs Creation Act of 2004, the Working Families Tax Relief Act of 2004, and the Military Family Tax Relief Act of 2003. The following highlights key provisions of these law changes that may impact your 2006 tax planning.

Enhanced Opportunity For Military Personnel To Fund IRAs.

On May 29, 2006, President Bush signed the Heroes Earned Retirement Opportunities Act. This Act allows members of the Armed Forces serving in a combat zone to treat non-taxable combat pay as compensation for purposes of qualifying to make contributions to a traditional or Roth IRA. In other words, qualified combat pay continues to be non-taxable income, but is considered compensation for purposes of determining your permitted IRA contribution for the year. Retroactive Effective Date! The Act also provides that if you received non-taxable combat pay during 2004 and/or 2005, you will have until three years following May 29, 2006 (i.e., until May 28, 2009) to make a contribution to an IRA and treat the contribution as made on the last day of the 2004 and/or the 2005 tax year. In addition, the statute of limitation for any refund created by a contribution to a traditional IRA within this three year period will not expire before one-year after the date the contribution is made. Tax Tip. Individuals qualifying for this delayed contribution, may wish to contribute to a Roth for 2003 and/or 2004 if they had little or no taxable income for those years since a regular deductible IRA would produce little or no tax benefit when contributed, but would be taxable when withdrawn.

Deduction For State And Local Sales Tax.

For 2004 and 2005, the American Jobs Creation Act of 2004 allowed you to "elect" to deduct "either" state and local income taxes or state and local sales taxes, as itemized deductions. Although this provision expired in 2005, many lawmakers (particularly those from states with no state income taxes) are pushing to extend this optional sales tax deduction at least through 2006. Tax Tip. If this deduction is extended to 2006, and you plan to opt for this deduction, consider accelerating the purchase of your big ticket items subject to the general sales tax into 2006.

Donations Of Motor Vehicles, Boats, And Aircraft.

Starting in 2005, the American Jobs Creation Act of 2004 added stringent reporting and documentation requirements for the donor and the charity, that must be satisfied in order to claim a charitable deduction in excess of $500 for a "qualified vehicle." A "qualified vehicle" generally includes motor vehicles designed for highway use, boats, or airplanes. Under these new rules, if you deduct more than $500 for the charitable contribution of a "qualified vehicle," your deduction is generally limited to the gross sales proceeds received by the charity on the sale of that vehicle. In addition to this deduction limitation, a deduction exceeding $500 is not allowed unless you receive a Form 1098-C from the charity. Tax Tip. If your deduction is $500 or less, your deduction is not limited to the sales price of the vehicle, and you are not required to file a Form 1098-C with your tax return. Example. Assume you contribute your 1990 Honda Accord to the Make-a-Wish Foundation, and although the independently-determined fair market value is $800, the Foundation sells the vehicle at an auction for $400. IRS says that you can deduct $500 in this situation, and you are not required to file a Form 1098-C. Don't forget, since your deduction is at least $250, you must still obtain a written acknowledgment from the charity that describes (but does not value) the contributed vehicle, and that states that you received no goods or services in return for the contribution.

Uniform Definition Of Child For Tax Purposes.

There are several common tax benefits that are potentially available to taxpayers with children: the dependency exemption; the child tax credit; the earned income credit; the child care credit; the exclusion for employer-provided child care; and head-of-household filing status. Recent tax legislation establishes a uniform definition of a "qualifying child" for purposes of qualifying for the above-listed tax benefits. Tax Tip. For divorced or separated parents, the child is treated as the qualifying child of the parent who has custody for the greater portion of the year. However, the child may be treated as the qualifying child of the noncustodial parent for purposes of the personal exemption deduction and the child tax credit, if the custodial parent releases the claim to the exemption to the noncustodial parent in a written declaration (typically by properly executing Form 8332) that the noncustodial parent attaches to the noncustodial parent's tax return. In that event, the child is still the qualifying child of the custodial parent for purposes of the earned income credit, the child care credit, the exclusion for employer-provided child care, and for claiming head-of-household status.

New Qualifying Child Definition Offers Potential Tax Benefits For High Income Families.

Under the new law, a child could be a "qualifying child" with respect to more than one individual (e.g., a child lives with various relatives in the same residence). If more than one person qualifies to claim the child as a qualifying child, there are "tie-breaking" rules that determine who is entitled to claim the child. However, these tie-breaking rules do not apply if a child is a qualifying child of more than one taxpayer, but only one of those taxpayers actually claims the child as a qualifying child. This can create unexpected planning opportunities for high income taxpayers who have adult and minor children living in their home. For example, assume for 2006, that Tim and Jill have adjusted gross income of $350,000 on a joint return. They have two children, a 15-year old son, Randy, with no income, and a 20-year old son, Brad, who has $21,000 of wages and no other income, and who is not a full-time student. Both children live at home and are supported by their parents. Brad is not a qualifying child as to Tim and Jill (because he is over age 18 and he is not a full-time student). However, Randy is a qualifying child with respect to Tim and Jill, but they would derive little or no tax benefit because their income is too high. Under the technical definition of a "qualifying child," Randy would be a qualifying child with respect to Brad for purposes of the dependency exemption, the child tax credit, and the earned income credit. Therefore, the family could agree that Brad will claim Randy as a qualifying child and Tim and Jill will not claim Randy as a qualifying child. This would give Brad the tax benefits of the earned income credit, the $1,000 child credit, and the dependency exemption for Randy. If Brad does not claim Randy as a qualifying child, his Federal income tax liability for 2006 would be $1,505. However, if he claims Randy as a qualifying child, he would receive a refund of $1,748. This results in a $3,253 tax savings for Brad. Planning Alert! The Administration has proposed technical corrections that would close this potential tax benefit. Please call us if you think that this planning technique will benefit your family and we will give you a status report.

IRS Announces Telephone Excise Tax Refund.

