December 2005

Subject: Current Tax Planning Information

Dear Clients and Friends:

Though changes in tax legislation haven't been as significant this year as in 2004, opportunities for savings from appropriate planning this year and next are great and growing. This letter contains some planning ideas for your consideration prior to year end, new deduction and credit limits and taxable income rate brackets to increase your awareness of how these opportunities apply to you. Individuals and business clients may consult our December 2004 year-end tax planning letter in addition to this letter update for details regarding items of continuing relevance to your planning.

This year individual taxpayers on extension from April 17 filing deadline will receive an automatic additional two months to the October 16 (vs. August 15) due date on extension. Cash donations between August 25 and December 31, 2005, to any qualified charitable organization (not solely Katrina related) will qualify for deduction of up to 100% of adjusted gross income (AGI) vs. the usual 50% of AGI each year limit with carryovers available. Taxpayers providing housing to Katrina victims at least 60 consecutive days may benefit from an additional $500 personal exemption per person up to $2,000 total for housing more than one person. Numerous other benefits especially designed for Katrina disaster victims were authorized in the Katrina Emergency Relief Act of 2005. Guidance and details on that and other hurricane relief provisions can be found at the IRS website www.irs.gov (go to www.irs.gov/newsroom/article/0,,id=147085,00.html) or call us to discuss your situation related to any declared disaster.

Your awareness of increasing IRS enforcement actions through imposition of added civil penalties for failure to report transactions or maintenance of an account with a foreign entity by answering questions regarding foreign accounts and trusts at part III of schedule B of form 1040 and separately filing Treasury Department Form TD F 90-22.1, whether willful or not, may save you tremendous grief if applicable. As a result of discovery activities obtaining names of foreign account holders (generally without social security numbers) the IRS has obtained many names of individuals with foreign accounts, including holders of credit cards of foreign institutions, and is trying to match those to the appropriate taxpayers. Prior law authorized a minimum civil penalty of $25,000 up to $100,000 which may be imposed on any person who willfully violates the reporting requirement with substantially higher criminal penalties and possible imprisonment, especially if the violation is part of a pattern of illegal activity. Current law adds an additional civil penalty that may be imposed (up to $10,000) without regard to willfulness. It may be waived if income from the account was properly reported on the tax return and there was reasonable cause for failure to report to the Department of Treasury. Also added is additional penalty for willful behavior to the greater of $100,000 or 50 percent of the amount of the transactions or account. An amnesty period for amending past returns to report prior violations exists to avoid imposition of these significant enforcement measures.

New reporting rules for donations of autos, boats or planes to charitable organizations require reporting to you on form 1098-C as well as written acknowledgment of use by donee organization, with appraised valuation or sale price obtained by the organization if not used for its charitable purposes.

Purchases of alternative fuel motor vehicles (hybrids) should be delayed to early 2006, when deductions will be replaced by possible credits until limits are reached.

Florida intangible tax rate for individuals with taxable assets in excess of $250,000 per person exemption falls 50% to 50 cents per $1,000 this year.

Businesses reporting as S corporations are facing increased scrutiny of proper payroll tax reporting for owners, with the service asserting no statute of limitation on payroll tax reporting forms improperly or not filed at all. The issue involves use of such entities to avoid payroll taxes on money taken from earned income without payment of a reasonable wage. Penalties and interest may greatly exceed tax liability itself if finding of improper reporting results. On July 25, 2005, the IRS announced it had launched a study of 5,000 randomly selected returns from 2003 and 2004 to do compliance behavior review to assist selection and audits of S corporations with greater compliance risk. Growth of S corporations is rapidly increasing making compliance auditing enforcement or even future legislative changes in this area expected.

Some businesses with tax years beginning in 2005 will be eligible for a deduction of 3% (in 2005 and 2006; 6% in 2007 and 2008 and 9% thereafter) of the lesser of the taxpayer's qualified production activities income or taxable income (modified AGI for individuals) or 50% of wages for the employer. Qualified production activities include sale, lease, rental or license of qualifying production property manufactured, produced or grown in the U.S., such as tangible property, software records, films, utilities, construction activities or engineering or architectural services performed in the U.S. for U.S. projects. There will be complicated record keeping required for this small deduction in many cases.

