INTERESTED IN JOINING OUR
If your CPA firm provides tax planning and preparation services to young health
care professionals, and you’d like to find out more about The MDTAXES
Network, please give us a call at
(800) 471-0045 or
click here for more information.
RECENT TAX LAW CHANGES
Andrew D. Schwartz, CPA
On May 17, President Bush signed the Tax Increase Prevention and
Reconciliation Act into law. While this $70 billion tax cut package
extends certain expiring tax breaks, it also includes a few provisions that
increase your tax burden.
Let's take a look at some of the ways this Tax Act might save you some
Reduced Tax Rate on Capital Gains and Dividends Extended Through 2010:
Currently, the maximum tax rate on long-term capital gains (assets held
for more than one year before being sold) and corporate dividends is 15%.
For people in the lowest two tax brackets, the rate is 5% through 2007, and
then will be 0% in 2008. Originally scheduled to rise in 2009, the 15%
and 0% tax rates on long-term capital gains and corporate dividends will now
remain in place through 2010.
A Little AMT Relief Through 2006: Due to a variety of factors,
more and more middle income taxpayers are being hit with the Alternative
Minimum Tax (AMT) each year. And for 2006, the AMT exemption, which
helps minimize the impact of this tax on the middle class, was going to fall
from $58,000 to $45,000 for married couples, and from $40,250 to $33,750 for
single individuals. This Tax Act restored the AMT exemption to $62,550
($42,500 for single taxpayers) for 2006 only.
Increased Section 179 Deduction Available Through 2009: Every
year, small business owners can elect to write off the business equipment
they purchase instead of depreciating the cost of an asset over its useful
life of 5 or 7 years. Effective 2008, the maximum Section 179
deduction was slated to decrease to just $25,000 from its current limit of
$108,000 (in 2006). This Tax Act extended the increased Section 179
limits through 2009.
Like all other tax law changes, This Tax Act contains a few revenue raising
items as well. Let's take a look at some ways this tax package might
increase your tax burden:
"Kiddie Tax" Age Increased to 17: The Kiddie Tax, introduced as
part of the massive Tax Reform Act of 1986, celebrates its twentieth
birthday in 2006 by becoming broader. Basically, any unearned income
above a certain threshold earned by a child under the age of 14 is taxed at
the parent's tax rate. Thanks to the recent Tax Act, the Kiddie Tax
now applies to children who are 17 or younger and earn more than $1,700 (in
2006) in interest, dividends, capital gains, and other non-wage income.
This change to the rules might make 529 Plans look even more attractive.
Income Limitation for Roth Conversions Disappears in 2010: Under
the current rules, you can only convert your IRAs to a Roth IRA if your
income is less than $100,000. The same threshold of $100,000 applies
to single individuals and to married couples alike. Starting in 2010,
the income limitation disappears, and anyone can convert their IRAs to a
Roth IRA. For 2010 Roth conversions, you'll also have the option to
pay the taxes due in 2010, or to spread the tax liability over two years
starting in 2011.
Good Tax Planning Gone Bad:
Tax planning continues to become more challenging. Even though you
need to plan based on the current set of rules in place, future tax law
changes might cause even the most prudent planning to backfire.
Let's look at an example of good tax planning gone bad. What if you
chose not to go with a 529 Plan to save for your child's college education,
and instead purchased investments in the child's name with the expectation
of selling those investments in 2008. Based on the pre-May 17th rules,
no capital gains taxes would have been due provided your child is at least
14 years of age that year.
Seems like great tax planning, right? Well, since the Kiddie Tax now
applies to children through the age of 17, those gains will now be taxed at
your rate of 15% unless your child is at least 18 years old.
So what's the solution? When planning, make sure to include a variable
in your calculations that reflects the risk of the tax rules changing.
The longer term your planning, the more likely that either the rates or the
rules will change, greatly impacting the taxes you ultimately end up paying.
CLOCK IS TICKING FOR HYBRID CAR TAX
Andrew D. Schwartz, CPA
With gas prices hovering at $3.00 per gallon, drivers have already begun to
migrate from gas guzzling SUVs to fuel efficient hybrids. As a sign of the
times, GM recently announced that they plan to discontinue the namesake of
the "Hummer deduction" in favor of the smaller Humvee.
In addition to getting better gas mileage, purchasers of hybrids are also
rewarded with a sizeable tax credit through 2010. The new hybrid car
tax credit replaces the $2,000 "Clean Fuel" deduction that was in place
through the end of 2005. Please note that this credit is only
available in connection with the purchase of a new hybrid vehicle, so
leasing one or buying
a used hybrid vehicle won't qualify.
The hybrid credit is based on two components. First there is the Fuel
Economy credit that compares the fuel efficiency of each vehicle with 2002
models. Then there is the Conservation credit which is calculated on
the projected fuel savings of the vehicle over its anticipated life.
