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monewise fall 2006

-new credit for energy conservation improvements;
-everyone can have a ROTH IRA, but maybe not until 2010;
-new Medicaid qualification rules;
-donating IRA monies to charities;
-a big change in beneficiary’s rights;
-increase in Medicare premiums;
-pension savings protected in bankruptcy;
-a few short topics.


Congress decided to bring back the energy credit, so I encourage my clients to improve the energy efficiency of their homes.  The Congressmen made the rules so complicated that every time I want to explain them I need to read them again.  The outline I give you should tell you what you need to do to save a lifetime maximum of $500.  For details, go to my web site and read more.

The Residential Energy Property Credit rewards you for the purchase of energy-efficient improvement and property.  It is made up of two subcredits: the Residential Energy Conservation Property Credit for 10% of significant energy-efficiency improvements to existing homes and the Residential Property Expenditures Credit.

The Residential Energy Conservation Property Credit only applies to improvements to the “envelope” of the house.  This term in the tax law is defined as what would be considered to be the shell of the house.  Windows, insulation, walls, and roofs are part of the shell or “envelope.”  You’ll need to make yourself aware of the many restrictions that apply to this credit.

The Residential Property Expenditures Credit applies on a dollar for dollar basis.  It would include things like approved furnaces, air circulating fans, geothermal heat-pumps and central air conditioners.

To reiterate, in total you can only save $500.  The credit must be used in either 2006 or 2007 (or a portion of each year).


If you’ve been earning over the income limits (around $110,000 if single or $160,000 if married), you have not been able to take advantage of ROTH IRAs until now.  As a result of legislation passed this year, the income limits on ROTH conversions will be lifted in 2010.  This means that anyone will be able to convert his traditional IRAs into ROTH IRAs in 2010.  In fact, the tax due on the conversion will be payable over two years.  This will allow you to spread the pain. 

If you earn over the income limit for making ROTH contributions in 2006 through 2010, you should be planning to make contributions to your traditional IRA accounts whether you can deduct them or not.  When 2010 arrives, you can convert your traditional IRA to a ROTH IRA.  You will pay tax on all the contributions that you were able to deduct in prior years, and you will pay tax on all earnings in your IRA.  If you have “basis” (non deductible contributions to traditional IRAs), you will not pay any tax on those contributions.  In case your brain is working overtime, and you are thinking that you will only convert the IRAs with “basis,” stop right now.  You can’t do that!  There is a proportion that is computed among your total IRAs and the “basis” you have in those IRAs; then that fraction is applied to determine how much of the conversion is taxable.  On the other hand, if you have never been able to deduct your IRA contributions, you will have 100% basis in your contributions so none of that will be taxed.  Without spending any more time on this topic, all you need to know is that we will figure it out when we file your 2010 return.

After the money is in a ROTH IRA, you will never pay tax on that money or on any increase in value in the account.  You will not need to take withdrawals from the ROTH accounts, and you can pass them on in with all the same benefits to your heirs after you pass.

The planning now should include making the maximum contributions each year to your traditional IRA ($4,000 if you are under 50 years of age, $5,000 if over 50 years of age).  You should also plan to have the money to pay the tax on the taxable amounts of the conversion in 2010 and 2011.

I see this as a win for all high income taxpayers.  If you can, plan on taking advantage of it.


In the WINTER 2006 issue of Moneywise, I wrote about the possibility of a new law that would affect the lookback period to qualify for Medicaid.  The new law became effective on February 28.  The lookback period is extended from 36 to 60 months and the beginning of the penalty period will not start to run until the individual is receiving institutional level care (i.e., nursing home care) and otherwise would be eligible for Medicaid had there not been a penalty period.  Under the old law, the penalty period started when the transfer was made and could have expired by the time the individual applied for Medicaid.

It has become much more difficult for people with assets to plan for Medicaid qualification, but it has not made it impossible to plan.  If you have a situation where you or someone you are working with might need to qualify for Medicaid, we should talk about it.  Earlier is better.  There are things that can be done.


Another new law allows you to direct the trustee of your IRA account (not a pension savings account) to give your money directly to a charity.  On first consideration, that might not seem like a big deal because you might think that you could take the money and donate it yourself and deduct it on your tax return.

The way the arithmetic of the tax return works, you would be reporting the IRA withdrawal as income and then taking a deduction of the same amount as an itemized deduction.  This would increase your adjusted gross income by the amount of the IRA distribution thereby raising the amount of the phase-out of your itemized deductions, limiting possible ROTH opportunities, increasing the amount of Social Security that is taxable, reducing the opportunity to use passive losses, affecting perhaps the amount of estimated tax you need to pay, and would affect a host of other items that are dependent on your adjusted gross income.

