Pension Protection Act of 2006

Pension Protection Act of 2006

(Signed into law August 17, 2006)

A - Charitable Contributions

1 - Taxpayers must have documentation for all monetary contributions. This can be cancelled check, bank record, or written communication from the organization. It must show the name of the organization, the date of the contribution, and the amount contributed. This is effective for years beginning after August 17, 2006 (2007 tax year for calendar year taxpayers).

2 - Contributions of clothing and household items must be in at least “good” condition. IRS is also given the authority to deny a deduction for anything of minimal value. These rules do not apply to the contribution of a single item of clothing or a household item that has a value of more than $500 if the taxpayers includes a qualified appraisal with his/her tax return. This change is effective for contributions of clothing and household items after August 17, 2006.

3 - Contributions of tangible personal property (other than publicly traded securities) with a fair market value deduction of more than $5,000 has a new recapture rule. If the charitable organization sells the property within three years of the contribution, the donor has to make an adjustment. This adjustment is not required if the charitable organization files a “qualified certification” with IRS that the use of the property was related to the organization’s exempt purpose or that the use was originally intended as such but has since become impossible or infeasible to implement. The recapture amount depends on when the sale takes place.

- - If the sale takes place in the same year as the contribution, the donor is required to use the SMALLER of the cost of the property or its FMV as the charitable deduction.

- - If the sale takes place in a later year, the donor is required to pick up as ordinary income the difference between the deduction taken and the donated property’s cost basis.

4 - A charitable contribution of real property for conservation purposes has changes for years beginning after December 31, 2005 and before January 1, 2008.

- - The modified AGI limitation increases to 50% instead of 30% for individuals. It increases to 100% for qualified farmers and ranchers (whether individuals or corporations) when:

- - The property is for agricultural or livestock production,

- - Contains a restriction that the property remain available for such, and

- - Takes place after August 17, 2006 and before January 1, 2008.

- The carryforward of any unused amount is 15 years instead of 5 years.

5 - A contribution after July 25, 2006, of conservation easements for buildings located in registered historic districts must preserve the entire exterior of the building (front, sides, rear, and height), prohibit any change inconsistent with the historical, and a qualified appraisal and photographs of the entire exterior of the building must be submitted with the taxpayer’s return. A taxpayer who claims a deduction for building easements greater than $10,000 must pay a filing fee of $500 beginning after February 17, 2007.

6 - When an S corporation makes a charitable contribution of appreciated property, the shareholder’s basis is reduced by the shareholder’s pro rata share of the adjusted basis of the contributed property. This is effective for contributions made in the S corporation’s years beginning after December 31, 2005 and before January 1, 2008.

7 - Contributions of qualified book inventory by C corporations to public schools is extended through 2007.

8 - Contributions of qualified food inventory for the ill, the needy, or infants is extended through 2007.

9 - Contributions of taxidermy property are limited to the smaller of the taxpayer’s basis in the property or the FMV of the property. The basis only includes the direct costs of preparing, stuffing, or mounting the property.

10 - Other changes have been made to the definitions of qualified appraisals, qualified appraisers, donor-advised funds, and charitable remainder trusts.

B – DISTRIBUTIONS FROM IRA TO CHARITY

1 - Taxpayer must be at least age 70 1/2 prior to the date of the contribution.

2 - The annual limit is $100,000. Excess distributions are included in the taxpayer’s income.

3 - It only applies to traditional IRAs and Roth IRAs, not SIMPLEs or SEPs.

4 - It only applies to 2006 & 2007.

5 - Distribution goes directly to charitable organization, NOT to the taxpayer and then to the organization.

6 - The distribution is not taxable to the taxpayer.

7 - The contribution is not deductible to the extent the distribution would have been taxable. The amount that would have been taxable is NOT computed like the Form 8606. Instead the taxable amount is computed is the same manner as an annuity which has made a nonannuity payment - income is deemed distributed first.

8 - The charity must be a 50% charity. (Wipes out the private foundation.) Can't be to a CRT.

9 - Taxpayer cannot receive anything in exchange for the contribution (no dinners, etc.). Receiving anything disqualifies the entire distribution and makes it taxable to the taxpayer with a subsequent charitable deduction.

10 - This contribution is considered part of the taxpayer's RMD, thereby reducing the amount the taxpayer must receive and pay taxes on.

C – PENSION AND IRA CHANGES

1 - A nonspouse beneficiary can do a trustee-trustee transfer of an inherited qualified plan to his/her IRA starting with distributions after December 31, 2006. The IRA is considered to be the decedent’s IRA for purposes of the distribution requirements.

2 - The higher IRA and pension plan contribution limits are made permanent.

3 - The AGI phase-out limitations for IRAs are indexed for contributions beginning in 2007.

4 - The Savers Credit is made permanent and the AGI limitations are indexed for contributions beginning in 2007.

5 - Rollovers from eligible retirement plans, including §§401(k), 403(b), and 457 plans, can be made directly to a Roth IRA, effective with distributions after December 31, 2007.

6 - Tax refunds can be directly deposited into an IRA starting with 2006 tax refunds. In order to be considered contributions to the IRA for 2006, the deposit must take place by April 15, 2007 and the trustee must be notified that the deposit is for the year 2006.

7 - Self-employment income that is exempt from SE taxes under a religious exemption can be considered income for purposes of Keogh and SIMPLE plans.

8 - Military personnel who have been called to duty for a period of 180 days or more and who have taken a distribution from an IRA, §401(k), or §403(b) plan do not have the 10% early distribution penalty. This is effective for distributions after September 11, 2001. The statute of limitations to amend closed years to take advantage of this provision is extended to August 17, 2007.

9 - Public safety employees are exempt from the 10% early distribution penalty for distributions received from a defined benefit government plan because of a separation from service after the employee reaches age50. This includes an individual employed by a state or political subdivision of a state who provides police protection, firefighting services, or emergency medical services.

10 - Vesting in defined contribution plans changes for plan years beginning after 2006 to either:

- - Full vesting upon the completion of three years of service, or

- - 20% per year starting with the participant’s second year of service.

11 - The limit for filing Form 5500 for plans with owners and their spouses as the only participants increases from $100,000 to $250,000 for plan years beginning after 2006.

D – OTHER PROVISIONS

1 - §529 plan changes made as part of the EGTRRA of 2001 are made permanent. This includes the tax free distribution rules when used for qualifying education expenses.

2 - Nonprofit organizations not required to file Form 990 due to gross receipts not normally exceeding $25,000 may annually have to provide certain information to IRS in a manner that IRS prescribes. This appears to be at the discretion of IRS. This information is to be submitted electronically and must include the entity’s legal name, any name under which it operates, its mailing address, its Internet address, its EIN, the name and address of a principal officer, and evidence of the continuing basis for the organization’s exemption from the filing requirements. It also must inform IRS if its existence is terminated. This is effective for period beginning after December 31, 2006.

Need help with a Federal tax issue? David & Mary offer a fee based consulting services.

This text has been shared with you courtesy of: David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111) , , , and

©2006 Ashwaubenon Tax Professionals. No reproduction of this article is permitted without the express consent of Ashwaubenon Tax Professionals, 2140 Holmgren Way, Suite 1040, Green Bay, WI 54304.

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