Tax Rate Changes and Reporting Requirements for 2007

FICA Tax Rate
Effective for all payrolls paid after 1/1/07, the social security withholding rate and the employer tax rate are 7.65% on wages up to a limit of $97,500 per employee. Wages in excess of $97,500 will be taxed at 1.45% for employers and employees.

SDI Withholding Rate
The employee tax rate for 2007 is .6% of wages to a maximum wage amount of $83,389 per employee for a maximum contribution of $500.33.

FUTA Tax Rate
he 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 12/31/06 are due by 1/31/07. 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 1/31/07.

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 2006, and social security or identification number..

Forms W-3 and 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 2/28/07.

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.

California Real Estate Withholding
The 3.33 percent withholding requirement for real estate sales has been modified for sales occurring after January 1, 2007. Sellers may elect to have the withholding based on the actual gain.

2007 Standard Mileage Rates
As of January 1, 2007, the standard mileage rates used by the Internal Revenue Service to calculate the deductible costs of operating an automobile will be 48.5 cents per mile for business purposes; 20 cents per mile for medical or moving purposes; and 14 cents per mile for charitable purposes.

2006 IRA and SEP Limitations
The IRA and ROTH IRA contribution for 2006 is $4,000 for individuals under 50 years of age and $5,000 for those 50 and over.

The SEP contribution for 2006 is 25% of compensation to a maximum of $44,000.

Telephone Tax Refund
The telephone tax refund is a one-time payment available on your 2006 federal income tax return, designed to refund previously collected federal excise taxes on long-distance or bundled services. It is available to anyone who paid such taxes on landline, wireless, or Voice over Internet Protocol service.

The IRS will refund to you the taxes on long-distance or bundled service billed to you for the period after Feb. 28, 2003 and before Aug. 1, 2006. In general, any individual, business, or nonprofit organization that paid the tax for long distance or bundled service billed after Feb. 28, 2003 and before Aug. 1, 2006 is eligible to request the refund.

Bundled service is local and long distance service provided under a single plan that does not state the charge for the local telephone service separately from other services. Bundled service plans include, for example, Voice over Internet Protocol (VoIP) service, and landline and wireless (cellular) service plans that provide both local and long distance service for either a flat monthly fee or a charge that varies only with the elapsed transmission time for which the service is used. Telecommunication companies provide bundled service for both landlines and wireless (cellular) service. If VoIP service provides both local and long distance service, and the charges are not separately stated, such service is bundled service.

The method of sending or receiving a call, such as on a landline telephone, wireless (cellular), or some other method, does not affect whether a service is local-only or bundled.

The IRS is making it easier for individual taxpayers by offering a standard refund amount between $30 and $60, so that these taxpayers don’t need to gather old phone bills. Taxpayers who choose the standard amount will only need to fill out one line on their tax returns. The standard amount is based on actual telephone usage data and the amount applicable to a family or other household reflects the taxes paid on long-distance or bundled phone service by similarly sized families or households. Using this amount may be the easiest way for taxpayers to get their refunds and avoid gathering 41 months of old phone records.

Individual taxpayers can take a standard amount from $30 to $60 based on the number of exemptions claimed on their tax return. For those claiming:

• one exemption, the standard refund amount is $30 • two exemptions, the standard refund amount is $40 • three exemptions, the standard refund amount is $50 • four exemptions or more, the standard refund amount is $60

Things get more complex. Though the Internal Revenue Service has come out with an estimation formula and an actual calculation method, they are not as simple as they might have been.

Kiddie Tax
Beginning in 2006, the “kiddie tax” will apply to children under age 18 instead of age 14. Therefore, children with unearned income in excess of $1,700 (in 2006) will pay tax on that excess income at their parents’ marginal rate, if that rate is higher than their own rate.

New Tax Rules Affecting Individuals
The recently passed 2006 Tax Relief and Health Care Act is a wide-ranging measure that preserves a variety of popular tax breaks for families and businesses, extends energy provisions encouraging alternative and renewable energy sources, and includes trade, oil drilling, and Medicare provisions. Here is a look at the key tax provisions in the new law, that directly affects individual taxpayers.

Extension and modification of certain tax relief provisions.
The new law extends through 2007, and in certain circumstances modifies provisions which under prior law either expired at the end of 2005 or would have expired at the end of 2006. These include:

Tuition deduction.
The tax deduction for qualified higher education expenses is extended through 2007. The deduction allows taxpayers to deduct up to $4,000 (depending on their income) of higher education expenses in lieu of claiming the Hope or Lifetime Learning tax credits. The deduction is taken “above-the-line,” meaning that it may be claimed by all individual taxpayers regardless of whether they itemize their deductions.

