For many of us 2006 will be remembered as the year of recovery. With many of us still trying to get damages repaired, homes built, or situated in a new location, taxes and knowing how to best benefit when filing is proving to be a challenge. Many of the Internal Revenue Service breaks that were announced for 2005 are still in effect for 2006.

Below are some of the tax breaks available as a result of the hurricanes. Be reminded that the area where you lived had to be declared a disaster area to be eligible for the benefits.

1. Repeal of the Telephone Tax will generate refunds between $30 and $60 for each taxpayer.

1. Any uninsured losses from any of the 2005 disasters can be used to amend your 2002, 2003, and 2004 returns to get refunds of any taxes not refunded. For the first time it will include the waiver of the 10% above AGI allowing full deductibility. You must establish your losses in 2005 to be eligible.

1. You had until October 16 th to file your 2005 business individual returns. An extension filed by October 16 th will give you to April 15, 2007.

1. Distributions from retirement plans will not be subjected to the 10% early withdrawals penalties for those affected up to $100,000. The distribution has to be made by December 31, 2006. Distributions can be spread over a three-year period. If Distributions are paid back within three years the distribution would be treated as a rollover.

1. Those families with children will not lose child credits or earned income benefits as a result of being temporarily displaced. They will be able to use their 2005 tax returns to get those benefits.

1. The rate for using your vehicle to do volunteer work is .3295 cents per mile or 70% of mileage rate for the business, which is .485 cents.

1. Prior to the disasters, a person receiving insurance income had 2 years to replace property without being taxed on the money received. The new limit is 5 years.

1. The IRS is waiving usual fees for requesting prior year tax returns for those affected by the disaster. For Free copies of your 2002, 2003, or 2004 returns, visit www.irs.gov.

1. Employees and their companies will get a break under the change in the tax law for any assistance the companies provide their workers. Per Diem while displaced, payment for funerals or home repairs are a few of the deductions. Those payments are not taxable income to employees and can be deducted by the company.

The above mentioned special tax changes for 2006 and tax planning are some ways to reduce taxes for 2006. Below is some tax planning techniques.

• Accelerating Expenses – Pay expenses that you plan to pay in the beginning of 2007 before December 31, 2006.
• Income Splitting – Spreading taxable income among family members is excellent for family businesses. Children under 19 years of age can earn about $5,000 without being taxed.
• Tax Free Investments – Municipal bonds and other tax-free investments.
• Real Estate Investments – Tax Free Exchange and other real estate investments such as 1031 Tax Free Exchanges.
• Tax Sheltered Investments – There are all sorts of tax shelters such as cattle, trees, oil, etc. Be careful some are illegal.

BASICS TO REDUCING YOUR 2006 TAXES:

• Shift income where possible until Jan 2007 . Ask that a check scheduled to be paid to you in late December be sent to you in the first few days of 2007. Defer year-end bonuses or delay billing if you are self-employed.

• Pay Jan 2007 mortgage, real estate taxes and medical bills in Dec 2006 . Accelerate expenses by pulling any expenses into 2006 that may be due in 2007. This is especially useful if you can expect your income to decline in 2007. Your deductions are worth more in 2006 than they will be in 2007.

• Maximize contributions to both work and IRA retirement plans . The much talked about changes in retirement investments started in 2002. The amounts you save in your 401K are from $15,000, for 2006, up to $15,500 per year by 2007.

Some of you with income of $25,000 filing single, $37,000 filing Head of Household and $50,000 Married Filing Joint are eligible for retirement savings contribution credit. IRA contributions current amount is $4,000 for 2006. There is an IRA catch up provision that started in 2002, permitting those 50 or older to stack away additional amounts. You can contribute an extra $1,000 per year. Take advantage if you do not have a company sponsored plan at work.

Employer and individual retirement plans has replaced social security as the cornerstone for retirement planning for most people.

