Fall 2006 Vol. XVI No. 1

Fall Notes:

We are so pleased with the feedback that we've received during the first eight months of the year - your communication with us lets me know what we're doing right and what areas need further attention. We thank you for the many client referrals received to date. This year more than any year I can recall has felt frenetic from the start. Part of this was caused by losing the services of my former partner, Jeannine. She is spending more time at home these days, taking care of her small children. Yet, with Ellen, Jeff, Becky, and now Marilee, I feel that we have a solid group of tax and accounting professionals.

Recently my wife Michele and I returned from a very nice vacation where we were able to explore the old cities of Florence, Athens, Istanbul and the Greek Isles. From coming face to face with the magnificent statue of David, to viewing the Acropolis, to navigating the Bosporus river separating Europe from Asia, it was a fascinating trip.

Alternative Minimum Tax, which we continue to address in our newsletters, remains a particular nuisance on many of the individual tax returns which we prepare. AMT comes with its own set of rules which parallel the regular federal income tax system. AMT is triggered when a taxpayer claims large deductions for unreimbursed employee expenses, has many personal exemptions or has high state and local taxes.

2006 Tax Changes:

President Bush has signed into law the Tax Increase Prevention and Reconciliation Act, which impacts individuals, investors, small businesses, and corporations. Here's a sampling:

• Alternative Minimum Tax Relief: A one year AMT patch to help keep more middle and upper- middle class taxpayers from falling prey to the AMT. Tip: Underpay your state income taxes to help avoid the AMT bite.
• Low Capital Gain and Dividend Tax Rate Extensions: A two-year extension of the 15 percent tax rate for capital gains and dividends. This cut was set to expire at the end of 2008 but has been extended to 2010. Tip: Turn your interest income into qualified dividend income to take advantage of these low tax rates.
• Conversions of IRA's to Roth IRA's: The Act eliminates the $100,000 adjusted gross income ceiling for converting a regular IRA to a Roth IRA for tax years beginning in 2010. Now anyone can convert to a Roth IRA starting in 2010. Tip: Higher income taxpayers with substantial amounts in traditional IRA's will finally be able to benefit from Roth IRA conversions.
• Increase of Age Limitations on “Kiddie Tax:” The kiddie tax, which subjects a child's income to the parents' higher tax rate takes effect immediately. This provision applies only to unearned income. Under old law, a child 14 and older could file a separate income tax return and pay tax at a lower children's rate. Now under the new law, the child's income is taxable at the parent's higher rate until the child turns 18. Tip: Strongly consider the use of Section 529 Education Accounts to completely avoid the kiddie tax. 529 Plans can be used to pay for college tuition, room, board, books, fees, supplies and certain equipment (e.g., computers).

Payroll Taxes:

The Internal Revenue Service has released Form 944, Employer's Annual Federal Tax Return. Small businesses are getting a break as the IRS will permit some small employers to file their employment tax returns annually instead of quarterly. The IRS sent out letters about the new program to small businesses in early 2006.

The Form 944 will replace the Form 941 when an employer's federal payroll tax liability is less than $1,000.00 during the federal look back period. Those employers who meet the criteria for Form 944 will file the form once per year and will not be required to file any Forms 941. These employers may also qualify to pay their employment tax liability annually with Form 944, due by January 31 each year.

The letter from the IRS tells businesses that they are eligible to participate in the Employer's Annual Federal Tax Program, also known as the Form 944 Program. This program is likely just the beginning of more simplification for small businesses. We'll keep you posted on current developments.

2005 Dollar Limitations For Retirement Plans:

College Education Credits:

You could be eligible for a tax credit and/or deduction for qualified tuition and related expenses you have paid. Two tax credits, the Hope Scholarship Credit and the Lifetime Learning Credit, took effect in 1998 to help families reduce out-of-pocket expenses for tuition and certain expenses paid to a post secondary institution that participates in federal student aid programs.

• The Hope Scholarship Credit provides a credit of up to $1,500 for a student who is enrolled at least half time in one of the first two years of post secondary education. This credit can be claimed for only two years.
• The Lifetime Learning Credit provides a credit of up to $2,000 per year for a student taking courses, including graduate-level degree work. This credit can be claimed for as long as the student is enrolled in an eligible educational institution.

Closing:

We look forward to seeing many of you over the next few months for income tax planning. This exercise enables us to get an early look at projected income, expenses, and tax credits, while providing helpful year-end advice. For those of you who visit, it's certainly time well spent. Please feel free to call our office anytime to schedule an appointment.

We are planning to raise our fees 8 percent at yearend. This is our first fee increase in four years, primarily due to increases in rents, supplies, and software. Our basic bookkeeping fees will remain unchanged.

Matthew R. Horowitz, C.P.A.
10015 Old Columbia Rd. Suite B-215
Columbia, Maryland 21046