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Income Tax Update Illinois Association of Aggregate Producers May 18, 2006 •Presented by Eck, Schafer & Punke, LLP

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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. - PowerPoint PPT Presentation

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Page 1: Income Tax Update

Income Tax Update Illinois Association of Aggregate Producers

May 18, 2006

•Presented by Eck, Schafer & Punke, LLP

Page 2: Income Tax Update

Canned Opening Gibberish …

• Make eye contact.

• Establish relevancy of topic to audience.

• Get audience involvement.

• Use humor as appropriate.

Page 3: Income Tax Update

Tax Increase Prevention Act

• Signed into law May 2006.

• 70 billion in “net” tax cuts.

• “Trailer bill” still to come.

Page 4: Income Tax Update

Alternative Minimum Tax

• Separate tax calculation.

• Eliminates benefit of many itemized deductions.

Should be called “Mandatory Maximum Tax”

Page 5: Income Tax Update

Alternative Minimum Tax

• Taxpayer required to pay the higher of “AMT” or regular tax calculation.

• Effects Millions.

Page 6: Income Tax Update

Alternative Minimum Tax

• Exemption bumped to $62,550 if married.

• $42,500 if single.

• For 2006 only.

• Will keep 15 million from paying “AMT”.

Page 7: Income Tax Update

Dividend & Capital Gain Rate Cuts

15% and 5% rates extended.

For 2 years.

Through 2010.

Page 8: Income Tax Update

Small Business Expensing

• 2006 expense limit of $108,000.

• On total additions under $ 430,000

• Expense would have dropped to $25,000 after 2007.

Page 9: Income Tax Update

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.

Page 10: Income Tax Update

Small Business Expensing

• Increased expensing allowance extended for 2 years.

• Amounts are indexed.

• Through 2009.

Page 11: Income Tax Update

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.

Page 12: Income Tax Update

ROTH IRAs … currently

Prohibit “conversions” at $100,000 of adjusted gross income (“AGI”)

Phase out contributions beginning at $150,000 of “AGI”

Page 13: Income Tax Update

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

Page 14: Income Tax Update

ROTH IRAs … Planning

Fund Maximum non-deductible IRA contributions through 2009

Convert traditional IRAs to ROTHs in 2010

Avoid tax on all future appreciation.

Page 15: Income Tax Update

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”.

Page 16: Income Tax Update

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.

Page 17: Income Tax Update

“Trailer” Bill … may extend

• State and local sales tax deduction.

• Teacher’s classroom expense deduction.

• R&D provisions.

• Employment tax credits.

Page 18: Income Tax Update

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.

Page 19: Income Tax Update

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.

Page 20: Income Tax Update

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.

Page 21: Income Tax Update

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.

Page 22: Income Tax Update

“Real Property” includes …

• Residential and commercial buildings.

• Land improvements.

• Infrastructure.

Page 23: Income Tax Update

“Infrastructure” includes …

• Roads

• Power Lines

• Water Systems

• Sewers

• Sidewalks

Page 24: Income Tax Update

Domestic Production Activities Deduction

• Sole Proprietors, S Corps, C Corps, Partnerships, LLC’s can qualify.

• Reported on Form 8903.

Page 25: Income Tax Update
Page 26: Income Tax Update

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.

Page 27: Income Tax Update

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.

Page 28: Income Tax Update

Examples … include

Fuel, oil, lubricants & cleaners.

Hand tools, Protective apparel & safety equipment.

Page 29: Income Tax Update

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.

Page 30: Income Tax Update
Page 31: Income Tax Update

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.

Page 32: Income Tax Update
Page 33: Income Tax Update

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

Page 34: Income Tax Update
Page 35: Income Tax Update

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.

Page 36: Income Tax Update

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.

Page 37: Income Tax Update

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.

Page 38: Income Tax Update

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.

Page 39: Income Tax Update

• Payment of Medical expense made directly to hospital or insurance provider, on behalf of another, does not count towards $12,000 annual gift limit.

Page 40: Income Tax Update

Summary

• Numerous 2006 changes provide opportunities.

• Roth IRA changes.

• U.S. Production Activities Deduction.

• Illinois MPC.

•Eck, Schafer & Punke, LLP