Richard A' Melancon, CPAwww'ramcpa'com

1
Now is the Time to Plan

• Disclaimer
• Be advised that this information was not
  intended or written to be used, and cannot be
  used, for the purposes of avoiding tax-related
  penalties or promoting, marketing, or
  recommending to another party any tax-related
  matters addressed herein.

2
THE MANY FACES OF TAXES

• Estate Tax
• Gift Tax
• Sales Tax (State, Parish, City)
• Use Tax (on purchases from other States)
• Excise Tax (Fuel tax, tire disposal tax,
  telecommunications tax)
• Property Tax
• Income Tax
• Alternative Minimum Tax

3
WHY DOES GOVERNMENT IMPOSE A TAX?

• Revenue generation
• Transfer of wealth
• Social directives

4
Revenue Generation

• Government must raise money to pay for itself
  and the programs it sponsors. Examples of
  government programs include
• Congressional Office and staff
• Federal, State City Civil Service jobs
• Interstate Highway system
• Military (Army, Navy, Air Force, et.al.)
• Department of Education
• Homeland Security

5
Transfer of Wealth

• Government uses the tax system to transfer
  wealth from high-income taxpayers to lower income
  citizens. Examples include
• Tuition grants and low-interest loan programs
• Welfare and Medicaid programs
• FEMA grants
• Population-based housing assistance

6
Social Directives

• Government uses tax rules to guide social
  responsibility. Examples of social intervention
  include
• Charitable contribution deduction to encourage
  philanthropy.
• Medical insurance deductions to encourage health
  care practices.

7
Flat Tax vs. Regressive Tax
8
Flat Tax vs. Regressive Tax
9
Flat Tax vs. Regressive Tax
10
Flat Tax vs. Regressive Tax
11
T I P R A

• In May,2006, Congress passed
• Tax Increase Prevention Reconciliation Act
  (TIPRA)
• TIPRA provides
• Alternative Minimum Tax (AMT) relief
• Extends lower long-term capital gains dividend
  rates
• Permits high-income taxpayers to convert
  traditional IRAs to Roth IRAs beginning in 2010.
• Energy Tax Incentives Act of 2005
• Offers tax credits to individuals and business
  owners buying or leasing hybrid and alternative
  fuel vehicles.
• Provides tax incentives to homeowners and
  business owners making qualified energy-efficient
  property improvements.

12
T I P R A

• Katrina victims continue to enjoy tax relief on
  retirement plan distributions and increased
  mileage deductions (.32 / mile) for
  Katrina-related charitable services.
• You can still qualify for a 500 tax credit per
  person (up to 2,000 total) if you provide
  housing for displaced Katrina victims starting in
  2006.

13
Basic Tax Planning Tips

• Suspend Income
• Accelerate Expense
• Contribute to Retirement Plans
• Add to your Educational Fund
• Plan your Tax Saving Tips for Next Year

14
MAXIMIZE YOUR EXEMPTIONS

• Generally, you are taxed on your Adjusted Gross
  Income, minus a deduction for a few standard
  items. These items include
• Standard deduction or Itemized deductions
• Personal exemption
• Dependent deductions

15
Standard Deduction

• The IRS rules provide you with a built-in
  Itemized deduction called a Standard Deduction.
  This rule states that each taxpayer family is
  assumed to have incurred a minimum amount of
  expenses during the year which could be used to
  reduce their income for tax purposes.
• This year, the Standard Deduction is
• Married Filing Joint 10,300
• Married Filing Separately 5,150
• Single Filer 5,150
• Head of Household filer 7,550

16
Phase-Out for Standard Deductions

• However, exemptions decrease, or phase out
  completely, for taxpayers with adjusted gross
  income (AGI) exceeding defined thresholds
• Single Filer 150,500 - 273,000
• Joint Filer 225,750 - 348,250
• Head of Household 188,150 - 310,650
• Married Filing Separately 112,875 - 174,125

17
Claiming the Dependent Exemption

• Who Can Claim the Dependent Exemption?
• Yourself and your spouse.
• Your children under 19 years old or full-time
  students under 24 years old.
• Your parents for whom you provide more than
  one-half of their annual support (whether or not
  they live with you).
• Anyone who lives with you for whom you provide
  more than one-half of their annual support, and
  who do not claim themselves as an exemption.

