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2006 Tax Planning TIPRA   

Tax Act (TIPRA) expected to be signed May 17, 2006.

A) Areas affecting Exporters:  Directly

The bill repeals the binding contract exception provided with respect to both the FSC and ETI regimes, effective for tax years beginning after the date of enactment of the bill.  The bill, however, would not repeal the general transition rules provided with respect to each regime.  Note: The WTO may,  however,  continue to object to the transition rules, schedule to expire after 2006.

B) Areas affecting Exporters:  Indirectly

1. Lower Tax Rates (15%) on Qualified Dividend Income received by Non Corporate Shareholders extended two years to 12/31/2010.  (Benefit applies to IC-DISC Shareholders.)
2. Adjusted Gross Income (AGI) ceiling, of $100,000,  on IRA to Roth IRA conversions  eliminated for Tax Years beginning after 2009.  The major reason most Exporters did not qualify for Roth IRAs.

C) Commentary:

While the Rate Extension continues to be a major benefit for IC-DISC Shareholders consideration should be given to Tax Planning for "after" the extension ends.  Considering that Long Term Tax Planning tends to mean,  two years or less.   The next logical step after 2009 for Exporters would be to set up a new IC-DISC to be owned by a Roth IRA.  At this juncture we feel that the 15% Rate Extension is more beneficial than the the Roth IRA for two
reasons:

1. In order to use the Roth approach, it is usually advisable to set up a Holding Co. to own IC-DISC stock, with a Roth IRA as the owner of  the Holding Co., to avoid an IRA Trust tax on dividends from an IC-DISC being Taxed as ordinary income (UBI).  In any event, with or w/o a Holding Co. at least one tax is due, to get funds into an IRA. On a $100k dividend-Corp. tax is $22,250 vs Trust tax of $34,000, vs an Individual tax of $15,000. All things being equal, having $85,000 in cash, free of any restraints seems better than a lessor amount with restraints.
   
2. The likelihood of no Income limitations for Roth Formations surviving as a Law by 2010 does not appear to be viable or sustainable.  Hence, the suggestion that this four year be used for tax planning to reduce income to less than $100,000,  for at least one of the four years, and convert a modest amount of IRA funds to a Roth IRA , under existing rules.               

Final Point:  

The tax benefits will not be based on the amount converted but only on the fact that an account is opened. The real benefit will be on the Roth receiving Dividends after 2010, because there never has been a limit on "Return on Investments".

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