Last month, President Bush signed the second major Tax Act of the year into law. "There are provisions in this Tax Act that will help many taxpayers reduce the income taxes they will pay down the road," explains Andrew D. Schwartz, CPA.
Full-featured accounting software at an easy-to-afford price.
- Total integration throughout
- Data migration for QuickBooks upgrades
- Complete security -- audit trail and
employee access control
- GAAP Compliant
- Installation services
- Wide range of training options
- U.S.-based support
Below are some of the provisions of the Pension Protection Act of 2006 that impact a variety of taxpayers.
- Increased Retirement Plan Contribution Limits To Continue Past 2010: The 2001 Tax Act, which increased the allowable contributions into employer sponsored retirement plans and IRAs, was slated to sunset after 2010. Thanks to the most recent tax law change, the higher annual contribution limits of $5,000 into an IRA and $15,000 into an employer sponsored 401(k), 403(b), or 457 plan are here to stay, and will soon be indexed for inflation. The same goes for the "catch-up" contributions available to people 50 or older.
- Direct Deposit of a Tax Refund Into An IRA: On the 2006 tax return, taxpayers will be able to instruct the IRS to directly deposit their tax refund into an IRA. The IRS has already created Form 8888 that allows taxpayers to designate their federal tax refund into as many as three different accounts.
- Direct Rollovers Into A Roth IRA No Longer Limited to IRAs: Individuals can now make a direct rollover from an eligible employer sponsored retirement plan into a Roth IRA. "Previously, you could only convert money held in an IRA to a Roth IRA. And remember, the Tax Act signed into law on May 17, 2006, eliminates the $100,000 income limitation for people looking to convert their IRAs to a Roth IRA, effective in 2010," explains Schwartz.
- Expiring Savers Tax Credit Made Permanent: Good news for moderate income taxpayers, since this Tax Act reinstated and made permanent the Savers Credit which was on track to expire on December 31, 2006. Anyone who is single and earns less than $25,000 or married and earns less than $50,000, qualifies for a tax credit of up to $1,000 by contributing at least $2,000 into an IRA or an employer sponsored retirement plan.
- Threshold For Annual 5500-EZ Filing Increased: One-participant retirement plans will no longer be required to file a Form 5500-EZ unless total Plan assets exceed $250,000, subject to certain limitations. The threshold had previously been $100,000 for a number of years.
- Qualified Distributions Made From 529 Plans Continue to Be Tax-Free After 2010. Prior to the 2001 Tax Act, distributions made from a 529 Plan to pay for a child's college education were taxed at that child's tax rate. Through 2010, qualified 529 distributions would be tax-free, and then the rules were on track to revert back to the pre-2001 rules. This Tax Act made tax-free distributions from 529 plans permanent.
Changes to the Deductibility of Charitable Donations
For years, the IRS has been concerned that many taxpayers were exaggerating the deduction they claimed for their non-cash contributions. So in October 2004, The American Job Creations Act changed the rules for people who donate their vehicles. Effective January 1, 2005, the amount a taxpayer can claim for a donated vehicle is limited to what the charitable organization sells it for, and not its “Blue Book” value.
This year, the Pension Protection Act of 2006 limits the deduction that can be claimed for donated clothing and household items. As of August 17, a person can only claim a deduction for donated goods that are in good condition or better.
This Tax Act also changes a few other of the charitable donation rules. Effective August 17, individuals must maintain a canceled check, bank record, or receipt from the charity substantiating the date and amount of any donation they're claiming. And through 2007, people 70 or older can withdraw up to $100,000 per year from their IRAs, tax-free, provided they donate that money to a qualified charitable organization.
"The Pension Protection Act of 2006 made numerous changes to the U.S. Income Tax rules and will take quite a while for taxpayers and tax professionals to digest. While many of these provisions will help save you taxes, it looks like tax simplification has once again been overlooked," says Schwartz, who is founder of CPA Niche, LLC (www.cpaniche.com), a site where taxpayers can interact with CPAs who specialize in a variety of niches such as healthcare, real estate professionals, newlyweds and lawyers.