18
Kiddie Tax Rules Updated

• There are new rules for the Kiddie Tax
• that take effect in 2006.
• Unearned income over 17,000 for children under
  age 18 will now be taxed at the parents top
  rates. This is less favorable to minor children
  since prior law allowed dividends and interest
  earned by children under the age of 14 to be
  taxed at generally lower rates.

19
Tax Planning Tip

• As a tax planning tip, consider shifting your
  childrens investments to tax-free securities,
  low-dividend growth stocks, or low-turnover
  mutual funds.
• Alternatively, consider the benefits of opening a
  trust fund as an alternative to holding the
  investment in the name of the child.

20
Tax Credits vs. Deductions

• Tax credits generally are more valuable than
  deductions to a taxpayer.
• Deductions reduce the amount of income on which
  the tax liability is calculated.
• Credits reduce the amount of income tax without
  regard to the taxpayers income.

21
Tax Credits vs. Deductions, CONT.

• For example, assume that a married taxpayer
• earns 35,000 and is in the 15 tax rate.
• A 2,000 deduction against a 35,000 Income
  level (33,000 AGI) will result in the following
• Tax Liability on 33,000 _at_ 15 rate 4,573
• A 2,000 credit associated with a 35,000 income
  level would result in the following
• Tax Liability on 35,000 _at_ 15 rate 4,872
• Minus Credit (2,000)
• Tax Liability 2,872

22
Child Tax Credit

• Taxpayers are allowed a Child tax credit of
  1,000 for each child under the age of 17.
  However, the credits phase out for incomes of
  75,000 for single filers and 110,000 for joint
  filers.
• Other family-related credits include the Adoption
  Credit and the Dependent Care credits

23
Education Credits

• College students may be eligible for the Hope
  Scholarship Credit or the Lifetime Learning
  Credit.
• The credits cover 20 of the first 10,000 in
  unreimbursed expenses.

24
Hybrid Fuel Vehicles

• Tax Credits are available to offset the cost of
  some new vehicles. For hybrid cars and light
  SUVs (less than 8,500 pounds), there are two
  types of credits
• Fuel economy credit worth between 400 and
  2,400, depending on the vehicles city fuel
  economy
• Conservation Credit worth between 250 and
  1,000, based on the vehicles estimated lifetime
  fuel savings.
• This credit is available to the first 60,000 cars
  sold for each automobile manufacturer.
• Alternative fuel cars may qualify for credits
  worth as much as 4,000, and heavy trucks may be
  eligible for credits worth as much as 43,000.

25
Residential Energy Efficient Credits

• You may claim up to a 500 tax credit for
  installing windows, doors, A/C Systems, and other
  fuel-efficient items that meet federal
  energy-efficiency requirements. (Certain limits
  apply).
• You may also claim a credit worth 30 of your
  costs, up to 2,000, for installing residential
  solar water heating systems.

26
What About the AMT?

• The Alternative Minimum Tax (AMT) originally was
  created to prevent people with high incomes from
  paying little or no tax. To understand the AMT,
  think of it as a separate tax system with its own
  set of rate and rules for deductions that tend to
  be less generous than the regular tax rules. For
  2006, the Tax Increase Prevention and
  Reconciliation Act temporarily raises the AMT
  exemption amounts to 42,500 for single filers
  and 62,550 for joint filers and surviving
  spouses.

27
Itemized Deductions

• ITEMIZED DEDUCTIONS
• When the total amount of itemized deductions
  exceeds the standard deduction, you will file a
  Schedule A. The standard deduction is
• Married filing jointly 10,300
• Married filing separately 5,150
• Single Filers 5,150
• Head of Household 7,550

28
Tax Strategy Bunch Your Deductions

• Bunch Your Deductions
• You may be able to bunch your deductions by
  doubling some expenses in one year and skipping
  these deductions in the next year. However, keep
  in mind that the AMT may eliminate the benefit if
  your deductions are disregarded by the AMT rules.

29
Tax Strategy Bunch Your Deductions

• Pay Estimated State Tax Early
• You can gain a larger federal deduction in 2006
  if
• You pay your state 4th quarter estimated tax
  payment by Dec 31st
• The AMT does not apply to you.

