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2006 Tax News

Tax News and Tips

  Hybrid Car Dealers, Buyers and Manufacturers: Guidance on New Tax Credit - The IRS and the Treasury Department have provided guidance on a process that manufacturers can use to certify the amount of the tax credit that can be claimed by the purchaser of a hybrid or lean-burn vehicle. Taxpayers who are purchasing these vehicles can then rely on the manufacturer’s certification when they claim the credit on their tax returns.

 A new tax credit for hybrid vehicles, which was enacted by the Energy Policy Act of 2005, can be worth as much as $3,400 for those who purchase the most fuel-efficient vehicles. Many currently available hybrid vehicles qualify for the
credit because they have drive trains powered by both an internal combustion engine and a rechargeable battery. The IRS guidance also provides a similar certification process for advanced lean-burn technology vehicles.

Taxpayers can only claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid and advanced lean-burn technology motor vehicle. For that reason, consumers seeking the credit may want to buy early in the year.

(Click here to read the guidance provided in IRS Notice 2006-9)

  Heavy Equipment Dealers: The IRS Eases Rules.
Thanks to new guidelines, certain heavy equipment dealers can now approximate the cost of their equipment parts
inventory using the replacement cost method of accounting. These new guidelines apply to heavy equipment dealers who are authorized to sell (or sell and lease) new equipment by agreements with one or more manufacturers or distributors.

Dealers already using the replacement method of valuing their equipment parts inventory may continue to do so without applying for a change of accounting method. Those wishing to change to the replacement cost method for tax years
ending on or after April 30, 2005 must file an IRS form.

  Are You Subject to the Alternative Minimum Tax (AMT)? If you're wondering whether you will be hit by the AMT, the IRS has developed an online calculator that might be able to answer that question. Taxpayers can use the "AMT Assistant" anonymously, answer a few questions, and quickly find out if they might be subject to the tax. To access the calculator, click here.

  Donate a Car Last Year to Charity? The IRS Issues Some Warnings. The general rules: For cars donated to charity after January 1, 2005, the contribution deduction is limited to the gross proceeds from the sale of the
car by the organization. For donations worth $500 or more, a taxpayer must attach the charity’s written acknowledgment of the proceeds to his or her tax return.

In an exception to the general rule, if a charity sells a donated car to a needy individual for far below the fair market value (FMV) the taxpayer's deduction is not limited to the gross proceeds.

The IRS is aware that these rules have given rise to some misunderstanding and questionable practices. To clarify, the tax agency recently issued two announcements:

1. A taxpayer can take a charitable contribution deduction for the year the vehicle is transferred to the charity, even if the vehicle is not sold until a later year.

2. The IRS will not treat donated vehicles sold at auction as being sold at prices significantly below fair market value. Therefore, those sales do not qualify for the exception.

This change became necessary because some charities were selling vehicles at auction and claiming the cars were sold to needy individuals at far below FMV, thus triggering the exception. That meant the donors did not have to limit their deductions to the proceeds of the sale.

According to the IRS, if a car is sold at auction, the donor can only claim a deduction greater than $500 if the proceeds of the sale exceed that amount and the charity’s written acknowledgment is attached to the tax return.

 Small Business Employers: A Step Toward Simplification - Beginning January 1, 2006, certain small business owners will be relieved of filing quarterly employment returns

(Form 941) and instead be allowed to file only an annual return, the new Form 944.

A business may qualify if its estimated annual employment tax liability is $1,000 or less —  which equates to a maximum of about $4,000 in wages.

The IRS will start notifying eligible employers next month and information should be available on the IRS Web site soon. If you believe you are eligible but don't receive a notice, contact the IRS before April 1 at 1-800-829-0115.


