“The new law allows you to make a direct contribution out of your IRA to a charity and you don’t have to pay tax on the distribution like you did before,” says Mary Ann Quay, co-managing partner of Vicenti, Lloyd & Stutzman LLP.
Smart Business spoke with Quay about how retirement plans and charitable contributions are affected by the Pension Act and what additional changes in tax law she anticipates.
What provisions does the Pension Protection Act of 2006 make?
The Pension Act consists of a number of provisions intended to strengthen the funding rules for defined benefit pension plans. Its intent is to ensure the solvency of the plans by requiring greater contributions by employers, and thereby, avoiding future insolvencies. It also includes provisions related to charities and charitable donations.
How are retirement plans affected by this change in tax law?
Starting after 2007, the current funding system for single employer-defined benefit plans will be replaced with one that changes the way minimum contributions are calculated. Multi-employer plans will have new rules as well. Many of the changes are very technical in nature they affect things like the way that interest rates are calculated and the minimum amounts of funding but they all have the goal of strengthening the funding so that the pension plans will be more likely to be solvent in the future.
What amendments have been made as far as charitable deductions go?
The big change for charitable contributions that the charities are excited about has to do with the allowing tax-free IRA distributions to charities. In the past, if you wanted to make a contribution to a charity out of your Individual Retirement Account, you were required to withdraw the funds, pay the taxes on it and then you could use what was left to make a contribution. This provision is only applicable to taxpayers over age 70, and it expires at the end of 2007. Another change is that the rules for deducting charitable contributions have been tightened up, especially for noncash gifts. It’s going to be more important than ever to document every gift that is given.
How does the Section 179 deduction benefit business owners and what is the amount that can be deducted?
Section 179, which was not changed by this new law, allows businesses to immediately expense or write off up to $100,000 related to purchases of machinery, furniture, computers or other equipment that normally would be depreciated over time. This gives an immediate tax benefit for equipment purchase. There are limits and the very large and very profitable companies can’t take advantage of this. But for many companies, it’s a huge tax benefit. The deduction of up to $100,000 per year can be taken up through the year 2010.
When making a decision to write off assets, why is it important to compare how an accelerated write-off will affect taxes in future years?
It’s really important to plan the year you want the deduction. Taking it all in the first year may reduce your taxable income down to a very low tax bracket which is great for this year, but then it means that you don’t have any write-off in future years and you could end up being in a higher tax bracket. Some companies, especially if the current year where the purchases were made is not a large tax year, may not want to make the election so they can defer the deduction into the future by depreciation. This way, the deduction will be used in a year when their tax bracket is higher.
In the future, what additional changes in tax law do you anticipate?
It’s really difficult to predict. It would not surprise me if there were more changes related to pensions even after this Pension Act, because this one is going to have the effect of inhibiting employers from doing defined benefit pension plans. We’ll see pensions decrease in the future, and there may be even more things that try to encourage other types of retirement plans. Other than that, it seems like there may need to be some kind of laws that increase taxes due to the high spending that’s been going on.
MARY ANN QUAY is co-managing partner of Vicenti, Lloyd & Stutzman LLP. Reach her at MQuay@vlsllp.com or (626) 857-7300.