Maryanov Madsen Gordon Campbell, Certified Public Accountants

Last chance to reduce 2006 taxes approaches

Howard Gordon
Special to The Desert Sun
December 13, 2006

Opportunities for reducing your 2006 tax liability will be available for only two more weeks, and with this year more complicated than ever - due to numerous changes in the law - it's important you give tax-planning some thought. In addition, Congress passed tax legislation just last week, renewing provisions that expired at the end of 2005. We will be discussing these changes in my next column on Dec. 27, just in time to make adjustments before the year ends.

First let's talk about the many Americans who don't have to file a tax return at all. If you fall into this category you can stop reading right now (unless you just happen to enjoy my column). If you are single and under 65, no return is required if your income is under $8,450. If you're over 65, no return is required if your income is under $9,700. Married couples don't have to file tax returns if your income is under $16,900, and if one of you is 65, the filing threshold increases to $17,900. Also, if you're both over 65 the threshold is $18,900. As with all rules, there are always exceptions. For instance, these rules would not apply if you were a dependent claimed by another taxpayer.

For those of you who have significant net worth, don't forget that the opportunities provided by the annual gift tax exclusion can significantly affect your tax bill. You are allowed to give away $12,000 a year to any number of people without incurring any gift tax or reducing your lifetime gift exclusion of $1 million. If you are married, you and your spouse could give $24,000 to any number of people. For instance, a husband and wife could choose to help their children and grandchildren by giving 10 gifts of $24,000 each and at the same time reduce their estate by $240,000. Remember that if you fail to use your annual gift tax exclusion, it does not carry over to next year.

A new regulation for 2006 and 2007 offers tax savings if you happen to own an IRA, are over age 70½ and are interested in charitable giving. You can now make a distribution from your taxable IRA directly to a charity without having to add the amount to your gross income first. Of course, since it's not included in your gross income, you will not get a charitable deduction on your return either. Still, for those who would like to make a significant gift to a charitable organization, this new method of distribution can represent a large tax savings. The maximum transfer allowed is $100,000, but similar tax advantages exist for smaller charitable transfers as well.

For example, in the past, if you removed $50,000 from your IRA and then donated it to a charity, your adjusted gross income would increase by that same $50,000. This could turn into a major disadvantage since some other deductions, such as medical expenses and miscellaneous itemized deductions, are limited by your adjusted gross income. Also, in some cases, those people who fall into the Alternative Minimum Tax would not have gotten the full benefit of the charitable deduction. Being allowed to make a direct transfer avoids these limitations on deductions. A further advantage of this new regulation is that the minimum distribution that is required when you're over 70½ will be reduced for the following year since your IRA is now smaller.

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