Although the Internal Revenue Code of 1986 is tax code we use, the tax code is updated, both by statute and the court. It is only when the tax laws being changed are so dramatic that the year of the code is updated, 1954 was the prior code used.
2006 like every year has some new tax legislation.
On May 17, 2006 the Tax Increase Prevention and Reconciliation Act of 2005 was signed into law by President Bush. (TIPRA)
Some of the changes are as follows:
The Section 179 expensing of small business equipment purchases that increased the $25,000 annual limit to $100,000 adjusted for inflation was extended 2 additional years through 2007. In 2006 the limit adjusted for inflation is $108,000. If total purchases of equipment exceed $430,000 in 2006 the maximum deduction is reduced.
The 15% long-term capital gain and qualifying dividend rate that was to expire in 2008 has been extended through 2010.
Alternative Minimum Tax (AMT) – has been a sore issue for many people. The AMT requires that a higher than regular tax may be due because certain items are not deductible for AMT purposes. Taxes and Miscellaneous deductions are 2 that may have a big effect on the AMT. The tax law extends and increases the AMT exemption amount. In 2006 the AMT exemption is increased for individuals to $62,550 from $58,000 and $42,500 from $40,250. These amounts are subject to phaseout based on total Alternative Minimum Taxable Income.
Kiddie Tax – Prior to this year, the Kiddie Tax was for children under the age of 14, effective with 2006 the Kiddie Tax applies to children under the age of 18.
Conversions of Traditional IRA’s to Roth IRA’s:
After 2009, there will be not adjusted gross income (AGI) limit, currently $100,000, to convert a Traditional IRA to a Roth IRA. If converted in 2010, the income is reported 1/2 in 2011 and 1/2 in 2012.
On August 17, 2006, The Pension Protection Act of 2006 was enacted. Although you might not think that a pension law would include income tax laws, it does. Either amendments of tax laws are included on other bills or other laws are included in tax laws. It is a way to get certain items through a bill that might not go through separately. Congress and the President don’t want to appear against certain types of bills; therefore, Congress attaches an amendment, that the President doesn’t want, to a bill he does want.
The savers credit has been made permanent. The credit is for lower income taxpayers who save through retirement plans, 401(k), Traditional or Roth IRA’s, Simple, SEP IRA’S, qualified profit sharing, money purchased pension plans or Keogh plans.
The credit is 50% of the savings up to $2,000 of savings; up to a $1,000 credit. The credit phases out as income hits certain levels. The sliding scale credit is available for married filing jointly and single individuals at Adjusted Gross Income of $50,000 and $25,000, respectively. Savers Credit
Congress has approved that federal overpayments can be deposited directly into IRA accounts; however, the IRA laws have not been changed. If you file your income tax return on April 14th the IRS will not have time to get the IRA contribution paid before April 15th; therefore, your contribution would be late and not be tax deductible if it was for the year you file your return. I’d recommend to see if there are any changes or if there is a cutoff date set up by the IRS relative to getting the funds to the IRA custodian, bank or investment account.
Small not-for-profit organizations not required to file Forms 990 will have to notify the IRS annually that they exist. If they do not file for three years the IRS will terminate their tax exempt status. Without tax-exempt status contributions made will not be deductible by the contributors.
Charitable contributions of clothing and household items can only be deducted if they are in “good used condition or better” also, items with minimal value deductions may be denied by the Secretary of the IRS. Used socks and underwear are out (thanks to Bill Clinton, who put high values on his socks and underwear).