The Fall/Winter Tax Client Newsletter brings you
up-to-date on a number of important tax law changes for 2006,
As a result of 2006 tax legislation, there are a number of significant
tax law changes affecting you this year and into 2007.
On May 17, 2006, Congress passed and the
President signed into law the Tax Increase Prevention and Reconciliation Act of
2005, TIPRA, and on August 17, 2006, President Bush signed into law the Pension
Protection Act of 2006. In addition
to these two mammoth pieces of tax legislation, other laws enacted during 2006
impact your taxes and there is still time for Congress to act again before the
end of the year.
Call my office to set an appointment should you
have any question or concern about your taxes and how your taxes may be affected
by this legislation.
Taxpayer’s who invest in stock are the broadest
group of beneficiaries of the Act.
The 15% favorable tax rate on long-term capital gains and qualifying dividends
is extended through 2010. The Act
also raises the amount of income exempted from the Alternative Minimum Tax
(AMT). The amount of income exempted
from the AMT is increased to $62,500 for married couples filing jointly, up from
$58,000 in 2005. The exemption for
single filers will be raised to $42,500 for 2006, up from $40,250 in 2005.
TIPRA also extended through 2006 the provision allowing taxpayers to use
non-refundable personal credits to offset AMT liability including the Dependent
Care Credit, Credit for Elderly and Disabled and the Hope and Lifetime Learning
Credits. Internal Revenue Code
Section 179, Expensing of Business Property, was extended through 2009 by the
American Jobs Creation Act of 2004.
In 2006, the maximum amount that may be expensed is $108,000 of qualifying
property, reduced by the amount by which the cost of qualifying property exceeds
$430,000. Without the extension in
the TIPRA, the amounts would have dropped to $25,000 on a $200,000 cap after
2007.
With these provisions to prevent additional
taxation, Congress enacted the following provisions into TIPRA in order to
facilitate “revenue neutral” legislation.
The Act provides for increasing the age limit of the “kiddie tax” to
children under 18 years of age which is up from the previous under age 14.
If a child under 18 has investment income, the first $850 is tax-free and
the next $850 is typically taxed at the child’s tax rate.
“Unearned” income above $1,700 is taxable at the parents’ top tax rate.
This change in the law is retroactive back to January 1, 2006.
TIPRA also eliminates the $100,000 adjusted gross income test for
converting a traditional IRA to a ROTH IRA.
The change is effective for tax years after 2009.
On May 28, 2006, President Bush signed into law
the Hero Act, allowing non-taxable combat pay to be deemed earned income to
qualify for an IRA contribution. The
Act is deemed effective for years 2004, 2005 and future years allowing those
taxpayers who qualify to make IRA contributions for the years of 2004, 2005,
2006 and beyond the normal contribution date.
The contribution due date has been extended for qualifying taxpayers
until May 28, 2009.
This new law includes almost 1,000 pages and
includes more than 100 tax provisions.
Enacted primarily to create some pension security for workers the
provisions of the new law are far more wide-ranging.
529 Plans were made permanent by the Pension Protection Act.
This means that the exemption from income tax for distributions used to
pay qualified higher education costs will continue indefinitely for 529 Plans.
The Act made the Retirement Saver’s Credit permanent.
This credit encourages individuals of modest income to make contributions
to 401(k) plans as well as IRAs by allowing them to claim a double tax break;
the tax credit as well as the tax deferral for the elective deferrals to the
401(k) plan or the deduction for the IRA contribution.
Beginning in 2007, the legislation allows non-spouse beneficiaries to
roll over qualified retirement benefits to an IRA.
Beneficiaries will be able to take required distributions from the IRA
over their life expectancy. The Act
provides for automatic enrollment in 401(k) Plans.
Automatic enrollment, which ensures
nondiscrimination, entitles owners and other highly-compensated employees to
take full advantage of contribution opportunities.
The legislation also requires the Internal Revenue Service to create
rules to allow withdrawals from 401(k) plans for hardships and unforeseen
financial emergencies with respect to any beneficiary.
The Pension Protection Act also made some changes
to charitable giving, with some specific changes directed at closing loopholes
perceived to exist. Those taxpayers
age 70 ½ and older who are taking required minimum distributions from IRAs can
opt to do so on a tax-free basis by rolling over the funds to charity.
While no charitable contribution deduction will be allowed for the
rollover, by avoiding the taxable impact of the distribution, the taxpayer’s
adjusted gross income will be reduced, thereby avoiding over twelve potentially
negative results to the tax calculation on the tax return.
The ability to claim an itemized deduction for donations of items that
are “not in good condition” has been restricted.
For donations after August 17, 2006, no deduction can be claimed unless
an item is in at least “good” used condition.
Currently, cash donations of $250 or more must be substantiated with a
written acknowledgment from the charity.