After a string of defeats in the courts, the IRS recently announced that anyone who paid the 3% Federal telephone excise tax on long-distance telephone service after February 28, 2003 and before August 1, 2006, is entitled to a refund of the tax. Taxpayers other than individuals (e.g., C Corporations, S Corporations, partnerships, limited liability companies, non-profits) generally have to compute the actual amount of telephone excise tax they paid during the refund period. The excise tax refund is claimed as a refundable credit on your 2006 income tax return. Planning Alert! If you paid the telephone excise tax on both local and long-distance service and the local service is not separately stated, the total excise tax is refundable. However, if the amount paid for long distance calls is separately stated from the charge for local service, the excise tax paid on the local service amount is not refundable. Tax Tip. If you are an individual taxpayer, you may avoid the complicated task of computing the amount of Federal telephone excise tax that you've paid since February 28, 2003, by simply electing to claim a standard refund amount allowed by the IRS on your 2006 income tax return. The standard amounts are: $30 if you claim one personal exemption, $40 if you claim two exemptions, $50 if you claim three exemptions, and $60 if you claim four or more exemptions. If you are not required to file an individual income tax return, a special Form 1040EZ-T must be filed in order to claim your refund. In addition, the IRS says that it is considering an "estimation method" that businesses and nonprofits may use to compute the amount of their telephone excise tax refund if they do not want to document the amount of tax paid. However, guidance had not been issued at the time we completed this letter.

TRADITIONAL YEAR-END TAX PLANNING TECHNIQUES

Planning With Capital Gains And Losses Watch Out For Incentive Stock Options And AMT.

If you exercised an incentive stock option (ISO) in 2006, the exercise could trigger the alternative minimum tax (AMT) on your 2006 return. Your AMT income includes the excess of the fair market value of the stock acquired upon the exercise of the option over the exercise price even though this excess is not included in regular taxable income upon the exercise of the options. Therefore, the exercise of the option could create a large tax bill even if the value of the stock you acquired plummets after the date of exercise. Tax Tip. If you exercised an ISO in 2006 and the stock you acquired has declined in value since the date of exercise, it may be possible to eliminate or reduce your AMT tax liability if you sell the stock on or before December 31, 2006. Please check with us if you have exercised incentive stock options during 2006 and the price of the stock has fallen since the date of exercise. A sale of the stock after December 31, 2006 will not affect your AMT liability for 2006. So, we must act timely for a sale to reduce 2006 taxes! Planning Alert! For this strategy to eliminate the AMT liability, you may not purchase the same or similar stock within 30 days before or 30 days after the sale.

Year-End Considerations For Capital Assets.

Timing your year-end sales of stocks, bonds, or other securities may save you taxes. After fully evaluating the economic factors, the following are several year-end tax planning ideas for sales of capital assets. Caution! Always consider the economics of a sale or exchange first! o

Taking Capital Losses To The Extent Of Capital Gains Plus $3,000.

If you have already recognized capital gains in 2006, you should consider selling securities that have declined in value prior to January 1, 2007. These losses will be deductible on your 2006 return to the extent of your recognized capital gains, plus $3,000. Net capital losses in excess of $3,000 are carried forward and offset capital gains for future years. These losses may have the added benefit of reducing your income to a level that you qualify for other tax breaks (e.g., the child credit, the HOPE credit, and IRA contributions). Planning Alert! If within 30 days before or after the sale of loss securities, you acquire the same securities, the loss will not be allowed currently because of the wash sale rules. Tax Tip. If you are caught by this wash sale rule, your disallowed loss will increase the tax basis of your replacement stock, which could reduce the ultimate gain on a subsequent sale of the stock. o

Making The Most Of Capital Losses.

If your stock sales to date have created a net capital loss exceeding $3,000, consider selling enough appreciated securities before year end to decrease the net capital loss to $3,000. Stocks that you think have reached their peak would be good candidates. All else being equal, you should sell the short-term gain (held 12 months or less) securities first. This will allow your short-term capital gain to absorb your net capital loss (in excess of $3,000), while preserving your favorable long-term capital gain treatment for later years. Tax Tip. Net short-term capital gains could also be used to free up a deduction for any "investment interest" you have incurred (e.g., interest you have paid on your margin account). o

Year-End Mutual Fund Purchases.

If you are thinking about buying mutual fund shares near year-end, watch out for a common tax trap. Mutual funds typically distribute income, including capital gains, near the end of each year. If you invest in the fund near the end of the year, but on or before the record date for this payout, you generally will be taxed on a year-end distribution as if you had held the fund all year. This, in essence, treats a return of your investment as a taxable distribution. Tax Tip. Before investing, determine the amount and timing of any year-end payout.

Stock "Traders" May Save Taxes By Electing "Mark-to-Market.

" If you are a "trader" in stocks, the "mark-to-market" election could possibly save you taxes. If you invest in stocks, the IRS will generally consider you either an "investor" or a "trader" (unless you sell securities to the general public). Generally, the IRS will treat you as a "trader" if you have frequent purchases and sales of stock, you hold the stock for short-term gain (rather than long-term appreciation and dividends), and you have a high volume of stock transactions for the year. If you qualify as a trader, you can elect (for tax purposes) to mark your stock down or up to market at year end. This election will convert what would generally be short-term capital gains and losses, into "ordinary" gains and losses. Tax Tip. This election could save taxes if you, at some point, incur significant losses. Each tax year you can only deduct $3,000 of the amount by which your capital losses exceed your capital gains. However, if you make a timely "mark-to-market" election, you can fully deduct those losses as "ordinary losses." Also, making this election will not subject your mark-to-market stock gains to Social Security or Medicare taxes. Planning Alert! Unless you made the election for a prior year, the mark-to-market election, unfortunately, must be made by the due date (without regard to extensions) of your prior year's tax return. Even though it is too late to make the election for 2006, you may wish to make the election by April 16, 2007, for 2007 and future years. Tax Tip. Although the IRS has refused to allow late elections, a recent Tax Court case did allow a "trader" to make a late election where he met certain rigid criteria. Also, for new taxpayers (e.g., a partnership created to trade securities), the election is due within two months and 15 days after the creation of the entity. For example, partnership created on October 1, 2006 should have until December 15, 2006 to make the election. Please call us if you think this election might save you taxes and we will be glad to fill you in on the details.

