As 2007 comes to a close, it’s important to review what changes may affect retirement plans or individual retirement planning. The Pension Protection Act of 2006 (“PPA”) provided several tools to ease the tax burden on taxpayers. The following are some of the highlights.
One provision allows for taxpayers at least 70 ½ years old to make charitable donations of up to $100,000 directly from an IRA or other tax qualified account to a qualified charity. This will result in a lower adjusted gross income which permits the taxpayer to achieve a greater tax benefit from the charitable donation. This tax break is only available until the end 2007, and then will close.
As of the beginning of 2007, non-spouse beneficiaries now may roll over assets inherited from a qualified plan. Now, children who inherit 401(k) assets may “stretch” the distributions over their life expectancy, versus the old rule that required distributions to be made over 5 years. Also, a new rule in 2008 will allow an investor to transfer money directly from a 401(k) plan to a Roth IRA. Finally, the PPA provides a tax credit for small businesses that are setting up new retirement plans.
Aside from the PPA, starting in 2008, there will be a significant change to the so-called “kiddie-tax”. The kiddie-tax is designed to prevent parents from gifting income to their children under the age of 18, where it would be taxed at a lower tax rate. The “kiddie-tax” allows the first $1,700 (in 2007) of unearned income (dividends, interest, capital gains) to be taxed at a lower rate, but in excess of $1,700 will be taxed at the parent’s tax rate. In response, parents often transferred income to their children. The new law that goes into effect in 2008 expands the definition of “children” to college students under the age of 24 that fail to provide half of their own support from earned income (salary, wages), thereby closing the “loop hole” for college kids.