• 401(k), 403(b), and 457 plans - defer up to $15,000 ($20,000 if age 50 or older by end of year).
• IRA or Roth IRA - stays at $4,000 (but goes to $5,000 for age 50 or older).
• Self-employed SEP or Keogh - you may contribute up to $44,000 if income is high enough.
• SIMPLE plan - defer up to $10,000 ($12,500 for age 50 or older).

1. Changed your address
2. Changed jobs
3. Got a big raise or bonus
4. Exercised a stock option
5. Retired
6. Got married or divorced
7. Had a child
8. Adopted a child
9. Sent your child to college
10. Got your child a job
11. Opened an account for a child
12. Collected unemployment
13. Start receiving Social Security
14. Started collecting a pension
15. Cashed an IRA
16. Won a prize
17. Won big at the track or casino
18. Won the lottery
19. Served as a paid executor
20. Received a director's fee
21. Won a lawsuit
22. Received alimony
23. Paid alimony
24. Sold stock or securities
25. Begin mutual fund investing
26. Opened a retirement account
27. Sold your home
28. Bought a home
29. Helped the kids buy a home
30. Refinanced your home
31. Remodeled your home
32. Think of starting a business!
33. Started a living trust
34. Add someone to title on your home
35. Bought a rental
36. Remodeled a rental
37. Started renting out your home
38. Let a friend move into a rental
39. Sold a rental
40. Began using a car for business
41. Sold your business car
42. Became a telecommuter
43. Let spouse use the business car
44. Cashed in EE Bonds
45. Inherited money
46. Inherited an IRA or pension
47. Reached age 59
48. Reached age 70
49. Became disabled
50. Are confused

If you miss the first sign-up period, the cost of your insurance goes up 1% for each  month you delay.  That rule is waived if you have "creditable" current coverage.  Your current provider will send you a letter telling you if your current policy is "creditable."  If it is, you can later switch to the Medicare drug coverage without any penalty.

2006 Standard Mileage Rates

The IRS announced standard mileage rates for mileage driven beginning January 1, 2006.  The standard mileage rates for the use of a car will be:

• 44.5 cents per mile for business miles driven,
• 18 cents per mile driven for medical or moving purposes and
• 14 cents per mile driven in service of charitable organizations.

SUV Tax Deductions

As you have probably heard, businesses can claim substantial deductions for a heavy (over 6,000 pounds gross vehicle weight) SUVs and other vehicles used in the business.

For heavy SUVs, the business can deduct up to $25,000 of the SUV’s cost in the year it is purchased. Also, the rules that limit the amount of annual depreciation allowed on passenger automobiles do not apply to heavy SUVs. This means the remaining cost of the heavy for can be written off over five years.

All this can add up to a substantial first-year deduction. For example, the maximum first-year depreciation deduction for a $45,000 heavy SUV placed in service during 2005 and used 100% for business will generally be $29,000 [$25,000 expense deduction + $4,000 MACRS deduction]. The maximum first-year depreciation deduction for a $45,000 passenger auto placed in service during 2005 and used 100% for business will only be about $3,000.

A heavy SUV is a passenger vehicle with an enclosed body that’s built on a truck chassis that has a gross vehicle weight rating—the manufacturer’s maximum weight rating when loaded to capacity—above 6,000 and less than 14,001 pounds. However, a vehicle that otherwise meets this definition is not classified as an SUV if:

 It is equipped with a cargo area of at least six feet in interior length. The cargo area cannot be readily accessible directly from the passenger compartment, but it can be either open or enclosed by a cab. Many pickups with full-size cargo beds will qualify for this exception, but “quad cabs” and “extended cabs” with shorter cargo beds may not qualify. So when you go to the dealership, be sure to pack a tape measure.

 It can seat more than nine passengers behind the driver’s seat, such as hotel shuttle vans.

 It has an integral enclosure that fully encloses the driver’s compartment and load carrying device, does not have seating behind the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield, such as delivery vans.

For these heavy non-SUVs, the full expensing deduction ($105,000 for 2005) is available. This means that businesses will often be able to write off the full cost of the vehicle in the year it is purchased.

As you can see, the deductions for purchasing a heavy SUV (or nonSUV) for use in your business can be substantial. Attached is a list of vehicles (SUVs and non-SUVs) qualifying for larger deductions. If you would like more details, please do not hesitate to call.

