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As you may be aware, you can pay your income taxes by credit card (1); however, you are responsible for a 2.49% add on fee. You can pay by credit card by phone at (888) 729-1040 or on the web at www.pay1040.com for federal taxes or (800)-272-9829 or on the web at www.officialpayments.com for federal, state or local property taxes.

There are 2 other ways in which to pay your taxes electronically. First is the Electronic Funds Withdrawal (EFW) (2) and the second is the Electronic Federal Tax Payment System (EFTPS) (3). These 2 ways have no fees as these are direct withdrawls from your bank accounts. To use the EFTPS you must register as an individual and/or a business separately with the IRS and wait for a pin number that can take about 2 weeks. The difference is that you can pay all federal personal and business taxes on line.

The EFW plan is set up when you e-file your tax return, you can authorize that the taxes are withdrawn from your checking or savings account. The EFW program is only available through your tax professional or tax software. The toll free number is (888) 353-4537 which can be called 24/7 for information regarding a payment or to cancel a scheduled payment (to cancel a payment you maust call by 8 p.m. 2 business days prior to the withdrawal date.

The EFTPS gives you more control as you set up the amounts for the following taxes:

Form 1040 – individual income tax return; (1), (2) (3)

Form 4868 – extension for individual income taxes;(1), (2) (3)

Form 1040-ES – estimated taxes for individuals (you can schedule up to 4 withdrawals on the due dates of the estimates, April 16, 2007 (April 17 2007 in Massachusetts and Maine), June 15 2007, September 17, 2007 and January 15, 2008; (1), (2) (3)

Form 1041 – income tax returns for estates and trusts;

Form 940 – unemployment taxes; (1), (2) (3)

Form 941 – quarterly employment taxes; (1), (2) (3)

Form 944 – employers annual federal tax return; (1), (2) (3)

Form 1120 – corporate income tax returns; (1) (3)

Form 1120S – “S” Corporation returns; (1) (3)

Form 1065 & 1065B – partnership & limited liability Companies returns (1) (3)

Form 7004 – extension for corporate returns; and, (1) (3)

Form 990-PF – income tax return for private foundations; (1) (3)

Most states have also added on-line payments to their system. You should check with your state’s department of revenue to set up their payment process. Links to all state’s department of revenue http://www.irs.gov/businesses/small/article/0,,id=99021,00.html

As we are counting down to December 31, 2006, the end of another tax year, it is time to see if there is anything that needs to be done in order to minimize your income taxes.

If you have a business and you want to set up a retirement plan certain plans must be set up before December 31, 2006. They include pension and profit sharing plans as well as profit sharing 401(k) plans. A SEP-IRA checlklist

If you don’t set up one of these plans you can set up and fund a Simplified Employee Pension SEP-IRA before the due date of your return (including extensions).

The SEP-IRA has different vesting requirements that a pension or profit sharing plan. The pension and profit sharing plan has several vesting schedules with the longest vesting schedule being 5 years from entering the plan (6 years from date of hire). The SEP-IRA has an immediate vesting, where your employee does not lose a share of the retirement contribution if he or she leaves after the plan is funded, usually 2 years.

The radio is constantly playing advertisements for donations of cars, boats and other items of value. Remember that only donations completed by December 31, 2006 will provide a deduction for 2006. Also, if the vehicle is sold by the not-for-profit organization your deduction is limited to the amount of the vehicle proceeds. If the vehicle is kept and used by the not-for-profit organization (not sold) then you can deduct the value of the car. The values can be obtaind from Kelly Blue Book (KBB), Edmunds, or National Automobile Dealers Association (NADA).

Buying equipment before December 31, 2006. It is only a good idea if you really need the equipment now or early next year and you know what specifically want to buy.
If you buy equipment to reduce taxes, it not only reduces the tax; however, it also reduces cash or puts you in debt for 100% of the cost.

An example, if you are in the 40% tax bracket and buy a piece of equipment with a cost of $10,000.00, you will save $4,000.00 in taxes or the equipment only cost $6,000.00 ($10,000.00-$4,000.00). However, if you didn’t buy the equipment you would have $6,000.00 in your pocket ($10,000.00-$4,000.00).

