TAX LAW CHANGES 2006
FEDERAL:
Alternative minimum tax: The AMT exemptions are increased to:
$62,550 MFJ From $45,000
42,500 Single 33,750
31,275 MFS 22,500
Section 179 expensing has been increased to a maximum of $108,000
for tax year 2006.
Loans to continuing care facilities: If part of the entrance fee to a life-care facility has a refundable fee associated with it, that part of the fee may be considered a loan and subject to imputed interest. Taxpayers age 62 or over, in an independent living unit, along with an assisted living or nursing facility, or both, with substantially all the independent living residents covered under a continuing care contract, are exempt from the imputed interest requirement for tax year 2006-2010.
Offers in compromise: A $150 application fee must accompany the offer in compromise as well as a 20% lump sum down payment unless the taxpayer submitting the offer has total monthly income below the poverty level or is making the offer based upon “doubt as to liability”.
Tax exempt interest: Even though the interest received from municiple bonds is tax exempt, the income must still be reported on Sch B.
ROTH IRA PLANNING: Beginning in 2010, a conversion from a traditional IRA to a ROTH IRA may be made without regard for income with the ability to spread out the conversion between 2011 and 2012 if done in 2010.
Foreign Earned Income and Housing Exclusions: Exclusion amount for 2006 for income earned abroad is limited to $82,400. In addition, housing expenses up to 30% of the foreign income which represents the excess of 16% of the daily salary of a grade GS 14, step 1. The total foreign income exclusion and housing exclusion under section 911 cannot exceed total foreign earned income.
Capital Gain and dividend rates: The maximum at of 15% is extended through 2010. Effective 2008-2010, taxpayers at the 10 or 15% bracket will pay 0% in capital gains.
Kiddie taxes: Effective 2006, children under age 18, rather than under age 14, can now be taxed at the parents’ marginal rate for unearned income
Musical works may be treated as capital assets: Taxpayers may treat the sale or exchange of musical compositions or copyrights in musical works they create as the sale or exchange of capital assets.
Cash contributions: NO DEDUCTION IS ALLOWED FOR CASH CONTRIBUTIONS UNLESS THE TAXPAYER HAS EITHER #1) A BANK RECORD, CANCELLED CHECK OR ACCOUNT STATEMENT OR #2) A WRITTEN RECEIPT FROM THE CHARITY WITH THE AMOUNT AND DATE OF THE DONATION.
Clothing and household donations: NO DEDUCTION is allowed for contributions of clothing or household goods unless the items are in good used condition or better. This rule does not apply to donations of items with a FMV of $500 or more, if a qualified appraisal is included with the return.
Food donations: Non C corporation taxpayers who donate food inventory to a Section 501 c 3 charity that uses the food for the care of the ill, needy or infants can deduct either the lessor of #1) the cost of the food plus half of the food’s appreciation or #2) two times the basis.
Retirement and savings provisions: IRA (TRADITIONAL AND ROTH) $4000 (under age 50) $5000 (50 or older) SEP-20% of net SE income with a maximum of $44,000 *
SIMPLE IRA-$10,000 under age 50 *
$12,500 50 or older
*contributions to both an SEP and a SIMPLE CAN BE MADE after taxpayer
reaches age 70 ½ if they still have earned income
401 K-Elective deferrals limited to $15,000 under age 50 and $20,000 age 50 or older (elective deferral cannot reduce wages by over 25%)
Pension Start up costs credit: 50% of certain start up costs for small employers who establish a new retirement plan has been made permanent.
Retirement Savings Contribution Credit: Nonrefundable credit of up to $1000 or $2000 (mfj)for eligible contributions to an IRA or employer sponsored retirement plan.
Credit is up to 50% of income up to $30,000 MFJ, $22,500 HOH, $15,000 Single
Phases out at $50,001 MFJ, $37,501 HOH and $25,000 Single
IRA Catch up contributions: Participants in a 401K plan where the employer matched at least 50% of contributions with employer stock can make a catch up IRA CONTRIBUTION of up to $3,000 per year, if in a year before the catch up contribution is made, #1) the employer was a debtor in a Bankruptcy case and #2) the employer was subject to an indictment or conviction due to a business transaction related to the bankruptcy. The individual must also have been a participant in the 401K plan for at least 6 months. The age 50 or older catch up provision is not allowed. Tax years 2007-2009 only
Direct deposit of IRAS from tax refunds: Starting in 2007, taxpayers can direct that all or part of their income tax refund be deposited into their IRA.
Tax free distributions to charities from IRA’S: Effective 2006 and 2007 only. Taxpayers can contribute up to $100,000 directly from their IRA to a qualified charity without paying taxes on the IRA distribution. However, no charitable deduction is allowed for the nontaxable transfer.
Rollovers of after tax contributions: Aftertax contributions to a qualified retirement plan can be rolled tax free into a tax sheltered annuity, defined benefit plan, defined contribution plan, or IRA if the receiving plan provides separate accounting for the after tax contributions and related earnings.
Tax years 2007 and beyond
Rollovers of a deceased individuals retirement plan-EFFECTIVE 2007 AND BEYOND. A nonspouse beneficiary of a deceased individuals IRA or qualified employer retirement plan can roll the funds over tax free in a direct trustee to trustee transfer to an IRA established to receive the inherited retirement funds.
