Some new tax provisions that began January 1, as well as some carryover provisions, can help average people minimize their taxes, maximize their wealth, and provide savings flexibility says Alan Sumutka, associate professor of accounting at Rider University for 28 years and a CPA.

Sumutka, who has published numerous articles on tax planning and is a tax/financial planning consultant, lists nine new or improved tax provisions that offer advantages in 2006.

1. Contribute to a 401(k)/403(b)/SIMPLE plan.  An employee should consider contributing up to the employer match. For example, if an employer matches at least three percent of employee contributions, the employee should put in at least three percent.  “That’s the minimum to contribute because it is free money from the employer,” Sumutka said.  “In other words, what you put in is matched dollar for dollar; it is a 100 percent return on your investment. It’s rare that you get a 100% risk-free return on your money anywhere.  Additionally, your contribution is tax-free so it’s partially funded by the government, the employer’s contribution is not taxed and along with the earnings are sheltered until distribution, probably many years from today.  The ‘match’ is probably the best tax/savings benefit available.”  In 2006, the match provision is available also in a new “Roth” 401(k)/403(b) option discussed below.
   
   
2. For many individuals, the second savings priority is to fully fund a Roth IRA.  Maximum 2006 contributions are $4000, the same as for 2005.  However, taxpayers at least age 50 can contribute another $1000 in 2006, up from $500 in 2005.  Although not all taxpayers are eligible to make these nondeductible contributions (e.g., higher income taxpayers), earnings accrue and are distributed tax-free, potentially a significant benefit over time.  “Arguably, it’s one of the most versatile and advantageous tax benefits created for the ‘average Joe.’  You are permitted to withdraw your contributions anytime for any reason without penalty, while accumulating tax-free earnings”   Sumutka noted.  “Although probably best saved for retirement, this could be used as an emergency/reserve fund, a fund to save for a home purchase down payment, and it’s probably the best way to save for college, since it’s ignored for financial aid purposes.”  However, under many circumstances, if you withdraw the earnings before age 59 1/2, there may be a 10 percent penalty.”
   
   
3. Individuals with the ability to save beyond the employer match and the maximum Roth IRA can benefit by fully funding their 401(k)/403(b)/SIMPLE plans, since the government subsidizes the contributions with the tax-free contribution.  “For example, a taxpayer who is in a 25 percent federal tax bracket and contributes $10,000 to one of these plans saves $2,500 in federal taxes for an after-tax cost of only $7,500,” Sumutka said.  “And those savings ignore possible state tax savings as well.  Following these three steps is the priority for many people to minimize their taxes, maximize their wealth, and gain flexibility with their tax sheltered savings.”   In 2006, individuals under age 50 can invest $15,000 in a 401(k) or 403(b) plan (up from $14,000 in 2005).  Those 50 or older can add $5000 (up from $4000) for a total of $20,000.  Maximum SIMPLE contributions remain at $10,000, plus $2,500 if you are 50 or over (up from $2000).   
   
   
4. Sumutka pointed out that there is a new retirement plan, the “Roth” 401(k)/403(b) plan, coming out January 1, 2006 which, as planned now, will be available for five years only.  Since anyone, regardless of income levels, is permitted to fund these plans with the same amounts as “traditional” 401(k) plans, “you can view these new plans as ‘super sized’ Roth IRAs, but unfortunately with greater restrictions on distributions,” Sumutka added.  “Generally, these are best for young people who usually are in low tax brackets since, like a Roth IRA, you forfeit the equivalent of a tax deduction, but usually at a low bracket, and probably gain tax-free future income upon withdrawal at high tax bracket.”
   
   
5. Employees with health care flexible spending accounts should consider funding the accounts to the level of their estimated un-reimbursed medical expenses.  “The benefit is that you don’t pay tax on the contributions, so it generates a tax savings,” Sumutka said.  Although the risk in these plans is either you ‘use it or lose it,’ a new 2005 ruling permits employers to extend the reimbursement period to March 15.”   But Sumutka said there is another way around this onerous provision.  “People can seek reimbursement for over-the-counter drugs through these plans.  In other words, with any leftover money you can stock up on cold medication, aspirin, antacids, etc. Historically, people purchased replacement eyeglasses or got an end-of-year physical exam.  Most companies offer a website with a listing of covered expenses.”  Similar provisions apply to dependent care accounts as well.
   
   
6.  For homeowners, new residential energy conservation incentives are available to encourage purchases of energy saving items in 2006 and 2007.  Homeowners are entitled to a 10 percent tax credit on the purchase of such items as insulation, exterior windows (including skylights) and exterior doors.  The maximum credit over two years is limited to $500. There is a 30 percent credit for certain solar electricity items.
   
   
7. Individuals seeking to buy or lease a new personal auto or light truck (under 8500 pounds) may benefit from a new hybrid (generally gas/electric) motor vehicle tax credit available from 2006 through 2010.  Although there are numerous eligibility requirements, if a person qualifies, the credit can range anywhere from $400 to $3,400.  But beware, Sumutka cautions. “Several studies question whether the gasoline savings from these vehicles are sufficient to justify the higher costs of these energy-efficient vehicles,” he said. “Many are paying a premium to get these cars right now to save on escalating gas prices, but they may be reducing their overall wealth.”
   
   
8. In 2006, the annual gift tax exclusion increases from $11,000 per donee to $12,000.  “What that means is I could give up to $12,000 to any one person in a year, and there are no gift tax implications,” Sumutka said.  “On the other hand, if I gave one person more than $12,000, it may trigger gift tax issues.  This is the first time in many years that the so-called ‘annual exclusion’ has increased.  It’s been $11,000 for quite a while.  Even ‘average people’ make use of this provision later in life to avoid possible estate taxes and/or to fund education plans for their grandchildren.”
   
   
9. The federal estate tax exemption increases to $2 million in 2006 from $1.5 million in 2005. That means if a person died in 2005 with an estate (generally including items such as savings, residence(s), life insurance, retirement plan accumulations) that was worth over $1.5 million, potentially the estate would be liable for a federal estate tax.  However, in 2006 you need an estate of greater than $2 million to be subject to the federal estate tax.  Sumutka warned that “New Jersey residents need to be cautious here, since the New Jersey exemption is only $675,000.”