Tax Changes and Credits and Deductions to look for 2006
It is that time of the year and everybody will be working on collecting his or her information for their 2006 tax return. Whether you are doing them yourself or taking them to your tax professional you need to be aware of the revisions that Congress has made to the tax code. Here are some of the notable changes to the tax code for this year and some tax tips that will make your tax return preparation go as smoothly as possible.
The most notable changes to the tax code affect charitable giving, “kiddie tax”, retirement savings and new energy tax breaks. The new rules for charitable giving require the donor to be able to provide proof of a donation to take any deduction for any monetary charitable gift. Documentation that will satisfy this requirement are a canceled check, credit card statement or receipt from the charity. For a donation after August 17, 2006 of clothes or household items, the donated items must be in “good” condition. An exception to this rule exists for a single donated item worth more than $500, that requires a qualified appraisal be attached to the tax return.
The new rule for the “kiddie tax” has increased the number of children subject to the “kiddie tax. Under the “kiddie tax” rule a child’s investment income over a certain threshold is taxed at the parent’s rate. Before the rule change the “kiddie tax” ended at age 14. At the age of 14, the child’s income was taxed at his or her own rate. Starting in 2006, the “kiddie tax” will apply until the child reaches the age of 18. For 2006, the threshold amount is $1,700. Children under the age of 18 with net unearned income above $1,700 will be taxed at the parent’s tax rate.
The new tax code makes the higher IRA and 401k-contribution limits permanent. You can contribute up to $4,000 to fund the Traditional or Roth IRA for 2006 and 2007. If you are 50 or older you can make an additional catch up contribution of $1,000 for both years. The catch up contribution will rise in 2008 to $5,000. Employees with Employer-Sponsored 401ks will be able contribute up to $15,000. Employees age 50 or older by the end of 2006 may make an additional catch up contribution of $5,000 for 2006.
One of the new provisions in the tax code for 2006 are the energy tax breaks. Making energy efficient improvements to your home like new windows, water heaters or furnaces, may make you eligible for a tax credit up to $500 in 2006. Additionally a credit may be available for the purchase of a hybrid or alternative fuel vehicle. The credit could be worth up to $3,400 in 2006, depending on the type of vehicle.
The easiest way to lessen your tax liability is to make sure you find all the credits and deductions you are in titled to under the tax code. Here are some credits and deductions to take a look at as you are preparing your tax return or to ask your tax professional about to see if you qualify for one or more of them.
Child Tax Credit
The Child Tax Credit allows you to reduce your federal income tax by $1,000 for each qualifying child under the age of 17. This credit begins to phase out if your modified Adjusted Gross Income is above $110,000 for joint filers, or $75,000 for single or head of household filers.
Dependent Care Credit
Parents who must pay for the care of a dependent under age 13 in order to work may be eligible for a tax credit of between 20 and 35 percent of qualifying expenses. For 2006, the maximum amount of expenses on which the credit can be claimed is $3,000 for the care of one dependent, or $6,000 for two or more.
Education Tax Credits
Two popular credits can help defray higher education costs. The Hope Credit, up to $1,650 for every qualifying student, is available for each of the first two years of college. A Lifetime Learning Credit of up to $2,000 per year is available for undergraduate, graduate and professional degree courses. Both credits are phased out as modified Adjusted Gross Income increases from $90,000 to $110,000 for joint filers, and from $45,000 to $55,000 for single filers. You cannot claim both credits for the same student in the same tax year.
Student Loan Deduction
Student loan interest is deductible up to $2,500 and the deduction can be taken without itemizing on your tax return. The deduction is phased out as modified Adjust Gross Income increases from $105,000 to $135,000 for joint filers, and from $50,000 to $65,000 for single filers.
Interest and Property Taxes
Home mortgage interest on up to $1 million of home acquisition loans secured by your principal residence and/or second home is fully deductible. You may also deduct mortgage interest on a home equity loan or line of credit (up to $100,000). Points paid to secure a loan for the purchase or improvements of a principal residence are usually fully deductible in the year you pay them. Points paid to refinance an existing mortgage must be deducted over the life of the loan. Real estate taxes and state and local property taxes on all your real estate are deductible.
In an ideal world everybody should be preparing for their 2006 taxes in 2006, but for the majority of us we will have to do a little last minute studying of the new tax codes or start making an appointment with your tax professional to take full advantage of the tax credits and deductions available. Either way I hope the above information has given you some ideas for when you prepare your own taxes or some conversation points to bring up with your tax professional.
Neil Chambers is a staff accountant of Marty, Lyle, Doty and Jones, LLC with offices in Boulder and Longmont Colorado. Marty, Lyle, Doty and Jones, LLC is a full service certified public accounting firm offering everything from individual and business tax returns to audited financial statements. These services also include more non-traditional areas such as business valuations, financial planning, performance enhancement and benefits consulting. We are committed to providing excellent financial services focused on your business and personal needs. We can also provide guidance in determining what level of service is required to meet the your needs through our one hour free consultations.
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