December 23, 2006

Dear Client,

We mentioned in our last newsletter that Congress may not be finished changing the tax law and at 2 a.m. on December 9, the 109^th Congress passed the Tax Relief and Health Care Act of 2006, a wide-ranging measure that preserves a variety of popular tax breaks for families and businesses, and includes new tax breaks as well. The new law is almost overwhelming “good news” for taxpayers, particularly because it retroactively restores and extends key tax breaks that went off the books at the end of 2005. This tax law still needs the President’s signature to be enacted.

The new law will prove to be a challenge when the time comes to file, because the IRS printed key forms and schedules before the new law extended these tax breaks. The IRS has said it will not reprint forms and schedules to reflect the new law, but will, instead, issue supplementary instructions.

New Law Changes Affecting Individuals

Here is a summary of the most widely applicable tax breaks for individuals that have been restored and/or extended, and for how long:

• The “above-the-line” tax deduction for qualified higher education expenses is restored for 2006 and extended through 2007.
• The tax break allowing individual taxpayers to elect to take an itemized deduction for state and local general sales taxes instead of the itemized deduction permitted for state and local income taxes is restored for 2006 and extended through 2007.
• The tax break permitting elementary and secondary school teachers and certain other school professionals to deduct up to $250 of out-of-pocket costs is restored for 2006 and extended through 2007.
• The 30% tax credit for the purchase of residential solar water heating, solar electric equipment and fuel cell property is extended through Dec. 31, 2008.
• The election to have excluded combat pay counted as income for purposes of calculating the earned income tax credit (EIC) is extended through 2007. This election could help those serving in the armed forces qualify for the EIC, as well as IRA deductions.

The Tax Relief and Health Care Act of 2006 also includes these new tax breaks for individuals:

• For the 2007 tax year only, there's a new itemized deduction for the cost of premiums for mortgage insurance on a qualified residence (phased out for AGI over $100,000).
• The new law includes many changes for health savings accounts (HSAs), including: allowing one-time rollovers from health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) into HSAs (after the enactment date of the new law and before 2012); repeal of the annual plan deductible limit on HSA contributions (after 2006); expanded contributions limit for part year coverage (after 2006); and allowing one-time rollovers from IRAs into HSAs (after 2006).

New Law Changes Affecting Businesses

Here is a summary of the most widely applicable business-related tax provisions that have been restored and/or modified and extended, and for how long:

• The research and development (R&D) credit is restored for 2006 and extended for 2007. For tax years ending after 2006, the credit is enhanced and expands to newer businesses.
• The work opportunity tax credit and the welfare-to-work tax credit are extended in their current form for workers hired in 2006 and combined and modified for those hired after 2006 and before 2008.
• The accelerated writeoff for certain leasehold improvements and restaurant property (depreciation over 15 years instead of 39 years) is restored for 2006 and extended through 2007.
• The tax credit for builders of new energy efficient homes is extended through 2008. The credit applies to manufactured homes meeting a 30% energy reduction standard and other homes meeting a 50% standard.
• The deduction for energy efficient commercial buildings meeting a 50% energy reduction standard is extended through Dec. 31, 2008.

Other matters to be mindful of (not necessarily connected to the new tax law):

· I-9 Form - You must have an I-9 form for each employee that you employ. The IRS will consider those wages paid to an employee without an I-9 form illegal and will disallow any deductions taken for those wages paid. The W-4 is also mandatory.

· 2010 IRA rollover into Roth IRA – If you choose to roll over traditional or non-deductible IRA funds into a Roth IRA during the year 2010, you must allocate non-deductible and traditional IRA funds proportionately as if you are taking the required minimum distributions to determine the taxable amount.

· Telephone Excise Tax Refund – Individuals will be able to claim amounts of $30 to $60 dollars, depending on the number of exemptions claimed. All businesses, partnerships, and other entities must calculate actual figures or use an IRS formula to estimate costs to claim this long distance excise tax refund for 2006.

· Return of full exemption and itemized deductions – Beginning in 2006, the phase-out of exemptions and itemized deductions for certain individuals is being rolled back. This is good news for many taxpayers.

· AMT alert – An extension of the traditional alternative minimum tax relief “patch” beyond 2006 was not included in the final package.

· Ohio Bureau of Worker’s Compensation now applies minimum and maximum payroll reporting limits to active executive officers of a corporation effective July 1, 2006. The minimum is imputed even if no compensation is paid.

Remember that this letter only highlights the most important changes in the new law and other tax issues. Please give us a call for details on how you are affected by these changes, and whether you are affected by any of the more highly specialized new law changes not covered in this update.

At your service,

Arend, Laukhuf & Stoller, Inc.