MAJOR TAX CHANGES for
2006
Standard deduction
The standard deduction (for
those who don't itemize deductions) rises to $10,300 from $10,000 in 2005 for
joint filers. For singles, it rises to $5,150 from $5,000 last year.
The standard deduction for
dependents who file their own tax returns rises to $850 from $800 in 2005.
The personal exemption goes to
$3,300 per person, up from $3,000 last year.
Retirement plans
Everyone is aware that Social
Security alone isn’t enough for retirement – that’s why the government is
incentivising retirement savings and financial counselors are advocating that
taxpayer’s plan for the future by developing multiple income streams. Life
planning, nor document preparation, should be a part of every taxpayer’s
relationship with their preparer.
The maximum amount employees
under age 50 can contribute before taxes to qualified retirement plans
(401(k), 403(b) or 457) increases to $15,000 from $14,000 last year.
Workers who will be 50 or
older this year can defer an additional $5,000, bringing their total
contribution to $20,000. Last year, the so-called catch-up contribution was
only $4,000.
For the past few years,
contribution limits have been going up by $1,000 annually. After this year,
they will be indexed to inflation but will only go up when adjustments reach
$500. Notifications to employers regarding catch-up contributions must be
renewed annually
For Individual Retirement
Accounts, the basic contribution limits remains at $4,000 this year (same as
2005), but those 50 and older can make an additional $1,000 catch-up
contribution in 2006. In 2005 the IRA catch-up was only $500. These limits
apply to all three types of IRAs combined: deductible, nondeductible and Roth.
For IRA Simple plans, common
among smaller companies, the maximum contribution remains at $10,000 (the same
as last year), but those 50 and over can add $2,500 (compared with $2,000 last
year).
Social Security
-- Taxes: The amount of annual
earnings subject to Social Security taxes rises to $94,200 in 2006, up from
$90,000 in 2005. This is the largest increase in the so-called wage base since
2002.
The Social Security
Administration estimates that 11.3 million workers, or about 7 percent of
those subject to Social Security tax, will pay more as a result of the
increase in the wage base.
The increase will cost
high-wage employees as much as $260.40 extra this year (that's $4,200 times
the 6.2 percent Social Security tax rate). Self-employed people, who pay both
the employer's and employee's Social Security tax, could pay up to twice that.
-- Benefits: People receiving
monthly Social Security and Supplemental Security Income benefits get a 4.1
percent cost of living increase this year, the biggest percentage boost since
1991. That will bring the average monthly check to $1,002, a $39 increase.
Offsetting the inflation
adjustment is a $10.30 increase in the monthly premium for Medicare Part B,
which covers doctors' bills and other services not covered by Medicare Part A.
Premiums for Medicare Part B are deducted from Social Security checks.
Social Security recipients who
are younger than full retirement age can earn up to $12,480 this year,
compared with $12,000 last year, before their benefits are reduced. If they
will reach full retirement age this year, they can earn up to $33,240,
compared with $31,800 last year, in the months before they reach full
retirement age, before their benefits are reduced. Once they reach full
retirement age, there is no benefit reduction for people who are still
working.
Gift tax
The annual gift-tax exclusion
-- the amount you can give another person (other than your spouse) before
filing a gift tax return -- rises to $12,000 this year from $11,000 for the
past four years. The gift tax return itself is unlikely to result in immediate
tax, but it does cut into the donor’s unified gift and estate tax exclusion.
Warning: if real estate
property is “gifted,” such as signing an interest in a house over to a
relative, the basis transfers to that person but the homeowner’s exclusion and
step up in basis for a decedent do not!
Energy credits
The 2005 energy bill provides
a wide array of tax incentives to encourage individuals and businesses to
become more energy-efficient.
One is a tax credit, which
offsets taxes dollar for dollar, for gas-electric hybrid, diesel and other
alternative-fuel vehicles placed into service starting Jan. 1, 2006.
The credit varies by vehicle
and depends on its weight, technology and fuel efficiency compared to a
base-year model. The Internal Revenue Service has not yet announced credits
for particular models, but the hybrid credit could range from $250 to $3,150,
says the American Council for an Energy-Efficient Economy.
Consumers can now claim tax credits for the purchase of home insulation and certain types of windows, electric heat-pump water heaters, high-efficiency furnaces and central air conditioning systems and solar systems (excluding those for swimming pools).
For more information, go to
www.energytaxincentives.org.
Deduction phaseout phasing out
For many years, higher-income
taxpayers have lost part of their personal exemptions and itemized deductions.
The higher their income, the more they lose.
These phaseouts -- often
called a stealth tax -- start to phase out themselves in 2006. "Taxpayers will
compute their phaseouts as usual in 2006, but then, any reduction will be
reduced by one-third," according to the tax information service CCH. "The same
rule will hold true for 2007."
The phaseout will be reduced
by two-thirds in 2008 and 2009, and disappear completely in 2010. In 2011,
however, the phaseouts come back in full force.
Alternative minimum tax
Many people could find that
the benefit they get from the phaseout reduction will be offset by an increase
in the alternative minimum tax.
This is a separate tax system that throws out many tax deductions allowed under the regular tax system, such as state and local income and property taxes. People are supposed to figure out their tax under both systems and pay whichever is higher.
In 2006, the standard deduction allowed under the alternative minimum tax drops significantly. For joint filers, it falls to $45,000 from $58,000 last year.
This change potentially
subjects millions more Americans to the pain and anguish of the alternative
minimum tax. Congress may change this before the 2006 election.
College expenses
The tax deduction for
higher education expenses expired at the end of 2005. Congress is likely to
renew it, but if it doesn't, taxpayers can no longer take this deduction for
expenses incurred in 2006. This is unrelated to the higher education tax
credits. Taxpayers did not have to itemize deductions to take advantage of
it, but it was off limits to higher-income households.
Most taxpayers can still
deduct interest on education loans in 2006. The income limit for this
deduction goes up slightly for joint filers (but not single filers) this year.