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  Warm Weather and Hot Opportunities

As we head toward the lazy days of summer, you're may be busy planning vacations and recreational activities. Take a few minutes to see if you qualify to take advantage of these six seasonal tax breaks:


New Tax Complications for SIMPLE Plans

    A SIMPLE plan, short for a Savings Incentive Match Plan for Employees, is a relatively easy retirement vehicle for small businesses. But the tax rules aren’t as always “simple” as they seem.
    Case in point: Employers were required to amend SIMPLE plans to meet certain requirements under the Economic Growth and Tax Reconciliation Act of 2001. However, the IRS recently discovered that thousands of employers with SIMPLE plans haven’t made the required changes. The IRS is now giving employers until year-end to make the necessary revisions.

    If a SIMPLE fails to meet the requirements in time, the company may have to forfeit the tax benefits associated with the plan.
    General rules: A SIMPLE plan is only available to employers with 100 or fewer employees. This includes all employees who have earned at least $5,000 in the previous year. Any employee who was paid at least $5,000 in compensation for any two previous years at the company (and expects to receive at least that amount in the current year) is eligible. If it chooses, a company can adopt more liberal eligibility requirements.
    For 2006, eligible employees may elect to contribute up to $10,000 to the plan. Generally, the employer must provide matching elective contributions of up to 3 percent of compensation (but not less than 1 percent in no more than two out of five years) or non-elective contributions of 2 percent of each eligible employee’s compensation (based on a maximum compensation of $220,000).
    In addition, a 2006 SIMPLE  “catch-up contribution” of $2,500 is available for participants age 50 or over.
    Most other rules for qualified retirement plans also apply to SIMPLE plans. Key exception: If a distribution is made prior to age 59 1/2 within the first two years of participation in the plan, the usual 10 percent tax penalty is increased to 25 percent. After two years, the 10 percent penalty still applies.
    Reminder: A SIMPLE plan must be established by October 1 of the current tax year.

Large Tax-Exempt Groups Face Deadline

    The IRS is reminding large tax-exempt organizations of the May 15 deadline to electronically file federal information returns, including Form 990. For the first time, exempt organizations are required to file these returns electronically if they have $100 million in total assets and file at least 250 returns per year — including income, excise, employment tax and information returns such as forms W-2 and 1099.
    Exempt organizations that cannot meet the May 15 deadline can request an automatic extension using Form 8868 and file by August 15, 2006. 
    For tax years ending on or after December 31, 2006, the electronic filing requirement will expand to include 2006 returns of tax-exempt organizations with $10 million or more in total assets that file at least 250 returns per year. In addition, private foundations and charitable trusts will be required to electronically file Form 990-PF, regardless of size if they file at least 250 returns annually.

1. Deduct a Company Picnic. If your company holds a gathering for employees, spouses and their children, it qualifies as a business entertainment expense. Even better, the entire cost is deductible — not just the usual 50 percent — as long as the get-together isn't restricted to just highly paid employees.

2. Let Uncle Sam help pay for summer camp. As working parents know, child care arrangements are turned upside down once school lets out for the summer. The answer for many Moms and Dads is day camp.

The cost of day camp is eligible for the "Child and Dependent Care Credit" if your child is under age thirteen. However, expenses paid for sleep-away camp are not eligible. What's the difference? Day camp is treated as a substitute for child care, while sleep-away camp is considered a luxury.

The credit is also available for older children and dependents of any age who are physically or mentally incapacitated.

If you have a tax-saving "flexible spending account" at work, the cost of day camp can be paid with money from the plan. Again, overnight camps don't qualify for "flex account" withdrawals.

You can claim the child care credit as long as you (and your spouse, if married) have earned income. A couple can also qualify if one spouse works and the other is a full-time student. How much is the credit worth? The exact amount depends on your income.

If you're planning to claim a credit, get the camp's tax identification number this summer while your child is attending. You must have the number to collect the savings on your tax return. Don't wait until next April when you're filing your return to track the number down. By then, the camp will probably be closed.

3. Write off moving costs to take a new job this summeror anytime. You might be able to deduct related expenses on your next tax return if you meet certain requirements. In order to deduct reasonable moving costs, the move must:

  • Be closely related to the start date of your new job.
  • Meet IRS tests involving distance and time. Basically, your new main job location must be at least 50 miles farther from your former home than your old job location was. And if you are an employee, you must work full-time for at least 39 weeks during the 12 months right after you move (there are different rules for self-employed taxpayers).

4. Own or considering a vacation home? Take advantage of a tax break for short rentals. If you qualify, you can take various tax deductions for a second home. But you can also rent out your vacation home (or principal residence) for no more than 14 days and get a special tax break. Any rental income you collect is tax-free. You don't have to report it on your tax return.

If you take advantage of the 14-day rule, you can deduct mortgage interest and property taxes for your vacation place. But you aren't eligible for additional deductions for rental-related expenses.

Buying a new boat or RV this summer?
There may be a couple ways to get a tax break. First, you can use a home equity loan to finance the purchase. Interest on home equity loans is generally deductible up to $100,000. The second option is to have your boat or RV qualify as a second home for tax purposes. To do so, it must have sleeping, cooking and toilet facilities and the loan must be secured by the boat or vehicle. Individual taxpayers can deduct interest on up to $1 million in debt used to buy or improve a principal residence and a second home.

6. Hire your children or grandchildren when they get out of school. Business owners have several incentives to put their kids on the payroll this summer. Your company can deduct their wages. And the children can escape paying taxes on some of the income because it's sheltered by the standard deduction. Plus, of course, working can teach them the value of hard work.

More advantages: The "kiddie tax" restrictions do not apply to children's wages, even if they come from a parent's business. And if you're a sole proprietor or operate your business as a husband and wife partnership, wages you pay your under-age-18 children are exempt from Social Security tax. (This exemption doesn't apply to an incorporated family business or to a partnership with a partner other than your spouse.)

Ask your tax adviser for more information about any of these tax breaks. 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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