Vehicles with GVWRs above 6,000 Pounds

BMW
X5 4.8is SUV

Cadillac
Escalade SUV
Escalade pickup

Chevrolet
Astro Passenger Van AWD (2005)
Avalanche pickup
Express Van (both cargo and passenger models)
Silverado pickup
Suburban SUV
Tahoe SUV
Trailblazer SUV extended models only

Dodge
Dakota Club Cab 4 door
Dakota Quad Cab 4 door
Durango SUV
Ram pickup
Sprinter van

Ford
Econoline E150 and E350
Excursion SUV
Expedition SUV
F150 pickup
F250 pickup
F350 pickup

GMC
Envoy SUV Denali
Safari Passenger Van AWD (2005)
Savana van (both cargo and passenger models)
Sierra pickup
Yukon SUV

Honda
Ridgeline pickup

Hummer
H1
H2

Infinity
QX56 SUV

Isuzu
Ascender SUV

Land Rover
LR3 SUV
Range Rover SUV

Lexus
GX470
LX470 SUV

Lincoln
Aviator SUV (2005)
Navigator SUV

Mercedes
G500 SUV (2005)
G55 AMG SUV (2005)
ML350 SUV
ML500 SUV

Nissan
Armada SUV
Titan pickup

Porsche
Cayenne SUV

Saab
9-7x SUV

Toyota
4Runner Limited V8 4WD SUV
4Runner Sport V8 4WD SUV
4Runner SR5 V8 4WD SUV
Land Cruiser SUV
Sequoia SUV
Tundra Access Cab
Tundra Double Cab

Volkswagen
Touareg SUV

Used Car Donations

Last year’s tax legislation included strict new rules for 2005 charitable contributions of used motor vehicles, as well as donations of used boats and airplanes. The new rules apply to donations worth over $500. If these rules are not met, you cannot claim your rightful deduction. This "Tax Tidbit" explains how the new rules work and what you should expect to receive from a charity to back up your donation of a used vehicle.

The most important thing to understand is that your allowable deduction for an affected donated asset now depends on how it is used by the charitable organization. If the organization sells the asset without using it significantly for charitable purposes and/or making meaningful improvements, your deduction is generally limited to the gross proceeds from the sale. When this general limitation rule applies, the fair market value (FMV) of the donated asset is irrelevant if it exceeds the sales proceeds. However, there are two exceptions where the sales-proceeds limitation rule does not apply.

• Exception No. 1:
  The charity sells or gives your donated vehicle to a needy individual for less than FMV in furtherance of the organization’s charitable purpose.

• Exception No. 2:
  The charity keeps your donated vehicle and uses it significantly for charitable purposes or makes meaningful improvements before ultimately selling it.

When one of these two exceptions applies, you can generally deduct the full FMV of the used vehicle as of the contribution date.

You May Get New IRS Form 1098-C from Charities

The tax law includes requirements for charities to substantiate—via written acknowledgements supplied to donors—all manner of things related to 2005 contributions of used motor vehicles. Most charities will comply with these requirements by issuing you a copy of new IRS Form 1098-C (Contributions of Motor Vehicles). If so, the all-important gross sale proceeds amount (which usually equals the amount you can deduct) must be reported to you on line 4c of Form 1098-C. The charity must indicate if one of the two exceptions explained above applies (which means you may be entitled to a larger deduction) by checking either box 5a or 5b and describing the significant use by the charity or material improvements made by the charity on line 5c.

You cannot claim a write-off above $500 unless the charity supplies you with Form 1098-C, or another document that supplies equivalent information. However, if you were sent an acknowledgment before July 6, 2005 (before Form 1098-C became available), it’s not a problem if the document omits: (1) the sale date, (2) a certification that Exception No. 1 applies, or (3) details regarding significant intervening use or material improvements by the charity when Exception No. 2 applies. For later acknowledgements, this information must be supplied to you on Form 1098-C or the equivalent.

Keep Your Documentation and Be Aware the IRS Will Get a Copy

You should receive a copy of Form 1098-C or the equivalent from the charity. If Form 1098-C is supplied, you will need to attach Copy B to your 2005 Form 1040 and keep Copy C for state income tax filing or record keeping purposes. Finally, be aware that charities are now required to notify the IRS about the financial details of all 2005 donations of used motor vehicles worth over $500. Of course, this means the government can check to see if the deduction claimed on your 2005 Form 1040 matches up to this information.

Please give me a call if you have questions or want to know more about how to handle 2005 charitable donations of a used vehicle.

Medical Flexible Spending Accounts

As we approach the end of the year, I want to alert you to some potential tax savings opportunities related to medical expenses. Your out-of-pocket medical expenses are theoretically tax deductible if you itemize your deductions. However, for most taxpayers, this is a hollow victory because only the expenses in excess of 7½% of your total income yield any tax savings. Fortunately, one of the easiest ways around this limitation is to take advantage of a flexible spending account for medical expenses (an FSA)—if one is offered by your employer.

