2006 Tax Law Changes

Author: Celia Ray Hayhoe, CFP®, Extension Specialist, Virginia Tech

Publication Number: 354-041, Revised April 2006

Use the following to estimate your 2006 taxes. Do not use it to do your 2005 taxes. Taxable income is income less adjustments less exemptions less deductions.

• Taxable income includes wages, salaries, bonuses, interest, dividends, some social security, alimony, unemployment, etc. It does not include child support, food stamps, or TANF benefits, etc.
• Common adjustments are alimony paid, contributions to regular (not Roth) Individual Retirement Accounts (IRAs), educator expenses, student loan interest, tuition and fee deductions, contributions to Health Savings Accounts (see below), and moving expenses. (Adjustments are in addition to itemized or standard deductions. They are subtracted to figure your adjusted gross income.)
• You get an exemption for yourself, your spouse, and qualified dependents such as children and elderly parents. The exemption amount for 2006 is $3,300 per exemption. Personal exemptions are phased out if your adjusted gross income (income less adjustments) is over $150,500 if you file as single, $225,750 for married filing jointly or as a surviving spouse, $188,150 for head of household, and $112,875 for married filing separately.
• You may take either standard or itemized deductions but not both. The standard deductions for 2006 are $5,150 if you file as single, $10,300 for married filing jointly or as a surviving spouse, $7,550 for head of household, and $5,150 for married filing separately. You get an additional $1,000 each if you or your spouse is over 65 and/or blind. The standard deduction of an individual who is claimed as a dependent by another taxpayer (i.e. a child that is claimed on the parents’ tax return) may not exceed the greater of $850 or the sum of $300 and the individual’s earned income.

Changes in Tax Schedules:
Single — Schedule X

If taxable income:		Then the tax is:
Is over-	But not over-	This amount	Plus	Of the amount over-
$0	$7,550	——	+10%	$0
$7,550	$30,650	$755.00	+15%	$7,550
$30,650	$74,200	$4,220.00	+25%	$30,650
$74,200	$154,800	$15,107.50	+28%	$74,200
$154,800	$336,550	$37,675.50	+33%	$154,800
$336,550	——	$97,653.00	+35%	$336,550

Married Filing Jointly or Qualifying Widow(er) —
Schedule Y-1

If taxable income:		Then the tax is:
Is over-	But not over-	This amount	Plus	Of the amount over-
$0	$15,100	——	10%	$0
$15,100	$61,300	$1,510.00	+15%	$15,100
$61,300	$123,700	$8,440.00	+25%	$61,300
$123,700	$188,450	$24,040.00	+28%	$123,700
$188,450	$336,550	$42,170.00	+33%	$188,450
$336,550	——	$91,043.00	+35%	$336,550

Head of Household — Schedule Z

If taxable income:		Then the tax is:
Is over-	But not over-	This amount	Plus	Of the amount over-
$0	$10,750	——	+10%	$0
$10,750	$41,050	$1,075.00	+15%	$10,750
$41,050	$106,000	$5,620.00	+25%	$41,050
$106,000	$171,650	$21,857.50	+28%	$106,000
$171,650	$336,550	$40,239.50	+33%	$171,650
$386,550	——	$94,656.50	+35%	$336,550

Married Filing Separately —
Schedule Y-2

If taxable income:		Then the tax is:
Is over-	But not over-	This amount	Plus	Of the amount over-
$0	$7,550	——	+10%	$0
$7,550	$30,650	$755.00	+15%	$7,550
$30,650	$61,850	$4,220.00	+25%	$30,650
$61,850	$94,225	$12,020.00	+28%	$61.850
$94,225	$168,275	$21,085.00	+33%	$94,225
$168,275	——	$45,521.50	+35%	$168,275

Child Tax Credit:
The child tax credit is $1,000 for every child under the age of 17 at the end of the tax year.

Earned Income Credit:
The maximum amount of income you can earn and still get the credit is higher for 2006 than it was for 2005. You may be able to take the credit for 2006 if:

• You have more than one qualifying child and you earn less than $36,348 ($38,348 if married filing jointly),
• You have one qualifying child and you earn less than $32,001 ($34,001 if married filing jointly), or
• You do not have a qualifying child and you earn less than $12,120 ($14,120 if married filing jointly).

The maximum amount of adjusted gross income (AGI) you can have and still get the credit has also increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you (http://www.irs.gov/formspubs/article/0,,id=109876,00.html#eic_2006).

Your earned income credit will be denied if your investment income exceeds $2,800. See IRS Publication 596 for more details.

Standard Mileage Deduction
The business related mileage deduction for 2006 is 44.5 cents per mile. The medical and move related rate is 18 cents. The deduction for miles driven for Charity is 14 cents except for miles driven in service of Hurricane Katrina relief is 32 cents for deduction and 44.5 cents for reimbursement purposes.

Annual Exclusion for Gifts
The annual exclusion for gifts goes up to $12,000 per person in 2006.

Maximum Estate and Gift Tax Rate and Exclusion Amount
The maximum estate and gift tax rate is 46%. The exclusion amount for estates in 2006 is $2,000,000.

Wage Limit for Social Security Tax
The wage limit for social security tax increases to $94,200. There is no limit on Medicare taxes.

Dividends from Stocks and Mutual Funds and Net Capital Gains
If you receive dividends on stocks and mutual funds, based on your tax bracket you will pay less tax on that income. The dividends must be from domestic corporations or foreign corporations who pay corporation taxes to the United States and whose stock is traded on an established U.S. securities exchange and you must own the stock for at least 60 days before the ex-dividend date (the date the dividend is declared). Dividends will be taxed similar to capitol gains.

• If you are in 10% or 15% tax bracket, you will only pay 5% on dividends from 2003-2007, and no tax in 2008.
• All other tax brackets will be taxed at the 15% rate through 2008.
• In 2009 taxation reverts back to taxing them as ordinary income.
• If you have net capital gains, the same rules apply as for dividends for gains with at least a one-year holding period.
• Some sales may be taxed differently. For example the capitol gains rate on collectibles is 28%. See IRS Publication 544, Sales and Other Dispositions of Assets.

Pension Plan and IRA Contributions

• The limit on deferred contributions to qualified pension plans increases to $15,000 ($20,000 for people 50 and over).
• SIMPLE plan contributions increase to $10,000 ($12,500 for people 50 and over).
• The deduction for IRAs remains at $4,000 but if you are over 50 the amount goes up to $5,000 in 2006. The spousal IRA goes up to $5,000 for spouses over 50.
• For married workers filing jointly or a qualifying widow(er) the amount of your Modified Adjusted Gross Income to not be affected by the deduction phase-out of a regular IRA goes up to $75,000. The amount remains at $50,000 for single individuals and heads of household, and $10,000 for married people who file separately.

Tuition and fees deductions
This is an adjustment to gross income. At the time of publication, the deduction of up $4,000 if your modified adjusted gross income is not more than $65,000 ($130,000 if you are married filling jointly) remains the same in 2006. It is a maximum of $2,000 between $65,000 and $80,000 (130,000 to $160,000) and disappears for incomes over $80,000 ($160,000). See Chapter 21 of IRS publication 17 for what are allowable education expenses.

Distributions from Qualified Tuition Programs
Distributions from Qualified Tuition Programs maintained by eligible education institutions can be excluded from income if the amount distributed is not more than qualified education expenses. For more information see Chapter 8 of IRS Publication 970, Tax Benefits for Education.

For more information and other changes see Publication 553 when the 2006 version is published sometime in January 2006.

Source: U.S. Department of the Treasury, Internal Revenue Service

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