Steven A. Branson, Esq. - Financial Strategies

The IRS announced a deduction for 2006 tax returns as a refund for federal taxes paid on long distance bills. The standard amounts are $30 for a person filing a return with one exemption, $40 for two exemptions, $50 for three exemptions and $60 for four or more exemptions. For example, a married couple filing a joint return with two dependent children (for a total of four exemptions) will be eligible for the maximum standard amount of $60.

Congress passed a new law to strengthen pension plans. This new tax law also made certain changes enacted with the 2001 tax law permanent, including:

• You can contribute up to $4,000 to an IRA, which becomes $5,000 in 2008 and will be inflation-adjusted thereafter. If you are age 50 or older, you can add a $1,000 catch-up contribution;
• You can contribute up to $44,000 to your plan if you are self-employed;
• You can contribute up to $15,000 to a 401(k) plan, with an additional $5,000 catch-up contribution if you are age 50 or older;
• You can contribute up to $10,000 to a SIMPLE plan, with an additional $2,500 catch-up contribution if you are age 50 or older;
• Roth 401(k) and 403(b) plans were available to employers before, but they are more likely to be offered now that they are permanent. (Employers were wary of the cost involved in maintaining the plans if the plans were to be only temporary.) An employee will now get to decide whether to invest in the standard 401(k) plan, with pre-tax funds, or the Roth 401(k) plan, with after tax funds but where the distributions are not subject to income tax at retirement; and
• Withdrawals for college from 529 plans now remain sheltered from income tax after 2010, which is consistent with our advice for clients with younger children to contribute to 529 plans.

The new law redefines certain rules for charitable deductions:

• Used clothing and appliances need to be deemed “in good condition” to be eligible. The IRS has not yet defined good condition;
• For single items valued above $500, an appraisal is required to receive a deduction;
• Deductions are allowed for cash donations only if the donor can show a written statement attesting to the amount of the contribution, the date the contribution was made and the name of the charity;
• The new law allows taxpayers to make tax-free distributions of up to $100,000 from IRAs for charitable purposes through December 31, 2007. The distribution is excluded from taxable income so you skip the step of getting funds from an IRA, having that amount taxed, and then taking the deduction. This is good as Schedule A deductions are reduced above a certain level, so you would lose part of the deduction value.

A taxpayer may roll over his or her deceased spouse’s interest in a qualified retirement plan, government plan or tax sheltered annuity into IRA. This is now also available for non-spouse beneficiaries (which aids same sex couples).

You can directly roll from a plan to Roth IRA, where before you had to roll from the qualified plan to an IRA and then to a Roth IRA.

Refunds from your tax return can now be split and deposited into three different accounts.