With a FSA, you generally must decide before the start of the year how much of your wages to put into the account. Then during the year, you’re reimbursed for your out-of-pocket medical expenses up to this amount. The money you put in the FSA isn’t subject to income taxes or Social Security taxes. Thus, the government effectively picks up a substantial part of your unreimbursed medical expenses (around 40% of the total costs for taxpayers in the highest tax brackets).

Traditionally, the catch with FSAs has been that whatever amount you put in the FSA has to be spent on qualifying medical expenses during the year or it is forfeited. Recently, though, the IRS loosened this so called use-it-or-lose-it rule a little by allowing employers to add a grace period of up to 2½ months. To add a grace period that’s effective beginning with the current plan year, employers simply need to amend their plans before the end of the plan year (which for most employers is 12/31/05). Some have decided to do this. Others are sticking with the customary year-end deadline. Thus, depending on what a particular employer decides, some employees with FSAs will have a 12 month period in which to use up their account for the current year while others will have up to 14½ months (i.e., either 12/31/05 or 3/15/06).

Because of the use-it-or-lose-it requirement (over the up to 14½ month period), it’s important to carefully project what you feel you’ll have in unreimbursed expenses for the coming year. Once you decide on an amount, you normally aren’t allowed to change it during the year unless you have what the tax rules refer to as a change in personal circumstances (such as a marriage, divorce, birth of a child, etc.).

Besides carefully choosing the amount to defer for next year (a decision most employees will be called upon to make in the next few weeks), the other key to successfully using a FSA is making sure you don’t let any money in the account go to waste. Thus, as employees are trying to use up funds in their 2005 accounts, we thought it might be helpful to provide you with a short list of often-overlooked items that potentially can be reimbursed out of your FSA account (subject to your plan’s terms and the FSA administrator’s final decision).

• Over-the-counter (OTC) medicines

• Nonprescription medical equipment, supplies, and diagnostic devices

• Laser eye surgery

• Reconstructive surgery (if medically necessary)

• Weight reduction programs to treat obesity or a specific problem directly associated with excessive weight

• Smoking-cessation programs.

One final category of expenses that’s often missed when seeking reimbursements from an FSA is medical related travel costs. Most FSAs will reimburse 15 cents per mile (22 cents after 8/31/05) for travel to doctor offices, hospitals, etc. In addition, amounts paid for lodging while away from home to seek medical care normally can be reimbursed up to $50 per person per night (as long as there’s no significant element of personal pleasure related to the trip).

Please call me if you have questions about using your FSA or if you’d like help in determining whether setting up a FSA might be right for your business.

End-of-Year Tax Planning

As the end of the year rolls around, there are a number of tax and investment decisions that should be considered. Some items relate to your job while others are personal decisions.

Retirement and Benefit Plans
Many employers have 401(k) plans or other deferred compensation plans, cafeteria plans, dependent care benefits, medical reimbursement plans, or medical premium plans. Initial participation or continued participation in these plans must be selected before the beginning of the New Year. Most employers will forward the necessary documents sometime in November. It will be up to you to select the level of participation before signing and returning the documents. From an income tax standpoint, participation means a savings of income tax by lowering your gross income. The cafeteria plans, premium only plans, dependent care benefits, and medical reimbursement plans also reduce income subject to FICA and Medicare tax.

The decision to participate in these plans is strictly yours. Participating in some of the programs can be scary because it requires you to guess how much you will spend. If your guess is too high, you could lose the money you have deferred because the system is based on a "use it or lose it" concept. There is good news for 2005. There is an opportunity to have an extra 2.5 months to use the prior year's allotment if your employer modifies the cafeteria plan to include this 2.5 month period. This takes a little uncertainty out of the decision.

Here are some reasons why participating in a tax deferred plan may be beneficial. A medical reimbursement plan or a pre-tax health insurance plan can give you a tax break through a lower taxable income. If you're single, pay $1,200 per year in health insurance, and your post-tax wage is $35,000, your federal income tax savings would be $180 plus $91.80 of FICA taxes. As your income increases, the amount of savings would increase as well.

Dependent care can be very costly. Using the dependent care benefits through an employer, a family with one child can take a larger deduction ($5,000) through the deferral than the amount of day care expense payments that can be used toward the childcare credit ($3,000). The amount of savings will depend on your tax rate.

