New 2006 Tax Laws

tax-form-amount-you-owe Two major Federal Tax Bills were signed into law during 2006 – The Tax Increase Prevention and Reconciliation Act (TIPRA) and The Pension Protection Act (PPA). Together with other scheduled 2006 changes, these bills will result in billions of dollars of tax provisions for individuals and corporations. The key laws that could impact are:

Kiddie-Tax Expands. Until recently, the Kiddie tax meant some of a chile’s unearned income got taxed at the parent’s higher rate until they reached 14 years old. But the rule now applies to children’s unearned income until they hit 18 and although the change was enacted in May, the law is retroactive to January 1, 2006.

Caution: Parents who transfer appreciated stock to their 14-year-old this year anticipating lower tax rates on gains could be facing a tax hit three times higher (15% versus 5%) than expected.

Split Refund Deposits. You may now have your federal tax refund directly deposited into as many as three accounts. Simply provide deposit instructions with your tax filing information.

Charitable Contributions. The IRS is cracking down on frivolous charitable deductions. All cash contributions will now require a cancelled check or receipt from the qualified charity.

Non cash donations of clothing and household items must now be in good or better condition.

But there is some good news as well. Retirees over 70 1/2 can contribute funds to public charities directly from their IRAs in 2006 and 2007 (avoiding some ordinary income tax).

Federal Long Distance Excise Tax Credit. Based on the repeal of the 3% excise tax on long distance telephone calls retroactive to February 28, 2003, you will receive a standard credit depending on the number of personal exemptions claimed on your return from $30 to $60. You may claim a higher credit if you can provide telephone receipts showing the actual excise tax paid.

Energy Credits. There are two new residential energy credits and a new alternative fuel vehicle credit in 2006. If you installed new energy efficient property (AC, water heater, air circulatory fans, furnace, solar system, window or doors) OR purchased a new hybrid vehicle you may be entitled to a credit on your return this year.

Military. Reservists may now take penalty free withdrawls from retirement plans if called to active duty for 180 days or more. Combat pay may be considered income for purposes of making IRA contributions. This change is provided retroactively to 2004. Contributions via amended return filing could yield refunds.

Retirement Plans. All of the higher contribution levels for retirement plans such as IRA’s, Roth IRA’s, Roth 401(k), 401(k), 403(b), 457, SIMPLE, including the "catch-up" contribution for age 50 and over are permanent.

Qualified Tuition Plans (529 Plans). This temporary college savings plan is now permanent and won’t expire in 2010 as scheduled.

Higher AMT Exemptions. The Alternative Minimum Tax income exemption amounts are raised to $62,550 for married joint filers and $42,500 for singles in 2006.

Lower Capital Gain and Dividend Rates Extended. The soon-to-expire reduced tax rates of 5% and 15% for capital gains and dividends are extended through 2010.