Traditional IRA’S

• Spouses who are not in a retirement plan at work can invest $4,000 even if a joint return is filed and adjusted gross income is less then $160,000 for joint filers.
• Joint filers with Adjusted Gross Income of $75,000 - $85,000 who are part of an employer retirement plan can still benefit from an IRA of $4,000 each. Single filers adjusted gross income of between $50,000 and $60,000.
• Need to use some of your retirement money now? For 2006 you maybe eligible to withdraw $100,000 because of Katrina. My advice is to try to borrow against your retirement first or seek other means of financing. The tax consequence could mean from 27 – 39 % additional taxes. Tax-exempt hardships are allowed for some distributions from retirement plans up to $10,000 for New Home Purchases, Medical & Health Aid and College Tuition. There are special distributions breaks if you are in a disaster area.

Roth IRA’S

• Principal advantage is If no earnings or gains are withdrawn for at least 5 years and certain other conditions are met, distributions will not be subject to income taxes or penalties. Income must be less than $110,000 single and $160,000 joint to open Roth accounts. Investment is limited to $4,500 per person under 50 years of age and $5,000 if you are over 50 years of age.
• You can convert from Traditional IRA to Roth IRA. Conversion is treated as taxable ordinary income and will be taxed.

• Convert non-mortgage interest to mortgage interest . Consolidate your bills into your mortgage. If you have a lot of debt and property with some equity, this a good way to save on taxes and give you room to work. Be careful you could lose your home if you default on the loan. Some points and origination fees can be deducted for home purchases or improvements while others are amortized over the life of the loan.

• Give unwanted personal property to charitable organizations . Giving to nonprofit organizations can really save you money. You can deduct the fair market value of the donated items. Recently passed tax law limiting the amount that can be taken on the donation of a vehicle will have to be taken into consideration when donating a car. The higher your tax bracket the more your donation is worth. You will need a written statement for property donations over $500 and $250 cash donations. Deductions for use of your car to qualified charitable organizations can be deducted. The IRS will allow you thirty-three cents per mile.

• Capital Gains/ Losses is also important to any good tax planning strategy. With the

stock market becoming more stable getting rid of loser stocks or mutual funds would

help up to $3,000 in Capital Losses. The higher your tax bracket the more tax savings

you benefit from.

8 . Reducing large refunds is another good tax strategy. This excess withholding could

be put in employer sponsored retirement plans or IRA to further reduce your tax liability.

9. Social Security Recipients. 85 % of your benefits could be subject to tax. The tax

applies only after other income plus 50 % of Social Security benefits exceeds

$25,000-$34,000 for single taxpayers and $32,000-$44,000 for married taxpayers.

• Social security retirees under 65 can earn up to $13,500 in 2006 without losing part of their benefits. Above that amount they lose one dollar of benefits for every two dollars earned. Retirees age 65, starting with the month you reach full retirement you will get your benefits with NO limit on your earnings. Social Security Taxes on wages increased from $90,000 in 2005 to $94,000 in 2006. The Medicare tax is taxed on all income.

If you are paying someone to clean and cook for you, you must file Form H if the amount paid exceeds $1,100.00. You may also be required to pay employment taxes as well.

REMEMBER THE KEY TO MINIMIZING YOUR TAXES IS MAKING THE ADJUSTMENTS BASED ON THE TAX LAWS AND YOUR CIRCUMSTANCES.

Military service in combat zone has tax benefits to military personnel. Make sure you take advantage if applicable.

Parents with college age children can still claim them as a dependent when providing over 50% of their support. They can earn up to $5,000 and be a dependent on your return. For children over the age of 23 that figure is $3,300. You can open an IRA for children with up to $3,300 of earned income. A Good Tax Shelter.

For those of us who have children in college or who will be attending college the Hope Credit & Lifetime Learning Credit is great.

• Hope Credit . Up to $1,500 for qualified tuition and related expenses for each eligible student under the age of 24 if you supply more than 50% of the child’s support for the year. The student must be a freshman or sophomore.

• Lifetime Learning Credit. The limit is up to $2,000 per year of qualified educational expenses.

• Student Loan Interest. Income limits have increased. The interest is deductible if paid in the first five years. Income must be less then $135,000 for joint filers and between $50,000 to $65,000 for single filers. The limit for the tax year 2006 is $2,500.

• Tax Free Savings Bonds . Bonds are another fairly new approach to save for college. Interest escapes taxes when used to pay for college. Income cannot exceed $124,700 for joint filers and $78,100 for others.

