income tax update illinois association of aggregate producers may 18, 2006 presented by eck, schafer...
TRANSCRIPT
Income Tax Update Illinois Association of Aggregate Producers
May 18, 2006
•Presented by Eck, Schafer & Punke, LLP
Canned Opening Gibberish …
• Make eye contact.
• Establish relevancy of topic to audience.
• Get audience involvement.
• Use humor as appropriate.
Tax Increase Prevention Act
• Signed into law May 2006.
• 70 billion in “net” tax cuts.
• “Trailer bill” still to come.
Alternative Minimum Tax
• Separate tax calculation.
• Eliminates benefit of many itemized deductions.
Should be called “Mandatory Maximum Tax”
Alternative Minimum Tax
• Taxpayer required to pay the higher of “AMT” or regular tax calculation.
• Effects Millions.
Alternative Minimum Tax
• Exemption bumped to $62,550 if married.
• $42,500 if single.
• For 2006 only.
• Will keep 15 million from paying “AMT”.
Dividend & Capital Gain Rate Cuts
15% and 5% rates extended.
For 2 years.
Through 2010.
Small Business Expensing
• 2006 expense limit of $108,000.
• On total additions under $ 430,000
• Expense would have dropped to $25,000 after 2007.
Section 179 Expense Limit• $25,000 limit for SUV’s
• Entity must have “trade or business” income.
• NOTE: W-2 wages count as “trade or business” income for individuals.
Small Business Expensing
• Increased expensing allowance extended for 2 years.
• Amounts are indexed.
• Through 2009.
ROTH IRAs … currently
No deduction for contributions.
Qualified distributions from a ROTH IRA are entirely tax free.
There are no “required distributions” at age 70 ½ as with a traditional IRA.
ROTH IRAs … currently
Prohibit “conversions” at $100,000 of adjusted gross income (“AGI”)
Phase out contributions beginning at $150,000 of “AGI”
ROTH IRAs … New Law
$100,000 “AGI” ceiling on conversions after 2009 is removed.
Conversions in 2010 may be taxed over 2 subsequent years.
No 10% Penalty
ROTH IRAs … Planning
Fund Maximum non-deductible IRA contributions through 2009
Convert traditional IRAs to ROTHs in 2010
Avoid tax on all future appreciation.
Kiddie Tax
• Requires “unearned income” (int, div) of children in excess of $1,700 to be taxed at parents’ tax rate.
• Minimizes the opportunity for “income shifting”.
Kiddie Tax
• Under old law this applied if child was under age 14 at year end.
• Under new law it applies if child is under age 18 at year end.
“Trailer” Bill … may extend
• State and local sales tax deduction.
• Teacher’s classroom expense deduction.
• R&D provisions.
• Employment tax credits.
Other Changes in 2006 …
• IRA Deduction Increased.
• Deduct up to $4,000.
• $5,000 if age 50 or over.
• Phase outs begin at $75,000 or $150,000 if you or your spouse are covered under a qualified retirement plan.
Other Changes in 2006 …
Domestic Production Activities Deduction.
• Deduct 3% of Qualified Production activity Income.
• Increases to 6% in 2007-2009.
• Increases to 9% in later years.
Domestic Production Activities Deduction
• Deduction is based on the lesser of “Qualified Production Activity Income” or “Taxable income”.
• Deduction can’t exceed 50% of W-2 wages paid.
What Qualifies …
• Sale of tangible personal property, computer software,
certain sound recordings, Manufactured, Produced, Grown or Extracted in the U.S.
• Construction activities (erection or substantial renovation of real property) in the U.S.
• Architectural and Engineering services related to construction activities in the U.S.
• Farming and raising livestock will qualify.
“Real Property” includes …
• Residential and commercial buildings.
• Land improvements.
• Infrastructure.
“Infrastructure” includes …
• Roads
• Power Lines
• Water Systems
• Sewers
• Sidewalks
Domestic Production Activities Deduction
• Sole Proprietors, S Corps, C Corps, Partnerships, LLC’s can qualify.
• Reported on Form 8903.
IL Manufacturer’s Purchase Credit
Earn the credit on the purchase of exempt manufacturing machinery & equipment.
Credit equals 50% of the tax that would have been paid.
IL Manufacturer’s Purchase Credit
Use the credit against sales or use tax paid on production related tangible personal property.
Used or consumed in a production related process.
Unused credit may be carried forward 2 years.
Examples … include
Fuel, oil, lubricants & cleaners.
Hand tools, Protective apparel & safety equipment.
IL Manufacturer’s Purchase Credit
June 30th deadline for claiming credit on all 2005 purchases.
File form ST-16 to establish the amount of your credit.
IL Manufacturer’s Purchase Credit
“Spend” your credit on current taxable purchases.
Fill out form ST-16-C with seller.
Seller keeps top half.
You keep bottom half.
IL Manufacturer’s Purchase Credit
June 30th deadline for reporting credit “spent” in the prior year.
File form ST-17 to report the total amount of credit used.
• Use info from all prior yr. Form ST-16-C’s
Basic Estate Planning
• Each individual currently (2006-2008) has a $2.0 million estate tax exclusion.
• In theory a married couple should be able to have $4.0 Million in assets and not pay estate tax.
Basic Estate Planning
• Need to review your wills to make sure both spouses will take advantage of their 2.0 million dollar exemption.
• This is often accomplished with a “Credit Shelter Trust”.
• Owning everything as “JTWROS” can work against you.
Estate Planning Techniques
• Use Annual Gift Exclusion Amount.
• You may gift up to $12,000 per person for 2006 ($24,000 if married) without gift or estate tax liability.
Estate Planning Techniques
• Payment of Tuition made directly to school does not count towards $12,000 annual gift limit.
• Grade School, High School & College Tuition all qualify.
TAX TIP – Practice working this fact into conversation with wealthy relatives.
• Payment of Medical expense made directly to hospital or insurance provider, on behalf of another, does not count towards $12,000 annual gift limit.
Summary
• Numerous 2006 changes provide opportunities.
• Roth IRA changes.
• U.S. Production Activities Deduction.
• Illinois MPC.
•Eck, Schafer & Punke, LLP