Winter 2006 Vol. XVI No. 2

Winter Notes:

This edition of our newsletter focuses on recent tax law changes plus a financial planning topic. Periodically we'll take inventory of client questions and try to address the most prevalent questions here. Lately, cutting taxes and saving for college expenses have been the most dominant themes.

I am pleased that so many individuals and business owners have visited with us this season to take advantage of year-end tax planning opportunities. This 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 came in it was certainly time well spent - for those of you who have not yet visited, there is still time to make an appointment. As we head into what promises to be a busy and productive season, I'd like to thank everyone for the many client referrals during the summer and fall. They are very much appreciated!

The Basics of Section 529 College Savings Plans:

College expenses are increasing faster than the average paycheck, but Section 529 savings plans can narrow the gap. These plans provide numerous advantages and have few disadvantages compared with other options. They offer tax savings, estate planning benefits, high contribution limits and no income limitations.

Because 529 plans are relatively new, it is difficult to determine the absolute best performing plans using long-term investment performance. However, these plans invest in mutual funds whose long term performance records are available from reputable rating services such as Morningstar and Lipper. These ratings can provide a long-term, risk adjusted performance measure that can be used to compare 529 savings plans.

In qualified plans covered by Section 529 of the Internal Revenue Code, amounts contributed grow tax-free and withdrawals used to pay for qualified educational expenses usually are free of taxes. If the child doesn't go to college, the funds generally can be used to pay for another family member.

Section 529 authorizes two types of plan: prepaid tuition plans and savings plans. Generally, state-sponsored prepaid tuition plans offer tuition contracts that allow contributors to lock in the cost of tuition and fees at an in-state public college or university. Unlike these prepaid tuition plans, most 529 savings plans do not offer any guarantees. The 529 program manager, usually a large mutual fund company, collects contributions and invests them in funds or other financial instruments.

An important factor which merits your consideration is whether to invest in a 529 plan affiliated with your home state or a plan based in another state. Owners of an out-of-state 529 account might lose a state income tax deduction or tax credit for contributions to the account. However, in our experience, the income tax deduction is so minor that we advise prospective investors to consider the mutual fund company's reputation, the fund's track record & investment fees, the ability to customize the portfolio and other pertinent investment factors.

Everyone who invests in a 529 plan shares a common goal: obtaining good investment performance at a fair expense. Most 529 account owners are investing for the long-term and, as part of their overall decision-making process, would find it useful to compare the long-term performance history of various 529 plans. Because of the newness of most 529 plans, long-term performance measures are not commonly available. Until they are, using the Morningstar ratings will help you to identify 529 plans that will allow you to achieve your goals.

Spotlight on Taxes:

Earlier this year our newsletter highlighted some tax changes that the President signed on May 17. The Tax Increase Prevention and Reconciliation Act (TIPRA) impacts a broad cross section of taxpayers and contains $70 billion in tax cuts. Here are several key changes:

• Alternative Minimum Tax relief: If you're one of the many taxpayers who are subject to the alternative minimum tax (AMT), you will be pleased to know that the new law increases the AMT exemption amounts for tax years beginning in 2006.
• Increased Age Limit for Kiddie Tax: The age of minor children whose investment income is subject to tax at their parent's higher rate is increased from under age 14 to under age 18. This means, starting in 2006, that unearned investment income above $1,700 of a child under age 18 is exposed to taxation at the parent's marginal income tax rate.
• Tax-free IRA Distributions to Charities: Under the new law, taxpayers age 70 1/2 or older can make tax-free distributions from a traditional IRA or Roth IRA of up to $100,000 for charitable purposes in 2006 and 2007. To qualify for tax-free treatment, the distribution must be made directly from the IRA trustee to the charity.
• Savings Incentives: Starting in 2008, a higher dollar amount for IRA contributions will be in effect. The usual $4,000 IRA contribution limit will increase to $5,000 in 2008. Also, the catch-up contribution for older workers increases from $500 to $1,000 this year!
• Other Miscellaneous Issues: The IRS standard mileage rate for 2006 is 44.5 cents per mile. Beginning in 2007, the standard mileage rate for business use of a car will be 48.5 cents per mile.

Consumers who buy environmentally friendly hybrid cars and SUV's may be eligible for an income tax credit of up to $3,400. A tax credit directly cuts your tax bill, reducing the tax you owe, dollar-for-dollar. The exact amount depends on the make and model of the hybrid and the number of vehicles manufactured. It may only be claimed by the original owner of a new, qualifying hybrid vehicle and does not apply if you purchase a used hybrid.

On September 1, the Internal Revenue Service announced the repeal and refund of a telephone tax dating back to the Spanish-American war. These amounts, which range from $30 to $60, will enable millions of individual taxpayers to request the telephone tax refund without having to dig through old phone bills. In general, anyone who paid the telephone tax will get the refund on their 2006 federal income tax return. The standard amounts are based on the total number of exemptions claimed on the 2006 federal income tax return. 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 will be eligible for the maximum standard amount of $60. (Refer to new IRS Form 8913).

The personal exemption for higher-income taxpayers has been partially restored. The maximum reduction for the $3,300 personal exemption for 2006 is $2,200. Thus the minimum exemption allowed (after the phase out) is $1,100.

Expired individual tax benefits include the now defunct educator expense deduction, the tuition & fees deduction, the deduction for general sales taxes, and the D.C first-time home buyer credit.

Closing:

For 2007 we return virtually our entire staff. On board, on the corporate side, are Ellen and Scott, two of my long-time associates. On the individual side, Jeff and Marilee will assist with the preparation of individual tax returns. Additionally, Becky and Marilee are our resident Quickbooks professionals. This team of dedicated professionals work quietly behind the scenes to ensure swift completion of our finished product.

I'd like to wish everyone a happy holiday season... we look forward to seeing each of you shortly.

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