A new feature exists for 401(k) plans beginning in 2006. If your plan makes the change, the plan can allow you to put some or all of your 401(k) contribution in a Roth 401(k) rather than the normal 401(k) plan. This change is not for everyone, but for certain people it will make sense. A Roth IRA allows you to put money into an IRA account that will grow tax-free as long as you do not take the earnings out before the allotted amount of time. Furthermore, all distributions are nontaxable as long as you adhere to the distribution rules. The money you have invested, not including the earnings, may be withdrawn at any time. Investing in a Roth IRA through your employer will allow you to put more money in the Roth IRA than you could on your own. The maximum deferral for 2006 is $15,000 plus an additional $5,000 for those who are age 50 and older. Ask your employer if your plan has been amended to receive Roth IRA contributions.

Your participation decisions, made prior to the beginning of the tax year, are locked in for the entire year. However, most plans have a safe harbor that allows changes to be made during the year when significant life-changing events occur. These status changes may include a divorce, a death in the family, or illness. Each plan must be examined to find the specific situations allowed by that plan.

Personal Tax Decisions
Moving to the personal year-end steps, you may have to decide whether to sell investments to take advantage of low capital gain rates or to offset existing losses with capital gains. The maximum capital gains rate for investments is normally 15%, but if you are in the 15% tax bracket, you may pay only 5% on the capital gains. If you have property you are considering selling, talk to me before you sell. I can advise you about the tax consequences of the sale.

Other personal items to consider before the end of the year are charitable contributions. Contributions are deductible when you itemize. With the devastating events in Louisiana and Mississippi, you may have made or are contemplating a contribution. Making the contributions before the end of 2005 will give you a deduction in 2005. Your donation may be money or property. If you donate property, be sure to take the property to an agency that will give you a receipt. A receipt is necessary as your substantiation for the deduction regardless of whether it is money or property. The IRS is keeping a watchful eye on charitable deductions. There are new procedures for deductions of automobiles given to charitable organizations. The deduction will be limited to the amount the charitable organization receives from the sale of the vehicle if the vehicle is sold within 30 days of the donation and has not been substantially modified or sold to low income buyers at below market value. Each vehicle donation will require the organization to notify the IRS regarding the treatment of the vehicle. Look for a Form 1098-C to be issued by the organization when you donate a vehicle.

The timing of the payment of real estate taxes can impact the overall tax picture. If you itemize and have been paying your taxes at the same time each year, continuing that schedule will produce similar results as in the past unless something has changed in your income or expense structure for the year. If you have not itemized in the past and you increased the mortgage on your home, changed your occupation to a job that requires you to incur job-related expenses, or you gave a substantial amount to charity, you should discuss your deduction possibilities with me before the end of the year. I can advise you regarding the benefits of paying the property taxes in the current year or the coming year.

If your marital status changed during the year, the refund or balance due you are accustomed to may be different. If you did not change your withholding to match your marital status, you may owe more than usual if you are now single. If you married during the year and continued to withhold at the single rate, your refund may be larger than you were expecting. No matter which way you changed, it is a good idea to review the change with me before the end of the year.

Paying school tuition before or after the new year can affect the Hope or Lifetime Learning credit. The Hope Credit is only allowed in the freshman or sophomore year of the student and only for a total of two years. Making the most of the credit is important. The Lifetime Learning Credit may be used when the Hope Credit is no longer available. Parents who pay for the tuition in the calendar year prior to the year of graduation may save themselves from losing the benefits. In the year of graduation, many students are no longer dependents of their parents. Paying the final semester's tuition in December rather than January can make a big difference to the parent.

Teachers can still reduce income by up to $250 of unreimbursed classroom expenses. Stock up on classroom needs such as bulletin board materials, stickers and stars, and other incidentals before the end of the year.

The standard mileage rate will have two different rates for this year. Business miles incurred before September 1, 2005, are paid at a rate of 40.5 cents per mile. The rate climbs to 48.5 cents per mile from September 1, 2005 to December 31, 2005. Medical and moving mileage increase from 14 cents per mile prior to September 1 to 22 cents per mile from September 1 to December 31, 2005.

2006 Update
In 2006, there are a few new changes to consider. The Energy Tax Incentives Act of 2005 created some new incentives to be energy conscious. One of the incentives is the Alternative Motor Vehicle Credit. The government will pay you to buy a more fuel efficient vehicle. The vehicles, of course, must be specially certified. There are four alternative credits depicting power from different sources. The most recognizable will be the Hybrid Motor Vehicle Credit. This credit covers vehicles that have been eligible for the hybrid vehicle deduction which has been repealed for 2005. The credit of $400 to $2,400 will be based on the fuel efficiency of the new vehicle compared to a vehicle of similar weight from 2002. There is an additional conservation credit component ($250 -$1,000) based on the lifetime fuel savings that is attached to each of the four credits.