Deposits of FUTA tax by employers are required quarterly only on balances due in excess of $500 in 2006.

Florida corporation or LLC owners should access www.sunbiz.org to update reporting and pay annual corporate fees no later than April 1 to avoid relatively heavy penalties.

Planning Ideas to Consider at Year End

1. Check withholding and estimated tax deposits to adjust if necessary to avoid underpayment penalty (which is really a nominal interest charge for not paying taxes in the year they are due). Reduce remaining withholding and estimated tax deposit due by January 17 if it is apparent your tax is overpaid. If your AGI last year is less than $150,000, you may use last year's total tax (less earned income credit) as safe harbor amount for withholding plus timely tax deposits by January 17 to avoid underpayment penalty if your tax is higher this year. If your AGI last year is greater, add 10%. Covering 90% of your current year tax, if less, will suffice.

2. Check net gains and losses on sale of non-retirement investments to date and unrealized gains or losses on current holdings to consider additional sales by year end for tax benefit. Losses on sales by year end are fully deductible against current year gains plus $3,000 against other taxable income. Excess losses carry over to future years.

3. If self-employed or other business owner and profitable, consider purchase and putting into service qualifying business assets by year end, using either cash or credit, to be entitled to elect section 179 acquisition year expensing up to $105,000 ($108,000 in 2006) against income or to take depreciation for the year. Note that vehicle deductions are limited. See last year's letter regarding those limitations.

4. If itemized deductions don't exceed your standard deduction (see chart with amounts below), consider bunching deductions paid (such as real estate or state income taxes, major purchases with high sales tax, charitable donations, elective medical if enough to exceed 7.5% AGI, and miscellaneous itemized deductions to exceed 2% of AGI), into alternate years for maximum tax savings.

5. If accelerating deductions to 2005, make intended charitable contributions by cash or credit card (to take advantage of up to 100% of AGI limit for cash donations after August 25 to December 31), pay real estate taxes due, pay significant medical bills by either cash or credit, make vehicle purchases, or pay significant miscellaneous items in 2005. If you are at risk of incurring the alternative minimum tax due to high itemized deductions or other tax preference items such as stock option exercise or large capital gains with other income, check the consequences with us before using normal tax strategies. These rules are very complex.

6. Consider increasing your basis in an S corporation by loaning cash by year end if necessary to allow deduction of losses this year or by repaying advances taken in the year to avoid taxable distribution for basis reduction.

7. Adjust payroll for owners, if applicable, to increase basis for retirement contributions. Employers should consider establishing a retirement plan, especially self-employed. See our prior letters describing plan options, or call us. Employees should consider authorizing increased participation in employer retirement plans available beginning early in the year. Notify us if refunds of excess 2005 contributions are received by you in 2006.

8. Consider income deferral or deduction acceleration at year end to defer taxation another year, unless this year's rates are lower than what is anticipated next year for you, or alternative minimum tax applies this year.

9. Insure minimum distribution requirements (see page 3 of our 2002 tax action guide) are met by December 31 to avoid potential penalty assessment, and consider distributing more than the minimum from your retirement accounts if you are in the lowest tax rates with substantial percentage of your available savings still in retirement accounts.

10. Check beneficiary designations on all accounts and policies to insure they are appropriately completed and update or document estate plans (wills, trusts, powers of attorney, health care surrogate designations, living wills, organ donor authorization, and listing of tangible property bequests) and consider advisability of completing annual gifts to the extent of $11,000 annual exclusion by December 31. The annual exclusion per donee for each individual increases to $12,000 in 2006.

New Tax Rates, Deductions & Limits

Indexing and scheduled increased limits continue to result in beneficial tax breaks for individuals in 2005 and 2006 (as illustrated for some commonly applicable examples below):