New Tax Laws enacted since 2000

Victims of Terrorism Tax Relief Act of 2001 (VTTRA)

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)

Military Family Tax Relief Act of 2003 (MFTRA)

Working Families Tax Relief Act of 2004 (WFTRA)

American Jobs Creation Act of 2004 (AJCA)

Katrina Emergency Tax Relief Act of 2005 (KETRA)

Gulf Opportunity Zone Act of 2005 (GOZA)

The Energy Tax Incentives Act of 2005

Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)

Pension Protection Act of 2006

Heroes Earned Retirement Opportunities Act of 2006 (HERO)

Tax Relief and Health Care Act of 2006 (12/10/06)

Tax Rates

The different Income Tax Rates for 2006 are as follows:

10%, 15%, 25%, 28%, 33%, and 35%

The tax brackets for your filing status could be located in the chart included in this package.

The Energy Tax Incentives Act of 2005

Energy Efficient Home Tax Credit: A tax credit is available for energy efficient improvements made to your home, energy efficient equipment installed in your home. See The Energy Tax Act of 2005 (enclosed) for details.

Alternative Motor Vehicle Tax Credit: This tax credit is available for the purchase of a new Alternative Motor Vehicle for 2006. Depending on the make and model of the vehicle, the maximum amount of the tax credit is $3,150. A tax credit reduces your total income tax dollar for dollar.

The tax credit was made available to offset the incremental higher cost of purchasing a hybrid, fuel cell, advanced lean burn technology and qualified alternative fuel powered vehicles. The amount of the credit will vary depending on the type of vehicle, along with its weight and fuel efficiency. In addition, a qualified vehicle is eligible for the credit only after the manufacturer certifies to the IRS that certain standards are met. The FULL tax credit is available before the manufacturer sells 60,000 units and a PARTIAL tax credit is available after that threshold.

See The Energy Tax Act of 2005 (enclosed) for a list of qualifying vehicles and the available tax credits.

Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)

Increase in Kiddie Tax age: Starting January 1, 2006 unearned income (such as interest income and dividends) of a child under the age of 18 is subject to the Kiddie Tax. The Kiddie Tax is imposed on unearned income of $1,700 or more at the parents’ highest tax rate. Unearned income of children age 18 and older is taxed at their own rates, which are generally very low. Prior to 2006 the age cutoff was 14.

Capital Gains tax rates: Favorable Capital Gains tax rates have been extended through the end of 2010. The Capital Gains tax rate for assets held more than 12 months is 15%. If you are in the 10% or 15% tax bracket the Capital Gains tax rate is 5%. Currently, after 2010 the Capital Gains tax rates will revert back to 20%.

Pension Protection Act of 2006

Individual Retirement Arrangements (IRA): For 2006 and 2007 you can contribute and deduct up to $4,000 and if you are over age 50, an additional $1,000 to a traditional IRA.

Deferred Compensation Plans: If you participate in an employer-sponsored plan (qualified plan), starting in 2006, you can defer up to $15,000 ($15,500 for 2007) and if you are over age 50, an additional $5,000. The deferral limit does not include any employer matching contributions.

Rollovers from Qualified Plans: Currently, funds must be transferred first to a traditional IRA and then rolled to a Roth IRA. However, in 2008 and 2009 funds in a qualified plan can be rolled directly into a Roth IRA. You may pay the tax on the conversion over a two (2) year period. After the conversion, you now have a fully funded Roth IRA that will hopefully appreciate over time, and at retirement the distributions from which will be tax free.

Rollovers by non spouse beneficiaries: Starting in 2007, a beneficiary of a qualified retirement plan can roll it over to an IRA even if he/she is not the participant’s surviving spouse. In prior years a non spouse beneficiary would have to claim the distribution as income and pay tax in the year of distribution. This inherited roll over IRA does not become the beneficiary’s IRA, so distributions must commence even if the beneficiary is under

70 ˝ years old. Distributions are taken over the beneficiary’s life expectancy using an IRS Table. A roll over by surviving spouse to his/her IRA can delay the required minimum distributions.

Charitable Contributions:

Contribution of IRA distributions: Owners of IRAs, age 70 ˝ or older can give their required minimum distributions to charity in 2006 and 2007 with the distributions being tax free. This means that the distribution will not be included in gross income. No additional charitable contribution deduction can be claimed for these types of distributions.