Credits for home energy enhancements have also returned. Solar heating panels, qualified fuel cells, and solar water heaters are among the items that may qualify for the credit. The maximum credit available is $2,000 for solar water heating property and an additional $2,000 for photovoltaic property (electricity from light). The credit for qualified fuel cells is limited to $500 each for each .5 kilowatt of capacity but has no overall maximum. Before you remodel or upgrade your home next year, check with me to see what qualifies.

New Energy-Related Tax Breaks Are Not Just for Businesses
Individuals Please Apply

The new Energy Tax Incentives Act of 2005 may sound like tax breaks for oil companies and businesses, but there are some credits that will apply to homeowners and car buyers.

Although the credits are generally not big numbers, certain credits will cut the cost of some energy-saving improvements in the home. Also, a change to the deduction to credits for buying a new hybrid vehicle makes tax planning even more critical.

Hybrid Vehicles

The Energy Act repeals the current deduction (of $2,000) on December 31, 2005, for clean fuel vehicles and replaces it with the Alternative Motor Vehicle credit, for taxable years beginning on or after January 1, 2006. The most common type of clean-fuel vehicle used for personal purposes is the hybrid car. The new law provides a combination of two tax credits for a hybrid car or light truck weighing 8,500 pounds or less:

• A fuel-economy credit that is $400 to $2,400 based on the rated fuel economy; and

• A conservation credit that is $250 to $1,000 based on lifetime estimated fuel savings.

The credits are based on a comparison of current to 2002 year standards and we understand the IRS and manufacturers will provide the details and credit amounts.

For vehicles weighing more than 8,500 pounds, the credit is based on the estimated increase in fuel economy and price differential between the hybrid and a gasoline vehicle. The maximum credit is $7,500 for a vehicle weighing more than 8,500 pounds and not more than 14,000 pounds.

Hybrid Vehicle Credit Caveats

• The credit may not reduce regular tax (less certain personal credits) below tentative minimum tax and has no carryover provision. Taxpayers who are in or close to federal AMT will not get a benefit for the credit.

• The credit is only available for the first 60,000 vehicles produced by each manufacturer in 2006. Keep in mind that consumers purchased 50,000 Toyota Prius hybrid vehicles in just the first quarter of 2005.

• The credit is only available to the original owner of the vehicle.

Other vehicle credits

For your more adventurous clients who purchase a qualifying vehicle that weighs less than 8,500 pounds, consider the credits for:

• Fuel-cell vehicles: a base credit maximum of $8,000 plus a fuel-economy credit ranging from $1,000 to $4,000;

• Alternative-fuel vehicles, which cannot be operated using gasoline: maximum of $4,000; and

• Advanced lean-burn technology: a fuel-efficiency credit of $400 to $2,400 plus a conservation credit of $250 to $1,000.

Residential Energy Property Credit

The Act provides a new credit for individuals who make energy-saving improvements to their principal residence. The credit applies to improvements made in taxable years beginning in 2006 and 2007. The credit is equal to 10% of the qualified cost of the items listed below with an overall maximum of $500 lifetime for all improvements with individual item maximums of:

• $200 for energy-saving windows;

• $50 for advanced main-air circulating fan;

• $150 for qualified furnace or hot-water boiler powered by natural gas, propane, or oil; and

• $300 for any item of energy-efficient building property.

What qualifies?

The credit is equal to 10% of the cost of:

• Energy-efficient building envelope components, defined as:
  
  - Any insulation material or system that is specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on such dwelling unit;
  - Exterior windows (including skylights);
  - Exterior doors; and
  - Any metal roof installed on a dwelling unit, but only if such roof has appropriate pigmented coatings that are specifically and primarily designed to reduce the heat gain of such dwelling unit.
  

•  Energy-efficient building property defined as:
  
  - A qualified electric heat-pump water heater;
  - An electric heat pump meeting a required heating seasonal- performance standard;
  - A geothermal heat pump meeting required standards;
  - A qualified furnace or hot-water boiler powered by natural gas, propane, or oil; or
  - An advanced main-air circulating fan.

With 2005 winding down, it’s time once again to consider year-end tax planning as a way to keep more of your hard-earned money. Year-end planning changes each year due to changing tax rules, as well as changes in your own personal financial and tax situations. For 2005, there are new planning strategies resulting from the three Tax Acts Congress has passed so far this year, as well as the phase-in of some provisions of prior year Tax Acts. Here are a few tax-saving ideas to get you started.

