IRS Releases Latest "Dirty Dozen"

The IRS released their 2006 version of the top 12 tax scams they run across in their enforcement duties. Basically, if you hear someone promoting a tax strategy that sounds too good to be true, it's probably on this list.

A couple areas that we've had clients ask us about are on this list: offshore bank accounts and misused trusts. As you can see, these are clearly on the radar screen of the IRS. If you participate in any of these types of schemes, just be ready to pay the penalties when the Service comes knocking!

How Tax Brackets Work

One of the most misunderstood areas of the tax system are the tax brackets. People often assume that being $1 into the next highest bracket results in all of your income being taxed at the higher rate. In reality, only that $1 would be taxed at the new rate. I ran across a helpful article discussing the details.

Self-directed IRA Can't Be Self-Serving

A business owner thought he had a pretty good idea about using his IRA. He wanted to purchase real estate in his IRA and lease it to his company. The Labor Department says that kind of plan won't work, and would be subject to penalty.

Some clients have asked us about moving IRA funds into self-directed accounts that can be used to purchase real estate and other investments. While these accounts are allowed under the law, we don't advise their use for a number of reasons. One of these is that most taxpayers aren't savvy enough to negotiate the myriad rules related to appropriate uses of these funds. Besides, we want your IRA to be there for you at retirement - use other funds for land speculation!

2006 Mileage Rates Released

The standard mileage rate falls to 44½ cents for 2006 business driving. While that's 4 cents higher than 2005 began, an increase in September brought the rate for the last part of 2005 to 48½ cents.

Medical miles decrease from 22 to 18 cents each, though they had started 2005 at 14 cents.

And of course, charitable miles remain flat at 14 cents. This article offers some insight into the reason for the charitable mileage rate remaining unchanged every year. Apparently the medical and business rates are based on actual operating costs, while our congressional representatives have to manually set the charitable rate. Apparently, having to consider the issue more than once every five years is too much of a strain on them.

Individual Tax Extensions Extended

The IRS recently issued new regulations which will allow for a streamlined extension process for individuals. Instead of receiving a four-month extension on April 15th, individuals will now be able to extend their due date to October 15th with one filing.

While individuals could already extend six months to October 15th, the process required an initial four-month extension to August, then an additional two-month extension to be filed by August 15th. The second extension request also wanted an explanation of the reason you needed a second extension, while the new system provides for automatic extensions of six months right off the bat.

One important item to remember about extensions is that they're always extensions of the filing deadline, but NOT the payment due date. Even if you need an extension, you must pay your tax in full by April 15th to avoid late payment penalties.

Increased Gifting Limits, More Updates For 2006

The IRS released further updates for 2006 today, updating various amounts that are supposed to increase each year based on inflation. One key change was an increase in the gift exclusion from $11,000 to $12,000.

The gift exclusion is the amount of money you can give to another person without affecting the amount you can leave tax free at your death. If you and your spouse both choose to each give the maximum of $12,000 to one of your children and their spouse, you can basically give $48,000 to a married child next year.

Other regular annual changes include increasing the standard deductions and widening each of the tax brackets, so that you can enjoy a little more income at each of the lower brackets.

Retirement Contribution Limits for 2006 Announced

The IRS recently released the updated limits on contributions to retirement plans effective January 1, 2006. These limits define the amount you can contribute to a 401k or similar plan during a year. There are a lot of obscure amounts in their information, so we'd like to highlight the key numbers for you.

• Maximum contributions to a 401(k) plan - increases from $14,000 to $15,000.
• Additional contribution allowed for those over 50 - increases from $4,000 to $5,000.
• Total amount allowed to be contributed for an employee, including their deferral and company match - increases from $42,000 to $44,000.

The full details of the release can be found at this site. When it comes to retirement savings, I always like to remind clients that I've never run across anyone who complained about having saved too much. Consider increasing your savings, and you can probably save some tax at the same time.

Katrina Relief Bill Signed by Bush

President Bush recently signed a bill containing tax relief provisions for those affected by or volunteering to help with relief from Hurricane Katrina. While many of these provisions will have more effect in my old hometown in Mississippi, there are some provisions that will help us in Washington who help personally or financially.

The main provisions that affect us outside of the Katrina devastation involve new breaks for contributions. The limits on contributions as a percentage of income are lifted for the remainder of 2005.

Another nice break for anyone who has traveled to affected areas to give relief is the increased mileage deduction for hurricane relief. As I've written before, the oddity is that charitable miles are a 14 cent deduction, while business miles apparently cost 48.5 cents. This bill, however, increases the charitable mileage deduction for hurricane relief efforts to 70% of the business rate. That should come out to about 34 cents per mile - a nice bump from the regular rate.

Quite a few people have asked if my family and friends were affected by the hurricane. While everyone I know is safe, there was some pretty serious devastation in my old hometown of Hattiesburg, Mississippi. My old high school caught a good bit of the blow - here are some pictures if you're interested.

For more details on the tax bill, click here.