The only reason to ever buy equipment is if you need it.

Bunching of deductions, if you are planning to give charitable contributions in early 2007, paying them in 2006 reduces your income taxes by 1 year.

Tax planning is an important tool that some CPA’s use. Although April 16th (17th for those states that celebrate Patriot’s Day (Massachusetts and Maine) is approximately 4 and 1/2 months away, estimating your 2006 income taxes can save money and cash flow or give you as much time as possible before taxes are due.

On several instances calculations can determine that there is enough tax payments made during the first 3 quarterly estimate payments to cover your entire tax. When this occurs you don’t have to make the 4th estimated tax payment. This helps your cash flow.

Sometimes the calculation shows that you will owe alot of money, the earlier you know how much you will owe the longer you will have time to put the funds together.

Although the 4th Quarterly estimated tax payments are due by January 15th, it may save Federal income taxes to prepay your state estimated tax payment, either the original amount or an adjusted amount based on the tax planning. The reason It may save income tax is two-fold. First you must itemize deductions in preparing your tax return. Second, there is an add on tax called the Alternative Minimum Tax (AMT) that disallows taxes and miscellaneous itemized deductions as well as having additional adjustments that have the potential to create the add on AMT tax.

It is important to note that each year more and more people become subjected to the AMT tax.

The AMT was originally added to the Internal Revenue Code in 1969, going into effect in 1970. The AMT was to create a tax on income even when the regular income tax was either $0.00 or very low. It was originally set up to make certain that the wealthy paid some taxes.

In a brief issued by the Congressional Budget Office (No. 4, April 15, 2004),^[3] the conclusion was clear:

Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow.

The IRS has a new option regarding an online payment agreement.

The online payment agreement program is currently available to tax professionals; however, eventually the online payment aggrement will be available to all taxpayers via the IRS website, www.IRS.gov

The online payment plan applies to cases up to $25,000 for individual tax obligations expected to be paid within five (5) years.

There is a $43.00 fee to set up the payment plan and there is an online payment calculator to help determine acceptable payment agreements based on income and expenses.

Changes have been made to the Offer in Compromise program.  In order to request an offer in compromise a 20% deposit is required with the offer.

Be careful with the IRS collections as the IRS has recently started using private collection agencies.  When a private agency is used to collect IRS liabilities, the taxpayer has the same rights aforded the taxpayer by the IRS.

Sole Proprietors/Self-employed businesses are expected to be audited more than they have been in the past.  The IRS has determined that sole-proprietorships have relatively low reporting rates.  There is more information available at www.taxtalktoday.tv/index.cfm? pag=571

In an effort to make deciding on an automobile easy, several manufacturers have set up what they call “a test drive”.  They give the buyer a certain time to return the vehicle for a full refund less a mileage charge and other fee.

In order to determine if it is worthwile taking the “test drive” it is important to know if the sales tax is refundable.  If not, in Massachusetts the “test drive” not only costs the mileage charge and fee, it will also cost 5% of the original purchase price.  That would make the “test drive” an expensive test.

Massachusetts has issued a policy on what effect the recision of an automobile purchase on the sales tax. In MA Directive 06-4 “The purchaser is entitled to an abatement of the sales tax if the vehicle is returned within 180 days of the date of the sale and the entire purchase price is refunded by the dealer, less the dealer’s established handling fee, if any. The handling fee must be reasonable, may be a flat fee or a percentage of the sales price, and may be established by the dealer’s customary policy or by written contract.”

“A mileage charge is not a vendor’s established handling fee. However, the imposition of a reasonable mileage charge will not preclude the return of a vehicle as being treated as a rescission for sales tax purposes, providing the other statutory criteria are met. The mileage charge will be treated as a charge for the rental or lease of the motor vehicle and as a new transaction subject to sales tax. The tax imposed on the mileage charge will be deducted from the amount of tax abated to the purchaser by the Department relating to the rescission.”

If you are not a resident of Massachusetts, you should check with your states sales tax department to determine how your state handles the sales tax on the recision of the automobile sales contract.

