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PENSION PROTECTION ACT OF 2006

IRS CONCEDES DEFEAT IN CHARGING FEDERAL EXCISE TAX ON LONG DISTANCE TELEPHONE SERVICE

Pension Protection Act of 2006

On August 17, 2006 the President signed the Pension Protection Act of 2006 (PPA). Besides strengthening traditional pension plans, the act includes provisions affecting retirement savings plans (such as IRAs and 401(k) plans), charitable deductions, charitable organizations, Section 529 college savings and prepaid tuition plans, and other areas of tax law.

Following is a summary of key PPA provisions. DKCB offers this information to help you understand how the act may affect you. Please let us know if you have any questions about this new law or other tax or benefits matters.

Traditional pension plans

To help ensure the security of employer-provided pension plans, PPA takes measures to ensure full funding, including even stricter requirements on plans deemed “at risk.” It also prohibits employers maintaining underfunded or terminated single-employer pension plans from funding nonqualified deferred compensation plans (which typically benefit top executives). This provision is effective for transfers or other reservations of assets that occur after Aug. 17, 2006, the date of enactment.

On the other hand, PPA allows assets in excess of 120% of current liability to be used to fund retiree health benefits for both single-employer plans and collectively bargained plans, effective for transfers made after Aug. 17, 2006.

In addition, the act makes permanent the increases in the annual benefit limit that had been set to expire after 2010.

IRAs and defined contribution plans

PPA includes provisions that enhance the retirement savings benefits of IRAs and defined contribution plans, such as 401(k)s, 403(b)s, 457s and SIMPLEs. For example, the act:

• Makes permanent provisions from the 2001 tax act that were to “sunset” after 2010. These include the higher annual contribution limits for IRAs and defined contribution plans, catch-up contributions for those 50 and over, and Roth 401(k) and 403(b) plans. • Makes permanent the Saver’s credit, which had been set to expire Dec. 31, 2006. • Waives the early withdrawal penalty from IRAs or 401(k)s (and similar plans) for National Guard members and Reservists who are called up between Sept. 11, 2001, and Dec. 31, 2007, for a period exceeding 179 days. Plus it allows repayment within two years of the distribution without regard to the annual contribution limit. • Simplifies the rules for automatic enrollment in employer-sponsored defined contribution plans, effective for plan years beginning after Dec. 31, 2007. • Allows taxpayers to direct the IRS to deposit their income tax refunds into an IRA, effective for taxable years beginning after Dec. 31, 2006.

Charitable giving

Charitable organizations

Other provisions

PPA also includes several miscellaneous provisions, the most notable of which is a permanent extension of the Section 529 provisions with respect to college savings and prepaid tuition plans. But a provision to allow a carryforward of up to $500 of unused Flexible Spending Account holdings didn’t make it into the final bill. And legislation containing extensions of expiring tax provisions, estate tax relief and an increase in the minimum wage was defeated in the Senate. This legislation may resurface again in some other form.

IRS CONCEDES DEFEAT IN CHARGING FEDERAL EXCISE TAX ON LONG DISTANCE TELEPHONE SERVICE

The U.S. Government has agreed to stop collecting a luxury telephone tax originally levied in order to raise money for the Spanish-American War of 1898. This decision will apply to mobile phones, internet phone service and certain landlines.

The tax, which imposed a 3 percent surcharge on calls based on their length and distance, was originally designed as an excise tax on the wealthy at the time when few Americans owned home telephones and using one was considered a nonessential indulgence.

It was argued that the tax, which was declared illegal by five different federal appeals courts, has become irrelevant due to the prevalence of unlimited long distance calling plans.

This announcement does not affect the federal excise tax on local telephone service, which remains in effect, nor does it impact the various state and local taxes and fees paid by telephone customers.

Effective July 31, 2006, consumers and businesses will be able to apply for retroactive refunds going back three years. Credits or refunds of all excise taxes paid on long-distance services billed after February 28, 2003 will be issued along with interest. This is expected to cost the Government a projected $13 billion, in addition to an estimated $37 billion in lost revenue over the next five years from the tax annulment.

Individual taxpayers can request a safe harbor amount without having any supporting documentation, but qualify to make that request only if they (1) have paid all taxes billed by their service provider after February 28, 2003, and before August 1, 2006, (2) have not received a credit or refund from the service provider, and (3) have not requested a credit or refund from the service provider or have withdrawn any request. The safe harbor amount has not yet been determined. For individuals with heavy long distance use, such as a sole proprietor, the safe harbor may not be the best choice.

Individual Taxpayers may request a credit or refund of tax only on their 2006 federal income tax return, which is the income tax return for the calendar year 2006, or the first tax year including December 31, 2006. Those who are not otherwise required to file a federal income tax return must file a return to obtain a credit or refund.

Entities such as corporations and partnerships are denied use of the safe harbor and must substantiate their claim with bills and cancelled checks or receipts of payment. Any pass-through entity (partnership or S-corporation) will allocate the credit on the current year's K-1 Forms.

Davie Kaplan Chapman Braverman, P.C. specializes in helping individuals and businesses minimize their taxes and maximize their financial well-being. Our advisors would welcome any questions you have about these or the other provisions of this act and how they may affect you. If you have any questions or need additional information, please contact our office.