• New Year Means It's Time to Look at the Numbers Again
  • January 20, 2006
  • Law Firm: Pepper Hamilton LLP - Philadelphia Office
  • A new year is here, and that means it's time to look at what's changing, what's not, and what you should do about estate planning and other tax issues. Here is a list of "important numbers" for the year 2006:

    Things that Change:

    • The annual exclusion from federal gift tax increases to $12,000 per donee.
    • The applicable exclusion amount increases to $2 million for federal estate tax and for generation-skipping transfer tax.
    • The maximum federal gift and estate tax rate drops to 46 percent.
    • The maximum amount that can be transferred in one year (using five-year forward averaging) to a 529 Plan for a single beneficiary without incurring a federal gift tax increases to $60,000.
    • Mileage deductions for federal income tax purposes in 2006 are: for business - 44.5 cents; for medical -- 18 cents; charitable -- 14 cents. This is a reduction from the amount in effect at the end of 2005.

    Thing that Stay the Same:

    • The applicable exclusion amount for federal gift tax remains at $1 million.

    401(k) and IRA Limits:

    • The maximum amount that can be contributed to qualified plans (401(k) plans, 403(b) plans, etc.) is increased to $15,000. If you are over 50, and the specific plan permits, you may add an additional $5,000 to qualified plans.
    • The maximum amount that can be contributed to an Individual Retirement Account (pre- and post-tax) is $4,000. If you are over 50, you may add an additional $1,000.
    • If your employer offers it, consider whether you should opt for a Roth 401(k) instead of the more traditional plan. Additions to a Roth 401(k) must be made from after tax dollars but all withdrawals (after the requisite waiting period and attained age) are made tax free. Additions to a Roth 401(k) reduce the amount you may contribute to a traditional plan.

    Things to do:

    • Make $12,000 annual exclusion gifts early in the year.
    • The increase in the applicable exclusion amount for federal estate tax to $2 million may increase the amount of assets allocated to the non-marital deduction trust if a standard allocation formula is used in your current estate plan. We recommend a review of your estate plan to ensure that assets are titled properly and that your Wills contain a proper allocation between assets passing to or for the benefit of a surviving spouse, and those passing to other family members.
    • Consider executing a Health Care Power of Attorney to authorize someone to make important decisions in the event you are incapacitated and cannot make them yourself. Equally important: Talk to your family and friends about what you would want done in such circumstances. And, make sure that you have a Financial Power of Attorney in place as well.
    • Beneficiary designations for qualified plans, individual retirement accounts and life insurance policies should be reviewed annually to make sure that they reflect your estate plan. The same applies to appointments of executors and trustees as well as guardians of the persons of minor children.