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HowardNews
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by HowardSoft®
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Professional software at personal prices.
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Spring/Summer 2006
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Major tax bill enacted
The Tax Increase Prevention and Reconciliation Act of
2005, signed into law on May 17, 2006, includes $90 bil-
lion in tax breaks and $20 billion in tax increases. It in-
cludes not only AMT relief for one more year and continued
breaks for investors and small businesses years from now,
but also an expansion of the “kiddie tax” to older children
and a tightening of foreign earned income and housing ex-
clusions. However, in spite of early publicity to the con-
trary, it does not include extensions to 2006 of several
popular breaks, including the research credit, work credits,
higher education expense deduction, state and local sales
tax deduction, new markets credit, electric vehicle credit,
and several more. They were dropped in order to keep the
net cost of the bill down to $70 billion and connected to
the 2005 budget, but are expected in a follow-up bill.
(For the full text of the bill as enacted,
click the following link: HR4297final.pdf (105.4 KB).
You must have Adobe's Acrobat Reader installed on your
computer in order to read this 29-page tax bill.)
The good and the bad for 2006
Most tax breaks in the bill do not apply to tax year 2006 but
rather the end of the decade. Instead, unpublicized tax in-
creases apply and hit some taxpayers very hard in 2006.
The good news...
AMT steamroller paused. The biggest breaks for 2006 ap-
ply to the alternative minimum tax (AMT), slowing down
the expected large increase in number of taxpayers hit by
the AMT. These changes will affect the 2006 Form 6251.
- Personal credits to be applied against AMT for 2006.
This benefit, extended to only 2004 and 2005 in the
last broad-based tax bill (the Working Families Tax relief
Act of 2004), applies to such credits as those for the
elderly and disabled, adoption expenses, child tax, and
higher education. Without this tax break a large number
of middle class families would have found themselves
hit by the AMT. (The Senate amendment to extend this
benefit to 2007 as well was rejected.)
- AMT exemptions increased. Originally scheduled to
drop to pre-2004 levels, the special increases for 2004
and 2005 are extended to 2006 and further increased.
The new levels are $62,550 for married taxpayers (up
from $58,000) and $42,500 for singles (up from
$40,250). Without this bill the levels would have
dropped to $45,000 and $33,750, respectively.
Liberalized depreciation/amortization for music. Clearly a
special-interest provision, the cost of acquiring or creating
musical works can now be amortized over 5 years. The 10-
year income forecast method is no longer required. This
change will affect your use of the 2006 Form 4562.
Future change in Roth IRAs impacts tax planning NOW.
Starting tax year 2010, you are no longer disallowed from
converting a traditional IRA to a Roth IRA when your in-
come (AGI) exceeds $100,000. Even though not applicable
until 2010 and considered a revenue-raiser by Congress,
high-income taxpayers can benefit from this change. Those
who cannot make tax-free contributions to their traditional
IRAs because of their high income can make nondeductible
contributions (up to the maximums) and then convert the
traditional IRAs to Roth IRAs in 2010. They’ll be taxed only
on earnings on the account and can spread the taxable
amount over 2 years. (With a Roth IRA, earnings are tax-
free and withdrawals are never required.) This change af-
fects the use of the 2006 Form 8606, where nondeductible
contributions to traditional IRAs must be reported.
...and the bad.
Kiddie Tax hits more families. Until now, the tax code
prevented you from benefiting from putting assets in your
child’s name only if the child was under 14 years of age.
But starting tax year 2006, the age is raised to 18. Parents
who had planned to sell a child’s portfolio when the child
reaches age 14 will now have to wait until age 18 to bene-
fit from their child’s lower tax bracket. This change affects
Forms 8615 and 8814 for 2006.
Foreign earned income and housing exclusions tightened.
Taxpayers who earn income abroad will be hit harder:
- Foreign earned income exclusion now indexed with inflation.
Starting in 2006, the maximum exclusion is in-
dexed with inflation from the 2005 figure of $80,000
to $82,400 for 2006. (Formerly, indexing was not
scheduled to start until 2008.) This is the good news.
- Foreign housing allowance reduced. The base above
which housing expenses are deductible is now 16% of
the maximum foreign earned income exclusion. The
base for 2006 is $13,184, up from $12,447 for 2006
before the law change. That’s not so bad, but there is
a new cap on the maximum exclusion allowed …
$11,536 for 2006 (14% of the maximum foreign
earned income exclusion). (Formerly, there was no cap
on the housing expenses at all.)
- Tax increase on all other income. Income remaining af-
ter the foreign exclusions are taken will be taxed at
higher tax rates. In figuring the tax rates to apply, the
income level before the exclusions will be used. Some
taxpayers will be pushed from the 10% tax bracket
into the 28% tax bracket as a result of this change!
These changes will affect Forms 2555 and 2555-EZ for
2006 and how tax is computed on Form 1040.
Stricter reporting requirements for tax-exempt bonds.
Payers of interest on tax-exempt bonds must now report the
payments to the IRS. Although the payments are not tax-
able, this reporting should keep taxpayers honest in calcula-
tions that are adversely affected by nontaxable income, in-
cluding many provisions that depend on a modified AGI.
Up-front payments for offers-in-compromise. After July
16, 2006, when a taxpayer proposes a lower tax to the
IRS, the taxpayer will have to make an initial payment at
the time of the offer: 20% of a proposed lump-sum pay-
ment or the first installment of a proposed installment
schedule. (Formerly only a filing fee had to be paid.)