One of my client’s One Eighty Business Solutions, LLC, 180biz.com has forwarded to me his November 2006 newsletter. In addition to his consulting information he has included information regarding the effect of Internet Explorer 7 on the QuickBooks software family. Here is an excerpt ftom his Newsletter:

“There is an update from Microsoft for Internet Explorer 7. There is an issue with QuickBooks which is an issue for any of the following versions:

The following QuickBooks financial software products will work with Internet Explorer 7.

• QuickBooks 2007 and QuickBooks Enterprise Solutions 7.0
• QuickBooks 2006 and QuickBooks Enterprise Solutions 6.0 when updated to Release 8
• QuickBooks 2005 in a future update. Please check www.QuickBooks.com/support/IE7 periodically for updates on a solution.
• QuickBooks Online Edition
• QuickBooks Point of Sale versions 4.0, 5.0 and 6.0

Note that unless otherwise noted, when we say “QuickBooks” we are talking about the Windows desktop versions of QuickBooks financial software, including Simple Start, Basic (last produced in 2005), Pro, and Premier. We also identify the corresponding version of Enterprise Solutions.

QuickBooks 2004 and prior versions will not function properly on Internet Explorer 7.

As your QuickBooks ProAdvisor®, I wanted you to know that Microsoft will soon be sending out an automatic update to Internet Explorer, replacing Internet Explorer 6 with Internet Explorer 7. This affects users of QuickBooks®: Simple Start, QuickBooks: Basic, QuickBooks: Pro, QuickBooks: Premier, and QuickBooks Enterprise Solutions.

I am recommending that you decline the Internet Explorer 7 upgrade if you are currently using any version of QuickBooks earlier than QuickBooks 2006 Release 8 or QuickBooks Enterprise Solutions 6, Release 8.

Intuit has posted more information for you at this link:

http://www.quickbooks.com/support/ie7

This approach will make sure that you are able to continue to use QuickBooks without any interruptions of the user experience.”

Although the Internal Revenue Code of 1986 is tax code we use, the tax code is updated, both by statute and the court. It is only when the tax laws being changed are so dramatic that the year of the code is updated, 1954 was the prior code used.

2006 like every year has some new tax legislation.

On May 17, 2006 the Tax Increase Prevention and Reconciliation Act of 2005 was signed into law by President Bush. (TIPRA)

Some of the changes are as follows:

The Section 179 expensing of small business equipment purchases that increased the $25,000 annual limit to $100,000 adjusted for inflation was extended 2 additional years through 2007. In 2006 the limit adjusted for inflation is $108,000. If total purchases of equipment exceed $430,000 in 2006 the maximum deduction is reduced.
The 15% long-term capital gain and qualifying dividend rate that was to expire in 2008 has been extended through 2010.

Alternative Minimum Tax (AMT) – has been a sore issue for many people. The AMT requires that a higher than regular tax may be due because certain items are not deductible for AMT purposes. Taxes and Miscellaneous deductions are 2 that may have a big effect on the AMT. The tax law extends and increases the AMT exemption amount. In 2006 the AMT exemption is increased for individuals to $62,550 from $58,000 and $42,500 from $40,250. These amounts are subject to phaseout based on total Alternative Minimum Taxable Income.

Kiddie Tax – Prior to this year, the Kiddie Tax was for children under the age of 14, effective with 2006 the Kiddie Tax applies to children under the age of 18.

Conversions of Traditional IRA’s to Roth IRA’s:

After 2009, there will be not adjusted gross income (AGI) limit, currently $100,000, to convert a Traditional IRA to a Roth IRA. If converted in 2010, the income is reported 1/2 in 2011 and 1/2 in 2012.

On August 17, 2006, The Pension Protection Act of 2006 was enacted. Although you might not think that a pension law would include income tax laws, it does. Either amendments of tax laws are included on other bills or other laws are included in tax laws. It is a way to get certain items through a bill that might not go through separately. Congress and the President don’t want to appear against certain types of bills; therefore, Congress attaches an amendment, that the President doesn’t want, to a bill he does want.

The savers credit has been made permanent. The credit is for lower income taxpayers who save through retirement plans, 401(k), Traditional or Roth IRA’s, Simple, SEP IRA’S, qualified profit sharing, money purchased pension plans or Keogh plans.