Postponing Taxable Income

Generally, it's a good idea to defer as much income into 2007 as possible if you believe that your marginal tax rate for 2007 will be equal to or less than your 2006 marginal tax rate. Deferring income into 2007 could also increase various credits and deductions for 2006 that are being phased out as your adjusted gross income increases. If you believe that deferring taxable income into 2007 will save you taxes, consider the following strategies.

Self-Employed Business Income.

If you are self-employed and use the cash method of accounting, consider delaying year-end billings to defer income until 2007. Planning Alert! If you have already received the check in 2006, deferring the deposit does not defer the income. Also, you may not want to defer billing if you believe this will increase your risk of not getting paid.

Installment Sales.

If you plan to sell certain appreciated property in 2006, you might be able to defer the gain until later years by taking back a promissory note instead of cash. If you qualify, the gain will be taxed to you as you collect the principal payments on the note. Planning Alert! Although the sale of real estate and closely-held stock generally qualify for this deferral treatment, some sales do not. For example, even if you are a cash method taxpayer, you cannot use this gain deferral technique if you sell publicly-traded stock or securities. Also, you may not want to take back a promissory note in lieu of cash if you believe that your chances of getting paid are at risk. Tax Tip. As the law is currently written, in general, the maximum long-term capital gains rate will increase from 15% to 20% after 2010. This scheduled increase in the long-term capital gains rate should be considered before agreeing to accept an installment note with payments due beyond the 2010 tax year.

Like-Kind Exchanges.

If you want to sell investment or business real estate but plan to use the proceeds to purchase other investment or business real estate, consider a like-kind exchange. You could have the purchaser of your property buy the property you want and trade it to you. If the purchaser of your property is not willing to buy replacement property for you, you may be able to accomplish the same results by using a qualified third-party intermediary to handle the exchange. This way the gain on the exchange may be deferred. Planning Alert! Although like-kind exchanges may appear simple, they are not. It is easy to convert what appears to be a tax-free exchange into a fully taxable transaction. Please do not attempt one without calling us first. Tax Tip. If you trade in your business vehicle for another business vehicle, your swap will generally be non-taxable. A trade-in may not be a good tax move if your tax basis in the trade-in vehicle is significantly greater than its fair market value (e.g., the trade-in vehicle was subject to auto depreciation limits or, you used the standard mileage rates). In that case, it may be better to sell the old vehicle, and claim a business loss on the sale. However, the sales tax rules should also be considered.

Required Distributions From Retirement Plans After 70½ Or Death.

If you want to postpone the distributions (and therefore the taxation) of amounts in your traditional IRA or in a qualified retirement plan as long as possible, there are many technical steps you need to consider, including: Naming A Proper Beneficiary.

It is critical that you name the appropriate beneficiaries. You should generally name an individual or a "qualified trust" as the beneficiary. Planning Alert! If your estate is the beneficiary of your IRA or qualified plan account, your heirs will generally miss out on substantial tax deferral opportunities after your death. In addition to naming an individual or individuals as your beneficiary, you should also name a "contingent beneficiary" in case your primary beneficiary dies before you. If you do not name a qualified beneficiary or if your estate is your beneficiary and you die before reaching age 70½, your entire retirement account generally must be distributed and taxed within five years of the year of your death. This will cause your beneficiaries to lose valuable tax deferral options. Tax Tip. If you are the current owner of a Roth IRA, you have no minimum required distributions after you reach age 70½. However, distributions must be made to your heirs after your death. The rules for maximizing the tax deferral possibilities for IRAs and qualified plan accounts are complicated. We will gladly review your beneficiary designations and offer planning suggestions.

Post Mortem Planning.

If you are the beneficiary of the IRA or qualified plan account of someone that has died, there are certain planning techniques you should consider as soon as possible. Tax Tip. If the decedent named multiple beneficiaries or included an estate or charity as a beneficiary, we should review the situation as soon as possible to see if there is anything we can do to avoid certain tax traps. The rules for rearranging IRA beneficiaries for maximum tax deferral are complicated and are subject to rigid deadlines. Acting before certain deadlines pass is critical. The best tax results can generally be achieved by making any necessary changes no later than the end of the tax year in which the owner of the IRA or retirement plan dies. If you need assistance, please call our office as soon as possible so we can advise you.

Attaining Age 70½ During 2006.

If you reach age 70½ at any time during 2006, you must begin distributions from a traditional IRA account no later than April 1, 2007. A 50% penalty applies to the excess of the required minimum distribution over the amount actually distributed. If you wait until 2007 to make the first distribution, then two distributions must be made for 2007 (one by April 1, 2007 for the 2006 year and one by December 31, 2007 for the 2007 year). If you are in this situation, please call our firm and we will help you determine whether it will be to your tax advantage to defer the required distribution for 2006 until 2007, or make the 2006 distribution on or before December 31, 2006.

Rollovers By Surviving Spouses.

If a taxpayer dies during 2006 and the beneficiary of the decedent's IRA or qualified plan is the surviving spouse, and the surviving spouse is over 59½, the surviving spouse should consider rolling the decedent's qualified plan or IRA amount into his or her name on or before December 31, 2006. The first required minimum distribution (because of the taxpayer's death) is required to be made no later than December 31, 2007. This distribution will be based upon the surviving spouse's single life expectancy if the account remains in the decedent's name on December 31, 2006. However, if the account is rolled into an account in the surviving spouse's name on or before December 31, 2006, the calculation of the 2007 distribution will be calculated using the Uniform Lifetime Distribution Table (resulting in a smaller required distribution in 2007). Planning Alert! If the surviving spouse is not yet 59½, leaving the IRA or qualified plan amount in the name of the decedent may be the best option if the surviving spouse needs to withdraw amounts from the retirement account before age 59½. If the account is transferred into the spouse's name, and the spouse receives a distribution before reaching age 59½, the distribution could be subject to a 10% early distribution penalty unless made as a series of payments over the surviving spouse's life expectancy.

