2006 Tax Law Changes for Individuals - contd....

Limit on Itemized Deductions Increases

If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2006, this amount is increased to $150,500 ($75,250 if married filing separately). In 2005, the amount was $145,950 ($72,975 if married filing separately). Beginning in 2006, the amount by which these itemized deductions are reduced is only 2/3 of the amount of the reduction that otherwise would have applied. See the Instructions for Schedule A (Form 1040), line 28, for more information on figuring the amount you can deduct.

Social Security and Medicare Taxes

For 2006, the employer and employee will continue to pay:

1. 6.2% each for social security tax (old-age, survivors, and disability insurance), and
2. 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.

New Option to Split Refunds Between Bank Accounts

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 refund automatically deposited into two or three accounts at a bank or other financial institution (such as a mutual fund, brokerage firm, or credit union). Individuals electing this split refund option must file Form 8888, Direct Deposit of Refund to More Than One Account, which will be available by the end of 2006.

Publication 1212, Guide to Original Issue Discount (OID) Instruments

Publication 1212 will no longer be revised annually and therefore does not contain the original issue discount (OID) tables, Sections I-A through III-G. The tables are only available on the IRS website at: www.irs.gov/formspubs/article/0,,id+109875.html. They are posted to the website in late November or early December of each year.

 

Standard Deduction Amount Increased

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.

Standard Mileage Rates

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.

Tax-Exempt Interest Reporting

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.

2006 Federal Income Tax Rate Schedules

The 2006 tax rate schedules are provided so that you can compute your estimated tax for 2006.

Tuition and Fees Deduction

You may be able to deduct qualified tuition and fees paid during the year for yourself, your spouse, or your dependent. This provision, which had expired for tax years after 2005, has been extended through tax year 2007.

Who can claim the deduction.  You can take this deduction only if all of the following apply.  

• You paid qualified tuition and fees in 2006 for yourself, your spouse, or your dependent(s). 
• Your filing status is any status except married filing separately. 
• Your modified adjusted gross income (AGI) is not more than: $80,000 if single, head of household, or qualifying widow(er); $160,000 if married filing jointly. Use lines 1 through 3 of the Tuition and Fees Deduction Worksheet to figure your modified AGI. You, or your spouse if filing jointly, cannot be claimed as a dependent on someone's (such as your parent's) 2006 tax return. 
• You are not claiming an education credit for the same student. See the instructions for Form 8863. 
• You were a U.S. citizen or resident alien for all of 2005 or you were a nonresident alien for any part of 2006 and you are filing a joint return.

How the deduction is figured.  Use the Tuition and Fees Deduction Worksheet to figure your deduction.

Exception.  Use Worksheet 6-1 in Publication 970 instead of the worksheet below to figure your tuition and fees deduction if you file Form 2555, 2555-EZ, or 4563, or you exclude income from sources within Puerto Rico.

Qualified tuition and fees.  Qualified tuition and fees are amounts paid in 2006 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution during 2006. Tuition and fees paid in 2006 for an academic period that begins in the first 3 months of 2007 can also be used in figuring your deduction. Amounts paid include those paid by credit card or with borrowed funds. An eligible educational institution includes most colleges, universities, and certain vocational schools.

Qualified tuition and fees do not include amounts paid for the following items. 

• Room and board, insurance, medical expenses (including student health fees), transportation, or other similar personal, living, or family expenses. 
• Course-related books, supplies, equipment, and nonacademic activities, except for fees required to be paid to the institution as a condition of enrollment or attendance. 
• Any course involving sports, games, or hobbies, unless such course is part of the student's degree program.

Qualified tuition and fees must be reduced by the following benefits. 

• 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 scholarship, educational assistance allowance, or other payment (but not gifts, inheritances, etc.) excluded from income.

How the deduction is claimed.   You must file Form 1040 to take this deduction. The deduction is claimed on Form 1040, line 35, “Domestic production activities deduction.” Enter "T" on the line to the left of that line entry if claiming the deduction for tuition and fees, or "B" if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering "B," you must attach a statement with a breakdown of the amount claimed for each deduction.

More information.  See chapter 6 of Publication 970 for more information about this deduction.