HERO ACT - Increased IRA Deductions for Armed Forces -   Appropriately enough, President Bush signed the Heroes Earned Retirement Opportunities Act of 2006 — the HERO Act, for short — into law on Memorial Day of this year. This new federal law expands retirement planning benefits for members of our armed forces currently serving in combat zones.
    Briefly stated, an individual is permitted to contribute to a traditional IRA or Roth IRA only if he or she has compensation (such as salary from a job) during the year. For the 2006 tax year, the limit on contributions is the lesser of $4,000 or the annual compensation. A taxpayer who is age 50 or older can make an extra $1,000 "catch-up" contribution.
The contributions to the traditional IRA may be fully or partially deductible depending on the taxpayer’s income and whether he or she actively participates in an employer-sponsored retirement plan. Roth IRA contributions are never tax deductible.
Under prior tax law, combat pay did not count as "compensation" for this purpose. As a result, soldiers were often unable to make IRA contributions. Now the HERO Act has come to the rescue.
The new law includes combat pay under the definition of compensation for IRA contribution purposes. This change is retroactive to tax years beginning after 2003. Thus, certain individuals have a unique opportunity to make retirement contributions for tax years that are closed.
Of course, the money earned as combat pay in prior years may have already been spent. This opens up a potential tax strategy for parents and grandparents of service men and women. A parent can “gift” the taxpayer the contribution amount. Currently, the annual gift tax exclusion is $12,000 ($24,000 for gift by a married couple). The gift can be used to fund the IRA contribution — even though the dollars aren’t the same as the compensation dollars earned in a combat zone.

Get a Fast Tax Refund
For Your Corporation

As you know, estimated tax isn’t just a concern for individuals. Corporations are also required to pay federal income tax in quarterly installments.

If your company was playing it safe during the 2005 tax year, you may now discover that you’ve actually overpaid corporate estimated tax. Fortunately, you can get a quick tax refund from the federal government…if you take prompt tax action.

All you have to do is have your tax adviser file the proper form with the IRS. To qualify, the overpayment must represent at least 10 percent of the corporation’s expected tax liability and be at least $500. Note: The form can be filed as late as March 15, 2006 for the 2005 tax year (but before the corporation files its annual income tax return). Also, the form should not be filed before the end of the corporation's tax year.

The IRS will act on the form within 45 days from the date it is filed. 

As an alternative, you might ask the IRS to apply the excess overpayment to cover payroll taxes. As a result, you won’t have to wait to receive a refund from your tax filing. Caveat: If you re-designate your income tax payments as payroll taxes, you might be liable for penalties if you subsequently end up owing income tax.

Similarly, your company might be able to carry back a net operating loss (NOL). The loss can offset tax liability in the two previous years and provide an immediate refund. Your tax adviser can provide more details for your company’s situation.

Employers and Employees:
Roth 401(k)s are Finally Here

    Employers can now add a Roth 401(k) option to existing 401(k) plans. This plan was authorized by a 2001 law and became effective on January 1, 2006.
    Basic rules: With a traditional 401(k) plan, employees contribute to their accounts on a pre-tax basis, usually in the form of payroll deductions. Contributions are invested and can grow tax free. When an employee finally receives distributions — usually, after retirement — the payouts are taxed as ordinary income.
    In contrast, there’s no up-front tax benefit with a Roth 401(k). The main benefits come on the back end. Salary deferrals are made on an after-tax basis. As with a regular 401(k), the contributions grow tax-deferred.
Key difference: If the funds are held at least five years, distributions are tax-free if the employee is age 59 1/2 or older. (Distributions are also tax-free if they are made due to death, disability; or are used to pay first-time homebuyer expenses, up to $10,000.)
Many other rules, such as annual contribution limits, are the same for both types of plans. For 2006, you can defer up to $15,000, plus an additional $5,000 if you’re age 50 or over. Your tax adviser can provide more details.

Individual Tax Filing Tips

    As we move closer to the filing deadline, we know that you're busy gathering tax records. Here are some considerations and preliminary filing tips to help ensure your return preparation goes smoothly:
     Check tax statements for accuracy. Soon, you should have your W-2 and 1099 forms. Take a few moments to verify that the figures are accurate and double-check that your Social Security number is correct. If there's an error, contact the issuer and have a corrected version sent to you before having your tax return prepared.
     Make sure you have charitable letters. If you made a charitable gift of $250 or more in 2005, the IRS requires you to have a written acknowledgment from the charity before filing. Most organizations send these letters, but if you didn't get one, contact them now.
     Eligible for a Social Security refund? If you received W-2 forms from more than one company in 2005, you may have overpaid the Social Security tax you owe for the year. Reason: You are responsible only for Social Security tax on wages up to the annual wage base ($90,000 for 2005). To recoup the excess, ask your tax adviser about filing for a refund. (If you worked for only one employer who overwithheld Social Security tax, you need to seek reimbursement directly from the employer.) Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email:

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