As you get ready for the end of the year there are numerous new tax law changes that will affect your taxes for 2006. By acting now, you could secure “instant” tax gratification on your 2006 tax return. At the very least, you can lay the groundwork for a future tax payoff. Here’s a brief summary of several new provisions:

Individuals and Small Business Owners

• In the past, you could convert a traditional IRA to a Roth IRA only in a year in which your adjusted gross income (AGI) did not top $100,000. The new law eliminates that dollar cap, but not until 2010. But start preparing today by bulking up your traditional IRAs through nondeductible contributions or retirement plan rollovers.

• Under the so-called "kiddie tax," a child’s investment income above an annual threshold ($1,700 for 2006) is taxed at the parents’ top marginal federal income tax rate. Prior to the new tax law, this rule applied to children under age 14. Effective for 2006, though, the age limit rises to 18.

• Currently, the maximum tax rate on long-term capital gain and qualified dividends is only 15 percent, as opposed to ordinary income rates reaching up to 35 percent. This special tax treatment was set to be repealed after 2008, but the new law extends it two more years.

• The alternative minimum tax (AMT) continues to affect a wide range of taxpayers from all income levels. The new law extends, and even slightly enhances, a modicum of AMT relief through 2006.

• The Section 179 “expensing” deduction enables you to currently deduct the cost of assets in the year they are placed in service, within generous limits. But the annual limit ($108,000 for 2006) was scheduled to revert to $25,000 in 2008. Under the new law, six-figure deductions are preserved for two more years.

Most Recent New Law: Pension Protection Act of 2006

The Pension Protection Act of 2006 contains many provisions that affect tax deductions for charitable donations from both individual and business taxpayers. It’s important that you are aware of these sweeping changes. The new law tightens the rules for substantiating charitable donations of cash or cash equivalents. It denies deductions for contributions of cash, check or other monetary gifts unless you can show a bank record or written communication from the charity. In addition, the new law:

• Prohibits deductions for gifts of clothing or household goods unless the items are in "good condition."
• Allows tax-free distributions from traditional IRAs and Roth IRAs if the funds are used for charitable purposes.
• Extends enhanced tax deductions for donations of food and books by certain business entities.
• Increases the deduction limit for charitable gifts of conservation easements.
• Increases favorable treatment of S corporation stockholders making charitable donations.
• Restricts gifts of fractional interests of tangible personal property.

New Energy Tax Law for 2006 and 2007 For 2006 and 2007, you can claim a 10 percent tax credit for the cost of a wide range of energy-efficient building components for your principal residence. These include:

• Insulation materials or systems that cut heating and cooling costs
• Exterior windows (including skylights)
• Exterior doors
• Certain metal roofs with special coatings designed to deflect heat

To qualify, homeowners must be the initial user of the equipment and the equipment must be expected to last at least five years. (Take note: This provision offers a tax credit—a dollar-for-dollar reduction off your income tax bill—which is much better than a simple deduction.)

In addition to the 10-percent tax credit, you can claim a credit equal to 100 percent of the cost of:

• Energy-efficient building components, such as electric heat-pump water heaters; electric heat pumps; geothermal heat pumps; central air conditioning; and natural gas, propane or oil water heaters that meet certain energy efficiency standards. (Maximum credit: $300)
• Natural gas, propane or oil furnaces, or hot-water boilers. (Maximum credit: $150)
• Advanced main air-circulating fans. (Maximum credit: $50)

Key point: Sadly, you can’t deduct the entire costs for all these upgrades. The law says overall lifetime credit for these improvements is limited to $500, and only $200 of the credit can be claimed for buying and installing energy-saving windows.

Also, in 2006 and 2007, homeowners can annually claim a personal tax credit equal to 30 percent of the cost of:

• Equipment that uses solar energy to generate electricity. (Maximum credit: $2,000)
• Solar water-heating equipment. (Maximum credit: $2,000)
• Fuel-cell power plant technology that converts fuel into electricity. (Maximum credit: $500)

The new energy law allows owners of commercial buildings to earn deductions for upgrades to existing systems (heating, cooling, ventilation or lighting), or for constructing new energy-efficient buildings. The deduction is generally limited to $1.80 per square foot of the building. To earn the tax break, the upgrade or new equipment must be certified as part of an overall plan designed to reduce total energy costs by 50 percent or more in comparison to a building meeting certain minimum requirements. If your building doesn’t meet that 50-percent limit, it can still earn a partial deduction for each separate building system that meets the energy-efficient building standards and is certified. In that case, the maximum deduction is 60 cents per square foot (as opposed to the usual $1.80-per-square-foot deduction).

Vehicle –Related Tax Benefits of Energy tax Law

The new law effectively repeals the current tax deduction for clean-air vehicles that was used in previous years (including tax year 2005) and replaces it with four new tax credits for vehicles you buy in 2006. Here are the four categories:

1. Hybrid vehicles. These vehicles combine an internal combustion engine with another system relying on an onboard rechargeable energy source like electric batteries. The credit size is based on the car’s fuel economy. Minimum credit: $650. Maximum: $3,400.

2. Advanced lean-burn technology vehicles. These are cars and trucks with an internal combustion engine that uses lean-burn technology (i.e., a direct injection of a fuel mix with a higher than normal percentage of air). The tax credits are the same as hybrid vehicles. (Note: The credits for these two types of vehicles will be phased out once a manufacturer sells more than 60,000 vehicles.)

3. Fuel-cell vehicles. This credit also has two parts: one based on the vehicle’s weight and the other on fuel efficiency. For a vehicle with a gross vehicle-weight rating of 8,500 pounds or less, the maximum combined credit is $12,000.

4. Alternative-fuel vehicles. These vehicles can run solely on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen or any liquid that’s a minimum of 85 percent methanol. For vehicles with gross vehicle weight ratings of 8,500 pounds or less, the maximum credit is $4,000.

Good Luck with your year-end everyone and remember to consult with your Tax Advisor to ensure you take maximum advantage of the new tax law changes.