The credit is 50% of the savings up to $2,000 of savings; up to a $1,000 credit. The credit phases out as income hits certain levels. The sliding scale credit is available for married filing jointly and single individuals at Adjusted Gross Income of $50,000 and $25,000, respectively. Savers Credit

Congress has approved that federal overpayments can be deposited directly into IRA accounts; however, the IRA laws have not been changed. If you file your income tax return on April 14th the IRS will not have time to get the IRA contribution paid before April 15th; therefore, your contribution would be late and not be tax deductible if it was for the year you file your return. I’d recommend to see if there are any changes or if there is a cutoff date set up by the IRS relative to getting the funds to the IRA custodian, bank or investment account.

Small not-for-profit organizations not required to file Forms 990 will have to notify the IRS annually that they exist. If they do not file for three years the IRS will terminate their tax exempt status. Without tax-exempt status contributions made will not be deductible by the contributors.

Charitable contributions of clothing and household items can only be deducted if they are in “good used condition or better” also, items with minimal value deductions may be denied by the Secretary of the IRS. Used socks and underwear are out (thanks to Bill Clinton, who put high values on his socks and underwear).

Anyone age 70 1/2 years old or older is required to take distributions from retirement plans. Retirement plans include Individual Retirement Accounts (IRA), profit sharing plans, 401(k) plans, 403(b) plans as well as SEP-IRA’s, Simple-IRA’s, SAR-SEP’s and Keogh Plans.

Roth IRA’s are not subject to the RMD rules.

Do not assume that your bank or investment broker will automatically distribute the required minimum distribution. If you forget to take the required minimum distribution or not enough of a distribution a 50% penalty may be charged.
In the year that a person becomes 70 1/2 years old, the person has a choice to postpone the distribution to April 1, of the next year. If the particpant in the plan postpones the prior years payment he or she will have to take 2 minimum distributions in the year you turn 71.

When deciding whether to postpone from one year to the next, it is important and should be determined on a case by case basis. If your tax bracket is higher in the year you become 71 versus the year you are 70 1/2, you may save more money by taking the distribution in the year you turn 70 1/2.

The Required Minimum Distribution (RMD) is calculated based on the value as of the first day of the year. The balance is divided based on your age on the Uniform Lifetime Table.

Other sites:

Investopedia

NY Life RMD Calculator

It seems the last thing people want to do is plan for death. In addition to potential estate tax issues, especially in states that don’t follow the federal estate tax exemption, estate planning gives each individual the ability to say where and when his or her assets are to go. Estate tax planning can minimize if not eliminate estate taxes.

As a part of estate planning people with children below the age of majority can and should determine who will have custody of their child(ren) to raise them and support them if something happens to one or both parents.

In addition to wills, estate plans often use trusts both living trusts (inter vivos trusts)and trusts arising from wills (testamentary trusts).

Each type of trust has its own pros and cons. Living trusts allow assets to pass after the death of an individual without going through the probate function. However, the living trust can be expensive and the cost occurs at the setup not after death. Also, assets in an inter vivos living trust do not avoid estate taxes.

In addition to wills and or trusts that are set up, people should have both a living will (health care proxy) and a Durable Power of Attorney.

A living will (health care proxy) gives permission to another individual to make medical decisions in case you are unable. Included with a living will (health care proxy), I recommend that the individual include as part of the health care proxy or living will one’s wishes as to what to do under certain medical conditions. By providing an explanation of your desires in case of emergency, the designated individual is not making the decision, the designee is telling the doctors exactly what you want done.

This may also take away any potential guilt the designated individual might have if he or she has to decide your fate without any instructions.

Another important document to have is a Power of Attorney. A power of attorney gives the right of the individual appointed to act in place of the individual giving the powers. Unlike the living will, the power of attorney gives immediate rights to the named individual. The powers take effect immediately even though the individual may only wants you to have control if the grantor of the power is unable to perform his or her acts. One way to mitigate powers is to have a third party hold the power of attorney and give it to the grantee upon the grantors unability to conduct his or her business.

A Durable Power of Attorney is valid until the death of the individual and is in force while the individual is incapacitated where a power of attorney (not durable) is not effective if an individual is incapacitated.

For more information see the attached links:

What is estate planning?

Estate Planning Dictionary