As always, you can call on me to help you sort through the options and implement strategies that make sense for you.

Year-end Planning For Individuals

Assess Your Alternative Minimum Tax Exposure. The first step in year-end planning is to see whether you might be subject to AMT this year (or next year for that matter). Taxpayers must compute their taxes under both the regular tax and AMT rules and then pay the greater of the two. Although AMT was originally designed to apply only to taxpayers who took too much advantage of certain tax breaks, the current rules encompass many unsuspecting taxpayers. Being in the world of AMT puts a whole new spin on tax planning because many great planning strategies that make sense in a regular tax situation completely backfire in an AMT scenario.

Certain items can increase your risk of AMT, including exercising incentive stock options, recognizing substantial long-term capital gains, and deducting a significant amount of state and local taxes or miscellaneous itemized deductions (like unreimbursed employee business expenses). But no one is safe from AMT anymore, and planning when AMT applies is tricky because each situation is unique. Therefore, if you have any of the items mentioned or suspect AMT might be an issue, please contact us so we can help you review and plan for your particular situation. Now that we’ve addressed the AMT matter, let’s move on to a variety of tax planning strategies that normally apply to the vast majority of taxpayers—that is, those in a regular tax situation.

Deferring Income and Accelerating Deductions. The most common year-end tax planning strategies are those that defer income from the current year to later years and those that move deductions from later years into the current year. The underlying reason is that it’s better to pay taxes later rather than sooner due to the time value of money.

So, how do you shift income and deductions between tax years? The most common techniques are using income or deductions that you can easily control. For example, if you’re due a year-end bonus and you can get your employer to agree, receive the bonus in January 2006 rather than 2005. On the investment side, income from short-term (i.e., maturity of one year or less) obligations like Treasury Bills and short-term CDs is not recognized until maturity. Income from those straddling year-end is deferred to the following year. For sales of property, consider an installment sale that shifts part of the gain to later years when the installment payments are received.

On the deduction side, move charitable donations you normally would make in early 2006 to the end of 2005. Do the same with real estate taxes or state income taxes. If you own a cash-basis business, delay billings so payments are not received until 2006 or accelerate payment of certain expenses, such as office supplies and repairs and maintenance, to 2005. Of course, before deferring income, you must assess the risk of doing so.

Deferring Energy Efficient Purchases. Residence Credits. The Energy Tax Incentives Act of 2005 provides two new credits for energy efficient improvements made to personal residences, but only if the improvement is made after 2005. So, if you are planning on making any such improvements in the near future, you will want to put them off until 2006. Otherwise, the credit won’t be available. Improvements eligible for credits in 2006 are as follows:

· Qualified home improvements on your principal residence (no vacation homes), including metal roofs coated with heat-reduction pigments; exterior windows, including those in skylights; exterior doors; insulation materials or systems designed to reduce heat loss or gain, energy efficient electric heat pumps, electric heat pump hot water heaters, geothermal heat pumps, and central air conditioners; qualified natural gas, propane, and oil furnaces and qualified hot water boilers; and advanced main air circulating fans. The available credit for such expenditures is generally limited to a lifetime amount of $500, although other limits may also apply. And to reiterate, it only applies to items put to use after 12/31/05.

· Qualified solar water heating equipment, electricity generating solar photovoltaic property, and fuel cell property put to use after 2005 in your personal residence. However, equipment used to heat swimming pools or hot tubs does not qualify. The credit will generally equal 30% of the item’s cost, limited to $2,000 per type of item or, in the case of fuel cell property, $500 for each .5 kilowatt of capacity.

Hybrid Vehicles. The Energy Tax Incentives Act of 2005 replaced the $2,000 deduction available for hybrid vehicle purchases made before 2006 with a credit of up to $3,400 for hybrid vehicles purchased after 2005. At first blush, delaying hybrid vehicle purchases to 2006 to take the credit seems to be the best deal. However, that is not necessarily so. You might actually be better off making the purchase before the end of this year and cashing in on the existing $2,000 deduction. To figure out where you stand on this issue, you must assess (1) the expected amount of the 2006 credit compared to the $2,000 deduction available for 2005 and your expected marginal tax rate for 2005, (2) the impact of the credit phase-out rules, (3) your projected 2006 AMT situation, and (4) whether the emissions standards will make your desired vehicle ineligible for the credit in 2006. If you are considering a hybrid vehicle purchase in the near future, please give us a call. We can put all the pieces together to ensure that you make the optimal tax-saving decision.