30
Tax Strategy Bunch Your Deductions

• Donate Appreciated Property
• If you donate appreciated capital gain property
  to charity, the amount of your deduction is the
  value of the property, rather than its cost. In
  addition, you are not taxed on the amount of
  appreciation. Be aware that most property
  donations should not exceed 30 of your AGI.

31
Tax Strategy Bunch Your Deductions

• Optimize Investment
• Interest Expense
• If you have capital gains or dividend income, as
  well as investment interest expenses, you can
  offset the income with investment interest
  expense.

32
What About the AMT?

• If you have numerous exemptions and deductions
  from areas such as interest paying accounts,
  second mortgages, and state and local taxes, you
  may be subject to the AMT. If you are, it is
  important to take steps now to reduce your
  exposure and plan ahead for next years tax
  return.

33
Tax Aspects of Divorce

• While Legal fees are not deductible, fees for
  tax advice related to the divorce are deductible.
  Ensure that you have separate invoices to
  support the tax advice expense.

34
Tax Aspects of Divorce

• Keep in mind that child support is not income
  and it is not a tax deductible expense.
  Conversely, alimony is taxable income and is
  considered a tax deductible expense. Consider
  how much of your settlement should be classified
  as child support vs. alimony.

35
Tax Aspects of Divorce

• During property settlement, remember that assets
  arent necessarily equal for tax purposes, even
  if they have the same value. For example
  receiving a cash settlement of 100,000 may have
  no tax effect while receiving rental property
  valued at 100,000 may incur a capital gains tax
  which reduces the inherent value of the received
  property.

36
CLAIM HOME-RELATED DEDUCTIONS

• Business Use of Home
• You may be able to take a home office deduction
  if the office is your principal place of
  business. The amount is the expense of the
  proportionate use of the home. Types of
  deductions include
• Homeowners Insurance
• Home repairs
• Utilities
• Direct improvements to the space used for
  business
• Depreciation or Rent

37
CLAIM HOME-RELATED DEDUCTIONS

• Mortgage Interest Deduction
• You may be able to deduct interest on a loan for
  your personal residences, provided your primary
  and secondary mortgages total less than 1
  million. You can also deduct interest on home
  equity loans, that dont exceed 100,000 in the
  aggregate.

38
CLAIM HOME-RELATED DEDUCTIONS

• You can deduct property taxes and prorated
  monthly portions of your points paid over the
  life of the loan for personal residences.

39
CLAIM HOME-RELATED DEDUCTIONS

• If you have a second home that is rented
  part-time, you must use the home for 14 days or
  10 of the time that it is rented (whichever is
  greater) for it to qualify as a second personal
  residence.

40
OTHER TAX PLANNING IDEAS

• Lower your own taxable income by shifting income
  to other family members.
• For example, if you are planning to receive a
  settlement and then assign the money to family
  members, consider having the settlement issued in
  the family member name directly if their tax rate
  is lower than yours or if they are willing to pay
  the taxes on the income.

41
OTHER TAX PLANNING IDEAS

• Consider your plans for the near future. How
  will marriage, divorce, a new child, retirement,
  or other events affect your year-end tax
  planning?

42
OTHER TAX PLANNING IDEAS

• Take maximum advantage your employers Section
  125 cafeteria plan, 401 (k) plan, health saving s
  account (HAS), and health reimbursement
  arrangement (HRA).

43
OTHER TAX PLANNING IDEAS

• Consider filing separately if one spouse has
  numerous itemized deductions subject to a floor
  amount.

44
OTHER TAX PLANNING IDEAS

• Repay personal debt or replace it with a home
  equity loan or a business line of credit to avoid
  nondeductible interest payments.

45
OTHER TAX PLANNING IDEAS

• Determine which type of IRA is best for you,
  establish an account before the end of the year,
  and make your contribution before the due date of
  your tax return to obtain a current year
  deduction.
• Be mindful of distributions from your IRAs.
  Before age 59 ½, withdrawals are generally
  penalized. At age 70 ½, you must withdraw
  certain minimum amounts. How much you withdraw
  should be based on an analysis of your life
  expectancy and other sources of income.

46
EDUCATION STRATEGIES

• Educational Credits are good tax strategies when
  you or a family member is considering extending
  their education. However, consider the impact
  and limitations of each credit.

