Money Matters Radio Show #820

October 8, 2006

Focus – Year end tax planning. My guests were CPA’s Sheldon Donner and Kathy Gottlieb, who for the past 16 years have served as the tax advisors for the Money Matters radio show. Sheldon and Kathy are partners in Donner Weiser and Associates – see their web site www.dwacpa.com.

A copy of their year end client letter is available free by e-mail – send a request to them dwa@dwacpa.com. They will also be glad to answer general questions by e-mail at no charge.

Things to consider for year end tax planning. The new tax law passed in May 2006 establishes a higher AMT exemption, extends the 15% capital gains and dividend rate (5% if you're in the lower tax brackets), allows anyone to convert to a Roth IRA in 2010 and beyond, and raises the age limit for "kiddie tax" to 18.

Higher Contribution Limits for IRA's and Employers' Qualified Plans —The Act makes permanent the expanded IRA contribution limits, expanded 401(k) and 403(b) pre-tax contribution maximums, and “catch-up” contributions for older savers. These savings incentives would have been eliminated after 2010, returning to the lower levels of $2,000 for IRAs and $10,500 for 401(k)s and 403(b)s, with no catch-up contributions available.

The new law eliminates the 10% early-withdrawal tax on distributions from a governmental defined-benefit pension plan to qualified public safety employees (including, but not limited to, police, fire, and EMT employees) who separate from service after age 50. This provision of the new law is effective immediately, but only for any distributions made after Aug. 17.

New charitable recordkeeping requirements for cash contributions Speaking of charitable contributions, they have been tightened up again in the new law. Not long ago, there were substantial changes to the recordkeeping requirements and documentation required when a vehicle was donated. Now the rules have been changed for cash contributions as well. Under the new law, taxpayers must keep records of all cash donations. Period. Individuals must show a receipt from the charity, a canceled check, or a credit card statement to prove their donation. No tax deduction will be allowed if the taxpayer cannot provide any supporting documentation. No longer will cash contributions be allowed without a receipt or cancelled check. Those of you making your charitable contributions in cash had better change your ways immediately.

New non-cash contribution rules: Congress didn't stop with cash contributions. The new law also toughens the rules for non-cash donations. Donated items, such as clothing and household goods, must be in "good condition." If the items are not in "good condition," no deduction is allowed. Alas, the new law does not define the term "good condition." What should you do if you intend to make contributions of clothing or household goods? It might be a good idea to take pictures of these items before packing them up and taking them to your local charity.

Look for possible favored treatment of stock you own inside your 401k. Potentially, your company stock can get preferred tax treatment. You will owe income tax only on the cost basis of your shares (the amount they were worth when you acquired them). Later, when you sell them, the appreciated amount will be subject to capital gains tax rates. For people in the 28 percent tax bracket, the long-term capital gains tax rate is 15 percent; for those in the 15 percent bracket, the rate is 5 percent. This works for retirees over 59 and a half and check with your CPA before you do this to make sure you are doing everything correctly. Just don’t overlook this potential tax savings.

Look out for bad tax moves such as:

• Donating something you have owned for less than one year. You won’t get the full tax benefit.
• Look out for wash sale rules – you could end up not being allowed the loss on the investment.
• People who forget the required minimum distributions on IRA’s, the penalties are enormous – so be vigilant on this.

For other questions, e-mail our tax experts dwa@dwacpa.com. And I urge you to also let them know you appreciate all they do to help people without compensation. Sheldon and Kathy have been offering their time on the air and e-mail guidance without charge to WSB listeners and we appreciate that devotion!