Relief For Late IRA Rollovers.

If you receive a distribution from your IRA or qualified retirement plan, and you want to avoid taxation, you typically must roll the distribution over into a new IRA or qualified retirement plan within 60 days. Tax Tip. You generally are allowed only one tax-free rollover of your IRA each twelve months. If an IRA account is rolled over more than once during a 12-month period, the amount involved in the second rollover is taxed and could be subject to a 10% penalty. However, there are no limits on the number of direct "trustee-to-trustee" transfers of your account between IRA trustees. If you wish to change your IRA trustee (e.g., move your IRA from one financial institution to another), please call us and we will assist you with a trustee-to-trustee transfer. If you have taken money from your IRA or a qualified plan and intended to roll over the funds within 60 days, but failed to do so, please give us a call. The IRS has issued special procedures for applying for an extension of the 60-day rollover period if you satisfy certain criteria. We will help you apply for an extension of time to complete the rollover. Planning Alert! Recently, the IRS significantly increased the user fees it charges for an application for extension of the 60-day rollover period. Obtaining an extension is a time-consuming, costly process. Tax Tip. The best policy is always to complete the rollover within the 60-day period. Or, better yet, don't rollover at all. If you wish to change plan trustees, simply transfer the funds using a trustee-to-trustee transfer. In a trustee-to-trustee transfer, the check for the amount transferred should be written to the new trustee, not to you.

Taking Advantage Of Deductions

Accelerating Deductions Into 2006.

If you are a cash method taxpayer, you can generally accelerate a 2007 deduction into 2006 by "paying" it in 2006. Accelerating an "above-the-line" deduction, such as the IRA deduction, qualified student loan interest deduction, and deductible alimony into 2006 may allow you to reduce your "adjusted gross income" below the thresholds needed to qualify for many tax benefits. Remember, however, that itemized deductions do not reduce your "adjusted gross income" and, therefore, will not affect your 2006 deductions and credits that are reduced as your income increases. Itemized deductions include charitable contributions, state and local taxes, medical expenses, unreimbursed employee travel expenses, and home mortgage interest. Tax Tip. "Payment" typically occurs in 2006 if a check is delivered to the post office, if your electronic payment is debited to your account, or if an item is charged on a third party credit card in 2006.

Planning Alert! The IRS says that prepayments of expenses applicable to periods beyond 12 months will not be deductible in 2006.

"Bunching" Itemized Deductions.

If your itemized deductions fail to exceed your standard deduction in most years, you are not receiving maximum benefit for your itemized deductions. You could possibly reduce your taxes over the long term by bunching the payment of your itemized deductions in alternate tax years. This may produce tax savings by allowing you to itemize deductions in the years when your expenses are bunched, and using the standard deduction in other years. Tax Tip. The easiest deductions to shift between tax years are charitable contributions, state and local taxes, and your January home mortgage interest payment. For 2006, the standard deduction is $10,300 on a joint return and $5,150 for single individuals. If you are blind or age 65, you get an additional standard deduction of $1,000 if you're married ($1,250 if single). Planning Alert! For 2006, most itemized deductions are reduced by 2% (3% in 2005) of your adjusted gross income in excess of $150,500 ($75,250 for married individuals filing separately). This cut back rule began phasing out in 2006, and is eliminated altogether by 2010.

"Bunching" Medical Expenses.

Many taxpayers ignore the medical expense deduction because medical expenses are deductible only if they exceed 7.5% of your adjusted gross income (10% for AMT purposes). However, if you have medical expenses that are discretionary, you may be able to "bunch" them into 2006 or 2007 and exceed the 7.5% floor. For example, braces are discretionary, and such medical procedures as radial keratotomy and laser eye surgery may be discretionary and qualify for the medical expense deduction. Tax Tip. You can include in your medical expense the following: medical insurance premiums, transportation essential for medical care, lodging (but not meals) while away from home primarily for medical care, and changes to your house to accommodate a physical handicap. Tuition payments to a special school for a child with severe mental or physical disabilities (which would include medically diagnosed attention deficit hyperactive disorder) may also qualify as a medical expense. However, the IRS requires that a doctor recommend that a child attend the school, and the school generally must determine the portion of the tuition payment that relates directly to the medical needs of the child. Also, the costs of programs and prescription drugs to help people stop smoking qualify as a medical expense.

Deduction For Self-Employed Health Insurance Costs.

If you are self-employed, a partner, or own more than 2% of an S corporation, you are generally entitled to an above-the-line tax deduction for your health insurance premiums.

National Guard And Reserve Travel.

If you are a member of the National Guard or Military Reserves, you may take an "above-the-line" deduction for travel costs incurred while traveling more than 100 miles from your home if you are required to stay overnight. These travel expenses are not treated as an itemized deduction and are exempt from the 2% reduction rule. Tax Tip. This rule applies to any amount paid or incurred for tax years starting after December 31, 2002. If you qualified for these deductible travel expenses and failed to take them as an "above-the-line" expense on a prior year's return, please call us. We will help you determine whether you may amend your return to obtain benefit of these deductions.

Taking Advantage Of Health Savings Accounts (HSAs).

Contributions to health savings accounts (HSAs) are fully deductible whether or not you itemize deductions, and distributions for qualifying medical expenses are tax free. In other words, an HSA permits medical expenses (including non prescription drugs) to be deducted directly from your adjusted gross income whether or not you itemize and avoids the rule that only medical expenses in excess of 7.5% of adjusted gross income are deductible. To qualify for an HSA, you must be covered by a qualifying "high deductible health plan" (HDHP). For 2006, if you have "self only" coverage, your HDHP must have a minimum annual deductible of $1,050, and your maximum out-of-pocket exposure cannot exceed $5,250. If you have "family" coverage, your minimum annual deductible is $2,100, and your maximum out-of-pocket exposure cannot exceed $10,500. Your maximum contribution to your HSA is the lesser of: 1) your annual deductible, or 2) $5,450 if you have family coverage, $2,700 for individual coverage. Planning Alert! You cannot receive a tax-free medical expense reimbursement from an HSA for any medical expense incurred before you established the HSA. Tax Tip. If you want to review more information on HSAs, please contact our office and we will be glad to assist you. If you wish to review the health insurance providers in your state that offer qualified high deductible health plans, you may consult www.hsainsider.com.

