2006 Tax Law Changes - Inflation Adjustments and Statutory Changes

From TaxAlmanac

Social Security and Medicare Taxes

For social security tax, the maximum amount of 2006 wages subject to the tax has increased to $94,200. For Medicare tax, all covered 2006 wages are subject to the tax. For information about these taxes, see Circular E (Publication 15).

Income Limits Increased for Reduction of Education Savings Bond Exclusion

For 2006, the amount of your interest exclusion is phased out 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 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 more information, see chapter 10 in Publication 970.

Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion

The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract has increased for 2006. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.

• The cost of qualified long-term care services during the period.
• The dollar amount for the period ($250 per day for any period in 2006).

Investment Income of Child Under Age 14

The amount of taxable investment income a child under the age of 14 can have without it being subject to tax at the parent's rate has increased to $1,700 for 2006.

Health Savings Account (HSA) Deduction Limits Increased

For 2006, the maximum HSA deduction has increased to $2,700 ($5,450 for family coverage). The maximum additional deduction for individuals 55 or older has increased to $700. For HSA purposes, the minimum annual deductible of a high deductible health plan has increased to $1,050 ($2,100 for family coverage) and the maximum out-of-pocket expenses limit has increased to $5,250 ($10,500 for family coverage).

Archer MSA Deduction Limits Increased

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

Standard Deduction Amount Increases

The standard deduction is, in most cases, higher for 2006. 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 person. The 2006 Standard Deduction Tables are shown in Publication 505.

Limit on Itemized Deductions Increased

If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2006, this amount has increased to $150,500 ($75,250 if married filing separately). See Publication 505 for more information on figuring the amount you can deduct.

Phaseout of Reductions of Personal Exemptions and Itemized Deductions

Taxpayers with adjusted gross income above a certain amount may lose part of their deduction for personal exemptions and itemized deductions. Beginning in 2006, the amount by which these deductions are reduced is only 2/3 of the amount of the reduction that would otherwise have applied. See Publication 505 for more information on figuring your deductions.

Exemption Amount Increases

The amount you can deduct for each exemption has increased to $3,300 in 2006.

You 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.

Limits Increased for Hope and Lifetime Learning Credits

For 2006, the maximum Hope credit has increased to $1,650 (100% of the first $1,100 of qualified education expenses and 50% of the next $1,100 of qualified education expenses). These dollar amounts are doubled for students attending an eligible education institution in the Gulf Opportunity Zone.

For 2006, the amount of your Hope or lifetime learning credit is phased out 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). For more information, see chapters 2 and 3 in Publication 970.

Adoption Benefits Increased

Beginning in 2006, the maximum adoption credit has increased to $10,960. Also, the exclusion from income of benefits under your employer's adoption assistance program has increased to $10,960. These amounts are phased out if your modified adjusted gross income (MAGI) is between $164,410 and $204,410. You cannot claim the credit or exclusion if your MAGI is $204,410 or more.

Earned Income Credit (EIC) Amounts Increased

The following paragraphs explain the changes to the credit for 2006.

Earned income amount increased

The maximum amount of income you can earn and still get the credit has increased for 2006. You may be able to take the credit 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 also has 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 increased

The maximum amount of investment income you can have and still get the credit has increased to $2,800 for 2006.

Nontaxable combat pay election extended

You can elect to have your nontaxable combat pay included in earned income when you figure your earned income credit for 2006. This election was previously due to expire at the end of 2005 but has been extended through 2006. For more information about the election, see Publication 596.

Earned Income Amount for Additional Child Tax Credit

For 2006, the minimum earned income amount used to figure the additional child tax credit has increased to $11,300.

Standard Mileage Rate

Business-related mileage

For 2006, the standard mileage rate for all business miles is 44½ cents per mile. Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463.

Medical- and move-related mileage

For 2006, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 18 cents per mile. See Transportation under What Medical Expenses Are Includible in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521.

Charitable-related mileage

The special standard mileage rate in effect for 2006 for the cost of operating your car for providing charitable services solely related to Hurricane Katrina is 32 cents per mile.

Deductible Long-Term Care Premium Limits Increased

For 2006, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums up to the amounts shown below as medical expenses on Schedule A (Form 1040).

• Age 40 or under - $280.
• Age 41 to 50 - $530.
• Age 51 to 60 - $1,060.
• Age 61 to 70 - $2,830.
• Age 71 or over - $3,530.

Note. The limits on premiums is for each person.

Self-Employment Tax

The maximum amount of net earnings subject to the social security part of the self-employment tax for tax years beginning in 2006 has increased to $94,200. All net earnings of at least $400 are subject to the Medicare part of the tax.

Depreciation and Section 179 Deduction

Increased section 179 limits

The maximum section 179 deduction you can elect for property you placed in service in 2006 has increased to $108,000 for qualified section 179 property ($143,000 for qualified enterprise zone property, qualified renewal community property, and qualified New York Liberty Zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $430,000. For qualified section 179 Gulf Opportunity (GO) Zone property acquired after August 27, 2005, the maximum section 179 deduction is higher than the deduction for most section 179 property. See chapter 2 of Publication 946.

Depreciation limits on electric vehicles

The total depreciation deduction (including the section 179 deduction) you can take for an electric vehicle is $8,980. This limit is reduced if the business use of the vehicle is less than 100%.

Meal Expenses When Subject to “Hours of Service” Limits

Generally, you can deduct only 50% of your business-related meal expenses. You can deduct a higher percentage for meal expenses while traveling away from your tax home for business purposes if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. (These limits apply to workers who are under certain federal regulations.) The percentage increases to 75% for 2006. Business meal expenses are covered in chapter 1 of Publication 463. Reimbursements for employee meal expenses are covered in chapter 13 of Publication 535.