Tax Law Changes : Tax-Year 2006 Individuals
Pick a topic from the list below to learn about the tax changes:
You must use Form 8615 to figure the tax of a child under age 18 (increased from age 14) with investment income of more than $1,700. The election to report a child's investment income on a parent's return and the special rule for when a child must file Form 6251 also now apply to children under age 18.
The following Schedule A (Form 1040) deductions are subject to the overall limit on itemized deductions.
- Taxes paid - line 9.
- Interest paid - lines 10, 11, and 12.
- Gifts to charity - line 18.
- Job expenses and certain miscellaneous deductions - line 26.
- Other miscellaneous deductions - line 27, excluding gambling and casualty or theft losses.
The following Schedule A (Form 1040) deductions are not subject to the overall limit on itemized deductions. However, they are still subject to other applicable limits. o Medical and dental expenses - line 4.
- Investment interest expense - line 13.
- Casualty and theft losses from personal use property - line 19.
- Casualty and theft losses from income-producing property - line 27.
- Gambling losses - line 27.
If your itemized deductions are subject to the limit, the total of all your itemized deductions is reduced by the smaller of the following reduced by one-third:
- 80% of your itemized deductions that are affected by the limit. See Which Itemized Deductions Are Limited, earlier, or
- 3% of the amount by which your AGI exceeds $150,500 ($75,250 if married filing separately).
Before you figure the overall limit on itemized deductions, you first must complete Schedule A (Form 1040), lines 1 through 27, including any related forms (such as Form 2106, Form 4684, etc.).
The overall limit on itemized deductions is figured after you have applied any other limit on the allowance of any itemized deduction. These other limits include charitable contribution limits (chapter 24), the limit on certain meal and entertainment expenses, and the 2%-of-adjusted-gross-income limit on certain miscellaneous deductions.
Itemized Deductions Worksheet. After you have completed Schedule A (Form 1040) through line 27, you can use the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040) to figure your limit. Enter the result on Schedule A (Form 1040), line 28. Keep the worksheet for your records.
TIP: You should compare the amount of your standard deduction to the amount of your itemized deductions after applying the limit. Use the greater amount when completing Form 1040, line 40.
Clothing and household items. You cannot take a deduction for clothing or household items you donate after August 17, 2006, unless the clothing or household items are in good used condition or better.
Household items. Household items include:
- Linens, and
- Other similar items.
Household items do not include:
- Paintings, antiques, and other objects of art,
- Jewelry and gems, and
Modified AGI limit for traditional IRA contributions increased. For 2006, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:
- More than $75,000 but less than $85,000 for a married couple filing a joint return or a qualifying widow(er),
- More than $50,000 but less than $60,000 for a single individual or head of house-hold, or
- Less than $10,000 for a married individual filing a separate return.
For tax year 2006, the exemption amount for alternative minimum tax (AMT) has been increased as follows:
- Single -- $42,500
- Married filing jointly or surviving spouse -- $62,550
- Head of household -- $42,500
- Married filing separately -- $31,275
You may be able to take a tax credit of up to $10,960 for qualified expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs even if you do not have any qualified expenses.
If your modified adjusted gross income (AGI) is more than $164,410, your credit is reduced. If your modified AGI is $204,410 or more, you cannot take the credit.
Qualified adoption expenses. Qualified adoption expenses are reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. These expenses include:
- Adoption fees,
- Court costs,
- Attorney fees,
- Travel expenses (including amounts spent for meals and lodging) while away from home, and
- Re-adoption expenses to adopt a foreign child.
Nonqualified expenses. Qualified adoption expenses do not include expenses:
- That violate state or federal law,
- For carrying out any surrogate parenting arrangement,
- For the adoption of your spouse's child,
- For which you received funds under any federal, state, or local program,
- Allowed as a credit or deduction under any other federal income tax rule,
- Paid or reimbursed by your employer or any other person or organization, or
- Paid before 1997.
Eligible child. The term "eligible child" means any individual:
- Under 18 years old, or
- Physically or mentally incapable of caring for himself or herself.
Child with special needs. An eligible child is a child with special needs if all three of the following apply.
- He or she was a citizen or resident of the United States (including U.S. possessions) at the time the adoption process began.
- A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents' home.
The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:
- The child's ethnic background,
- The child's age,
- Whether the child is a member of a minority or sibling group, and
- Whether the child has a medical condition or a physical, mental, or emotional handicap.
When to take the credit. Generally, until the adoption becomes final, you take the credit in the year after your qualified expenses were paid or incurred. If the adoption credit becomes final, you take the credit in the year your expenses were paid or incurred. See the instructions for Form 8839 for more specific information on when to take the credit.
