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Pension reform has significant tax implications

Aviano Air Base, Italy -- The Pension Protection Act, signed into law in August 2006, introduced some of the most comprehensive pension reform in the last 30 years. 

The PPA included a number of significant tax incentives to enhance and protect retirement savings. It also implemented tax changes for charitable donations and eliminated penalties for qualifying military personnel that take out an early withdrawal from their Individual Retirement Account. 

Military members called to active duty between Sept. 11, 2001 and Dec. 31, 2007 can take a penalty-free withdrawal from their 401k or IRA. 

The Internal Revenue Service allows these individuals to re-deposit the withdrawal up to two years after the end of their active duty commitment, and thereby avoid paying income tax on the withdrawal. 

The new PPA establishes contribution limits for IRAs in 2007 and beyond. IRA contributions will be $4,000 in 2007, $5,000 in 2008, and adjusted for inflation thereafter.
The PPA also introduces more stringent tax laws for charitable donations. Beginning in 2007, taxpayers are required to maintain detailed receipts, canceled checks or bank records to claim cash donations to charities as a deduction. 

Documentation is required regardless whether the person donates $5 or $5,000. Even small donations dropped in the Salvation Army kettle will require proof of payment if the taxpayer wants to add it to their deductions. 

In the past, a written acknowledgement was only needed for a single cash contribution of $250 or more. 

Now, no tax deduction will be allowed if the taxpayer can't provide supporting documentation, however taxpayers are not required to submit receipts with their tax return. Instead, they must keep their receipts and other documentation with their copy of the return in the event of an audit. 

The rules for noncash donations such as old clothing and certain household items have also changed. 

Now the IRS will only allow people to take a deduction for tangible items designated in "good used condition or better." To claim a deduction on anything worth more than $500, the taxpayer needs to have a qualified appraisal performed and include it with their tax return. 

These recent changes created by the PPA may have a significant effect on tax returns. Remember to document charitable donations and maintain documentation for at least three years. Call the legal office at Ext. 7843 for more information.