Beginning in 2007, cash donations of any amount will need to be
substantiated with either a canceled check, bank statement or a receipt from the
charity. Additionally, in 2007,
individuals will be able to combine annuities with long-term care protection.
Beginning in 2007, insurance companies will be able to issue annuity
policies with a long-term care rider.
Earnings from the annuity will be used to provide long-term care
insurance for nursing home and in-home care.
The effect of this provision will not be implemented until 2010.
In August 2005, President Bush signed into law
the Energy Policy Act of 2005. The 2005
Energy Act provides new credits for energy efficient improvements made to
personal residences. To qualify,
home improvements must be made to your principal residence and not to a second
home. A $500 lifetime credit is
available for certain energy-saving expenditures for your personal residence.
One of the most significant features of the 2005
Energy Act is a new incentive for the purchase of new hybrid vehicles.
The Act only rewards the original owners of hybrids.
The former deduction of a maximum $2,000 has now been replaced with a new
tax credit which may be as high as $3,400.
This new credit for hybrid cars and trucks is made up of two parts, a
fuel economy credit and a conservation credit.
The Energy Credit for hybrids is a limited credit and
For taxpayers making too much in income and
loosing the deductibility of their itemized deductions and personal exemptions,
known as the phase out, 2006 will see the beginning of the phase out of the
phase out. Taxpayers in 2006 will
loose only 2/3 of the deductions and exemptions they lost in 2005.
In 2007 they will only loose 1/3 and in 2008 they will loose nothing.
The phase out will no longer exist after 2007.
The filing of your 2006 Federal Income Tax Return
will include applying for the Federal Excise Credit.
The credit will be representative of Excise Taxes charged on
long-distance telephone service for the last three years.
The credit will also include interest.
The Internal Revenue Service, in conjunction with the
Beginning in 2006, refunds on your Federal Income
Tax Return can be automatically deposited in up to three different bank
accounts, including an account that holds your Individual Retirement Account.
Optional Standard Mileage Rate
44.5 cents
Medical Mileage Rate
18.0 cents
Moving Mileage Rate
18.0 cents
Charity Mileage Rate
14.0 cents
The IRS has announced that it will delay the
release of the 2007 mileage rates until the end of the year.
Tax brackets for 2006 remain at 10%, 15%, 25%,
28%. 33% and 35%.
Single
$ 5,150
Married Filing Jointly
$10,300
Married Filing Separately
$ 5,150
Head of Household
$ 7,550
For 2006, the Personal Exemption Amount is
$3,300.
In order to maximize the tax benefits of your
retirement contributions the following amounts reflect the maximum contributions
for the respective years:
Individual Retirement Account (IRA)
$4,000
$4,000
Catch-up amount, age 50 and older
$1,000
$1,000
401(k)
$15,000
$15,500
Catch-up amount, age 50 and older
$ 5,000
$ 5,000
SIMPLE Plan
$10,000
$10,500
Catch-up amount, age 50 and older
$ 2,500
$ 2,500
SEP IRA contribution limit
$44,000
$45,000
For 2006, the value of an estate less than 2
million dollars escapes federal estate tax.
The indexing of this value continues over the next several years until in
2010 all decedents will escape the estate tax.
However, on January 1, 2011 the estate tax will again have the threshold
of 1 million dollars.
$12,000 is the annual gift limit escaping,
tax-free, from gift tax. The $12,000
is per beneficiary and can increase to $24,000 in the case of joint gifts from
married couples.
Gifts to college savings 529 Plans permit five
years worth of gift giving in a single year.
In 2006, provided no other gifts have been made to the beneficiary, a
total of $60,000 in gifts can be made to the 529 Plan.
In the case of joint gifts from a married couple the amount would
increase to $120,000.
·
The COLA increase for 2007 is 3.3%.
In 2006 the COLA increase was 4.1%.
·
In 2007 Medicare Part B premiums will be indexed
according to income.
·
In 2007 the maximum taxable payroll earnings for
Social Security will increase from the $94,200 in 2006 to $97,500.
Although 2006 may go down as a record year for
tax law enactments, two particular provisions remain without extension.
The $250 adjustment to income known as the “Educator Deduction” and the
deductibility of Sales Tax as an itemized deduction both expired on December 31,
2005 and have yet to be extended.
After the mid-term elections it is generally thought that both of these issues
will be addressed in other legislation to be passed by years end.
As with any tax planning, you and your particular
issues are in the forefront of our thoughts.
It is wise to review your tax issues and address them in advance of year
end. I look forward to speaking with
your regarding any personal concerns or questions you might have.
Do not use this article as a substitute for professional advice.
The information in this article is intended to be only a general overview of the topic and may omit details that could be critical to your specific situation. Accordingly, this article should not be construed as rendering legal, tax, or other professional services. Please contact our office for more information on this topic and how it could affect your specific tax or financial situation.