RICHARD MERCADO - Integer



RICHARD MERCADO

640 Federal Road

Brookfield CT. 06804

203-775-6254

Certified Public Accountant Certified Financial Planner Registered Investment Advisor

December 2006

Dear Client:

The following is a summary of some of the important tax developments for 2006. The “Tax Increase Prevention and Reconciliation Act” (TIPRA) and the Pension Protection Act came into law in 2006. While we can expect more changes with a new Congress for 2007, there are changes you should be aware of that will now affect your 2006 and 2007 income tax situation. As with everything the government gives you, they also take something back.

First the Good News:

➢ “TIPRA” postponed the scheduled decrease in the Alternative Minimum Tax (AMT) exemption amounts for individuals for one year and provides higher exemption amounts for 2006. While the AMT has not been repealed, there will be some relief when compared to 2005. In addition, certain nonrefundable personal tax credits will offset AMT liability for 2006 that were not allowed previously.

➢ The current low-taxed capital gains and dividends rate that was due to expire after 2008 has been extended.

➢ The IRS has finally conceded that the federal excise tax does not apply to long-distance calls for which the charges are computed on an elapsed time regardless of distance. You will be able to request a refund on your return for these taxes you paid for the period after Feb. 28, 2003 and before Aug. 1, 2006. The IRS will provide “safe harbor” amounts ranging from $30 to $60 that can be used on the 2006 returns in lieu of taxpayers documenting the exact amount.

➢ A new opportunity in 2006 and 2007 for an individual age 70 ½ or older to exclude from income up to $100,000 a year of distributions from IRAs that are paid directly by the IRA trustee to a qualifying charity. You will not be able to deduct this amount on your return. The distribution is also not taxable in Connecticut. You may want to consider this opportunity in the taking your minimum distributions and planned donations. Remember, the trustee must make direct payment to the charity.

➢ For pension distributions after 2006, pension plans may make distributions once a plan participant reaches age 62, even if he or she continues working. This change will may it easier for some to phase into retirement assuming their employer adopts this change.

Page 2 Good News continued…………………..

➢ For distributions after 2006, nonspouse beneficiaries of retirement plan accounts will be able to make rollovers to inherited-IRA accounts. Currently, only spouse-beneficiaries of retirement plan accounts can make rollovers to IRAs. This change gives much flexibility to those who inherit retirement plan accounts from a non-spouse (such as a parent or uncle).

➢ Income limits on Roth IRA conversions from a traditional IRA have been eliminated for tax years beginning after 2009. Also, post-2006 cost-of-living increases to the income limits at which the IRA deduction phases out when an individual (or spouse) is an active participant in an employer-sponsored plan will result in more individuals being able to make deductible IRA contributions.

➢ For Connecticut taxpayers – both resident and non-resident filers, you can now deduct on the Connecticut tax return contributions made to the Connecticut Higher Education Trust (CHET), a Section 529 plan. Maximum deduction per year is $10,000 for joint returns and $5,000 for single taxpayers with any excess contributions carried over to the following year. The beneficiary of the account does not have to be a Connecticut resident. Contributions for the year must be made by December 31. Go to for further information, or call 1-888-799-CHET (2438). Qualified distributions of earnings from Section 529 plans are now tax- free distributions if used for education.

Now some Bad News:

➢ Under “TIPRA” the Kiddie Tax now applies to children under 18. For 2006 and later, this tax applies to children with unearned income over $1,700. A child subject to the Kiddie Tax pays tax at his or her parents` highest marginal rate on the child’s unearned income over $1,700. Parent can elect to include on their own return the child’s gross income in excess of $1,700 (for 2006).

➢ Starting in 2007 there will be new substantiation requirements for charitable contributions. A taxpayer will not be able to deduct any charitable contribution unless you have a cancelled check or written acknowledgment from the charity showing its name, date of contribution, and amount. Remember, if you have a contribution of $250 or more, you must have a written communication from the charity. Saying you go to church every week and contribute $5 per week in the plate, or you estimate you give $50 in cash to various charities during the year will result in no deduction.

➢ Effective August 17, 2006, contributions of clothing and household items that are not in good used condition or better can’t be deducted. Items with minimal monetary value such as used socks or undergarments are no longer deductible. The IRS expects to see a deduction for clothing or a household item that is not in good used condition or better that has a more than $500 claimed value to be backed up by a qualified appraisal. It is obvious the government perceives this

Page 3 Bad News continued………………………..

area as being abused by taxpayers. Until I get more guidance in this area, make sure your contributions to Goodwill, Salvation Army, etc. are backed up by a listing of what you gave, the condition it was in, the original cost, and the value you are placing on it. This will become a target area for audit.