Increase Charitable Giving. Ordinarily, the amount of cash donations to IRS-approved public charities that an individual can deduct in any year is limited to 50% adjusted gross income (AGI). Any charitable contribution deduction is also potentially subject to phase-out if your AGI exceeds $145,950 in 2005. Given the horrendous tragedies that occurred in 2005, Congress has bent these rules for most cash contributions made between 8/28/05 and 12/31/05. Such contributions are deductible—without any reduction under the phaseout rule—up to 100% of your AGI when combined with donations made earlier in the year.

This makes 2005 a particularly good year to make charitable contributions if you are so inclined. And, if you charge the contribution to a credit card, it is deductible in the year charged, not when payment is made on the card. Thus, charging donations to your credit card before year-end enables you to increase your 2005 charitable donations deduction even if you’re temporarily short on cash or simply want to defer payment until next year. Note, however, that any interest paid with respect to the charge is not deductible.

Deducting State and Local Sales Tax. You can deduct either sales tax or state and local income taxes. While this option clearly benefits individuals who live in states that don’t impose a significant income tax, even taxpayers subject to state income tax may find that the sales tax deduction exceeds their state income tax deduction. This is especially true if you make significant purchases this year.

If it turns out that the sales tax deduction is more beneficial than deducting state income taxes, you can choose between claiming the actual sales taxes you paid during the year or an amount from IRS-published tables. The table amount is based on your income level and the size of your family. Saving your receipts to document the sales tax you actually paid (especially if you made or are planning to make significant purchases) may yield a larger deduction than using the IRS tables. But, even if you use the IRS tables, the sales tax on certain big-ticket items can be added to the sales tax amount from the tables. Namely, the sales tax on motor vehicles, whether purchased or leased, aircraft, boats, homes (including mobile and prefabricated), and home building materials (if the tax rate was the same as the general sales tax rate) can be added to the table amount. A motor vehicle includes a car, motorcycle, motor home, recreational vehicle, SUV, truck, van, and off-road vehicle. So, even if you plan to simplify your life and use the IRS tables to figure your 2005 sales tax deduction, be aware of these items and be sure to keep documentation of sales tax paid on them so the tax can be added to the table amount.

Adjusting Federal Income Tax Withholding. If it looks like you are going to owe income taxes for 2005, consider bumping up the Federal income taxes (FIT) withheld from your paychecks now through the end of 2005 so that your total tax payments (estimated payments plus withholdings) equal at least 90% of your estimated 2005 liability or, if smaller, 100% of last year’s liability (110% if your 2004 AGI exceeded $150,000). On April 15, 2006, you will still have to pay the taxes due less the amount paid in, but you won’t owe any interest or penalties.

Alternatively, you could take an IRA or qualified plan distribution and request that enough FIT be withheld to cover the payment shortfall. However, the total amount of the distribution (i.e., before FIT withholding) must be rolled into an IRA (or qualified plan) within 60 days. Otherwise, the distribution will be fully taxable, and, if you are under age 59½, subject to the 10% early distribution penalty. Therefore, this should be considered only if you have the funds available to fully complete the rollover.

Year-end Planning for Businesses

Expense the Cost of up to $105,000 of Business Property. The section 179 deduction allows business owners to deduct up to $105,000 of the cost of qualifying depreciable property placed in service in 2005. Property eligible for the immediate tax write-off can be new or used and includes “off-the-shelf” computer software. (Even property purchased on the last day of the year qualifies.) However, the allowable deduction cannot exceed your business’s net income and is reduced dollar-for-dollar to the extent the amount of qualifying property placed in service during the year exceeds $420,000. If you have plans to buy a business computer, office furniture, equipment, vehicle, or other tangible business property, you might consider doing so before year-end to maximize your 2005 deductions.

Maximize the New Deduction for U.S. Production Activities. For 2005, businesses (incorporated or not) can deduct (for both regular and alternative minimum tax) up to 3% of their qualified domestic production activities income. “Qualified domestic production activities income” is the net income from certain business activities, if substantially all the activity takes place in the U.S. (or its possessions). “Production” is somewhat of a misnomer. In addition to traditional manufacturing, the deduction is available for income from selling personal property that the business manufactures, grows, produces or extracts; construction; producing software, film, or videotape; farming; and processing agricultural products and food.

