TaxEsqBlog -by Ronald J. Cappuccio, J.D., LL.M.(Tax)

The federal government may not tax the money plaintiffs receive as compensation for emotional distress and other intangible injuries, a federal appeals court said Tuesday. The U.S. Court of Appeals for the D.C. Circuit struck down as unconstitutional a portion of the tax code that said only compensation for physical injuries is tax exempt. This only applies in the District of Columbia. Nevertheless, It is possible the IRS may accept this interpretation for other states.

Like most laws containing tax provisions, the title of the newly passed Pension Protection Act of 2006 only tells part of the story. The legislation, which President Bush signed on August 17, 2006, does contain numerous provisions involving pension plans, but it also includes changes in the tax rules for charitable contributions, college savings plans, and more. Here are eight highlights from the massive piece of legislation spanning more than 900 pages. Click here for full article

The American Jobs Creation Act of 2004 created section 6306 of the Internal Revenue Code allowing private collection agencies to collect taxes. Later this year private collection agencies will start calling to cllect for the IRS. If you are contacted by a collection agency, SAY NOTHING! Do not admit to the debt and tell them to contact your tax attorney! The private collection agencies will not be authorized to take enforcement actions such as liens, levies or seizures. Nor will they work technical issues such as offers in compromise, bankruptcies, hardship issues or litigation. They will be assigned cases in which the taxpayer has not disputed the liability.

The new Tax Law effective July 17, 2006 requires taxpayers to pay a NONREFUNDABLE 20% of the amount they offer in an Offer In Compromise with the offer. If they also offer to make monthly payments then they must begin the monthly payments. The 20% with the OIC and the monthly payments are nonrefundable. THis means most taxpayers cannot risk submitting an Offer In Compromise.

HERO ACT - Increased IRA Deductions for Armed Forces Appropriately enough, President Bush signed the Heroes Earned Retirement Opportunities Act of 2006 — the HERO Act, for short — into law on Memorial Day of this year. This new federal law expands retirement planning benefits for members of our armed forces currently serving in combat zones. Briefly stated, an individual is permitted to contribute to a traditional IRA or Roth IRA only if he or she has compensation (such as salary from a job) during the year. For the 2006 tax year, the limit on contributions is the lesser of $4,000 or the annual compensation. A taxpayer who is age 50 or older can make an extra $1,000 "catch-up" contribution. The contributions to the traditional IRA may be fully or partially deductible depending on the taxpayer’s income and whether he or she actively participates in an employer-sponsored retirement plan. Roth IRA contributions are never tax deductible. Under prior tax law, ...

IRS Announces Hybrid Cars that Qualify for a Tax Credit Last year's Energy Policy Act replaced the $2,000 clean-fuel burning deduction with a tax credit that is potentially worth much more. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006. The credit is only available to the original purchaser of a new, qualifying vehicle. (If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.) The amount of the credit varies based on the fuel efficiency of the vehicle. These models have been certified by the IRS for the credit in the following amounts: 2007 Ford Escape Front WD Hybrid — $2,600 2007 Ford Escape 4 WD Hybrid — $1,950 2007 Mercury Mariner 4 WD Hybrid — $1,950 2007 Toyota Camry Hybrid — $2,600 2005 Toyota Prius — $3,150 2006 Toyota Prius — $3,150 2006 Toyota Highlander 4WD Hybrid — $2,600 2006 Toyota Highlander 2WD Hybrid — $2,600 2007 Lexus GS 450h — $1,550 2006 Lexus RX400h 2WD — $2...

The Tax Increase Protection and Reconciliation Act changes the rules for Offers in Compromise (OIC), eliminating the breathing room a taxpayer has while waiting for the IRS to accept or reject an OIC. That is not good news. Starting with OICs filed on or after July 16, 2006, taxpayers must make a non-refundable payment or the OIC will not be processed. The non-refundable payment amount depends on the type of OIC made. Lump-sum offers must include a 20% “down payment.” Thus an OIC to pay $10,000 cash to settle a tax liability must include a $2,000 payment with the OIC to be considered. If the IRS rejects the OIC, it keeps the cash. If the OIC is based on periodic payments, the OIC must include the first proposed payment and the taxpayer must keep making payments under the proposed terms of the OIC until the IRS accepts or rejects the OIC. Again, if the IRS rejects the offer, it keeps the cash.