TAX SUMMARIES

2006 INCOME TAXES

Single

• 10% on income between $0 and $7,550
• 15% on the income between $7,550 and $30,650; plus $755.00
• 25% on the income between $30,650 and $74,200; plus $4,220.00
• 28% on the income between $74,200 and $154,800; plus $15,107.50
• 33% on the income between $154,800 and $336,550; plus $37,675.50
• 35% on the income over $336,550; plus $97,653.00

Married Filing Jointly or Qualifying Widow(er) Filing Status

• 10% on the income between $0 and $15,100
• 15% on the income between $15,100 and $61,300; plus $1,510.00
• 25% on the income between $61,300 and $123,700; plus $8,440.00
• 28% on the income between $123,700 and $188,450; plus $24,040.00
• 33% on the income between $188,450 and $336,550; plus $42,170.00
• 35% on the income over $336,550; plus $91,043.00

Increased Retirement Contribution Limits. The changes for 2006 are as follows:

• The maximum 401(k) and 403(b) employee contribution increases to $15,000.
• Taxpayers who are at least age 50 before the end of 2006 can increase their contribution limits by the following amounts for the following plans (called the catch-up contribution limit):
• An additional $5,000 for 401(k), 403(b), salary reduction SEP plans, and 457 plans
• An additional $2,500 for SIMPLE plans
• An additional $1,000 for IRAs (both traditional and Roth IRAs)

Higher Income Limits for Deductible IRAs. If you are covered by a retirement plan at work, you can take an IRA deduction if your modified adjusted gross income is less than $85,000 (married filing jointly) or $60,000 (single or head of household).

New Credit for Nonbusiness Energy Property. From 2006 to 2008, a taxpayer may claim a lifetime credit of $500 ($200 for windows) for making qualifying energy saving improvements to his residence. Qualifying expenditures include installation of certain energy-efficient insulation materials, exterior windows and doors, electric heat pumps, and central air conditioning. The credit is 10 percent of the cost of qualifying materials.

New Credit for Residential Energy Efficient Property. From 2006 to 2008, a taxpayer may claim a $2000 credit for the installation of solar water heating equipment, photovoltaic or fuel cell equipment in his residence. The credit is 30 percent of the cost of the equipment. No credit is allowed for equipment used to heat a swimming pool or hot tub.

New Credit for Purchase of New Energy Efficient Vehicles. Beginning in 2006, the purchase of qualifying vehicles will allow you to claim a tax credit. This replaces the Clean Fuel Deduction, which expired at the end of 2005. A credit is available for a variety of alternative fuel vehicles. New hybrid vehicles are eligible for a tax credit up to $3400, depending on the fuel-efficiency of the vehicle. This credit is limited, however, to the first 60,000 vehicles sold after 1/1/06 per auto manufacturer.

Tuition & Fees Deduction. This deduction expires for tax years after 2005.

Educators' Deduction. This deduction expires after 2005 and therefore is no longer available in 2006.

Sales Tax Deduction. The sales tax deduction expires after 2005.

Reduction in Itemized Deduction Limits for High-Income Taxpayers. Currently, itemized deductions are phased out (reduced) as your income rises. Starting in 2006, the deduction phase-out will be reduced by one third. In 2008, it will be reduced by two thirds, and in 2010, the phase-out will disappear entirely.

Alternative Minimum Tax (AMT) exemptions reduced. Beginning in 2006, the AMT exemptions revert to their 2002 levels. The AMT exemption for couples married filing jointly will drop from $58,000 in 2005 back to $45,000 in 2006. This will cause more individuals to pay AMT.

Some personal credits not allowed against AMT. Beginning in 2006, certain personal credits will no longer be allowed against the Alternative Minimum Tax. These credits include the dependent care credit, credit for the elderly and permanently and totally disabled, mortgage interest credit, hope and lifetime learning credits, and the DC first-time homebuyer credit.

Gift Tax Annual Exclusion Increased. In 2006, the annual amount of cash that you can give to someone else without filing a gift tax return increases from $11,000 to $12,000.

THE ECONOMIC GROWTH AND TAX RELIEF

RECONCILIATION ACT OF 2001

Estate Tax: Per the attached Table, the applicable exclusion (formerly unified credit exemption equivalent) from tax is $2 million in 2006-2008 and $3.5 million in 2009. The maximum federal estate tax rate declined from 55%, and is currently 46%, decreasing to 45% in 2009 before full repeal in 2010 (if current law remains unchanged, which is unlikely). The Generation Skipping Tax Exemption, and the rate of GST tax, is now equivalent to the estate tax applicable exclusion. Believe it or not, in 2010 the estate tax will (unless changed in the meantime, as we expect) be repealed, but the “sunset” provision of the new law requires that in 2011 all estate and gift taxes return to the same as they were in 2002 unless Congress extends the repeal. The sunset is caused by legislative budget balancing restrictions, requiring projected revenues increases to accompany tax cuts.