If your business is engaged in one of these qualified activities, the new deduction can be significant. But, there is one catch—the deduction can’t exceed 50% of the wages paid to employees (W-2 wages) for the year. This could be a problem for businesses that pay little or no wages. Many sole proprietorships do not pay the owner a salary. Likewise, S corporations often pay owners relatively small salaries to minimize their payroll taxes. This means that, after applying the W-2 wages limit, their deduction for U.S. production activities could be significantly reduced.

Business owners who are eligible for the U.S. production activities deduction should look at their compensation policies and consider increasing owner salaries to ensure their deduction is not scaled back. Also, because the deduction is based on net income from qualifying activities, it would be a good idea to take a look at your accounting system to be sure it will allow you to determine the income from qualifying activities, as well as expenses directly related to or allocable to that activity. If not, some tweaking of the accounting system may be in order.

Paying Dividends in Lieu of Owner Salaries. If for 2005 you expect to personally be in the 28% or higher tax bracket and you own a corporation that you expect to be in the 15% income tax bracket (taxable income of $50,000 or less), you could net more cash after taxes by paying yourself some dividends in lieu of additional salary. This is because dividend income is subject to a maximum 15% tax rate, while your salary is subject to your 28% or higher tax rate, plus you and your corporation must pay payroll taxes on your salary.

Any dividends paid to you must be paid to other owners as well. Thus, if there are multiple shareholders, paying dividends could alter the bottom-line cash flow reaped by the various shareholders, which may make this strategy unworkable in some situations. However, in the context of family-owned C corporations, this may be a good thing—a family recipient who is in the 10% or 15% tax brackets (which many children are) will pay only 5% on this dividend income.

Strategies That Never Go out of Style

Lower Tax Rates on Capital Gains. Long-term capital gains and qualifying dividend income are subject to a tax rate of only 15% for taxpayers in a regular tax bracket of 25% or higher and 5% for taxpayers in the lower regular tax brackets. Given tax rates as high as 35% for other types of income, this is quite a break. To be eligible for the lower 15% (or 5%) capital gain rate, a capital asset must be held for more than a year. So, when disposing of your appreciated stocks, bonds, investment real estate, and other capital assets, pay close attention to the holding period. If it’s less than one year, consider deferring the sale so that you can meet the greater-than-one-year period. While it’s generally not wise to let tax implications drive your investment decisions, you shouldn’t ignore them either.

When selling stock or mutual fund shares, the general rule is that the shares you acquired first are the ones you sell first. However, if you choose, you can specifically identify the shares you’re selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it’s long-term or short-term.

Harvesting Capital Losses. It’s always a good idea to periodically review your investment portfolio to see if there are any losers you should sell. This is especially true as year-end approaches, since it’s the last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital losses. But, don’t forget the wash-sale rule. This rule defers your loss if you purchase a substantially identical security within the period beginning 30 days before and ending 30 days after the date of sale.

Manage Your AGI. Many tax breaks are only available to taxpayers with adjusted gross income (AGI) below certain levels. Some common AGI-based tax breaks include the child tax credit (phase-out begins at $110,000 for married couples and $75,000 for heads-of-households), the $25,000 rental real estate passive loss allowance (phase-out range of $100,000–$150,000 for most taxpayers), and the exclusion of social security benefits ($32,000 threshold for married filers; $25,000 for other filers). In addition, taxpayers with 2005 AGI in excess of $145,950 begin losing part of their itemized deductions, to the extent of 3% of the excess. Accordingly, strategies that lower your income or increase certain deductions might not only reduce your taxable income, but also help increase some of your other tax deductions and credits.

Retirement Plan Distributions. If you’re age 70½ or older, you’re normally subject to the minimum distribution rules with regard to your retirement plans. Under these rules, you must receive at least a certain amount each year from your retirement accounts. You can always take out more than the required amount, but anything less is subject to a 50% penalty on the shortfall amount. Thus, if you haven’t taken your required distribution for 2005, do so before year-end to avoid a hefty penalty. If you turned age 70½ in 2005, you can delay your 2005 required distribution until April 1, 2006 if you choose. But, waiting until 2006 will result in two distributions in 2006—the amount required for 2005 plus the amount required for 2006. While deferring income is normally a sound tax strategy, here it results in bunching income into 2006, which may push you into a higher tax bracket or have a detrimental impact on other tax deductions you normally claim.

Conclusion

Taking the time now to review your 2005 tax situation gives you a chance to take advantage of many year-end tax saving opportunities. We are here to help. If you would like to discuss the strategies mentioned here or other ideas for reducing your 2005 tax liability, please don’t hesitate to call me. I would be pleased to set up a meeting within the next few weeks while there’s still time to implement tax strategies before year-end.