Tax Changes for 2006
Plenty of new tax law changes are in store for 2006 and they're important.
Standard Auto Mileage Rate
Effective January 1, 2006, the standard auto mileage rate will be 44.5 cents per mile.
Itemized Deduction Limitation Phase-Out
The reduction in certain itemized deductions for high-income taxpayers starts to phase out beginning in 2006. For years before 2006, the amount of the reduction is the lesser of 3 percent of the excess of AGI over a threshold amount or 80 percent of affected itemized deductions. For 2006 and 2007, the amount of the reduction is two thirds of that amount.
State and Local Sales Taxes No Longer Deductible
Unless extended, the option for individuals to deduct state and local sales taxes instead of state income taxes is no longer available after 2005.
AMT Exemption and Phase-Out Amounts for Individuals Reduced
In 2006 Unless extended, the alternative minimum tax exemption amounts will be reduced in 2006 from $40,250 to $33,750 for single/head of household and from $58,000 to $45,000 for married filing jointly/surviving spouses. That means it will be easier to run afoul of the AMT in 2006, making careful planning even more important.
Tax Credits and AMT
Most non-refundable tax credits can no longer be used to offset alternative minimum tax liability for tax years after 2005. However, the child tax credit, the adoption expenses credit, and the credit for retirement contributions by certain low-income individuals will continue to offset AMT liability.
Qualified Electric Vehicle Credit Reduced
The maximum qualified electric vehicle credit that a taxpayer may claim is reduced to $1,000 in 2006, from $4,000 in 2005.
Roth 401(k) Available
Starting in 2006, a 401(k) plan may include a qualified Roth contributions program, allowing a participant to elect to have all or a portion of elective deferrals included in income when earned. "Designated Roth contributions" and "Roth 401(k)s are like a Roth IRA; contributions are not deductible or excludable, and distributions are not included in income.
Energy Tax Credits
Beginning in 2006, two new residential energy credits are available courtesy of the Energy Policy Act of 2005 ¬ and the Residential Energy Efficiency Property Credit. A credit of up to $500 is available for 10% of the cost of the following types of energy-efficient property: (1) exterior doors; (2) heat pumps; (3) water heaters; (4) central air conditioners; (5) furnace or hot water boilers; (6) fans used in natural gas, propane, or oil furnaces; (7) insulation material or an insulation system specifically and primarily designed to reduce the heat gain of a dwelling unit; (8) exterior windows (including skylights); The non-business energy property credit is 30% of the cost of: (1) qualified property for producing solar electricity; (2) qualified solar water heating property; and (3) qualified fuel cell property, limited to $2,000 Condominium and cooperative owners may claim the credit on a pro rata basis for expenditures made by a condo association or coop
Percentage Depletion Limitations Return for Marginal Producers
For tax years beginning after December 31, 2006, percentage depletion for marginal producers is again limited to net income from oil and gas production.
Excluded Combat Pay Not Included for Earned Income Credit Purposes
In 2006 Beginning in 2006, you can no longer elect to include combat pay that is otherwise excluded from gross income in earned income when computing the earned income credit.
Other Tax Incentives No Longer Available
Unless extended, these tax incentives expire on 12/31/2005: - work opportunity credit - research activities tax credit - deduction for qualified higher education tuition and related expenses, and - educators' deduction for up to $250 of certain classroom material.
Changes in Estate and Gift Tax
The maximum estate tax rate drops slightly, from 47 percent in 2005, to 46 percent in 2006. The amount that is excluded from the federal estate tax will be $2,000,000 in 2006. The gift tax exclusion amount is $1,000,000, the same as 2005. The per-donee annual gift exclusion has been increased from $11,000 in 2005 to $12,000 in 2006.
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