2006 Tax Law Changes

2006 Tax Law Changes for Individuals

Alternative Minimum Tax

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

Archer MSA Limits Increased

For Archer MSA purposes for 2006, the minimum annual deductible of a high deductible health plan increased to $1,800 ($3,650 for family coverage). The maximum annual deductible of a high deductible health plan increased to $2,700 ($5,450 for family coverage). The maximum out-of-pocket expenses limit increased to $3,650 ($6,650 for family coverage).

Restrictions on Charitable Contributions

Cash contributions.

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 Credit Amounts Increase

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.

Income Limits Increased for Reduction of Education Savings Bond Exclusion

For 2006, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $94,700 and $124,700. You cannot take the deduction if your MAGI is $124,700 or more. For 2005, the exclusion phased out between $91,850 and $121,8500.

For all other filing statuses, your interest exclusion is phased out if your MAGI is between $63,100 and $78,100. You cannot take a deduction if your MAGI is $78,100 or more. For 2005, the exclusion phased out between $61,200 and $76,200. For more information, see chapter 9 in Publication 970, Tax Benefits for Education.

Educator Expenses Deduction

If you were an eligible educator in 2006, you can deduct up to $250 of qualified expenses you paid in 2006 as an adjustment to gross income, rather than as a miscellaneous itemized deduction. This provision, which had expired for tax years after 2005, has been extended through tax year 2007. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses.

Eligible educator. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year.

Qualified expenses. Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is one that is common and accepted in your educational field. A necessary expense is one that is helpful and appropriate for your profession as an educator. An expense does not have to be required to be considered necessary.

Qualified expenses do not include expenses for home schooling or nonathletic supplies for courses in health or physical education.

You must reduce your qualified expenses by the following amounts.

Excludable U.S. series EE and I savings bond interest from Form 8815.
Nontaxable qualified tuition program earnings.
Nontaxable earnings from Coverdell education savings accounts.
Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2.

How the deduction is claimed. You must file Form 1040 (or Form 1040NR) to take this deduction. The deduction is claimed on Form 1040, line 23 (or Form 1040NR, line 24), “Archer MSA Deduction.” Enter "E" on the dotted line to the left of that line entry if claiming educator expenses, or "B" if claiming both an Archer MSA deduction and the deduction for educator expenses. If entering "B," you must attach a statement with a breakdown of the amount claimed for each deduction.

Electric and Alternative Motor Vehicles

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 IR-2006-86, dated June 1, 2006, and the news article, Summary of the Credit for Qualified Hybrid Vehicles, for more information.

Exemption Amount Increased

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.

Health Savings Account (HSA) Deduction Limits Increased

For 2006, the maximum HSA deduction increased to $2,700 ($5,450 for family coverage). The maximum additional deduction for individuals age 55 or older increased to $700. For HSA purposes, the minimum annual deductible of a high deductible health plan increased to $1,050 ($2,100 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increased to $5,250 ($10,500 for family coverage). For more information, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Income Limits Increased for Hope and Lifetime Learning Credits

For 2006, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $45,000 and $55,000 ($90,000 and $110,000 if you file a joint return). You cannot claim an education credit if your MAGI is $55,000 or more ($110,000 or more if you file a joint return). This is an increase from the 2005 limits of $43,000 and $53,000 ($87,000 and $107,000 if filing a joint return). For more information, see chapters 2 and 3 in Publication 970, Tax Benefits for Education.

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2006 Tax Law Changes for Individuals Alternative Minimum Tax 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 Archer MSA Limits Increased For Archer MSA purposes for 2006, the minimum annual deductible of a high deductible health plan increased to $1,800 ($3,650 for family coverage). The maximum annual deductible of a high deductible health plan increased to $2,700 ($5,450 for family coverage). The maximum out-of-pocket expenses limit increased to $3,650 ($6,650 for family coverage). Restrictions on Charitable Contributions Cash contributions. 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 Credit Amounts Increase 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. Income Limits Increased for Reduction of Education Savings Bond Exclusion For 2006, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $94,700 and $124,700. You cannot take the deduction if your MAGI is $124,700 or more. For 2005, the exclusion phased out between $91,850 and $121,8500. For all other filing statuses, your interest exclusion is phased out if your MAGI is between $63,100 and $78,100. You cannot take a deduction if your MAGI is $78,100 or more. For 2005, the exclusion phased out between $61,200 and $76,200. For more information, see chapter 9 in Publication 970, Tax Benefits for Education. Educator Expenses Deduction If you were an eligible educator in 2006, you can deduct up to $250 of qualified expenses you paid in 2006 as an adjustment to gross income, rather than as a miscellaneous itemized deduction. This provision, which had expired for tax years after 2005, has been extended through tax year 2007. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses. Eligible educator. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. Qualified expenses. Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is one that is common and accepted in your educational field. A necessary expense is one that is helpful and appropriate for your profession as an educator. An expense does not have to be required to be considered necessary. Qualified expenses do not include expenses for home schooling or nonathletic supplies for courses in health or physical education. You must reduce your qualified expenses by the following amounts. Excludable U.S. series EE and I savings bond interest from Form 8815. Nontaxable qualified tuition program earnings. Nontaxable earnings from Coverdell education savings accounts. Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2. How the deduction is claimed. You must file Form 1040 (or Form 1040NR) to take this deduction. The deduction is claimed on Form 1040, line 23 (or Form 1040NR, line 24), “Archer MSA Deduction.” Enter "E" on the dotted line to the left of that line entry if claiming educator expenses, or "B" if claiming both an Archer MSA deduction and the deduction for educator expenses. If entering "B," you must attach a statement with a breakdown of the amount claimed for each deduction. Electric and Alternative Motor Vehicles 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 IR-2006-86, dated June 1, 2006, and the news article, Summary of the Credit for Qualified Hybrid Vehicles, for more information. Exemption Amount Increased 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. Health Savings Account (HSA) Deduction Limits Increased For 2006, the maximum HSA deduction increased to $2,700 ($5,450 for family coverage). The maximum additional deduction for individuals age 55 or older increased to $700. For HSA purposes, the minimum annual deductible of a high deductible health plan increased to $1,050 ($2,100 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increased to $5,250 ($10,500 for family coverage). For more information, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Income Limits Increased for Hope and Lifetime Learning Credits For 2006, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $45,000 and $55,000 ($90,000 and $110,000 if you file a joint return). You cannot claim an education credit if your MAGI is $55,000 or more ($110,000 or more if you file a joint return). This is an increase from the 2005 limits of $43,000 and $53,000 ($87,000 and $107,000 if filing a joint return). For more information, see chapters 2 and 3 in Publication 970, Tax Benefits for Education. 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