• Education IRA . $2,000 can be saved for each child in 2006 and be sheltered from taxes. Income cannot exceed $220,000 for Married Filing Joint taxpayers and $110,000 for Single taxpayers.

• The Federal 529 Education Plan as well as the State SMART Program has tax advantages.

• You will no longer be able to take an adjustment to income if you do not qualify for the college audit.

Divorced or Separated with Children . It is better to have a written understanding of who will claim the dependent child otherwise the custodial parent will get deductions. This understanding may be either through a court decree or multiple support agreement. ( IRS form 8332).

With the popularity of gambling, here are some tips in documenting gamblingwinnings & losses .

In general the following information should be kept: A. Name of gambling establishment, B. Address or locations of gambling establishment, C. Amount won or loss.

All income received from unemployment benefits continues to be fully taxable in 2005 . States will withhold federal taxes up to 10% when requested.

Many of you have business-related expenses with local and out of town work . The Federal per diem rates in which the IRS used for out of town expenses varies from city to city, Chicago is $176 for meal and lodging per day, New Orleans is $131 and St Paul is $141. Other deductible expenses include meals, entertainment, laundry, phone, transportation, and work expenses in general. You must keep a log of the dates and purpose and proof of hotels expenses. Some of you have work assignments out of the country and may be eligible for Foreign Tax Credit Exclusion up to $84,000 for 2006.

Real Estate continues to be a good hedge against taxes . Rental Properties can provide some relief against taxes but you must actively participate in the management

of the properties to get tax advantages. Depreciation and deductions for repairs and upkeep helps for up to $25,000 in losses and losses over $25,000 if you put 50% off the time into properties and income is under $150,000. You can also defer gain on investment property through Section 1031 of the IRS code for Like Kind Property Exchange.

Income Splitting. Most know that our children are our biggest investment. Some of us have investment accounts for our children and others employ children in our businesses.

Here are a few tips on getting the most out of your investment efforts in your children.

• Make investments in the name of children. The first $800 of interest is tax free.

Children can also earn $5,000 tax free money while working in your business. Your child must be under nineteen (19) years of age.

B. If you own a business, consider hiring your children. If your tax rate is higher than

10% then paying your children will allow additional income to be taxed at 10%.

In addition your company will be able to get a deduction for wages paid. Children

under 18 employed by parents are not subject to Social Security or Medicare taxes or

Federal Unemployment Taxes. If a family forms an S Corporation, Partnership, or

Limited Liability Company (LLC) its income will be taxed to its owners in proportion

to their ownership interest. Give children over 13 years of age interest in these

businesses, shifting income into a lower income bracket.

C. Using $2,000 of children’s income to set up Savings Plans like Education IRA’s of

Tax Deferred Education Plans. Education IRA’s can be used to defer up to $2,000

per year for children under 18 years of age. These accounts can be used to offset

elementary and secondary education in private and parochial schools along with cost

of computer or internet classes. Full payment will be allowed if adjusted gross income

is less than $190,000.

• Child Care expenses for children 13 and younger will be deductible up to $3,000 per

child and up to $6,000 per family with more than one child.

• Earned Income Credit . Many of you have had your Earned Income Credit challenged by the IRS. The following criteria must be met to qualify: Must have a qualifying child. A child that passes the relationship is your child or stepchild under 24 if in school and 19 if not in school and residency must be in your home more than 6 months of the year. You are eligible if you meet the above requirements and your income is under $11,750 for single filers and $13,750 for Married Filing Joint filers without children, or $33,030 with one child or $37,458 if you have more than one child and filing MFJ. These income limits could be adjusted to increase them by January 1, 2007.

Also, if more than one taxpayer is eligible to claim a child for EIC, where the child

lived will determine who will get the exemption. You must provide the correct social

security number to receive EIC for a child.

Selling your home ? You are eligible to exclude up to $500,000 of gain. The taxpayer must own and use the property as a principle residence for 2 years during the 5 year period prior to the sale.

These are just a few of the changes that may affect your 2006 personal income tax liability. Remember that every year there are hundreds of changes to the tax code, so every consideration should be investigated.