You must be over age 70 1/2 to take advantage of this new law.  If you plan on making charitable contributions and must take money out of IRAs anyway, be sure to consider contacting your trustee to arrange for him to pay the charity directly.  The amount allowed is $100,000 each year.  Amounts donated to charities will satisfy the minimum distribution requirements.  I’ll show you how much you saved by taking advantage of this new opportunity when we meet to prepare your return.

Unlike the rules dealing with the treatment of “basis” in IRAs discussed in the article on ROTH conversions, the amount you contribute to charity is deemed to have been taken from your deductible contributions and earnings.  This means that your future tax liability on distributions to you will be substantially reduced if you have “basis” in your IRAs.


Starting in 2007, non spouse beneficiaries will be allowed to roll over the bequeathed pension assets into a so-called inherited IRA account.  Now children and other non spousal beneficiaries can withdraw the money gradually based on their expected life spans.  Currently, a non spouse beneficiary is required to take the money and pay tax on all of it in the year withdrawn.  Payouts made in 2007 are eligible even if the account owner died in 2006.

This is a big deal.  You should consider putting your beneficiary designations on your company pension plans.  Non spouse beneficiaries who inherit an IRA have had these rights for a few years.


An individual with an income exceeding $80,000 and married a couple with a combined income that is more than $160,000 will be paying a surcharge for his/their Medicare Part B coverage beginning in 2007.  The current premium is $88.50 a month.  It is expected that for individuals with incomes over $200,000, the premium will quadruple by 2009.  The standard premium is expected to be $98.40 a month for 2007, an 11% increase from 2006.

The way the surcharge for 2007 will work is that Social Security will use data from 2005 tax returns.  If an individual has modified adjusted gross income (I can’t find a definition for this, but I’ll try to let you know in my next newsletter or on my web site) of $80,000 to $100,000, the surcharge will be 13.3%, which adds about $13 to the monthly premium, for a total of about $111.50.  For a single person with income of more than $200,000, the surcharge will be about 65%, or about $72 a month, for a total premium of about $170.50.

There is a provision for hardship relief if you can show that your income declined.

I have not been able to find out any information about this program from Medicare.  You would think that a big change like this would be advertised, and information would be disseminated to the public.  I found out about it through the New York Times.


Congress passed a major bankruptcy reform act in 2005 with provisions protecting pension savings including IRAs, 401, 403, 408, 414, and 457 (basically all types of retirement savings plans as well as 529 educational savings plans).

Prior to the passage of this new legislation, when a person filed for bankruptcy protection, there was much confusion about whether these funds could be taken by the courts to satisfy his obligations.  Some states exempted some plans.  Now it is clear that your retirement savings will be protected in the event you need to file for bankruptcy protection.


-You can look forward to getting back $30 to $60 when we file your 2006 tax return.  A federal telephone tax was determined to be illegal and refunds will be issued through the tax return.  You’ll get $30 if single and $10 for each additional exemption you claim.  The maximum refund will be $60.

- The Florida Intangible Tax has been eliminated after 2006.  Good news for our wealthy Florida friends.

-The “kiddie tax,” the law that requires children under age 14 to be taxed at their parents rate if they receive more than $1,700 of unearned income will now apply to all children under 18.  The pre-1986 law allowed parents to shift assets to children at birth to avoid paying tax on the income earned by those assets or to pay tax at the low rate of the child.  This latest change to 18 basically closes that door.  My recommendation, where possible, is to use the 529 plan from birth to college as a saving vehicle.  I do understand this isn’t the answer to in all situations.  Let’s talk.

-A new law provides for treating the sale of self-created musical work as the sale of a capital asset.  Absent this provision, the transaction would have been deemed a sale in the course of ordinary business, resulting in ordinary income.

-For 2006, the amount that can be contributed to an IRA increases to $4,000, plus another $1,000 if you are 50 or older. For 401k, 403b and 457 plans, the deferral limit increases to $15,000, plus another $5,000 if you are 50 or older.

-The amount that can pass free of Federal Estate tax increased to $2 million on January 1, 2006.  It is scheduled to increase to $3.5 million on January 1, 2009.  Every taxpayer may transfer up to $12,000 per person each year to an unlimited number of individuals.  This Annual Gift Exclusion increased to $12,000 in 2006.

-Contributions of used clothing and household items valued at more than $500 after August 17, 2006 will need an appraisal.  A letter saying “5 bags of clothing” will no longer do the trick.  I don’t know how this will be done.  We’ll need to watch for compliance guidance.

-A number of favorable tax benefits scheduled to expire have been made permanent.  They include  the lower rate on long term capital gains and qualified dividends as well as the tax benefits afforded to earnings on 529 plans.