47
Coverdell Education Savings Accounts (ESAs)

• Each year, you can contribute up to 2,000 to an
  ESA. Earnings grow tax deferred, and the funds
  can be used tax free for elementary and secondary
  education expenses, as well as for higher
  education costs. Also, contributions can be made
  as late as April 15th of next year.
• Contributions phase out rules apply
• Joint filers with AGIs between 190,000 and
  220,000, and
• Single filers with AGIs between 95,000 and
  110,000.

48
Coverdell Education Savings Accounts (ESAs)

• Age restrictions apply
• Contributions can be made for a beneficiary age
  18 or younger
• Distributions must be taken by age 30.
• Limits may be waived for students with special
  needs.

49
Education Credits

• One of the following tax credits may help lessen
  your current education expense
• Hope Scholarship Credit provides a tax credit
  worth up to 1,650 for college education expenses
  during a students first two years.
• Lifetime Learning Credit covers 20 of the first
  10,000 in expenses.

50
529 Plans

• The qualified tuition programs offered as
  prepaid tuition plans or college savings plans,
  are valuable tools to help you finance your
  childrens college educations. Prepaid tuition
  programs allow you to lock in todays tuition
  rates at participating private and public
  colleges and universities.

51
529 Plans

• Alternatively, college savings plans offer a
  variety of investment options, and funds can be
  used to pay for tuition and other qualified
  higher education expense at most colleges and
  universities nationwide.
• Consider whether the program you have selected
  has State tax deduction benefits.
• Most programs provide federal tax deferral for
  earnings growth and federal tax free
  distributions for educational expenses.
• Currently, tax free distribution benefits will
  expire in 2010 unless Congress extends the law.

52
INVESTMENT PLANNING DIVIDENDS

• Qualified dividends are now taxes at the same
  rates as long-term capital gains. For taxpayers
  in the 10 or 15 tax bracket, they will pay zero
  taxes on dividends from 2008 through 2010. After
  that, dividends are scheduled to be taxed as
  ordinary income.

53
INVESTMENT PLANNING CAPITAL GAINS/LOSSES

• The tax rate on capital gains for assets held
  more than one year has been reduced to 15 for
  taxpayers in the top four brackets and to 5 for
  those in the lowest tax brackets. Prior to the
  reforms, capital gains rates were either 20 or
  10.
• Capital gains are not subject to AMT.
• Short-term gains continue to be taxed as ordinary
  income, with substantially higher rates.

54
INVESTMENT PLANNING HOME SALE

• Married couples can exclude up to 500,000 of
  gain when they sell their home (250,000 for
  single filers). The home must have been the
  principal residence for at least two fo the last
  five years.
• The exclusion can be used once every two years
  and at any age.

55
TIMING THE SALE OF YOUR ASSETS

• The 15 capital gains rate only applies to
  investments held for more than 12 months. So,
  unless you are holding a really volatile stock
  and risk substantial loss, consider holding your
  investments for at least a year. Even if a stock
  price drops slightly, you may cut your taxes on
  the profit by more than half if you wait.

56
TIMING THE SALE OF YOUR ASSETS

• If you have cashed in significant gains during
  the year, review your portfolio for unrealized
  losses. Sell off any stock not likely to rebound
  and use the losses to offset your gains. If you
  end up with more losses than gain, you can use
  3,000 against ordinary income and carry
  remaining losses over the future years.

57
Timing the Sale of Your Assets

• Reviewing gains and losses before the end of the
  year helps you determine if youve paid enough
  estimated taxes to cove any gains. A year-end
  review of gains and losses can also help you plan
  for AMT. Large capital gains may force you into
  the AMT trap.
• When selling off shares of stock purchased at
  different prices and at different times, inform
  your broker beforehand that you wish to sell the
  shares with the highest basis. This will minimize
  taxable gain or maximize deductible loss.

58
Timing the Sale of Your Assets

• An investment that increases in value while
  paying no income to you will not be taxed until
  sold. By timing that sale carefully, you can
  greatly enhance your tax and financial position.
  For instance, you can wait to sell until a year
  in which your tax rate is low. Or, you can give
  the investment to a child who is older than18 and
  who will be taxed a lower rate.

59
Timing the Sale of Your Assets

• Mutual funds often make capital gain
  distributions in November and December. If you
  buy into a fund between the declaration date and
  before the distribution date, you will be taxed
  on distributed gains even through they may have
  already been reflected in your purchase price for
  the shares. Consider waiting until January to
  buy into the fund.