FOR THOSE OF YOU IN BUSINESS FOR YOURSELF OR INCORPORATED THERE ARE MORE CHANGES, OPPORTUNITIES, LOOPHOLES, AND PITFALLS TO CONSIDER. SOME INCLUDE:

• The type of business structure could have a big impact on your personal,

employment, and other business taxes. You should compare annually how your

business is structured with other forms of business structures. The three most

common forms of business structures are Sole Proprietorship, Limited and

Unlimited Partnerships , and Limited and Unlimited Corporations. Some of the

decisions include whether to incorporate or stay as a sole proprietor and whether to

contract work or hire employees. S Corporations and LLC’s are the 2 most discussed

business forms because it is treated like sole proprietors with the employment taxes

attached.

• You may be responsible for paying estimated taxes on the profits from your

business if you are self-employed . Based on some assumptions, you should forecast

your expected business situation, both revenues and expenses. This will give you

some idea of what taxes, if any would be owed. A change in business structure could

eliminate any estimated taxes.

• Commercial Fisherman can avoid estimated tax payment and penalties if you derive 2/3 of your total income from fishing and file by March 31, 2007. Farmers can elect to average their income over the last 3 years. Farmers can also file their returns by March 31, 2007 if 2/3 of their income is from farming.

• Self employed people can create retirement plans through their business and lower taxes in the process. Simplified Employee Pensions (SEP) and IRA’s allow you to invest up to 15% of Net Profits per year.

• Health insurance for self-employed taxpayers is fully deductible in 2006. This is an excellent way to subsidize your health insurance cost.

• The standard mileage rate for business travel is 485. You still have the option of taking the actual expenses of operating your vehicle plus depreciation or the standard allowance. You can own or lease the car for the standard allowance.

• Home office deductions will be allowed if the office is the principle place of business. If the taxpayer used that office to conduct administrative or management activities and there is no fixed location of business.

• Taxpayer’s working out of the country, in the military or on construction projects receive exclusions on some income through foreign tax credits and exclusions and military personnel receive non taxable income while working in combat and special zones.

Almost all expenses related to business activities are deductible, so please try to account for all your expenses . A record keeping system that allows you to retain records for at least 4 years should be adopted for your records.

WHEN ORGANIZING YOUR RECORDS AND RECEIPTS, YOU SHOULD GROUP THEM BY THE FOLLOWING CATEGORIES:

1. Income earned in 2006 (salaries, capital gains, unemployment benefits, and interest

earned, self-employed income.)

2. All taxes paid (local, state, federal, & property tax) although some may not be

deductible.

3. Medical expenses paid (medicine, travel to doctors, dentist, medical equipment and

supplies, etc).

4. Interest paid on mortgages only (include second mortgage, RV and Mobile Home

interest).

5. Contributions paid to churches or charity. (Cash, property, or volunteer expenses)

There is a change in the law as it relates to car donations.

6. Casualty losses and thefts. (Insurance & police reports are good verification)

7. Work related expenses. (Meals, work clothes, mileage, hotel, tools, and any other

Work related expense)

8. Business income and expenses for 2006 from unincorporated businesses.

9. Gains or losses and sale of real estate or other capital assets, such as stocks or bonds.

10. Income and expenses related to rental property.

11. Bad debts. (Business & Personal)

12. Contributions to IRA, Keogh, and SEP accounts and other retirement plans.

13. Utilities for businesses if you operate from home (electricity, gas, phone, water, etc.)

• Act of Sale Documents from home purchases or sales, Points and certain closing costs are deductible.

15. Job Search expenses. (Mileage, production and distribution of resume, phone, and the

Cost of attending interviews and transportation expenses)

16. If working out of the country, the dates you were out of the country and the country

You worked in must be kept.

Remember that early filing is good cash management, and it also ensures a speedy return of your refund. We are again offering a $20.00 discount off any return received by February 10, 2006!!!

If after evaluating your 2006 income tax position, you feel we can assist you in planning, please feel free to contact me for an appointment before the end of the year. This would be an excellent first step in starting your 2007 tax planner. Remember it is never too early to start your plan.

Warmest regards,

Ernest D. Kelly