News

As always the tax laws are ever changing.  Here are some highlights of law changes that could affect you in 2006.

ROTH 401K

Beginning in 2006, employees may begin designating some of their 401k contributions as Roth contributions.  Whether or not to offer this option is fully under the employer’s discretion so be sure to ask about it if your company offers a 401k plan.

Contributions to these plans will be made after tax has been taken out but the employer’s matching will still be pre-tax.  There is no immediate tax benefit for these contributions, but all the earnings will be tax free.

Individuals whose employers offer this new Roth contribution option can contribute up to $15,000 in 2006 instead of the normal $4,000 allowable to Roth IRA’s.

This could be an attractive option to those who don’t need the current tax deduction, if you have questions about this new option be sure to ask your tax professional during your next appointment.

For 2005 Standard Mileage Rate Increase For Last Four Months

The government has blessed us with another split year of mileage rates for the 2005 tax year.  The IRS increased the standard mileage rate for a vehicle used in a business from 40.5 cents for the first eight months (January 1 – August 31) to 48.5 cents for the last four months (September 1 – December 31). It’s important to note that you now have to keep detailed records for each part of the year and not just the totals for the entire year.  Please be sure to keep proper records of the business miles you drove during the year. The standard mileage rate for 2006 will be 44.5 cents.

Used Auto Donations

For the 2005 tax year auto donations made to charitable organizations have new requirements.  Amended by Act Sec 884(a) for Code Sec 170(f)(12) more requirements were added when donating your vehicle.   If the vehicle exceeds a value of $500 the taxpayer must have the following in writing:

• The name of the donor.
• Taxpayer identification number of the donor,
•  Vehicle identification number or similar number) of the vehicle.

Taxpayers are no longer able to use the fair market value of the car they donated but instead they will use the value that charitable organization sold the vehicle for.

Example, A taxpayer donates a car with a fair market value (blue book value) of $1,500 to a charity. The charity immediately sells the car to a wholesaler for $500. If the donation were made in 2005, the tax payer would only be able to deduct the gross proceeds from the charity’s sale, thus the amount the taxpayer will take as a deduction is $500 not $1,500.

Note: If the car that you donate is going to be used by the charitable organization in its charitable operations, then you may still deduct the fair market value of the car.  If you have the time you may want to look for a charity that will be actually using the vehicle and not just selling it.

Credits for Alternative Motor Vehicles

Starting in 2006 there are several new credits for alternative vehicle purchases.  Here are some of the highlights:

• You can get a credit of up to $3400 (but most vehicles won’t qualify for the maximum credit).
• You do not have to use the vehicle for business.
• You can only use the credit to the extent that your regular tax exceeds AMT.  If you have been subject to AMT in the past it is likely that you will not benefit from this credit.
• There is a phase-out of the credit for hybrid vehicles (the most popular of the vehicles that will qualify) starting when the manufacturer hits a 60,000 production amount.  So if you are thinking about purchasing one of these vehicles it is better to do it sooner than later.

Some of the vehicles that qualify are:

• 2006 Toyota Highlander Hybrid
• 2005 Ford Escape Hybrid
• 2001 – 2005 Toyota Prius
• 2000 – 2005 Honda Insight
• 2003 – 2005 Honda Civic Hybrid
• 2005 Honda Accord Hybrid
• 2006 Lexus 400h

NOTE:

Lessees do not qualify for the deduction since ownership is required.