income tax update
DESCRIPTION
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 PresentationTRANSCRIPT
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