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 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.
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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. |
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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. |
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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. |
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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.)
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