The hybrid car tax credit you'll claim is the sum of these two credits.
According to the information available on the
IRS' website, below are the
vehicles currently eligible for this tax credit:
Chevy Silverado 2WD Hybrid Pickup - 2006 & 2007
Chevy Silverado 4WD Hybrid Pickup - 2006 & 2007
|Ford Escape Hybrid Front WD - 2006
|Ford Escape Hybrid 4 WD - 2006
GMC Sierra 2WD Hybrid Pickup - 2006 & 2007
GMC Sierra 4WD Hybrid Pickup - 2006 & 2007
Honda Civic Hybrid CVT - 2006
Honda Civic Hybrid SUVEL - 2005
Honda Insight CVT - 2005 & 2006
Honda Accord Hybrid AT - 2006
$1,300 or $650
Honda Accord Hybrid AT - 2005
|Lexus GS 450h - 2007
|Lexus RX400h 2WD or 4WD - 2006
|Mercury Mariner Hybrid 4 WD - 2006
Saturn Vue Grren Line - 2004
|Toyota Camry Hybrid - 2007
|Toyota Highlander Hybrid - 2006
|Toyota Prius - 2005 & 2006
Even though the hybrid
credit runs though 2010, the credit won't be available for long on many
popular models. To level the playing field for Ford
and other newcomers into the hybrid market, the allowable tax
credit starts to disappear for a manufacturer once they have sold
60,000 hybrid vehicles, as follows:
The full credit is
allowed through the end of the quarter following the quarter
during which the manufacturer sells its 60,000th hybrid vehicle.
The credit is cut in
half for the subsequent two quarters.
The credit is then cut
to a quarter of the original credit for the subsequent two
No credit is allowed
for vehicles purchased from that manufacturer thereafter.
Efficient Alternatives Lose to the AMT
The good news is that
the new hybrid car tax credit is much more valuable then the
$2,000 Clean Fuel deduction. That's because a credit
provides you with a dollar-for-dollar reduction in the taxes you
The problem is that the "Alternative Motor Vehicle Credit" won't
benefit you once the Alternative Minimum Tax (AMT) kicks in.
And with more and more taxpayers paying this tax each year,
there's a good chance you were hit by the AMT last year.
Check out line 45 of your 2005 Form 1040 to see if you paid this
tax last year. If there is an amount greater than zero on
that line, you're in the AMT.
Unlike other tax
breaks, you're generally not allowed to carry forward this unused
credit to a subsequent year. So if you're hit by the AMT and
can't use the credit the year you purchase the vehicle, you lose
Is there any way around
the AMT? Yes, if you purchase the hybrid through your
business, you get to carry back the unused "general business credit" to the
prior year, and then carry it forward for twenty years.
There's a pretty good chance that one year during this twenty-two
year window you'll avoid the AMT and be eligible to claim this tax
What Does Green Mean
The color green
represents different things to different people. To some it
signifies being environmentally friendly. To others, green
interpretation, a hybrid is environmentally friendly, will save
you some money at the pump, and may even get you a tax refund from
the IRS. Plus, your friends and neighbors driving around in
their huge SUVs might even be a little green with envy when they
see you in your new hybrid vehicle.
TAX AND FINANCIAL PLANNING CALENDAR FOR
Saving and Investing
- For 2005, the standard deduction for a single individual is
$5,000 and for a married couple is $10,000. A person will benefit by
itemizing once allowable deductions exceed the applicable standard deduction.
Itemized deductions include state and local income taxes (or sales taxes), real estate taxes,
mortgage interest, charitable contributions, and unreimbursed employee business
- For 2005,
the personal exemption is $3,200. Individuals will claim a
personal deduction for themselves, their spouse, and their dependents.
- The maximum earnings subject to social security taxes is $94,200
for 2006, up from $90,000 in 2005.
- The standard mileage rate is $.485 per business mile as of
September 1, 2005 (after being $.405 per mile through August 31, 2005), and
will then be $.445 per mile for 2006.
- The maximum annual contribution into a 401(k) plan or a
403(b) plan is $15,000 for 2006.
And if you'll be 50 or older by December 31, 2006, you can contribute an extra
$5,000 into your 401(k) or 403(b) account this year.
- The maximum annual contribution to your IRA is $4,000 for
2006. And if you turn 50 by December 31st, you can contribute an extra $1,000 for 2006. You have until April 15, 2007 to make your
2006 IRA contributions.
copyright - 2006 - CPANiche, LLC
Tax and financial planning calendar for June, 2006
our CPAs everyday on
The MDTAXES Message Board
Join our Live Tax Chat on the first Wednesday of each month at 9 pm
Need help with your practice's MEDICAL
Find out more about,
an innovative and proven web-based medical billing and EMR provider.