Time is running out ... update NOW for 2007! They had little coverage in the popular press, but two major tax bills passed in 2006 with an impact on tax returns for the upcoming tax season. In addition, the IRS has planned several changes unrelated to these two bills. But you needn't worry because HowardSoft is ready with its complete automation of the changes. All you have to do is order now (if you haven't done so already), because we ship on a first-in/first-out basis. Click Here to order securely over the internet, or order by phone, fax, or mail using a printed copy of our Order Form. Remember, we accept all major credit cards as well as personal and business checks.

Pension Protection Act ... much more than pensions!

The Pension Protection Act of 2006, the second major tax bill of the year, was signed into law on August 17, 2006. The main thrust of the bill is a massive reform of the rules for pensions, including increased funding requirements for defined benefit retirement plans to make them safer. However, a number of unrelated tax provisions were tacked onto the bill that affect tax returns for individuals. (For the full text of the bill as enacted, click the following link: HR4final.pdf (920.2 KB). You must have Adobe's Acrobat Reader installed on your computer in order to read this 393-page tax bill.)

Charity reforms. The new law tightens the substantiation rules for most giving, but also adds new benefits:

• Tax-free distribution of IRA to charity. For tax years 2006 and 2007, taxpayers of age 701/2 or older are allowed to exclude from taxation up to $100,000 of IRA withdrawals made to a qualified charity. (The withdrawal must be a direct distribution to the charity.)
• Favorable rules for contributions of food and books extended. The 2005 Katrina tax bill included liberal rules for valuing contributed food and books contributed to K-through-12 public schools, irrespective of whether the donee was a victim of Katrina. Originally set to expire at the end of 2005, the rules are now extended to the end of 2007.
• Limit raised on contributed conservation capital gain property. For tax years 2006 and 2007, you are allowed to contribute capital gain property valued up to 50% of your AGI, rather than the usual 30%, and allowed to carry over the excess up to 15 years, providing the property is restricted to qualified conservation use. (The limit is 100% of AGI for farmers and ranchers who contribute property with the restriction that it remain available for agriculture or livestock production.)
• Restrictions on contributed clothing and household goods. For contributions made after August 17, 2006, no deduction is allowed for clothing and household goods unless in good used condition. Exceptions: (1) the IRS may disallow any item of minimal value, and (2) the taxpayer may deduct any single item valued at $500 or more irrespective of condition provided a qualified appraisal is included with the return.
• Records required for all monetary gifts. Starting tax year 2007, you must have a bank record or a qualified eceipt from the donee in order to deduct any contributed cash, check, or other form of money.

Saver's credit made permanent. A tax credit of up to $1,000 is currently available to low-income taxpayers based on a sliding scale that phases out at $50,000 of AGI (through Form 8880). Originally set to expire at the end of 2006, the credit is now permanent and the income limits will be indexed with inflation starting in 2007.

Direct deposit of refunds into IRAs. You are now allowed to direct that part or all of your tax refund be deposited in your IRA. While the law only requires the IRS to design any new form for tax year 2007 or later, the IRS has already designed the form for use on your return for tax year 2006. Form 8888 allows you to allocate your refund among three different accounts, which can include an IRA account. (If you want all of your refund deposited in your IRA, you can enter the information directly on Form 1040 instead, as you have done in the past for savings or checking accounts.)

IRA limits set to sunset after 2010 made permanent. A number of benefits that were started in the massive 2001 tax reform and set to expire after 2010 are now permanent, including:

• Increased IRA contributions. The IRA limit is currently $4,000 per taxpayer and increases to $5,000 in 2008. The level will now stay at $5,000 after 2010.
• Additional allowed for age 50 and older. The IRA limit is currently increased by $500 for taxpayers of age 50 or more, and increased by $1,000 in 2007. The increase will now stay at $1,000 after 2010.
• Other pension and IRA rules made permanent. All other provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 that relate to pensions and IRAs are also made permanent, including increased maximums for 401(k) contributions and liberal rollover rules.

New withdrawal and rollover flexibilities introduced. Several special interest groups benefit from the new pension law:

• No withdrawal penalty for police and firemen. After August 17, 2006 there is no 10% penalty for an early withdrawal from government defined benefit plans to qualified public safety employees.
• No withdrawal penalty for reservists called to active duty. Retroactive to September 11, 2001, there is no 10% penalty for an early withdrawal from an IRA or other qualifying plan if the distribution is made between the time of an order to active duty for at least 180 days and the end of the active duty. Furthermore, the taxpayer can re-contribute any such withdrawn amount without limit. (This provision expires December 31, 2007.)
• Rollover of qualified plan into Roth IRA allowed. Starting 2008, you can make a direct rollover from a qualified plan into a Roth IRA if AGI is less than $100,000, and without limit after 2009.
• Nonspousal beneficiaries allowed rollovers in own IRAs. Starting 2007, you do not have to be a spouse to make a rollover of an inherited pension or IRA into your own IRA.
• Uniform rules for hardship withdrawals from a 401(k). The IRS is instructed to draw up new rules for nonspousal beneficiaries so that they are eligible for tax breaks similar to those already afforded spouses.
• No withdrawal penalty for employees of age 62 or more. Under this provision, older employees can take distributions from their pension without penalty even though they are still working (for plan years starting in 2007 or later).

Another tax bill to come

Time is running out for several popular deductions and credits set to expire at the end of 2005 or 2006. These include the above-the-line deductions for higher education expenses and teacher out-of-pocket expenses, the itemized deduction for state and local sales taxes, and the research, work opportunity, and welfare-to-work tax credits. Their renewal was removed from the first major tax bill just days before its passage. Then they were tacked onto the unrelated estate tax bill, which included not only controversial changes to the estate tax but also a major increase in the federal minimum wage. Congress is expected to try again before year-end, making all renewals retroactive to their expiration date. Let's hope they succeed so that we don't have mid-season changes in the forms once again next year!

Changes to tax forms

The IRS has been releasing advance drafts for the next filing season regularly since early June. While some of these forms will change again because of the new tax laws, the IRS is well on its way to a timely release of most forms, in sharp contrast with the last filing season. We are currently preparing a review of the changes based on these advance drafts and will soon post it to our web site. You can keep yourself up-to-date with the changes by visiting www.howardsoft.com regularly. Just click on our link for IRS Forms Progress Report on our home page.