Maximizing Employee Business Expenses.

If you are incurring unreimbursed employee business expenses, you must reduce those expenses by 2% of your adjusted gross income. "Bunching" these expenses into 2006 or 2007 so the 2% threshold is exceeded may reduce your taxes. You can bunch 2007 expenses into 2006 by prepaying the 2007 amounts in 2006. Planning Alert! Unreimbursed employee-business expenses are not deductible at all for purposes of computing your alternative minimum tax. Tax Tip. If you are a "statutory employee" (e.g., full-time life insurance salesperson, certain commissioned drivers, certain home workers) you are not subject to the 2% limitation for employee business expenses. The "statutory employee" box on your Form W-2 should be checked if you are classified as a statutory employee. o

Taking Advantage Of Employer's "Accountable Plan."

As an employee, you can avoid the 2% rule and the AMT exposure for employee business expenses, if you document your business expenses and get reimbursed by your employer under an "accountable plan." We can help you establish a proper reimbursement arrangement with your employer. Tax Tip. The IRS has issued several rulings approving the use of electronic expense reports and electronic receipts for accountable plans, if the plans satisfy certain criteria. o

Avoiding The 50% Reduction For Meal And Entertainment Expenses. You can generally deduct your meals if you are on an overnight business trip. In addition, you can generally deduct business entertainment (including a meal) if you engage in a legitimate business meeting with a bona fide business associate shortly before, during, or after the meal or entertainment. However, only 50% of your otherwise deductible business meal and entertainment expenses are deductible. Tax Tip. You can avoid the 50% reduction if you properly document your business meals and entertainment and receive reimbursement for the expenditures from your employer under an "accountable plan." However, your employer may deduct only 50% of the reimbursement. If you are self-employed, you can also avoid the 50% reduction if you separately bill your client (with proper documentation) for your qualifying business meal and entertainment expenses on behalf of the client. Your client, however, may deduct only 50% of the reimbursement. Consequently, you should document and obtain a reimbursement for all business meal and entertainment expenses whenever possible if you wish to avoid the 50% reduction. Individuals working in selected transportation industries and subject to the Department of Labor's hours of service limitations are required to reduce their meal deduction by only 25% rather than 50% (e.g., pilots; interstate truck and bus drivers; and railroad engineers).

Charitable Contributions o

Contributions Of Appreciated Property.

If you are considering a significant 2006 contribution to a public charity (e.g., church, synagogue, or college), it will generally save you taxes if you contribute appreciated long-term capital gain property, rather than selling the property and contributing the cash proceeds to charity. By contributing capital gain property held more than one year (e.g., appreciated stock, real estate, etc.), a deduction is generally allowed for the full value of the property, but no tax is due on the appreciation. Tax Tip. Generally, this rule does not apply to contributions to private foundations. However, you can contribute "qualifying publicly-traded stock" to a "private foundation" and deduct the full fair market value (rather than the cost basis). Planning Alert! Don't forget, as discussed previously in this letter, recent tax legislation creates new rules for charitable contributions of vehicles, boats, airplanes, personal effects, and cash. In addition, the Pension Protection Act of 2006 allows trustees and custodians of IRAs maintained for individuals at least age 70½ to make charitable donations directly to qualifying charities. o

Substantiation Requirements.

If you contribute $250 or more to a charity, you are allowed a deduction only if you receive a qualifying written receipt from the charity by the time your return is filed. The receipt generally must include the amount of money and a description of any property contributed, and a good faith estimate of the value of any goods or services that were provided to you in exchange for the gift. If no goods or services were provided to you in return for the contribution, the receipt must contain a statement that no goods or services were provided. Planning Alert! Recent legislative changes to charitable contributions have not altered this requirement. You must receive this receipt before we file your 2006 return, and you should retain the receipt in your tax files in case you are later audited. IRS says a canceled check is not sufficient where a receipt is required! o

Be Sure To "Pay" Your Charitable Contribution In 2006.

A charitable contribution deduction is allowed for 2006 if the check is mailed on or before December 31, 2006, or the contribution is made by a credit card charge in 2006. However, if you give a note or a pledge to a charity, no deduction is allowed until you pay off the note or pledge.

Maximizing Home Mortgage Interest Deduction.

If you are looking to maximize your 2006 deductions, you can increase your home mortgage interest deduction by paying your January, 2007 payment on or before December 31, 2006. Typically, the January mortgage payment includes interest that was accrued in December and, therefore, is deductible if paid in December. o

Look For Deductible "Points."

Points paid in connection with the purchase or improvement of your principal residence are immediately deductible. Points are deductible even if the bank labels them as something else. For example, points include "loan-processing fees," "loan premium charges," or "loan origination fees" so long as they don't represent fees for services, etc. (e.g., appraisal, title, inspection, attorneys' fees, credit checks, property taxes, or mortgage insurance premiums). Tax Tip. If 2006 marks at least the second time that you refinanced your home, and you are not refinancing with the same lender, you may deduct in 2006 the unamortized points from the previous refinancing. o

Remember To Deduct Seller-Paid Points. If you bought a house this year and negotiated for the seller to pay your points at closing, the IRS says you can deduct those seller-paid points as though you paid them yourself. o

Pay Off Personal Loans First. If you have both home mortgage loans and other personal debt, pay off the personal debt first because interest on personal debt is generally not deductible but home mortgage interest is generally deductible. This will maximize your interest deduction.

Tax-Wise Payment Of State And Local Taxes.