It is possible and some say likely that estate taxes will be repealed before 2010 based on the new legislative majority and the high priority accorded to tax issues by the reelected President Bush--but: we are still confident with our original guesstimate that estate tax reform will 1) include most of the planned increase in the tax free inheritance over the remainder of this decade, and 2) a reduced rate of federal tax from 45% to perhaps 25%-but it now appears more likely that liberalization will NOT culminate in repeal. Net: we expect a continuation of the present system with a higher tax threshold of around $3-5 million per taxpayer by the end of the decade and an aggregate rate of tax closer to one third than one half (NY and Fed). If history is any guide, by then, of course, our net worth (or our client’s net worth) may be much higher than present levels—so we must continue to be wary of potential tax liability. If repeal is accomplished, we expect the democrats to reverse it when they obtain the necessary power and votes in a future administration

An appreciation of the current situation for the taxpayer cannot be properly formed without an understanding of the historical context. This is the fourth time in our country’s history that transfers by gift and inheritance have been used to increase revenue, starting with the French and Indian Wars little more than a decade after independence. This last version has been around since 1916. We need to recognize the risk of continued estate taxes in the future even if a “permanent” repeal occurs, and plan accordingly.

Another significant provision of the new law is the gradual elimination of the State Death Tax Credit, which in 2004 has been replaced by a deduction. As a result of this change, Federal and NY estate taxes are no longer in conformity, and it has become difficult for planners to navigate. At this point, compared to other states like Florida, for wealthy individuals the death tax burden is about 8% higher in NY. At this point, due to budget problems, it appears unlikely that we will see any changes in Albany to remedy this unfair situation, and whenever possible we are urging clients move their domicile for tax purposes to Florida or other states where the tax climate is more hospitable.

Gift Tax: There is no repeal of gift taxes, in part to protect the integrity of the income tax system. The amount exempt from gift taxes increases next year to $1 million, but stays at that level permanently. The rate of tax on gifts reduces each year with the estate tax, remaining at 45% after 2009. There is no change to the annual exclusion amount under the new law, although it remains indexed for inflation. In 2006, we got an increase to the new annual $12,000 amount on tax free individual gifts (no limit on the number of donees).

If the law is not modified by 2010 as we expect, a big potential problem is caused by the new rules on capital gains on inherited property. Under current law, cost basis for computing gains is “stepped up” to the date of death value, even in non-taxable estates. Although it may never take affect (the new “carryover basis” rules don’t take effect till 2010) the new rules will greatly increase income taxes on inherited property, once it is sold. A special tax return would be filed at death even without estate taxes, to identify the cost basis on all inherited property for the IRS. So just in case, we need to start constructing and keeping historically accurate and verifiable records of original cost basis. We had carryover basis in the law for a few years in the eighties, and it was repealed as too complex and unworkable-now we may have it again.

Federal Transfer Taxes after the Economic Growth and Tax Relief Reconciliation Act of 2001

Set forth in the following table is a quick reference guide to the scheduled increases in the estate and gift tax applicable exclusions amounts, the GST exemption amounts, and the top marginal estate and gift tax rates and the GST tax rates through 2011, along with a few reminders of when various features of the Act are scheduled to become effective. Please note that this does not include State Estate Taxes, which may be significant, especially for New Yorkers.

Year	Estate Tax Applicable Exclusion	Gift Tax Applicable Exclusion	GST Exemption	Top Marginal Estate & Gift Tax Rate and GST Tax Rate
2001	$675,000	$675,000	$1,060,000	55%	Transfers after 12/31/00 are subject to automatic allocation of GST exemption.
2002	1,000,000	1,000,000	1,100,000	50%	5% estate and gift tax surtax repealed for estates of decedents dying after 12/31/01
2003	1,000,000	1,000,000	1,120,000.	49%
2004	1,500,000	1,000,000	1,500,000	48%	Family-owned business deduction is repealed for estates of decedents dying after 12/31/03
2005	1,500,000	1,000,000	1,500,000	47%
2006	2,000,000	1,000,000	2,000,000	46%
2007	2,000,000	1,000,000	2,000,000	45%
2008	2,000,000	1,000,000	2,000,000	45%
2009	3,500,000	1,000,000	3,500,000	45%
2010	N/A	1,000,000	N/A	N/A for estate & GST taxes. 35% for gift taxes.	Estate tax and GST tax are repealed. Carryover basis is in effect. Any transfer to a trust other than a wholly owned grantor trust will be treated as a completed gift.
2011	1,000,000	1,000,000	2003 amount indexed for inflation.	55%	Current law springs back into effect.

Note: For NY decedents, the maximum combined rate of tax (both state and federal, on estates) is 54% through 2009. Due to the elimination of the Credit for State Death Taxes, Florida, and most other states, now have no death taxes. New York’s taxable threshold is now $1 million.