Dear Clients and Friends:

As in years past, more than one new tax act and several clarifications to the existing tax code became law.  There is neither room nor time to enumerate them in this letter, nor are the changes relevant to everyone.  However, we would like to highlight a few of those changes which may pertain to you.

For the 2006 tax year, the key word seems to be "compliance”.  Congress has become concerned about the perceived "tax gap" between income reported and that which is believed should be reported. Toward the elimination of that "tax gap", additional audits of small businesses have been approved and IRS is mandated to close that "tax gap." Those taxpayers that do come under closer examination can expect to be required to substantiate and document more than they have had to do in the past. For example, the use of automobiles, home computers and cell phones require the maintenance of logs or journals documenting business usage. A paid cell phone bill will not be sufficient to claim a business deduction.

Similar documentation will be required from individuals claiming charitable deductions. After August 17, 2006, no deduction will be allowed for contributions of clothing or household items unless the items are in good condition or better. Starting in 2007 gifts under $500 need to be evidenced by receipt, cancelled check, or properly filled in diary. An appraisal is required for the gift of non-cash items (or group of similar items) over $5,000.

The Pension Protection Act of 2006 was the first major reform of pension tax law in thirty years.  Most provisions are too lengthy for this letter.  However, there was one interesting provision that may catch media attention.  A taxpayer who is required to take minimum distributions from an IRA may make provisions to have this amount paid directly to a qualified charity, without the necessity of first reporting the distribution on the tax return and then taking a charitable deduction for the amount. This will benefit those taxpayers who wish to make a charitable donation but do not itemize. Unfortunately, many institutional IRA trustees were not prepared to handle the paperwork for 2006. However, this remains an option for 2007 for those who wish to use this provision.

The Pension and Protection Act also extended the Savers Credit for elective contributions to qualified plans by low income individuals. The act also made permanent increases in IRA contribution limits including the ability to make catch-up contributions. IRA limits for 2006 are $4000, and $1000 as a catch-up contribution.

The Tax Increase Prevention and Reconciliation Act, signed by President Bush on May 17, 2006 extended the 15% capital gains cap on long term capital gain, and increased the Alternative Minimum Tax Exemption amount for unmarried taxpayers from $40,250 to $42, 250, and for married taxpayers from $58,000 TO $62,550.

The number one long term tax "tip" is to become familiar with the Alternative Minimum Tax (AMT) which was first enacted in 1969 to insure that taxpayers who take advantage of tax shelters must still pay at least some tax. The provisions of this tax are fairly complicated, and results can often be surprising.   Even those who do not use what would normally be considered tax shelters, can be caught off guard.  For example, most people do not consider borrowing on the equity of their home to be a tax shelter; yet, home equity interest is not deductible for AMT purposes. Even professional tax planners are advised to "crunch" the numbers to avoid surprises.

The American Dream continues to be home ownership.  The deduction for interest paid on a home mortgage remains the most commonly used deduction for those taxpayers who itemize.  However, taxpayers must remain aware that not all interest is eligible for deduction. Taxpayers must separate and clearly identify the nature of interest paid.  Personal interest, such as charges for credit cards or personal use vehicles, is not deductible. Interest paid to acquire, construct, or substantially improve a qualified residence is deductible.

Refinanced debt remains acquisition debt only to the extent it does not exceed the principal amount of the acquisition debt immediately before refinancing. Due to past years of skyrocketing real estate prices, lending institutions often made loans at ever increasing amounts.  When assembling materials for tax preparation, the taxpayer must be able to separate the interest paid on acquisition debt from amounts refinanced over and above the acquisition debt. The bad news is that a portion of that refinanced debt will not qualify for deduction.  Also, interest on home equity debt of over $100,000 is considered personal interest and not deductible. 

The Tax Relief and Healthcare Act of 2006 extended the deduction for qualified tuition and related expenses.

Also extended is the deduction for state and local sales taxes.  The above the line $250 deduction for expenses paid personally by teachers and other school professionals for classroom supplies is also extended.

 The Energy Policy Act of 2005 created a $500 credit for energy-efficient improvements to a personal residence.  However, no more than $200 of the credit can be attributable to expenses for windows. There are other provisions for business owners with strict certification procedures required to be followed.

 The Energy Tax Incentive Act of 2005 provided for a credit for alternative fuel motor vehicles and is still available with limitations for 2006 and 2007. 

 In accordance with the concern that Congress has expressed over non-reporting of income, The Treasury Department has put new teeth in the requirement that all American taxpayers must disclose foreign bank accounts or financial holdings. Congress has become aware that the number of individuals using offshore bank accounts to engage in abusive tax scams has increased significantly in recent years. As a result, The American Jobs Creation Act of 2004 added an additional civil penalty of up to $10,000 that may be imposed on any person who violates the requirement to report foreign financial holdings, without regard to willfulness. US persons who have a financial interest or signature over bank, securities, or other financial accounts in a foreign country which exceed $10,000 in aggregate value at any time in a calendar year must file Form TD F 90-22.1.  Furthermore, they must disclose that they had an interest in or signature or other authority over such an account (regardless of value) on their federal income tax return.

These are merely examples.  However, our top tax "tip" for 2006 and years forward is to maintain your records in an orderly and detailed manner. Organization can save you money, time and stress when it is time to prepare your tax return. 

In closing, our words of advice to you are: ORGANIZE your records in a timely manner, DOCUMENT your deductions, and PLAN wisely for possible tax situations.

                        Very truly yours,

                  John Van Vorst

 JVV:djr