You have just finished filing your 2005 tax return. And, if you are like most people, you vow to be more prepared next year. The following is a summary of the most important tax developments that have occurred in the past three months of 2006 that may affect you, your family, your investments, and your livelihood.
Energy-efficient home improvements tax credit. There is a new tax credit for homeowners. This up-to-$500 Code Sec. 25C tax credit is available to homeowners for eligible energy-efficient home improvements placed in service after 2005 and before 2008. A 10% credit is allowed for the cost of certain improvements, e.g., insulation, exterior windows, skylights, exterior doors, and pigmented coated metal roofs; and a specified amount is allowed for other items-e.g., advanced main air circulating fans ($50), natural gas, propane, or oil furnaces or hot water boilers ($150), and heat pumps, water heaters, and central air conditioners ($300). Manufacturers of these energy-efficient items must provide consumers with a certification that they can rely on in claiming the credit.
Donations of cars, boats, and planes valued at more than $500. The IRS has revised the form which a charity must use for 2006 to report qualified vehicles donated to it-Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes. Under stringent new rules, a taxpayer's charitable deduction for these vehicles with a claimed value in excess of $500 can't, with a few narrow exceptions, exceed the charity's gross proceeds from its sale of the vehicle. The revised form clarifies that for a donor to get his deduction the charity's acknowledgement must include (along with other required information) whether the charity provided any goods or services in exchange for the vehicle, and a description and good faith estimate of the value of any such goods or services, or, if the goods or services consist solely of intangible religious benefits, a statement to that effect.
Phaseouts of 2006 itemized deductions and personal exemptions. Under liberalized tax law changes that apply for the first time in 2006, there's a smaller phaseout of a higher-income taxpayer's itemized deductions and personal exemptions. All things being equal, a smaller phaseout means a larger deduction and, as a result, less taxes due for 2006. This may be of particular importance to individuals who must pay quarterly estimated tax or face a penalty (i.e., most taxpayers who have income that's not subject to withholding). The smaller reductions in a taxpayer's itemized deductions and personal exemptions may result in smaller required estimated tax payments during the year. The IRS has provided official worksheets that can be found in Publication 505 for calculating these reduced phaseout amounts.
Domestic production deduction. There is a new Form 8903, used to compute the Domestic Production Activities Deduction, Under Code Section 199; taxpayers may claim a deduction for a percentage of the income earned from eligible activities undertaken in the U. S. These activities include manufacturing, food production, software development, film and music production, production of electricity, natural gas or water, construction, and engineering and architectural services. Equal to a percentage (3% for 2006; 6% through 2009; and 9% thereafter) of the lesser of their qualified production activities income for the tax year (i.e., net income from U.S. manufacturing, production, or extraction activities) or their taxable income, subject to a 50% of W-2-wages limitation. There are often tortuous computations necessary to determine this credit.
Contractor's energy-efficient home credit. The Energy Policy Act of 2005 provides a new credit of up to $2,000 for an eligible contractor who constructs a qualified new energy efficient home. The home has to be substantially completed after August 8, 2005 and sold as a residence after Dec. 31, 2005 and before Jan. 1, 2008. The home must meet specific energy saving requirements. The IRS has a list of software programs that may be used in calculating energy consumption to obtain the certification needed to qualify for this credit.
Cost of removing building's mold is currently deductible. Generally, expenses must be capitalized if they're needed to place property in an ordinarily efficient operating condition (as in the case of expenses to remedy a condition that existed when the property was acquired), or if they add to a property's value, substantially prolong its useful life, or adapt it to a new or different use. The costs of removing asbestos from a building have been characterized by the IRS as a capital expenditure because it results in an improvement in the property by reducing or eliminating human health risks. The IRS has privately ruled that-unlike the costs of removing asbestos-the cost a business incurs to remove mold from a building it owned and leased out is deductible as an ordinary and necessary expense.
Luxury auto depreciation limits for 2006. The IRS has released the inflation-adjusted depreciation limits for business autos. If 2006 is the first year a passenger automobile is placed in service the depreciation limits are, 2006 $2,960, 2007 $4,800, 2008 $2,850, and $1,775 for each succeeding year. For light trucks and vans, including minivans and sport-utility vehicles (SUVs), first year placed in service in 2006 the limitations are $3,260, 2007 $5,200, 2008 $3,150 and $1,875 for each succeeding year. The depreciation limits for electric autos are roughly triple the amount allowed for regular passenger autos. Also released are the annual income inclusion amounts for such vehicles first leased in 2006.These amounts have increased substantially over the 2005 amounts.
Distributions from Roth 401(k)s. For tax years beginning after 2005, an employer's Code Sec. 401(k) plan or Code Sec. 403(b) annuity can include a qualified Roth contribution program (i.e, a "Roth 401(k)") that allows participants to elect to have all or part of their elective deferrals treated as Roth contributions. These amounts are currently includible in income, but their distributions may be excluded from income. The complex rules that apply to Roth 401(k)s are different from those applicable to Roth IRAs. For example, the special ordering rule that treats the first distributions from a Roth IRA as a return of contributions (and thus not includible in income) until all contributions have been returned as basis doesn't apply to distributions from a Roth 401(k); instead the tax rules for annuities apply.
Hurricane relief. The IRS has approved an additional automatic filing and payment extension-to Aug. 28, 2006-to those taxpayers affected by Hurricane Katrina. A second 6th month extension is also available only to those who formally apply for one and it is discretionary on the part of the IRS to grant it or not. The IRS has also extended until Oct. 16, 2006 the deadline for deducting in a prior year hurricane-related losses attributable to Hurricane Katrina, Rita, or Wilma.
Toyota Prius Hybrid certified for the clean burning fuel deduction. The IRS has certified the 2006-model-year Toyota Prius Hybrid as being eligible for the clean-burning fuel deduction. Other 2006-model-year vehicles previously certified by the IRS are the Ford Escape Hybrid, the Mercury Mariner Hybrid, the Lexus RX 400h, and the Toyota Highlander Hybrid. The original owner of one of these vehicles may claim a deduction of $2,000 for vehicles placed in service in 2005, the last year this credit is available. In 2006 this $2,000 credit is replaced by the Code Section 30B alternative motor vehicle credit.
Chances of being audited. The IRS has issued its statistical data on its fiscal year 2005 activities, including how many tax returns it examines (audits), and what categories of returns it focuses its resources on. In general, audit rates have risen in all categories of nonbusiness individual returns except for those 1040A filers under $25,000. The audit rate for most corporations has declined, but it has increased for corporations with assets of $250 million or more.
Please call The Law Office of Marc J. Lane, P.C. at (312) 372-1040 for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
Jo Bechtel, CSEP, CPA, is associated with The Law Offices of Marc J. Lane, a Professional Corporation. Ms. Bechtel is a graduate of Keller Graduate School of Management (M.B.A.) and De Paul University (B.S.).
View Todd Medland of WYIN interview Marc Lane about Advocacy Investing on February 28, 2006, click here
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.