60
Timing the Sale of Your Assets

• You cannot control the timing of sales inside of
  a mutual fund. Therefore, consider purchasing
  mutual funds that consider certain tax-saving
  strategies. Some funds trade actively, while
  others employ tax-efficient buy-and-hold
  strategies.

61
MORE TAX-SAVING STRATEGIES

• Consider a like-kind exchange to defer gain on
  the sale of business or investment property.
• Typically, do not exchange loss property unless
  you are trying to shift losses to a future year.
• Also, consider the impact of capital gains tax
  rates on appreciated property. Since the
  favorable capital gains rates are scheduled to
  expire in 2010, you may not want to exchange
  property if you cannot sell it before 2010.

62
MORE TAX-SAVING STRATEGIES

• To avoid being tax twice, remember to count
  reinvested dividends as part of your tax basis
  when you sell stock.
• Consider your investment mix in light of the
  temporary, lower tax rates for qualifying
  dividends. The 15 rate applies for both regular
  tax and AMT purposes. This is a significant
  reduction form the ordinary income rates of 10
  to 35.
• Dividend tax rates are 15 for taxpayers in the
  top four tax brackets and 5 for those in the
  lowest tax brackets.
• Dividend tax rates are zero from 2008 2010 for
  taxpayers in the lowest two tax brackets.
• The 15 rate applies for both regular tax and AMT
  purposes.

63
RETIREMENT STRATEGIES

• Individual Retirement Accounts (IRAs)
• IRAs remain an attractive option for retirement
  savings. Through 2007, you can contribute up to
  4,000 to an IRA or combination of IRAs. And, if
  you are age 50 or older, you can contribute an
  additional 1,000 this year (or up to April 15th
  of next year).
• Earnings grow tax deferred
• Contributions to a traditional IRA may be
  deductible.

64
RETIREMENT STRATEGIES

• Keep in mind the following matter
• Distributions before that age of 59 ½ may be
  subject to a 10 federal income tax penalty in
  addition to the income tax that will be due.
• If you tap into your IRA early to pay for
  qualified higher education expenses or major
  medical expense, the 10 penalty may not apply.
• You may be able to use up to 10,000 to pay for
  your first home without incurring the 10
  penalty.

65
RETIREMENT STRATEGIES - ROTH IRAs

• Roth IRA contributions are not deductible, but
  qualified distributions are tax free. Roth IRAs
  may be a good fit for you if
• You are fairly young,
• You expect to be in a similar tax bracket when
  you retire,
• You are concerned about cash flow during
  retirement,.
• You have earned income in post retirement years
  and want to avoid the IRA minimum distribution
  rules after age 70 ½.

66
IRAs FOR CHILDREN

• If your child has earned income form outside the
  household, consider sheltering it with an IRA.
• As an example, assume that your child saves 800
  from a part-time job and invests in a Roth IRA
  that earns 8 annually. That IRA will result in
  37,000 at age 65.
• Alternatively, if that child at age 15
  contributes
• 2,000 to a Roth IRA for 10 years, the value of
  his tax-free fund at age 65 will be about
  700,000 if the annual growth rate is 8.

67
RETIREMENT STRATEGIES 401(k) PLANS

• 401 (k) plans are a form of stock bonus or
  profit sharing plan offered by thousands of
  employers. As an employee, you can contribute
  the maximum dollar amount allowed by law (15,000
  in the current year) or a maximum percentage of
  salary, as defined by the plan.
• Taxpayers age 50 and over can contribute an
  additional 5,000 in the current year.
• The contributions are tax deductible in the
  current year.
• Earnings are tax deferred until the funds are
  distributed.

68
GIFTS TO OTHERS

• In 2006, you may provide a gift valued up to
  12,000 to an individual without tax
  consequences. This is important because the
  Contributions to a 529 Plan on behalf of a
  beneficiary may be considered a gift.
• Additionally, under a special provision, you can
  combine up to five-years of 529 Plan
  contributions in one year, for a maximum gift of
  60,000 if you want to shift a portion of your
  estate to another person. This provides an
  immediate transfer of wealth, a future benefit
  for a family member, tax free educational
  benefits, and long-term security for assisting in
  college education.