Better news for the future
Other major changes do not apply until later years:
- For 2007, stricter rules for the domestic production
activities deduction. There is a cap on this deduction,
new for 2005, amounting to 50% of wages paid.
Starting 2007, however, wages used in figuring this
cap must be related to domestic production income.
- Also for 2007, another benefit for musical works.
Starting 2007, the gain on the sale or exchange of mu-
sical works is taxed at the low capital gains tax rates.
- For 2008 and 2009, further extension of the raised
section 179 ceiling. The maximum sec. 179 expense
that can be deducted remains at $100,000 (adjusted
for inflation) for another two years. (It would have
dropped to $25,000 in 2008 without this change.)
- For 2009 and 2010, further extension of low capital
gains tax rates. The rates in effect for 2008 are ex-
tended to 2009 and 2010, including a 0% rate for low-
income taxpayers and a 15% maximum rate overall.
- For 2010, conversion to Roth IRA at any income level.
Starting 2010, the former restriction to taxpayers with
AGI under $100,000 is lifted. Anyone can convert a
traditional IRA to a Roth IRA under the new rules, and
can spread any tax on the conversion over two years.
- For 2011, withholding from government payments required.
Starting 2011, government agencies must
withhold 3% of all payments made for services or
property. (Interest, classified contracts, real property,
and welfare-related payments are exempt.)
Another tax bill is expected to renew several credits that
expired at the end of 2005. Be sure to check our website
(howardsoft.com) regularly for the latest news.
Advance Order Form for 2007 Editions now on-line.
You'll get 15% off all software, including e-file specials, but remember that this Advance Order Special
expire July 15, 2006. Click Here to order securely over the internet.
(You can also order by phone, fax, or mail. We accept all major credit cards in addition to personal
or business checks.)
Contents at the three software levels. To help you decide which software level is right for you,
a chart of contents for each level follows. Note that we have added two popular forms to the Standard Level
and have removed from the Economy Level features that are of interest only to serious tax professionals.
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Comparison chart for the three software levels for the 2007 Edition.
(Table is based on Windows CD-ROM versions of the software.)
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Economy
(Individual)
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Standard
(Professional)
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Premium
(Professional Plus)
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Functions:
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Updates on the web... Free on-line updates keep your software up-to-date throughout tax season.
(Charge for update disks is $15 for each disk requested.)
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X
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X
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X
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Interactive data entry... Calculate as you enter data using smart on-screen forms and worksheets.
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Unlimited number of returns... Eliminates 15-return (one volume) limit of Economy Level.
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X
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X
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True-batch/Pre-format data entry... Clerical personnel enter data from data sheets you prepare.
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X
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X
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Volume-free file management... Select return from on-screen list by client name, filename, SSN.
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On-screen Documentation:*
* All documents are printable too!
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User’s Guide... 300 pages of operating instructions and tutorials.
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Tax Forms Guide... 500 pages of line-by-line instructions on completing on-screen forms.
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IRS forms and instructions... Up-to-date forms from the IRS.
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IRS publications... Useful publications for complete answers to tax questions.
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Premium Level Supplement... More than 200 pages of additional line-by-line details.
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Printing:
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High-speed draft printouts... Text-based facsimiles of official forms for quick and easy review.
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Batch printing... Organized by volumes to print up to 15 returns at a time.
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Client letters... Print professional billing letters to clients and cover letters for returns.
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IRS-approved graphic printouts... Print IRS-like graphics to avoid manual fill-in or transparencies.
(All Windows printers supported. High-speed DOS printing also supported for compatible laser printers.)
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Volume-free selection of return... Print a return in any volume from an ordered, volume-free list.
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e-file:
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Unlimited e-file... Simple on-line e-file for pros, for a low per-return fee (requires IRS-issued EFIN).
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FREE Customer Service... We’ll help you resolve problems with returns rejected by the IRS.
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Option for lower transmission fees*... Reduce per-return transmission fee to $2.
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Option for NO transmission fees*... Reduce per-return transmission fee to $0.
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Refund Anticipation Loans (RALs)*... Get quick loans for clients based on anticipated refunds.
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Refund Checks (QIK checks)*... Get your fees deducted from clients’ refund checks.
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* Additional one-time fee applies, good for the entire tax season.
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IRS forms:
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Basic tax form set for employees, investors, and farm and non-farm businesses...
Form 1040 and Schedules A, B, C, C-EZ, D, EIC, F, H, J, R, SE, Forms 2106, 2106-EZ, 2210, 2441,
3468, 3800, 3903, 4562, 4684, 4797, 4835, 4868, 5329, 6251, 6252, 8283, 8582. 8606, 8615, 8812,
8814, 8829, 8863, 8880, 8901, 8914, 1040-ES, 1040X, 1040-V.
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Forms for e-file... Forms 8453, 8879, W-2, W-2G, 1099-R, RAL/QIK Application.
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Forms for serious investors... Forms 1116, 4952.
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Forms for other credits... In addition to credit forms already in all levels,
Forms 4136, 5884, 6478, 6765, 8396, 8586, 8801, 8834, 8839, 8846, 8859, 8861, 8885.
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Forms for recapture taxes... Forms 4255, 8611, 8828.
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Forms for foreign income... Forms 4350, 2555, and 2555-EZ.
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Forms for sophisticated investors... Forms 4952, 6198, 6781, 8271, 8594, 8815, 8824.
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Forms for other taxes and deductions... Forms 4137, 4970, 4972, 8853, 8889.
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Special support forms... Forms 1310, 2120, 8332, 8379, 8862.
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Useful stand-alone forms... Forms 2848, 8822.
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