The 2006 Tax Act: It introduces a host of changes
In May, President Bush signed the 2006 tax act, which introduced a host of changes. Besides those revisions, there are others that are mandated by indexing, government lingo for annual upward adjustments to provide relief from inflation, as measured by increases in the Consumer Price Index. What follows are the highlights of several changes that might influence your tax planning.
Personal exemptions. You get a bigger break just for being you. Exemptions are worth $3,300 apiece for 2006, up slightly from $3,200 for 2005.
Reductions of exemptions. For upper incomers with AGIs (short for adjusted gross income, the figure on the last line of page one of Form 1040) above certain levels, the deductions for all exemptions, including those for a spouse and dependents, gradually decline. For 2006, the exemption phaseout starts when AGI surpasses $150,500 for singles, up from 2005’s $145,950; $225,750 for joint filers, up from $218,950; $188,150 for heads of household, up from $182,450; and $112,875 for married persons filing separately, up from $109,475.
Partial disallowance of itemized deductions. Most itemized deductibles must be reduced by 3 percent of the amount by which your AGI exceeds a specified amount: $150,500 for 2006, up from $145,950 for 2005. Stated differently, you forfeit $30 in total 2006 deductions for every $1,000 of AGI above $150,500 if you are single or filing jointly. The $150,500 figure plummets to $75,250 if you are married and file a separate return. Going that route does not raise the threshold for a couple to a combined $301,000, cautions CCH Inc., the Riverside, Ill., publisher of tax and other business information and software.
Standard deductions. The standard deduction is the no-proof-required amount that is automatically available without having to itemize for outlays like real estate taxes and charitable donations. Just how much of a standard deduction you get depends on your filing status and age. The normal standard deductions are $10,300 for joint filers; $5,150 for married persons filing separately and singles; and $7,550 for heads of household.
Extra-large standard deductions for the elderly and blind. For those individuals who are at least 65 by the close of the 2006 tax year, the standard deduction increases by $1,000 for a married person (whether filing jointly or separately) and $1,250 for an unmarried person. Persons who are considered blind are entitled to those additional amounts or double those amounts if they are both 65 and blind.
A word of caution: Special rules lessen the deduction amounts allowed individuals (children, mostly, or elderly parents) who can be claimed as dependents on the returns of other people. The standard deduction can be as little as $850.
Social Security taxes. They now take a bigger chunk of employees’ wages. The Social Security tax of 6.20 percent goes from the first $90,000 of earnings for 2005 to $94,200 for 2006, an increase of $4,200. The Medicare tax of 1.45 percent applies to all salaries, bonuses, commissions, vacation pay, etc., for 2006. Several years ago, a change in the law abolished the cap on Medicare’s wage base.
Contrast 2006’s tab with the maximum levy of $30 (1 percent of the first $3,000 in earnings) for 1937, when Social Security taxes debuted. Nowadays, they exact more than federal income taxes from most middle-income earners.