State and local general sales taxes.
The tax break allowing individual taxpayers to elect to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes is extended through 2007. Taxpayers have two options for determining deductible sales tax: (i) actual sales tax paid if receipts are maintained for IRS verification or (ii) approximate sales tax paid as estimated in tables provided by the Secretary of the Treasury, plus sales tax on certain additional items (such as a boat or car) that may be added to the table amount.

Deduction for certain expenses of elementary and secondary school teachers.
The tax break permitting elementary and secondary school teachers and certain other school professionals to deduct up to $250 of out-of-pocket costs incurred to purchase books, supplies, and other classroom equipment is extended through 2007. The deduction is available to all individual taxpayers regardless of whether they itemize their deductions.

Availability of medical savings accounts.
New contributions to Archer medical savings accounts (“Archer MSAs”) may be made through 2007 (instead of through 2005, as under prior law). New contributions may be made after 2007 only by or for individuals who previously had Archer MSAs, and employees who are employed by a participating employer. Individuals may make tax-deductible contributions to an Archer MSA to pay for health care expenses. The distributions are tax-free if used to pay for eligible medical expenses.

Extension of certain expiring energy provisions and other energy provisions.
The new law provides an extension through 2008 of a number of energy provisions that would have expired at the end of 2007 under prior law. For individuals, the most important of these provisions is a one-year extension of the 30% tax credit for the purchase of residential solar water heating, solar electric equipment, and fuel cell property through Dec. 31, 2008.

Health savings account provisions.
The new law includes many changes for health savings accounts (HSAs), including: allowing one-time rollovers from health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) into HSAs (after the enactment date and before 2012); repeal of the annual plan deductible limit on HSA contributions (after 2006); expanded contributions limit for part year coverage (after 2006); and allowing one-time rollovers from IRAs into HSAs (after 2006).

Other tax relief provisions.
The new law also contains a package of other tax provisions designed to provide additional tax relief and certainty to taxpayers. These include:

Premiums for mortgage insurance.
A new itemized deduction for the cost of premiums for mortgage insurance on a qualified personal residence is established. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeds $100,000. The new deduction applies for 2007 only.

New Tax Rules Affecting Businesses
Here is a look at the key tax provisions that directly affect business taxpayers.

Extension and modification of certain tax relief provisions.
The new law extends through 2007, and in certain circumstances modifies, provisions which under prior law either expired at the end of 2005 or would have expired at the end of 2006. These include:

Research tax credit.
The research and development (R&D) credit, which expired at the end of 2005 under prior law, is extended to qualified amounts paid or incurred during 2006 and 2007.

Work opportunity and welfare-to-work tax credits.
The work opportunity tax credit (WOTC), which is a credit for wages paid by employers who hire individuals from certain targeted groups, and the welfare-to-work tax credit (WWTC), which is a credit for wages paid by employers who hire long-term family assistance recipients, are extended in their current form for 2006 and combined in 2007.

Enhanced deduction for corporate contributions of computer equipment for educational purposes.
The rule that encourages businesses to contribute computer technology and equipment to schools by allowing an enhanced deduction for such contributions is extended through 2007.

Extension of certain expiring energy provisions and other energy provisions.
The new law provides an extension through 2008 of a number of energy provisions that would have expired at the end of 2007 under prior law. It also contains a package of other energy provisions. The changes include:

Credit for electricity produced from certain renewable resources.
The placed-in-service date for facilities qualifying for the renewable electricity production tax credit is extended for one year through Dec. 31, 2008 for certain facilities (e.g., those producing electricity from wind, closed-loop biomass, open-loop biomass, small irrigation, landfill gas, and trash combustion).

Energy credit for certain business purchases.
The 30% business tax credit for the purchase of fuel cell power plants and solar equipment is extended through Dec. 31, 2008.

Credit for new energy efficient homes.
The tax credit for builders of new energy efficient homes is extended for one year through Dec. 31, 2008. The credit applies to manufactured homes meeting a 30% energy reduction standard and other homes meeting a 50% standard.

Deduction for energy efficient commercial buildings.
The deduction for energy efficient commercial buildings meeting a 50% energy reduction standard is extended for one year, through Dec. 31, 2008.