Remember, last year the IRS put new rules in for automobiles, boats and airplanes donated to charities. You cannot claim a deduction in excess of $500 for an auto donated to a charity unless the charity gives you documentation on Form 1098-C as to what happened to your donation.

➢ There will be new information reporting requirements of tax-exempt interest starting in 2006. The brokerage houses will be sending this information with your regular tax reporting information for inclusion (still not taxable) on your 2006 return. You could be penalized for leaving this information off your return.

Some tax planning ideas………………..

✓ Kiddie Tax-Consider investing money in child’s name in Series EE and Series I bonds to defer reporting interest until maturity or redemption. Consider growth stocks that pay little or no dividends or tax efficient mutual funds such as index funds. If you have a family business, consider employing the child as long as work is performed and the wages are reasonable.

✓ If you are not subject to the AMT, consider paying any property tax or state income taxes due in January 2007 before December 31.

✓ Realize losses on stock while substantially preserving investment position. Compare your capital gains with investments in a loss position you see not appreciating currently. It is anticipated some mutual funds will be passing significant capital gains this year, which will be taxable to you if held in a non-deferred account. Now is the time to check with your mutual fund.

✓ If possible, defer receipt of income owed in 2006 to 2007, i.e. bonus, commission check, sale of a security you are confident will not change significantly from now to January 2007. Consider writing (selling) a call option to hedge your stock position. Donate appreciated securities to charity.

✓ Pay any deductible expense (medical, charitable) or business expense owed by credit card before December 31. The amount is deductible in 2006 even though you do not pay it until 2007.

✓ Review your company benefits to make sure you are taking advantage of 401k, dependent care, medical reimbursement plans, etc.

✓ Check your designated beneficiaries on life insurance owned and retirement accounts. Remember, the beneficiary you have listed is the beneficiary of the account regardless of what is in your will.

✓ In January, prepare a personal net worth statement listing all assets you own including life insurance you own and retirement accounts, less liabilities. If the net approaches 2 million, it may be time to think about estate planning.

Page 4

Two items to watch in December: Hopefully, before Congress breaks for the Christmas recess they will restore the $250 deduction allowed for educators and the deduction for qualified tuition expenses (maximum $4000). These provisions expired at the end of 2005 and have yet to be extended.

Please call me if you have any questions on the above items. I will be using a different tax organizer for 2006 to help you gather your information. Please call if you will want to use one. I wish you the best this Holiday Season and in the New Year.

Sincerely,

Rich Mercado

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RETENTION OF TAX RECORDS

Keep tax returns indefinitely and supporting records for at least six years. In general, except in cases of fraud or substantial understatement of income, IRS can only assess tax within three years after the return has been filed. For example, if you filed your 2005 individual tax return by its original due date of April 17, 2006, IRS would have until April 15, 2009 to assess a tax deficiency against you. If you filed later, IRS generally has three years from date you filed the return to assess a deficiency. The assessment period is six years instead of three if taxpayer omits more than 25% of the income reported on the return. Note that there is no limit if a taxpayer doesn’t file a return, files a false or fraudulent return with intent to evade tax or files an unsigned tax return.

While it is impossible to be completely sure that IRS won’t at some point seek to assess tax, retaining tax returns indefinitely (with W-2`s) and important records for six years after the return is filed should, as a practical matter be adequate. Retain W-2 for comparison to social security statement of F.I.C.A wages.

Records relating to property should be kept longer. If you own stocks, bonds and mutual funds in a taxable account, you must keep records for as long as you own the security and then for at least six years after you dispose of the entire asset. This would include details on the original purchase, reinvested dividends, and sales. After the asset is sold, keep all the records for at least six years. If you gift a property asset to someone, you need to tell him or her the cost basis of the asset gifted.

Same rules apply for any capital asset you own (your house, lot, rental property, asset used in business such as a car, computer, office furniture, etc.). You will need to keep the records of purchase (closing statement), improvements to property, and final sale. Even though there is an exemption of gain from sale of your principal residence from $250,000-$500,000, there is no telling how much your home will be worth when sold or guarantee that the home-sale exclusion will still be available when the future sale takes place.

In case of separation or divorce be sure you have access to any tax records. Make copies of the above items before the divorce is final even if you have to put this in the divorce agreement. Your records should include copy of divorce decree, agreement of separate maintenance in addition to the items mentioned above. Liability for tax on a joint return is joint and several as the deficiency can be asserted against either spouse.

Safeguard your records against loss or theft. Keep your most important records in a safe deposit box or other safe place outside your home.

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