November 2005

Dear Clients & Friends:

The holiday season is upon us and tax season is around the corner. It was just last month that we completed the 2004 individual tax returns. This coming tax season will be one with many changes in how we file individual tax returns. New York State has mandated that all tax professionals who prepare more than 200 individual tax returns, must e-file tax returns effective January 1, 2006. Accordingly, both Resident Federal and most State individual income tax returns will be e-filed by our office unless you, the client, elect to opt out of e-filing. If you elect to opt out of e-filing, please fill out the enclosed Form IT-800 and send back to our office as soon as possible.

E-filing presents many changes in procedures and filing. In order to e-file your tax return, we will be sending you a copy of your tax return to review and retain for your records. Included will be Form 8879 that you will need to sign authorizing us to file the tax return on your behalf. This form must be sent back to our office immediately in order to complete the e-file process. Without this form we are prohibited from e-filing your tax returns. E-filing will decrease the time it takes for you to receive your refund. It will save you the problem of having to mail your Federal and State income tax returns. If you have a balance due, you can either pay by check or electronically transfer the balance due on or about the due date. When we e-file tax returns, we will receive an acknowledgment within 48 hours that the IRS and State have received and accepted the tax return. We will then notify you of their acceptance of the tax return.

The e-filing process will offer you, the client, the ease and convenience of us, the CPA firm and tax preparer, filing your Federal and State tax returns for you once we have received your permission. If you want to further decrease the time it takes to receive your tax refunds, please provide us with your bank name, type of account, bank account number and routing number and the Internal Revenue Service and the State will electronically transfer your tax refund into your bank account. This will eliminate a check being mailed to you, further reducing the time it will take to receive your refund. As your CPA firm, e-filing will entail additional work for our office. We will have to keep track of the tax returns we send you, monitor the acceptance of your tax returns and then e-file your Federal and State tax returns. There will be a cost for us being mandated to provide this service. All e-filed tax returns will be subject to a $50 e-file processing charge.

Onto year end tax planning. The good news is 2005 has been a year where we have not seen too many changes in the tax laws. The bad news is that Alternative Minimum Tax (AMT) is still a major problem for taxpayers. As I mentioned in previous letters, AMT is a separate tax calculation that penalizes taxpayers who itemize their deductions and reside in high taxed metropolitan areas such as New York, New Jersey, Connecticut and California. AMT affected 6 million taxpayers in 2004. Accordingly, if you fall into AMT your real estate taxes and state income taxes are not deductible.

The Energy Tax Incentive Act of 2005 has created several new tax credits that apply to property placed in service after December 31, 2005. A credit of up to $500 is available for the installation of non-business energy property such as central air conditioning, heat pumps, water heaters, furnaces, insulation, residential exterior doors and windows. The $500 credit is the total amount available for 2006 and 2007 combined. If you install solar equipment, you may receive a credit of $2,000 per type of equipment for each year.

Effective January 1, 2006, the unified estate and gift tax exemption will increase to $2 million. In addition, the annual gift exclusion will increase to $12,000.

We continue to advise our clients to fully maximize allowable contributions to tax deferred retirement programs. For self-employed and corporate clients, you must open a profit-sharing plan by December 31, 2005, however, the plan contributions can be funded up to the due date of the tax return, including extensions. The maximum contribution to a profit-sharing plan in 2005 is $42,000 and will increase to $44,000 in 2006.


IRA’s, on the other hand, must be funded by April 15, 2006. The maximum contribution to a Traditional and Roth IRA for 2005 through 2007 is $4,000. An individual who is at least 50 years old by the end of the year is allowed to make an additional contribution to a traditional IRA or Roth IRA of $500. In 2006 this will increase to $1,000. We always recommend a Roth IRA contribution if you are able to do so. Contributions to a Roth IRA are not tax deductible. The maximum yearly contribution is phased out for higher income taxpayers. Roth IRA’s are phased out for single taxpayers with adjusted gross income between $95,000 and $110,000, married taxpayers filing jointly between $150,000 and $160,000 and married taxpayers filing separately between $0 and $10,000.

401K plans are now widely used. The maximum 401K contribution is $14,000 for 2005 and will increase to $15,000 in 2006. Individuals who will be at least 50 years old by the end of the year may contribute an additional $4,000 in 2005 and $5,000 in 2006.

The social security tax rate has remained the same at 6.2% with the wage base increasing from $90,000 in 2005 to $94,200 in 2006. Social Security benefits will rise by 4.1% in January 2006, the largest increase since 1991. The normal retirement age for Social Security is going up again. The full retirement age for people born in 1940 is 65 years and six months, For those born in 1941, it is 65 years and eight months. Retirees below full retirement age can earn up to $12,480 per year or $1,040 per month in 2006 without loss of benefit. The Medicare Part B monthly premium will be $88.50 in 2006 an increase of $10.30 from 2005.

Effective September 1, 2005, the optional mileage allowance for owned or leased automobiles, which includes vans and pickups, is 48.5¢ per business mile. The IRS has delayed announcing what the 2006 rate will be.

Recently enacted rules concerning U.S. tax issues are subject to new Treasury Department regulations known as Circular 230, which governs our practice before the Internal Revenue Service. These rules apply to all written communications, including letters, faxes and e-mails on tax advice. As part of our efforts to comply with these new rules, all correspondence from our office professionals will include the following disclaimer:

TAX ADVICE DISCLOSURE

In order to ensure compliance with requirements imposed by the IRS on practitioners who render tax advice (IRS Circular 230), we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used for the purpose of (I) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Please note that the disclaimer is in no way lessens the quality of our work. This is a requirement that the IRS has imposed on us.

Given the commencement of e-filing in 2006, the deadline for providing us with your tax information will be strictly adhered to. To have your tax returns timely filed by April 15, we must have your information in our office by April 1. In addition, to have your extended tax returns prepared by October 15, we need your information by October 1.

This firm was started more than twenty years ago and has continued to grow. We are a full service firm, here to assist in all aspects of your business and individual tax planning needs. Understand that we stay within the realm of our expertise. We utilize the knowledge

and ability of other individuals on our team when the need arises. Over the years we have developed business relationships with many competent individuals who can assist you with your business and financial needs. These individuals include investment advisors, mortgage brokers, attorneys and insurance agents. By addressing your needs and giving you the service you require, we know that we have instilled in you a mutual sense of confidence and loyalty.

We thank you for your past business and hope that your faith in us will continue. We have always treated your referrals with the same courtesy, respect, and care that you have received from us.

We urge anyone who needs to go over their 2005 tax projections or requires any tax planning to make an appointment as soon as possible.

My staff and I would like to wish you and your family a safe, happy, healthy holiday season and a prosperous New Year.

Very truly yours,

Eliot H. Lebenhart, CPA