69
ESTATE PLANNING

• The main purpose of Estate Planning is to direct
  how your assets will be distributed after you
  die. Secondarily, estate planning allows you to
  choose options to minimize the tax liability that
  your estate will incur.

70
ESTATE PLANNING

• Keep in mind that the Gift and Estate Tax rules
  apply to your accumulated wealth throughout your
  life and then at the time of your death. So,
  whatever you give as a gift will impact the
  calculation of your Estate taxes at the time of
  your death.

71
IMPACT OF ESTATE PLANNING
72
Maximize Your Estate Tax Exemption

• The estate tax exemption allows you to transfer
  up to 2 million tax free at death to your
  children or other heirs. A lifetime gift
  exclusion is available for gifts up to 1 million
  in value.
• An unlimited amount of your estate can pass to
  your spouse tax-free.
• This amount of estate tax exemption will reach
  3.5million in 2009.

73
Maximize Your Estate Tax Exemption

• Estate taxes are scheduled to be repealed in
  2010 and then reinstated in 2011 at pre-2001
  rates, unless Congress takes further legislative
  action.

74
ESTATE PLANNING STRATEGIES

• Currently, you can give a person a gift valued
  up to 12,000 each year without including the
  transfer in the Gift or Estate tax calculation.
  If fact, you can give an unlimited number of
  individuals a 12,000 gift each year, and your
  spouse can match those gifts as well.

75
ESTATE PLANNING STRATEGIES

• If you own stock that is temporarily depressed in
  value but with high appreciation potential,
  consider giving it to your children now.
• The gift impact (as determined by the
  date-of-gift (fair market value) will be reduced.
  
• When the stock price recovers, your children will
  not pay income tax until it is sold and may be
  subject to lower capital gains tax rates.
• The appreciated stock value will not be added to
  your estate tax base.

76
ESTATE PLANNING STRATEGIES

• If you would like to make a gift to a grandchild
  (or another person), consider making a payment to
  the providers for education (Tuition payments) or
  medical providers (dental braces, plastic
  surgery, etc.) to eliminate the gift limitations
  and estate tax base.

77
ESTATE PLANNING STRATEGIES

• Consider setting up a trust to own life
  insurance. The value of the life insurance can
  be excluded from your taxable estate. The funds
  can be used to pay for burial costs or other
  post-death expenses, including estate taxes,
  without liquidating the estate assets.

78
SUCCESSION PLANNING

• If youve spent the greater part of your life
  building up a profitable business, dont let it
  go to ruin. Implement a business succession plan.
  At a minimum, a good plan should help you
  accomplish the following during your lifetime
• Transfer control according to your wishes.
• Carry out the success of your business in an
  orderly fashion.

79
SUCCESSION PLANNING, CONT.

• Minimize the tax liability for you and your
  heirs.
• Provide economic well-being for you and your
  family after you step aside.

80
SUCCESSION PLANNING, CONT.

• Here are some ideas for
• succession planning
• Give stock as a gift to family members now so
  ownership can be transferred without incurring
  unnecessary transfer taxes
• Employ a buy-sell agreement that values your
  business for estate tax purposes. An effective
  agreement provides estate tax liquidity and gives
  your successors the means to acquire your stock.

81
SUCCESSION PLANNING, CONT.

• Create an employee stock ownership plan (ESOP)
  and sell your stock to the plan.
• You can roll over the sale proceeds into other
  investment tax free.
• Ownership can be transferred to your employees
  over time
• Your business can obtain income tax deductions
  for the plan contributions.

82
SUCCESSION PLANNING, CONT.

• Take advantage of the estate tax installment
  payment option. It allows you to pay the portion
  of your estate tax attributable to inclusion of
  your closely held business interest over a period
  o up to 14 years. Artificially low interest
  rates apply during the tax-deferral period.
  Special rules apply.

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CONCLUSION

• Early planning is the key to your success. Some
  tax breaks will expire in a few years, while
  other laws change over time. Your succession
  plans should be reviewed and updated each year to
  ensure that your goals can be met and that your
  tax liability can be minimized. When you fail to
  plan, then your plan probably will fail.

84
WEBSITE ACCESS

• Download a full copy of these slides at
• www.ramcpa.com

85

• Thank you
• for your
• time and attention.

86

• QUESTIONS?