Tax Law | 2006 Legislation UpdateOn August 17th, President Bush signed into law a comprehensive pension reform bill: the Pension Protection Act of 2006. Its 900+ pages give tax professionals many new variables to consider in advising business and individuals on their retirement benefits, and create a whole new set of rules on charitable giving. There are a handful of miscellaneous provisions that deserve attention as well.
The pension reform portion of the bill is too complex to cover here and has limited impact on the majority of our readers, so this article will highlight some of the other key provisions.
► Taxpayers can now direct the IRS to deposit their refund into an IRA
► Individuals called to active military duty may make penalty-free early distributions from IRAs and 401(k)s. They will then have up to two years after the end of their active duty period to re-contribute the amounts withdrawn without tax consequences.
► A taxpayer may roll over his or her deceased spouse’s interest in a qualified retirement plan, government plan or tax sheltered annuity into an IRA and not be taxed except as normal distributions are taken. The new law extends this special treatment to nonspouse beneficiaries.
► Effective for distributions after December 31, 2007, the new law will allow direct rollovers from a qualified retirement plan, tax-sheltered annuity, or governmental plan directly to a Roth IRA.
► The new law makes permanent many of the provisions of EGTRRA that were scheduled to sunset at the end of 2010, including the higher dollar amount for IRA contributions ($4,000 starting in 2006, $5,000 in 2008, inflation adjusted thereafter), and the rules allowing for Sec. 529 qualified tuition programs. The Saver’s Credit, set to expire this year, was also made permanent.
► The Act tightens the rules for donations of cash, clothing, household and other items, and for the first time allows direct, tax-free contributions of IRA proceeds to charities.
Cash: In a major change, no deduction is allowed for any contribution of cash, check or other monetary gift unless the donor can show a bank record or a written communication from the charity indicating the amount of the contribution, the date the contribution was made, and the name of the charity.
Clothing & Household Goods: no deduction is allowed for used clothing and household items unless the items are in “good” condition; however, the new law does not define “good condition.”
► Under the new law, taxpayers age 70 1⁄2 or over will be able to make tax-free distributions from IRAs for charitable purposes through December 31, 2007. The maximum annual cap is $100,000.
The above are highlights only; please consult your tax advisor before making changes based on this new legislation.
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