If you anticipate deducting your state and local income taxes, consider paying them (fourth quarter estimate and balance due for 2006) and property taxes for 2006 prior to January 1, 2007 if your tax rate for 2006 is higher than or the same as your projected 2007 tax rate. This will allow a deduction for 2006 (a year early) and possibly against income taxed at a higher rate. Planning Alert! You should not employ this tactic without carefully calculating the alternative minimum tax impact. Also, "overpayment" of your 2006 state and local income taxes is generally not advisable since a refund in 2007 from a 2006 overpayment may be taxed at a higher rate than the 2006 deduction rate because of the phase-out rules for itemized deductions. Please consult us before you overpay state or local income taxes!

Tax-Wise Planning For Education Costs

For 2006, if you are incurring higher education expenses for yourself or your dependents, you will have fewer options for tax benefits. The provision that allowed you to claim an above-the-line deduction for postsecondary tuition and fees of up to $4,000 for 2002 through 2005 expired after December 31, 2005. Unless Congress extends this provision, this deduction will not be available for 2006 returns. However, the following are the education tax breaks that remain available for 2006 that you should consider as you develop your 2006 tax planning strategies.

Coverdell Education Savings Accounts.

You can contribute up to $2,000 annually to a Coverdell education savings account (formerly "Education IRA"). This limit applies to the aggregate contributions that may be made by all contributors to one or more Coverdell education savings accounts (CESAs) established on behalf of any particular beneficiary. Although your contribution to a CESA is not deductible for tax purposes, you may make tax-free distributions from a CESA for the payment of qualified education expenses for elementary or secondary school education as well as for higher education expenses. Tax Tip. You may make a contribution to CESA for 2006 by April 16th of 2007. Your $2,000 contribution amount is phased out on a joint return as adjusted gross income goes from $190,000 to $220,000 ($95,000 to $110,000 if you are single). Planning Alert! The IRS says a child may make an education savings account contribution for himself or herself. Thus, if the adjusted gross income of both the parents and the grandparents exceed the limits, the child's parent or guardian may wish to establish a CESA with the child's funds (e.g., funds in a Uniform Gift to Minors Act account). Tax Tip. You may not make a contribution for a child after he or she attains age 18. However, if your child has "special needs" (e.g., the child is medically diagnosed as having learning disabilities), you may continue the annual contributions beyond age 17.

Section 529 Plans.

Earnings of a qualified state tuition plan (section 529 plan) may be distributed tax-free for qualified "higher" education expenses. So, unlike CESAs, K-12 education expenses should not be paid with section 529 plan funds. However, there is no $2,000 per year limitation on the amount that may be contributed to a section 529 plan and there are no income limits. Instead, once the amount in a section 529 plan equals the amount necessary to fund 5 years of undergraduate education at the highest cost institution in the state, no more contributions are allowed to that particular beneficiary's plan. Several state tuition plans have limitations on total contributions of $300,000 or more. So, if you wish to accumulate funds for qualified college education expenses (tuition, fees, and room and board), you should consider a section 529 plan. Tax Tip. Many individuals are using CESAs to save for private school education expenses and setting up section 529 plans to fund college expenses. You may establish both a CESA and a section 529 plan for the same individual.

Planning Alert! Contributions to CESAs and to section 529 plans are gifts to the beneficiary of the account for gift tax purposes. However, the $12,000 annual exclusion for gifts is available to offset these contributions for gift tax purposes. Also, there is a special rule which allows you to consider the amount of gifts to a CESA or a qualified tuition plan for a year as made over five years. Therefore, it is generally not wise, from a gift tax standpoint, to transfer the maximum amount allowed to a qualified tuition plan in one year. However, by electing the 5-year rule, you could contribute $60,000 ($120,000 if both husband and wife make contributions or elect split-gift treatment) to a section 529 plan in one year and there should be no Federal gift tax on the contribution as long as no other gifts are made to the beneficiary of the account for the current year and the next four years. Tax Tip. Please call us before contributing to a state tuition program. We can help you decide which plan best suits your needs. Also, some states allow a state income tax deduction for contributions to qualified state tuition plans but only if you contribute to that state's plan.

Student Loan Interest.

You may deduct (whether or not you itemized deductions) up to $2,500 of interest on qualified student loans. Your deduction phases out as your adjusted gross income increases from $105,000 to $135,000 on a joint return (from $50,000 to $65,000 on a single return). The IRS says that if a family member pays your interest, the payment will be treated as a gift to you, and you will then be treated as paying the interest yourself. Tax Tip. If you paid any student loan interest in 2006, be sure to provide us with Form 1098-E. This will help us determine your interest deduction for 2006.

HOPE Education Tax Credit.

If you pay post-high school education expenses for yourself, your spouse, or a dependent, you may be entitled to a tax credit of up to $1,650 per student (up from $1,500 per student in 2005). The HOPE education credit is available only for two years of post-secondary education with respect to any one student. Under the two-year rule, the credit is allowed for a tax year if the student has not yet completed, before the beginning of the tax year, the first two years of post-secondary education at an eligible educational institution. For a full-time student who enters college in the autumn, that means that the credit is available for two of the first three calendar years the student attends college. The credit phases out ratably as your modified adjusted gross income increases from $90,000 to $110,000 on a joint return ($45,000 to $55,000 on a single return). The HOPE credit equals 100% of the first $1,100 (and 50% of the second $1,100) of tuition and fees required by the educational institution. No credit is allowed for meals, lodging, transportation, or other personal living expenses. Tax Tip. To get the full $1,650 credit for 2006, you must pay tuition of at least $2,200 for the student by December 31, 2006. If tuition, for example, is $1,200 each semester, you must pay two semesters of tuition in 2006 to get the full credit of $1,650. If your child began college in August or September of 2006, you should pay the $1,200 tuition for the spring semester of 2007 no later than December 31, 2006 (payments after that date will not qualify for credit during 2006). Tax Tip. Unless more than one member of your family qualifies for either the HOPE credit or the Lifetime Learning credit for 2006, the Lifetime Learning credit (described below) will produce a larger tax benefit than the HOPE credit if tuition and fees paid for 2006 exceed $8,250.

