2 Seniors (over 70) have a better shot at converting IRA s to ROTH IRA s

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1 Prudential 23 Financial and Tax Strategies to Save You Tax Law Changes 1 Gain on sale of home acquired in a 1031 exchange must now be owned a minimum of 5 years to qualify for the $250K/$500K Standard mileage rate can now (2004) be used for up to 4 vehicles driven by a business at same time Crackdown of donations of cars, boats, and airplanes starting 1/1/05 Estate and Gift Tax Changes Estate Tax Exclusion $2,000, ,2007,2008 $3,500, Estate Tax Repeal 2010 $1,000, Will probably be negotiated to a level of $3,500,000 within next 12 months Current annual Gift Tax Exclusion is $12,000 Other Tax Law Changes 2 Seniors (over 70) have a better shot at converting IRA s to ROTH IRA s 3Katrina/Wilma/Rita Issues-IRS Pub 4492 Charitable Contributions Additional Exemptions Casualty loss issues New Credits For 2005 and later years, automatic 6 month extension instead of a 4 and 2. Top Bracket Fifth Bracket Fourth Bracket Third Bracket Sec. Bracket Initial Bracket Tax Acts of Tax Rate Reductions % 35% 30% 27% 15% 10% % 33% 28% 25% 15% 10% Capital Gain and Dividend Rate Reductions-An Investor s Dream 5 Capital Gains Rate Capital Gains Rate for L/I Dividends Tax Rate Dividend Tax Rate for L/I % 10% As high as 38.6% As high as 38.6% % 5% thru 2007, 0% in % 5% thru 2007, 0% in

2 & SAFE Highway The credits and deductions under these bills primarily effect tax years 2006 and later Alternative Motor Vehicle Credit: Qualified Fuel Cell Motor Vehicle Advanced Lean-Burn Technology Motor Vehicles Qualified Hybrid Motor Vehicle Credit 6 Clean-Fuel Vehicle Refueling Property A Reward for Going Green USA Today Article 5/9/06 Chev/GMC Silverado/Sierra 2WD $250 Chev/GMC Silverado/Sierra 4WD $650 Ford Escape Hybrid 2WD $2600 Ford Escape Hybrid 4WD $1950 Honda Civic Hybrid $2100 Honda Insight (Automatic) $1450 Lexus RX 400H 2WD $2200 Lexus RX 400H 4WD $2200 Mercury Mariner Hybrid $1950 Toyota Highlander Hybrid 2WD $2600 Toyota Highlander Hybrid 4WD $2600 Toyota Prius $3150 Energy Efficiency Improvements to Existing Homes: 7 10% credit for qualified energy efficiency improvements $500 maximum lifetime credit Credit also allowed for the purchase of energy efficient property (limits apply) Energy Efficient New Homes: Qualifications: 8 Located in the U.S. Substantially completed after December 31, 2005 & before January 1, 2008 Certified to reduce energy consumption by 30% - 50%+ Credit provided for Constructing energy efficient home, or Producing energy-efficient manufactured home Maximum credit equals: $1,000 for 30% standard reduction $2,000 for 50% standard reduction 2

3 Energy-Efficient Commercial Buildings Deduction: 9 Depreciable property used for: Interior lighting Heating, cooling, ventilation, hot water Building envelope Installed on or in any U.S. building Certified as part of plan to reduce energy costs by 50% or more Energy-Efficient Commercial Buildings Deduction: Deduction limited to $1.80 per square foot A lesser deduction of $.60 per square foot for separate systems if 50% reduction not met Electricity Reliability Energy Efficient Appliances Business Solar Investment Tax Credit Personal Residence Solar & Fuel Cell Credit Clean Coal Provisions CB1 The Alternative Minimum Tax 10 The Alternative Minimum Tax Separate system designed to tax high income, high net worth individuals Started in 1969, when Congress identified approx. 175 individuals with AGI in excess of $200,000 who paid no income tax Expected to affect 40 million taxpayers by 2010, if law is left as is USA Today Article 2/8/05-No plans to reduce taxes resulting from AMTrevenue needed Alternative Minimum Tax tax provisions are targeted under the AMT, among which are: State and local income taxes RV interest expense Boat interest expense Too many kids Incentive stock options Fast depreciation deductions High capital gains Strategies to reduce AMT Timing of income and deductions Timing of large capital gains Exercise of Incentive Stock Options Taking large depreciation deductions Problem is that planning tips that reduce regular tax result in AMT 3