Foreign child. If the child is not a U.S. citizen or resident at the time the adoption process began, you cannot take the credit unless the adoption becomes final. You treat all adoption expenses paid or incurred in years before the adoption becomes final as paid or incurred in the year it becomes final.
How to take the credit. To take the credit, you must complete Form 8839 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 54, and check box b on that line.
You may be allowed a tax credit if you placed a qualified electric vehicle in service during the year.
Qualified electric vehicle. Generally, this is a vehicle that:
- Has at least four wheels and is manufactured primarily for use on public streets, roads, and highways,
- Is powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or other portable sources of electrical current,
- Is originally used by you,
- Is acquired for your own use and not for resale,
- Has never been used as a nonelectric vehicle, and
- Is used predominately in the United States.
Amount of credit. If you placed a qualified electric vehicle in service during 2006, the credit is generally 2.5% of the cost of the vehicle. However, if the vehicle is a depreciable business asset, you must reduce the cost of the vehicle by any section 179 deduction before figuring the credit. See Publication 463, Travel, Entertainment, Gift, and Car Expenses, for information on the section 179 deduction.
The credit is limited to $1,000 for each vehicle placed in service in 2006.
Recapture. If the vehicle no longer qualifies for the credit within 3 years of the date you placed it in service, you must recapture part or all of the credit. You recapture the credit by adding part or all of it to your income tax for the year in which the recapture event occurs.
The vehicle will no longer qualify if it is changed in either of the following ways.
- The vehicle is modified so that it is no longer primarily powered by electricity.
- It becomes nonqualifying property.
Sale or other disposition. Generally, no recapture occurs on the sale or other disposition of the vehicle. However, if the vehicle will be modified after you dispose of it so that it no longer qualifies for the credit, the credit may be subject to recapture.
How to take the credit. To take the credit, complete Form 8834 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 55. Check box c and enter "8834" on the line next to box c.
You may be able to take a credit if you place qualified alternative fuel vehicle refueling property in service in 2006. You can no longer take a deduction for clean fuel vehicle refueling property.
Qualified alternative fuel refueling property.
Qualified alternative fuel vehicle property is any property (other than a building or its structural components) used to do either of the following.
- Store or dispense a clean-burning fuel into the fuel tank of a motor vehicle propelled by the fuel, but only if the storage or dispensing is at the point where the fuel is delivered into the tank.
- Recharge motor vehicles propelled by electricity, but only if the property is located at the point where the vehicles are recharged.
Amount of the credit. For personal use property, the credit is generally the smaller of 30% of the property's cost or $1,000. For business use property, the credit is generally the smaller of 30% of the property's cost or $30,000. Each property's cost must first be reduced by any section 179 deduction before figuring the credit.
How to take the credit. To take the credit, you must complete Form 8911 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 55. Check box c and enter "8911" on the line next to box c.
If you were billed after February 28, 2003, and before August 1, 2006, for the federal telephone excise tax on long distance or bundled service, you may be able to request a credit for the tax paid. You had bundled service if your local and long distance service was provided under a plan that does not separately state the charge for local service.
You cannot request the credit if you are claimed as a dependent on someone else's return or have already received a refund from your service provider. If you request the credit, you cannot ask your service provider for a credit or refund and must withdraw any request previously submitted to your provider.
You can request a credit for either the actual amount of tax paid or a standard amount. It usually will be to your benefit to request the actual amount if it is larger than the standard amount.
Actual amount. If you request the actual amount paid, you must attach Form 8913 showing the amount paid and keep records to substantiate the amount. See the Form 8913 instructions for details.
Standard amount. The standard amount depends on the number of exemptions claimed on your return. If you are not required to file a tax return, the standard amount depends on the number of exemptions you would be allowed to claim if you were required to file. The standard amounts, which include both the tax paid and interest owed on that tax, are shown in the following table.
|IF the number of exemptions claimed is...||THEN the standard amount is...|
|4 or more||60|
|* Even though your standard amount is zero, you can request the actual amount paid on Form 8913.|
If you request the standard amount and you later want to change it to the actual amount, file an amended return. If you request the standard amount, you do not have to include the credit in income for any tax year.
How to request the credit. To request this credit, enter the amount on Form 1040, line 71; Form 1040A, line 42; or Form 1040-EZ, line 9. Attach Form 8913 if requesting the actual amount. If you are not otherwise required to file a federal income tax return, you must nevertheless file Form 1040EZ-T, Request for Refund of Federal Telephone Excise Tax, to request the credit.
You may be eligible for 2 credits, the nonbusiness energy property credit and the residential energy efficient property credit, if you made energy saving improvements to your home.
