New Roth 401(k) PLANs
Starting January 1, 2006, employers can offer Roth 401(k) plans, which combine features of the traditional 401(k) with those of the Roth IRA.

Like traditional 401(k) plans, Roth 401(k) contributions are taken out of a participant's paycheck and deposited into selected investment options. However, contributions to Roth 401(k)s will be made with after-tax dollars. The maximum annual deduction is $15,000 or $20,000 for those 50 years of age or older.

While there is no up front tax deduction, the account will grow tax-free provided they are taken out after age 59-1/2 and after at least five years from the first contribution date.

The IRS is still working on the final regulations governing Roth 401(k) plans.

Mileage Rates
Beginning January 1, 2006, the standard mileage rates used by the IRS to calculate the deductible costs of operating an automobile is 44.5 cents per mile for business miles driven, 18 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations (32 cents if it is related to Hurricane Katrina).

For 2005, the standard business mileage rate was 40.5 cents through August 31 and 48.5 cents from September 1 through December 31, 2005.

Payroll Taxes and Filing Requirements

FICA Tax Rate
Effective for all payrolls paid after 1/1/06, the social security withholding rate and the employer tax rate are 7.65% on wages up to a limit of $94,200 per employee. Wages in excess of $94,200 will be taxed at 1.45% for employers and employees.

SDI Withholding Rate
The employee tax rate for 2006 is .8% of wages to a maximum wage amount of $79,418 per employee for a maximum contribution of $635.34.

FUTA Tax Rate
The FUTA wage base per employee remains at $7,000 and the tax rate is .8%.

Quarterly Payroll Tax Reporting
Form 941 (Federal) for the year ended 12/31/05 are due by 1/31/06. If we do not already prepare your quarterly payroll tax returns and you would like our assistance in preparing these returns, please call us.

Annual Payroll & Wage Reporting
Form 940 (Federal FUTA tax) and W-2's for employees must be completed by 1/31/06. If we prepare your quarterly payroll tax returns, we will automatically prepare these forms as well. If you would like assistance in preparing these returns, please call us.

Annual Information Returns-FORM 1099

Annual Information
Individuals, partnerships, corporations, or other organizations engaged in a trade or business are to file information returns (Forms 1099). These forms are required to be sent to payees by 1/31/06.

What payments are reported on Form 1099?

•	Payments of $10 or more, relating to interest, stock dividends or distributions, royalties, unemployment compensation, state tax refunds, or original issue discount
•	Payments of $600 or more, for non-employee services, rent, providers of health and medical services, or liquidation distributions
•	Payments (regardless of the amount) for acquisition or abandonment of property secured for debt, broker or barter transactions, pension proceeds, proceeds from the sale or exchange of real estate, or distributions from an IRA are reportable.
•	Payments made to corporations are generally not reportable. Exceptions: If, in the course of your trade or business, you paid attorney fees or gross proceeds to an attorney of $600 or more, it is reportable. Payments for medical and health services are also reportable.
•	Banks and other businesses administering escrow accounts, including construction accounts, will be required to issue 1099-MISC for payments made on construction loans made after December 31, 1993.

If you would like our assistance in preparing these forms, please call us or send us the information. We will need the name, address, amount paid in 2005, and social security or identification number.

Form 1096
These forms are all used for submitting appropriate copies of the various types of informational returns to the Internal Revenue Service. These are all due by 2/28/06.

There are severe penalties for failure to file any of these returns, as well as substantial penalties for incorrect filings. We urge you to comply with these requirements and, as always, we are available to assist you in any way to comply with the requirements.

Extensions
Effective January 1, 2006, Individuals will be granted a six-month extension to file their personal income tax return. There will no longer be a four month extension. Therefore, if you request an extension to file your 2005 income tax return, you will have until October 15, 2006 in which to file. However, as has always been the case, any money due is due on April 15. Penalties and interest will apply to payments made after that date even though the return is on extension.

Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are quickly becoming an accepted health insurance option. Here are some things to keep in mind: HSAs are open to individuals covered by a high deductible health insurance plan. The annual deductible must be at least $1,000 for individual coverage, and at least $2,000 for family coverage. HSAs are a significant improvement over previous savings vehicles, which were limited to employees of small businesses and the self-employed and required health insurance policies with much higher deductibles.

Individuals with existing medical savings accounts (MSAs) can either retain them or roll the amounts over into a new HSA.

Contributions to HSAs by individuals are deductible, even if the taxpayer does not itemize. Contributions by an employer are not included in the individual's taxable income. Individuals, their employers, or both can contribute tax-deductible funds each year up to the amount of the policy's annual deductible, subject to a cap in 2005 of $2,650 for individuals and $5,250 for families (an increased amount for 2006 is anticipated but has not yet been released.) In addition, individuals over age 55 can make extra contributions to their accounts ($700 in 2006, increasing to $1000 by 2009) and still enjoy the same tax advantages.

The interest and investment earnings generated by the account are also not taxable while in the HSA.

Amounts distributed are not taxable as long as they are used to pay for qualified medical expenses. HSA funds can be used to cover the health insurance deductible and any co-payments for medical services, prescriptions, or products. In addition, HSA funds can be used to purchase over-the-counter drugs and long-term care insurance, and to pay health insurance premiums during any period of unemployment.

Amounts distributed that are not used to pay for qualified medical expenses will be taxable, plus a 10% penalty to be applied to deter the use of the HSA for non-medical purposes.

HSAs are portable, so an individual is not dependent on a particular employer to enjoy the advantages of having an HSA. Like an individual retirement account (IRA), the HSA is owned by the individual, not the employer. If the individual changes jobs, the HSA goes with the individual.

Note, you can't open an HSA without subscribing to a high deductible health care plan (HDHP), but you can subscribe to an HDHP without opening an HSA. However, keep in mind that this option fails to take advantage of HSA tax benefits while exposing one to the risk of paying the very high deductibles out of ordinary savings should expensive medical treatment be required.

SEP and 401(k) Tax Return Requirements
If you are self-employed and have a SEP or a 401(k) plan with assets of $100,000 or more, you are required to file tax return Form 5500 annually. The return is generally due on July 1 but can be extended. If you have more than one plan and the total assets are $100,000 or more, a return is due for each plan.

There are severe penalties for failure to file any of these returns, as well as substantial penalties for incorrect filings. We urge you to comply with these requirements and, as always, we are available to assist you in any way to comply with the requirements.

Estate Tax
The good news is it's becoming increasingly less likely that you'll owe estate taxes. That's because Congress has approved a schedule that increases the amount an individual can leave to heirs tax-free to $2 million in 2006 and eventually to $3.5 million in 2009. In 2010, it will supposedly be repealed altogether.

Still, with 401(k) accounts compounding and life insurance death benefits thrown into the pot, it's easier than some think for a working couple to be subject to the estate tax, at least for the next few years. And this tax can be brutal. For every dollar more than $2 million that you leave behind, Uncle Sam will take at least 45 cents. The marginal tax rate hits 47% for a $2 million estate.

Even though the current law calls for complete repeal of the federal estate tax in 2010, believe it when you see it. Estate tax planning remains critically important until the repeal actually occurs; if it ever does. Politicians have been known to change their minds, and future economic and political events could result in backsliding on the promised repeal. The good news is that the federal estate tax exemption amounts will increase dramatically over the next few years. These increases are likely to stick even if the estate tax is not completely repealed as currently scheduled in 2010.