The Lifetime Learning Credit.

You may qualify for a Lifetime Learning credit of up to $2,000. This credit equals 20% of the first $10,000 of qualified higher education tuition and fees. The phase-out rules for the Lifetime Learning credit are the same as those for the HOPE credit, discussed above. Unlike the HOPE credit, the Lifetime Learning credit is for an unlimited number of years and can be used for graduate or professional degrees (as well as undergraduate education). However, the Lifetime Learning credit limitation of $2,000 is per tax return not per student. Caution! The Lifetime Learning credit is not available for any of the education expenses of a student for 2006 if you take the HOPE credit for education expenses for that same student on your 2006 return. Tax Tip. In some situations, it may be better to claim the Lifetime Learning credit for qualified expenses that would otherwise qualify for the HOPE credit. For example, if a freshman's tuition is $10,000 in 2006, the Lifetime Learning credit would give you a $2,000 credit compared to the HOPE credit of $1,650. Keep in mind, however, that your total Lifetime Learning credit on your 2006 return cannot exceed $2,000. By contrast, you may take a HOPE credit of up to $1,650 for the tuition and fees for each family member who qualifies. Planning Alert! If your income is more than $110,000 ($55,000 on a single return), you do not qualify for the Hope credit or the Lifetime Learning credit. However, the IRS says the student (e.g., your child) may claim the credits on his or her return, provided you elect not to claim that child as a dependent on your tax return (even if the child otherwise qualifies as your dependent). Of course, since the HOPE and Lifetime Learning credits are non-refundable credits, your child must have sufficient income tax liability to utilize the credits on his or her return. Caution! Be sure to check with your health insurance carrier before releasing your child's "tax" dependency exemption to ensure that the release will not impair your child's health insurance coverage under your health plan.

Tax Planning For Your Home

Home Sale Exclusion.

If you have owned your home and used it as your "principal residence" for at least two out of the last five years, you can exclude up to $250,000 of the gain ($500,000 on a joint return) when you sell it. Tax Tip. The IRS generally allows you to exclude gain that would otherwise be allocable to your "qualified home office" (except for gain attributable to depreciation taken on the home office after May 6, 1997). You may also exclude gain when you sell land adjacent to your residence so long as the land is sold within two years of the sale of your home and the land has been owned and used as part of your residence for the required period. In addition, you may claim a portion of the exclusion when you have not owned and used your residence for the required two-year period, but you sell the home because of a change in place of employment, for health reasons, or because of certain unforseen circumstances. For example, you are entitled to relief if you move: for health reasons pursuant to a physician's recommendation; because of an employment change satisfying a 50-mile test; because of a divorce or legal separation; or because of a natural disaster.

The Home Office Deduction.

Qualifying for home office deductions (e.g., depreciation, insurance, utilities, repairs and maintenance) may be easier than you think. If you're self-employed, you only have to establish that you use your home office "regularly and exclusively" to perform management or administrative duties for your business and there is no other fixed location where you perform substantial management or administrative duties relating to that trade or business. If you are an employee, in addition to meeting the above requirements, you must also establish that your home office is "for the convenience of your employer" (this generally means you're not provided an office at work). Tax Tip. The IRS says that if you have a qualifying home office, you can deduct any travel from your home office to another work location as a business expense. So, by having a qualified home office, you will generally have more deductible business travel. Furthermore, if you're an employee who qualifies for home office deductions, you should ask your employer to reimburse your home office expenses. This reimbursement should be excluded from your income if reimbursed under an "accountable reimbursement arrangement." If you are an employee and your home office expenses are not reimbursed, the home office expense deduction will be reduced by 2% of your adjusted gross income.

Planning With Retirement Plans

Consider Contributing The Maximum Toward Your Retirement.

As your income rises and your marginal tax rate increases, deductible retirement plan contributions generally become more valuable to you. Also, making your deductible contribution to the plan as early as possible generally increases your retirement benefits. As you evaluate how much you should contribute, consider the following: o

IRA Contributions.

If you are married, even if your spouse has no earnings, you can generally deduct up to $8,000 ($10,000 if you're both at least age 50 by the end of the year) for contributions to your and your spouse's traditional IRAs. No more than $4,000 ($5,000 if you're at least age 50) may be contributed to either your or your spouse's IRA during any one tax year (except for rollover contributions). You must have earnings at least equal to the total contributions. If you are an active participant in your employer's retirement plan, your IRA deduction is phased out ratably as your adjusted gross income increases from $75,000 to $85,000 on a joint return ($50,000 to $60,000 on a single return). However, if your spouse is an active participant in his or her employer's plan and you are not an active participant in a plan, you may contribute the full amount to an IRA as long as the adjusted gross income on your joint income tax return is not more than $150,000. Planning Alert! Every dollar you contribute to a deductible IRA reduces your allowable contribution to a nondeductible Roth IRA. Your ability to contribute to a Roth IRA is phased out ratably as your adjusted gross income increases from $150,000 to $160,000 on a joint return or from $95,000 to $110,000 if you are single. o

Using IRA Funds For Education Or First-Time Home-Buyer Expenses.

If you have an IRA, you can withdraw funds for qualified higher education expenses or qualified first-time home buyer expenses (up to $10,000), without having to pay the normal 10% early distribution penalty. The distribution is, however, still taxable. Tax Tip. The distribution for higher education expenses, although taxable, may generate a HOPE credit or a Lifetime Learning credit. Planning Alert! You must withdraw the funds in the same tax year that you incurred the qualified education expenses or purchase the home to avoid the 10% early distribution penalty. Also, these exceptions from the early distribution penalty only apply to distributions from IRAs. Therefore, if you receive a distribution from your employer's retirement plan and you are not 59½ or disabled, you will generally pay the 10% penalty tax even if you use the funds for qualifying education expenses or to purchase your first home. Therefore, a distribution from your employer's retirement plan should be first rolled to an IRA and then distributed from the IRA for qualifying education expenses or first-time home buyer expenses to avoid the 10% penalty. o

Workers At Least Age 70½.