Cash Donations: Beginning with tax year 2007, the IRS will disallow, under audit, charitable deductions for a contribution of cash, check or other monetary gift unless the taxpayer maintains a record of the contribution, a bank record or written communication from the donee organization that includes their name, date and amount of contribution.

Auto Donations: For tax year 2006, if you donate your car to a charity and the charity, or its agent sells it, the value of your donation is limited to the sales proceeds. All charities must report sales proceeds to you and to the IRS. This rule doesn’t apply if the charity uses or improves the vehicle in a substantial way before selling it.

As an example, substantial use would be if the charity uses the vehicle to deliver meals to homebound individuals and drives it 10,000 miles before selling it. In such situations, you can rely on an estimated fair market value of the car.

Strategy: To maximize your deduction, contribute your car to an organization that intends to use it in its charitable activities - ask the charity about its intentions.

Non-Cash Donations: Items donated after August 17, 2006 must be in “good” condition or better to be deductible. The definition of “good” condition has not yet been determined by the IRS. This is an area where I tell my clients to donate clothing or household items to an organization that will give you a receipt for the items donated instead of dropping items in drop box. With the receipt you can substantiate the contributions taken on your tax return in case of an audit.

Heroes Earned Retirement Opportunities Act of 2006 (HERO)

Combat Pay: Military personnel receiving combat pay can now count excludable combat pay as income when figuring the Child Tax Credit and have the option of including combat pay as income when figuring the Earned Income Credit. Counting combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.

IRA’s: Members if the Military can now count tax free combat pay when determining whether they qualify to contribute to either a Traditional or Roth IRA.

Other Tax Item to Consider

Sales Tax Deduction: This additional itemized deduction had been set to expire at the end of tax year 2006 but has been extended through 2007.

Educator Expenses Deduction: This deduction had been set to expire after 2003. Teachers, Instructors, Principals, Counselors and classroom Aides can take a deduction against their Gross Income in the amount of $250 for 2006.

Higher Education Tax Credits: In 2006, the maximum Hope credit is $1,600 and the maximum Lifetime Learning credit is $2,000. These credits are phased out once certain Adjusted Gross Income (AGI) figures are reached.

Higher Education Tuition Deduction: For 2006 and 2007, a maximum $4,000 deduction is available for higher education tuition and qualified fees paid by taxpayers.

Telephone Tax refund: The telephone tax refund is a one-time payment available to be claimed on your 2006 Federal income tax return. The refund is for long distance federal excise taxes collected between August 1, 2003 and July 31, 2006. See Telephone Tax Refund (enclosed) for details.

Medical Deductions: In addition to health insurance premiums, prescriptions and out of pocket expenses, medical expenses for items and services prescribed by a doctor for a specific condition are deductible. Home improvements to mitigate a diagnosed medical ailment, equipment used to alleviate a medical condition and programs and treatments for health reasons are also deductible.

$250,000 FDIC Insurance: Starting April 1, 2006 the Federal Deposit Insurance Company has increased insurance to $250,000 from $100,000 for self directed Retirement accounts held at banks such as Traditional and Roth IRA’s, SIMPLE plans, Keogh plans, Section 457 accounts and 401(k)’s.

Social Security: The taxable FICA wage base for working individuals for 2006 is $94,200 ($97,500 for 2007). Taxable wages up to that amount will be taxed at 6.2% for Social Security purposes, while entire taxable wages will be taxed at 1.45% for Medicare tax purposes.

Capital Loss Deduction: The amount you can deduct from ordinary income remains at $3,000. Any Capital losses not utilized can be carried forward until the entire Capital loss is used up.

Gain on Sale of Principal Residence: Taxpayers can still exclude a portion of the gain on the sale of their home. If you are a married couple filing jointly you can exclude from income up to $500,000 of gain, if you are unmarried you can exclude up to $250,000 of gain from income. This general rule applies if you owned and used the home as your primary residence for 2 out of 5 years preceding the sale.

Mileage Rate Allowance: The 2006 rate for business use of your vehicle is 44.5 cents

(48.5 in 2007). The 2006 rate for use of your vehicle to get medical care and moving expenses is 18 cents (20 in 2007). The rate for charitable activities remains unchanged at 14 cents (14 in 2007).

Websites:

Internal Revenue Service: www.IRS.gov

New York State Department of Taxation: www.Tax.State.NY.US

J.P. Marsala & Co: www.JPMCO.net