4 Slide 16 CB1 p-2 Chris Bird, 2/8/2005

5 Retirement Plan Contribution Limits 11 Retirement Plan Catch-Up Provisions-50 years old or more 12 Year 2005 IRA 4000 Simple (k) Def Cont SEP % of Profit 20/25 Year 2004 IRA $500 Simple $1, (k) 403(b) 457 $3, / and later $500 $1,000 $2,000 $2,500 $4,000 $5,000 The 401(k) series 13 A good way to increase retirement plan contributions on lower levels of profit. Must be started by end of first year, you can t wait until the following year to set up like a SEP IRA Only problem is that if a self employed person is not maximizing contributions to their current retirement plan, they won t do it to the 401(k) either The 401(k) series Solo (k) or Safe Harbor 401(k) Profit $50,000 $80,000 $220,000 Cont: $15,000 $15,000 $15, % 12,500 20,000 29,000* =401(k) $27,500 $35,000 $44,000 Age ,500 $40,000 $49,000 Vs SEP $12,500 $20,000 $44,000 The ROTH 401(k) 14 Do not forget this one. Brand new for 2006 IRS Regulations just came out on this Taxpayers will be able to put in elective deferrals up to $15,000, plus catchup provisions, into an after-tax ROTH 401(k) Do not forget the Defined Benefit Plan 15 Best for those in high 40 s and older Best for those at the top of their game, income wise Best for those most disciplined financially Enables the self employed person to maximize contributions to a retirement plan Contributions based on age, income, and present retirement balances 4

6 Real Estate in Your Retirement Plan 16 The Key Players A Special Asset Custodian You Your retirement plan Why Should I Self Direct My Retirement Account Funds? Choices! Expect a rate of return based on what you know. Tax deferred growth or tax free growth. Take charge of building your long term equity. The SUV write-off 17 Vehicle must have a GVWR>6,000 lbs. Cannot ever use standard mileage rate on same vehicle Law change effective for vehicles acquired after 10/22/04 Potential for more changes with tax climate in Washington If purchased new or used after 12/31/04 Total first year deduction is only $2,960 Cadillac Escalade-This is an SUV!! Cost $55,000 B/U 90% Bus Base $49,500 IRC 179 $49,500 Totally written off, if purchased new or used 10/22/04 or before. And if purchased after 12/31/04 Cost $55,000 Bus Use 90% Basis $49,500 IRC 179 $25,000 Reg Dep. $ 4,900 Total $29,900 5

7 A health insurance crisis Chris and Kay Bird, 2 healthy 50ish individuals 2003 premiums, $689 per month 2004 premiums, $866 per month 2005 premiums, $1,002 per month Sorry---don t think so, but what is the answer??????? Enrolled in HSA program 1/1/05, monthly premiums are $436 per month Health Savings Accounts 18 Part of the Medicare Bill passed 1/1/04 Looks to be better than MSA s (Medical Savings Accounts, and are available to more people Excellent for healthy individuals, mandates high annual deductible, resulting in lower premiums. If you are not insurable, the HSA will not help Health Savings Accounts Requires 2 components A qualified high deductible health insurance plan With an established insurance company An individual tax savings or investment account With a local bank, or in the alternative, with the insurance company To pay for routine medical expenses/and or to provide savings for the future 529 College Savings Plans 19 What is a 529 Plan? It is an education savings plan operated by a state or educational institution designed to help families set aside funds for college costs 529 Plans are usually categorized as either prepaid or savings, or some element of both Every state now has at least one 529 plan available What is so great about 529 Plans? 1. Unsurpassed income tax breaks 2. You (the donor) stay in control of the account 3. Hands off easy way to save for college 4. Everyone is eligible to take advantage of a 529 Plan 5. Amounts donor can contribute are substantial Tax Free Exchanges Section No gain or loss shall be recognized in the exchange of like-kind property, resulting in a deferral of taxes. 6

8 1031 Exchanges Select a competent Qualified Intermediary Turn to the experts and engage a QI with a track record and strong financial backing OREXCO-Old Republic Exchange Company Currently doing over 10,000 exchanges a month The Real Estate Professional Rule 21 I have talked about this issue for the past several years. The issue has been brought to the attention of NAR legal The result of this issue, if it goes badly, is the loss of deductions for owners of rental properties The Real Estate Professional Rule Tom is a real estate professional, with rental property generating the following: Rental Income $140,000 Interest Expense (82,000) Operating Expenses (57,000) Depreciation (45,000) NET LOSS $ (44,000) IS THIS LOSS DEDUCTIBLE OR NOT? The Law-IRC 469(c)(7) The owner (you) must materially participate more than 50% of their total time in a real estate trade or business, and The owner (you) must spend more than 750 hours of service in the real estate trade or business during the year Note: Neither of these two rules are a problem The Problem and a Warning! Charitable Remainder Trusts 22 Recent IRS wins in court against owners of rental properties In addition to the two rules earlier, the following rule is in the law: The taxpayer (owner) must materially participate in each rental real estate activity (property) If taxpayer owns multiple properties, consider the real estate ELECTION A total winner where the only loser is the IRS Involves a gifting of substantially appreciated property to a charitable org of your choice, with an annuity coming back to you No Capital Gain No AMT A large Charitable Contribution Deduction Immediately reduces Estate of donor 7

9 The Principal Residence Exclusion 23 $250,000/$500,000 exclusion of gain every two years Has to be huge in Hawaii!!!!!!!!!!!!!!!!!! Have to qualify----2 out of 5 years Exception to 2 year rule applies if: Change in job location Health Unforeseen circumstances I am honored to speak in front of a group of this caliber. 8