Benefit: A non spouse beneficiary can avoid a short distribution period.
Rollovers from qualified retirement plans to roth IRAS’: EFFECTIVE 2008 AND BEYOND.
Funds from a qualified retirement plan can be rolled over directly into a Roth IRA. Any taxable portion of the rollover will be taxed at the time of the rollover.
Withdrawls-penalty waiver for police/firefighters and active duty reservists: If a distribution is made from a pension for a firefighter/police who has retired and is at least age 50, no 10% penalty will be charged. No 10% penalty will be charged on an active duty reservist who is active for at least 180 days when a distribution is made from an IRA or 401K plan if the distribution is made within the time of activation to active duty.
Builders of energy efficient homes: Contractors that build new energy efficient homes in the U.S. and sell them for use as personal residences receive a $2000 tax credit per dwelling unit. Manufactured homes that meet a reduced energy consumption can generate a $1000 credit. Tax years 2005-2007.
Hybrid vehicle credit: Vehicles placed into service after 2005. Hybrid auto combines an internal combustion engine with another propulsion system that uses an onboard rechargeable energy source such as electric batteries.
The phaseout of the credit is based upon vehicle sales on the second calender quarter after the manufacturer has sold over 60,000 qualifying vehicles. Refer to chart in Quickfinder page #11-9.
Use form #8910
Other hybrid vehicle credits: Advanced lean burn technology for passenger vehicles with an internal combustion engine that uses lean-burn technology, which involves direct injection of fuel mix using more air than normal.
Qualified fuel cell motor vehicles, include vehicles that run on hydrogen power cells. The fuel cell credit has two parts #1): a flat amount based on the vehicles weight and #2)an additional amount based on fuel efficiency improvements compared to 2002 models. To be eligible for this credit, fuel cell vehicles must also meet certain federal emission standards.
Qualified alternative fuel motor vehicles: These include vehicles capable of running only on compressed or liquified natural gas, liquified petroleum gas hydrogen or any liquid that is at least 85% methanol. Reduced credits are allowed for mixed fuel vehicles that run on a mixture that consists of at least 75% of an alternative fuel and not more than 25% of a petroleum based fuel.
USE FORM 5695-RESIDENTIAL ENERGY TAX CREDITS
Personal energy property: Tax years 2006/2007. A credit for expenditures for qualified energy efficiency improvements to existing homes. Maximum credit is $500 lifetime.
Exterior/Windows/Skylights: 10% of cost up to $200-All energy star labeled windows Installation costs not allowable Storm Doors/Storm windows: 10% of cost up to $200-Meets International Energy Conservation code or Energy Star Exterior Doors: 10% of cost up to $500-Energy star doors /installation costs don’t qualify. Or Storm Doors:
Roofing: Metal roofs: energy star only 10% of cost up to $500-no installation costs
Insulation: Meet 2000 IECC, 10% of cost up to $500/no installation costs.
Heating/air conditioning/geothermal heat pumps: Energy star, EER, SEER 15 (look in quickfinder page #12-11) Tax credit $300
Gas, Oil and propane furnace or hot water boiler: AFUE 95 for both furnaces and boilers, Max credit $150
Advanced main circulating fan: No more than 2% of furnace total energy use: Max Credit $50
Water heaters: Gas, oil, propane with an energy factor .8, Max .credit $300 Electric pump, pump heater, energy factor 2.0 credit max $300
Solar Energy systems: Solar water heating or photovaltaic systems, 30% of cost up to $2000
Fuel Cells: Efficiency of at least 30% and must have a capacity of at least .5KW, 30% of cost up to $1,000 per KW of power produced.
Energy Efficient commercial buildings deduction: quickfinder Section O-11
Itemized deduction phase out for high income taxpayers: Beginning in 2006, certain higher income taxpayers will lose part of their itemized deductions as their AGI exceeds $150,500 MFJ or $75,250 MFS.
Meals and entertainment for transportation workers: DOT workers can deduct 75% of the cost of meals and entertainment for 2006 and 2007 and 80% thereafter.
Personal exemption phase out: A phase out for personal exemptions is charged for upper income taxpayers with AGI of over $225,750 MFJ, $150,500 HOH and $112,875 MFS. In 2006 and 2007 the reduction is limited to 2/3 of the amount. In 2008 and 2009, the reduction is limited to 1/3.
Estate and gift tax changes: The top estate tax drops of 46% and the applicable exclusion amount for estate taxes increases to $2 million. Tax year 2006.
Roth IRA: Taxpayers can treat elective deferrals to a 401k plan as a ROTH, if the plan provides for this treatment. Effective 2006.
Telephone excise tax refunds: A refundable credit for excise taxes on long distance phone calls is available via the tax form ranging from $30 to $60.
New York State changes: Increased standard deduction for married couples
Empire state child tax credit for children ages 4-16 of 1/3 of the federal child tax credit
New York State National guard members called to active service in the state by the federal government is tax exempt
Enhanced state earned income credit for certain non custodial parents making child support payments via NYS
