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Income Tax Update. Illinois Association of Aggregate Producers May 18, 2006. Presented by Eck, Schafer & Punke, LLP. Canned Opening Gibberish …. Make eye contact. Establish relevancy of topic to audience. Get audience involvement. Use humor as appropriate.

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income tax update

Income Tax Update

Illinois Association of Aggregate Producers

May 18, 2006

  • Presented by Eck, Schafer & Punke, LLP
canned opening gibberish
Canned Opening Gibberish …
  • Make eye contact.
  • Establish relevancy of topic to audience.
  • Get audience involvement.
  • Use humor as appropriate.
tax increase prevention act
Tax Increase Prevention Act
  • Signed into law May 2006.
  • 70 billion in “net” tax cuts.
  • “Trailer bill” still to come.
alternative minimum tax
Alternative Minimum Tax
  • Separate tax calculation.
  • Eliminates benefit of many itemized deductions.
  • Should be called “Mandatory Maximum Tax”
alternative minimum tax1
Alternative Minimum Tax
  • Taxpayer required to pay the higher of “AMT” or regular tax calculation.
  • Effects Millions.
alternative minimum tax2
Alternative Minimum Tax
  • Exemption bumped to $62,550 if married.
  • $42,500 if single.
  • For 2006 only.
  • Will keep 15 million from paying “AMT”.
dividend capital gain rate cuts
Dividend & Capital Gain Rate Cuts
  • 15% and 5% rates extended.
  • For 2 years.
  • Through 2010.
small business expensing
Small Business Expensing
  • 2006 expense limit of $108,000.
  • On total additions under $ 430,000
  • Expense would have dropped to $25,000 after 2007.
section 179 expense limit
Section 179 Expense Limit
  • $25,000 limit for SUV’s
  • Entity must have “trade or business” income.
  • NOTE: W-2 wages count as “trade or business” income for individuals.
small business expensing1
Small Business Expensing
  • Increased expensing allowance extended for 2 years.
  • Amounts are indexed.
  • Through 2009.
roth iras currently
ROTH IRAs … currently
  • No deduction for contributions.
  • Qualified distributions from a ROTH IRA are entirely tax free.
  • There are no “required distributions” at age 70 ½ as with a traditional IRA.
roth iras currently1
ROTH IRAs … currently
  • Prohibit “conversions” at $100,000 of adjusted gross income (“AGI”)
  • Phase out contributions beginning at $150,000 of “AGI”
roth iras new law
ROTH IRAs … New Law
  • $100,000 “AGI” ceiling on conversions after 2009 is removed.
  • Conversions in 2010 may be taxed over 2 subsequent years.
  • No 10% Penalty
roth iras planning
ROTH IRAs … Planning
  • Fund Maximum non-deductible IRA contributions through 2009
  • Convert traditional IRAs to ROTHs in 2010
  • Avoid tax on all future appreciation.
kiddie tax
Kiddie Tax
  • Requires “unearned income” (int, div) of children in excess of $1,700 to be taxed at parents’ tax rate.
  • Minimizes the opportunity for “income shifting”.
kiddie tax1
Kiddie Tax
  • Under old law this applied if child was under age 14 at year end.
  • Under new law it applies if child is under age 18 at year end.
trailer bill may extend
“Trailer” Bill … may extend
  • State and local sales tax deduction.
  • Teacher’s classroom expense deduction.
  • R&D provisions.
  • Employment tax credits.
other changes in 2006
Other Changes in 2006 …
  • IRA Deduction Increased.
  • Deduct up to $4,000.
  • $5,000 if age 50 or over.
  • Phase outs begin at $75,000 or $150,000 if you or your spouse are covered under a qualified retirement plan.
other changes in 20061
Other Changes in 2006 …

Domestic Production Activities Deduction.

• Deduct 3% of Qualified Production activity Income.

  • Increases to 6% in 2007-2009.
  • Increases to 9% in later years.
domestic production activities deduction
Domestic Production Activities Deduction
  • Deduction is based on the lesser of “Qualified Production Activity Income” or “Taxable income”.
  • Deduction can’t exceed 50% of W-2 wages paid.
what qualifies
What Qualifies …
  • Sale of tangible personal property, computer software, certain sound recordings, Manufactured, Produced, Grown or Extracted in the U.S.
  • Construction activities (erection or substantial renovation of real property) in the U.S.
  • Architectural and Engineering services related to construction activities in the U.S.
  • Farming and raising livestock will qualify.
real property includes
“Real Property” includes …
  • Residential and commercial buildings.
  • Land improvements.
  • Infrastructure.
infrastructure includes
“Infrastructure” includes …
  • Roads
  • Power Lines
  • Water Systems
  • Sewers
  • Sidewalks
domestic production activities deduction1
Domestic Production Activities Deduction
  • Sole Proprietors, S Corps, C Corps, Partnerships, LLC’s can qualify.
  • Reported on Form 8903.
il manufacturer s purchase credit
IL Manufacturer’s Purchase Credit
  • Earnthe credit on the purchase of exempt manufacturing machinery & equipment.
  • Credit equals 50% of the tax that would have been paid.
il manufacturer s purchase credit1
IL Manufacturer’s Purchase Credit
  • Usethe credit against sales or use tax paid on production related tangible personal property.
  • Used or consumed in a production related process.
  • Unused credit may be carried forward 2 years.
examples include
Examples … include
  • Fuel, oil, lubricants & cleaners.
  • Hand tools, Protective apparel & safety equipment.
il manufacturer s purchase credit2
IL Manufacturer’s Purchase Credit
  • June 30th deadline for claiming credit on all 2005 purchases.
  • File form ST-16 to establish the amount of your credit.
il manufacturer s purchase credit3
IL Manufacturer’s Purchase Credit
  • “Spend” your credit on current taxable purchases.
  • Fill out form ST-16-C with seller.
  • Seller keeps top half.
  • You keep bottom half.
il manufacturer s purchase credit4
IL Manufacturer’s Purchase Credit
  • June 30th deadline for reporting credit “spent” in the prior year.
  • File form ST-17 to report the total amount of credit used.
  • Use info from all prior yr. Form ST-16-C’s
basic estate planning
Basic Estate Planning
  • Each individual currently (2006-2008) has a $2.0 million estate tax exclusion.
  • In theory a married couple should be able to have $4.0 Million in assets and not pay estate tax.
basic estate planning1
Basic Estate Planning
  • Need to review your wills to make sure both spouses will take advantage of their 2.0 million dollar exemption.
  • This is often accomplished with a “Credit Shelter Trust”.
  • Owning everything as “JTWROS” can work against you.
estate planning techniques
Estate Planning Techniques
  • Use Annual Gift Exclusion Amount.
  • You may gift up to $12,000 per person for 2006 ($24,000 if married) without gift or estate tax liability.
estate planning techniques1
Estate Planning Techniques
  • Payment of Tuition made directly to school does not count towards $12,000 annual gift limit.
  • Grade School, High School & College Tuition all qualify.
  • TAX TIP – Practice working this fact into conversation with wealthy relatives.
Payment of Medical expense made directly to hospital or insurance provider, on behalf of another, does not count towards $12,000 annual gift limit.
  • Numerous 2006 changes provide opportunities.
  • Roth IRA changes.
  • U.S. Production Activities Deduction.
  • Illinois MPC.

Eck, Schafer & Punke, LLP