Nonbusiness energy property credit
You may be able to take this credit for any of the following improvements to your main home located in the United States in 2006 if they are new and meet certain requirements for energy efficiency.
- Any insulation material or system primarily designed to reduce heat gain or loss in your home.
- Exterior windows (including skylights).
- Exterior doors.
- A metal roof with pigmented coatings primarily designed to reduce heat gain in your home.
You may also be able to claim this credit for the cost of any of the following items if the items meet certain performance and quality standards.
- Certain electric heat pump water heaters, electric heat pumps, geothermal heat pumps, central air conditioners, and natural gas, propane, or oil water heaters.
- A qualified natural gas, propane, or oil furnace or hot water boiler.
- An advanced main air circulating fan used in a natural gas, propane, or oil furnace.
Residential energy efficient property credit.
You may be able to take this credit if you paid for any of the following during 2006.
- Qualified photovoltaic property for use in your home located in the United States.
- Qualified solar water heating property for use in your home located in the United States.
- Qualified fuel cell property installed on or in connection with your main home located in the United States.
Condominiums and cooperative apartments. If you are a member of a condominium management association for a condominium you own or a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any costs of such association or corporation for purposes of these credits.
Basis reduction. You must reduce the basis of your home by the amount of any credits allowed.
How to take the credits. To take either of the credits, you must complete Form 5695 and attach it to your Form 1040. Enter the credit on Form 1040, line 52.
All cash contributions made in tax years beginning after August 17, 2006, to any qualified charity must be supported by a dated bank record or a dated receipt. The tax year for most individual taxpayers begins on January 1.
Clothing and household items
Beginning with contributions made after August 17, 2006, no deduction is allowed for most contributions of clothing and household items unless the donated property is in good used condition or better.
Earned income amount
The maximum amount of income you can earn and still get the credit is higher for 2006 than it is 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.
Investment income amount
The maximum amount of investment income you can have in 2006 and still get the credit increases to $2,800.
For 2006, the list of vehicles that are qualified hybrid vehicles for the Alternative Motor Vehicle Credit has been expanded. The tax credit for hybrid vehicles applies for vehicles purchased on or after January 1, 2006, and could be as much as $3,400 for those who purchase the most fuel-efficient vehicles.
See the news article, Summary of the Credit for Qualified Hybrid Vehicles, for more information.
The amount you can deduct for each exemption has increased from $3,200 in 2005 to $3,300 in 2006.
You may lose part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2006, the phaseout begins at:
- $112,875 for married persons filing separately,
- $150,500 for single individuals,
- $188,150 for heads of household, and
- $225,750 for married persons filing jointly or qualifying widow(er)s.
If your adjusted gross income is above the amount for your filing status, use the Deduction for Exemptions Worksheet in the Form 1040 instructions to figure the amount you can deduct for exemptions.
For 2006, the employer and employee will continue to pay:
- 6.2% each for social security tax (old-age, survivors, and disability insurance), and
- 1.45% each for Medicare tax (hospital insurance).
Wage limits. For social security tax, the maximum amount of 2006 wages subject to the tax has increased from $90,000 to $94,200. For Medicare tax, all covered 2006 wages are subject to the tax.
Beginning in 2007, a new refund option is available for filers of Form 1040, Form 1040A, Form 1040EZ, Form 1040NR, Form 1040NR-EZ, Form 1040-PR, and Form 1040-SS.
Filers of these tax forms for 2006 will be able to elect to have their federal income tax automatically deposited into up to three different bank accounts. Individuals electing this split refund option must file Form 8888, Direct Deposit of Refund, which will be available by the end of 2006.
The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2006 than it was for 2005. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.
The basic standard deduction amounts for 2006 are:
- Head of household — $7,550
- Married taxpayers filing jointly and qualifying widow(er)s — $10,300
- Married taxpayers filing separately — $5,150
- Single — $5,150
The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $850 or the sum of $300 and the individual's earned income.
For tax years beginning in 2006, the allowable deductions for the standard mileage rate are as follows:
- Business miles. The standard mileage rate for the cost of operating your car changes to 44.5 cents a mile for all business miles driven.
- Charitable services. The standard mileage rate allowed for use of your car when you use your car to provide charitable services to a charitable organization is 14 cents a mile.
- Charitable services — Hurricane Katrina relief services. If you used your vehicle in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate allowed for use of your car is 32 cents a mile.
- Medical reasons. The standard mileage rate allowed for use of your car for medical reasons is 18 cents a mile.
- Moving. The standard mileage rate for determining moving expenses is 18 cents a mile.
Beginning in 2006, state and local governments are required to report interest paid on tax-exempt state and local bonds on Form 1099-INT, Interest Income. This amount must be shown on your tax return and is for information only.