If you are age 70½ or older, you cannot make a contribution to a traditional IRA. Tax Tip. If you are working, age 70½ or older, have a spouse under age 70½, and otherwise qualify, you can make a deductible IRA contribution to a separate traditional IRA for your spouse (not to exceed your compensation) even where the spouse has no earned income. Also, if you otherwise qualify, you can contribute to a nondeductible Roth IRA even after you reach age 70½. o

Consider Contributing To Your Company's 401(k) Plan.

If you are covered by your company's 401(k) plan, you should consider putting as much of your compensation into the plan as allowable. The maximum amount for 2006 is $15,000 ($20,000 if you're at least age 50 by the end of 2006). This is particularly appealing if your employer offers to match your contributions.

The Roth IRA.

The Roth IRA continues to be a popular retirement savings option. If you have "earned income" at least equal to the contribution, you may make a nondeductible contribution of up to $4,000 ($5,000 if you are at least age 50) to a Roth IRA. You may generally make a contribution for 2006 anytime on or before April 16, 2007. If you are married, you can contribute up to $4,000 for yourself, and an additional $4,000 for your spouse, provided your combined earnings are at least $8,000. However, for 2006, the $4,000 contribution limits are phased out as your adjusted gross income increases from $150,000 to $160,000 on a joint return, and $95,000 to $110,000 if single. Also, the $4,000 amount you may contribute to a Roth IRA is reduced by any contributions you make to a regular IRA for the same tax year. Although you can not deduct your contributions to a Roth IRA, qualified distributions from the Roth are tax free. If you maintain your Roth IRA for at least five years, amounts may be withdrawn completely "tax free" if you meet any of the following conditions: 1) you have attained age 59½, 2) the distribution results from your death or disability, or 3) the distribution is for up to $10,000 of qualifying first-time home buyer expenses. Also, distributions from a Roth IRA are deemed to come from your nondeductible contributions first. Thus, you may generally withdraw any or all of the amounts you have contributed tax free without meeting the above requirements.

Converting Regular IRA To Roth.

If you have little or no taxable income for 2006, you may be able to save taxes in the long-run by converting all or a portion of your regular IRA to a Roth. This is particularly true if the amount included in your income from the conversion does not increase your Federal or state tax liability. This strategy, in essence, will convert taxable retirement income into tax-free retirement income. If you want the conversion to be effective for 2006, you must transfer the amount from the regular IRA to the Roth IRA no later than December 31, 2006. Planning Alert! Before 2010, you cannot convert a regular IRA or a portion of a regular IRA to a Roth if your modified AGI exceeds $100,000 (excluding the income from the conversion and any IRA distribution required because you have reached age 70½).

Setting Up A Roth IRA For A Minor.

You can set up a Roth IRA for your minor child, provided the child has "earned income" at least equal to the Roth IRA contribution (the maximum contribution is $4,000). Your child's earned income can include money from baby sitting or mowing lawns. Furthermore, if your child's outside earnings do not exceed $400, the child will not be subject to social security taxes. If you are a sole proprietor, you don't have to pay FICA or medicare taxes on wages paid to your child who is under age 18. Furthermore, assuming you are paying reasonable compensation, your child's wages may be taxed at a rate as low as 10% and deducted by you at your rate (as high as 35%).

Other Items To Consider

Child Tax Credit. You may be entitled to $1,000 child tax credit even if the credit exceeds your Federal income tax liability. You are entitled to a refundable credit to the extent of 15% of your earned income in excess of $11,300. Tax Tip. For 2006, if you have one qualifying child, you need earned income of at least $17,967 to qualify for the full $1,000 refundable credit.

Adoption Tax Credit.

If you are considering adopting a child, the adoption tax credit may substantially reduce your tax bill. This year, you may be entitled to an adoption tax credit for qualifying adoption expenses of up to $10,960 per child. However, the adoption credit is phased-out as your modified adjusted gross income increases from $164,410 to $204,410. Tax Tip. If you finalize the adoption of a "special needs child" in 2006, you may receive the full adoption tax credit of $10,960 even if this is more than your adoption expenses. This credit for the excess of $10,960 over your actual expenses is allowed only in the year the adoption is finalized. Planning Alert! Your adopted child must have a taxpayer identification number (TIN) for you to take the credit. A child's Social Security number is normally the TIN. If, after reasonable efforts, you are unable to obtain a Social Security number for the child, you can apply for an "adoption taxpayer identification number" by filing a Form W-7A with the IRS.

Moving Expenses.

If you had a job-related move in 2006, you may be entitled to deduct unreimbursed moving expenses. Deductible moving expenses include only: 1) moving household goods and personal effects from your former residence to your new residence, and 2) travel costs (including lodging during the travel) from your former residence to your new residence. Tax Tip. If your employer reimburses your moving expenses, provide your employer with proper documentation of the moving expenses. Otherwise, the IRS says employer reimbursements should be included in your Form W-2.

Penalty For Under-Withholding Or Under-Estimating.

One way to avoid a penalty for failing to pay or withhold sufficient income taxes for a tax year is to pay 100% of your prior year's tax liability in quarterly estimated payments or through income tax withholding. Planning Alert! If your 2005 AGI was over $150,000, you must pay in 110% of your 2005 tax liability to qualify for this safe harbor in 2006. Tax Tip. If you have not paid sufficient estimates to avoid an underpayment penalty for 2006, you may have additional amounts withheld from your wages, year-end bonuses, or IRA distributions on or before December 31, 2006. Any withholding for 2006 is deemed paid equally on each quarterly installment date for estimated tax purposes, even if the withholding occurs in December.

FINAL COMMENTS

Please call us if you are interested in a tax topic that we did not discuss. Tax law constantly changes due to new legislation, cases, regulations, and IRS rulings. Our firm closely monitors these changes and we will be glad to discuss any current tax developments and planning ideas with you. Please contact us before implementing any planning ideas discussed in this letter, or if you need more information.

Note: The information contained in this material represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation.

Circular 230 Disclaimer:

Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.