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IRS Releases 2006 Inflation Adjustments and Tax Rate Tables (5 November 05)
The IRS released inflation-adjusted items for 2006, including the tax rate tables for tax years beginning in 2006, the standard deduction amounts, the personal exemption amounts, the adoption credit, and education credit amounts, and several additional items. Rev. Proc. 2005-70, 2005-47 I.R.B. __.
In Rev. Proc. 2005-70, the IRS released the following inflation adjustments to items relating to calendar year 2006.
Standard Deduction
For 2006, the standard deduction amounts under Code Section 63(c)(2) are: $10,300 for married individuals filing joint returns and surviving spouses; $7,550 for heads of households; $5,150 for unmarried individuals; and $5,150 for married individuals filing separate returns. The additional standard deduction amounts for taxpayers who are at least 65 or blind are $1,000 for each. These amounts are increased to $1,250 if the individual is also unmarried and not a surviving spouse. Finally, the standard deduction 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.
Overall Limitation on Itemized Deductions
For taxable years beginning in 2006, the applicable amount of adjusted gross income above which the amount of a taxpayer’s otherwise allowable itemized deductions will begin to be phased out is $150,500 ($75,250 for a married individual filing separately).
Personal Exemption
The personal exemption amount for tax years beginning in 2006 is $3,300. For joint return filers and surviving spouses, the personal exemption amount begins to phase out when adjusted gross income reaches $225,750 and is completely phased out at $348,250. For heads of households, the phaseout begins at $188,150 and is complete at $310,650. For unmarried individuals (other than heads of households and surviving spouses), the phaseout begins at $150,500 and is complete at $273,000. For married individuals filing separately, the amount begins at $112,875 and is complete at $174,125.
Kiddie Tax
The amount used to reduce net unearned income on a child’s return subject to the kiddie tax in 2006 is $850 (which is the same amount as the standard deduction allowed to a taxpayer who can be claimed as a dependent by another taxpayer). The same $850 is also used for the determination of whether a parent may elect to include a child’s gross income in the parent’s gross income.
Adoption Credit
The maximum credit allowed for the adoption of a child is the amount of the qualified adoption expenses up to $10,960 and the maximum credit allowed in the case of an adoption of a child with special needs is $10,960, regardless of the amount of expenses (if any) paid or incurred. The amount of the adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $164,410 and is completely phased out for taxpayers with modified adjusted gross income of $204,410.
Hope and Lifetime Learning Credits
The modified gross income taken into account in 2006 in determining the reduction of both the Hope and Lifetime Learning credits is the amount in excess of $45,000 ($90,000 in the case of a joint return). In addition, 100 percent of qualified tuition and related expenses not in excess of $1,100, and 50 percent of such expenses in excess of $1,100 are taken into account in determining the amount of the Hope Scholarship Credit.
Expensing of Depreciable Assets
For taxable years beginning in 2006, the aggregate cost of depreciable property a taxpayer can elect to expense under Code Section 179 is adjusted to $108,000. This $108,000 limitation is reduced on a dollar-for-dollar basis (but not below zero) to the extent the total cost of eligible property placed in service during the year by the taxpayer exceeds $430,000.
Earned Income Credit
The earned income amounts, i.e., the amounts of earned income at or above which the maximum amount of earned income is allowed, are: for taxpayers with one qualifying child, $8,080; for taxpayers with two or more qualifying children, $11,340; and $5,380 for taxpayers with no qualifying children. The maximum amount of the credit is $2,747 for taxpayers with one qualifying child; $4,536 for taxpayers with two or more qualifying children; and $412, for taxpayers with no qualifying children.
CAUTION: In addition, the earned income tax credit is denied if the aggregate amount of certain investment income exceeds $2,800 in 2006.
Qualified Transportation Fringe Benefit Exclusion
For transportation fringe benefits paid in 2006, the monthly limitation on the aggregate exclusion for transportation in a commuter highway vehicle and any transit pass is $105, and the monthly limitation on the exclusion for qualified parking is $205.
Interest on Education Loans
In 2006, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified adjusted gross income exceeds $50,000 ($105,000 for joint returns), and is completely eliminated when modified adjusted gross income is $65,000 ($135,000 for joint returns).
Income from U.S. Savings Bonds
The exclusion for income from U.S. savings bonds for taxpayers who pay qualified higher education expenses begins to phase out for taxpayers with modified adjusted gross income above $94,700 for joint returns and $63,100 for other returns.
Long-Term Care Insurance Premiums
The amount of long-term care premiums eligible to be deducted as medical care expenses is set at $280 for an individual age 40 or less at the close of the taxable year; $530 for an individual over age 40 but not over age 50; $1,060 for an individual over age 50 but not over age 60; $2,830 for an individual over age 60 but not over age 70; and $3,530 for an individual over age 70.
The dollar amount of the per diem limitation on periodic payments received under a qualified long-term care insurance contract or periodic payments that are treated as paid by reason of the death of a chronically ill individual is $250.
Medical Savings Accounts
For medical savings accounts, a high-deductible health plan for self-only coverage is defined as one with an annual deductible of not less than $1,800 and not more than $2,700, and under which the annual out-of-pocket expenses (other than for premiums) do not exceed $3,650. A high-deductible health plan for family coverage is defined as one that has an annual deductible that is not less than $3,650, and not more than $5,450, and under which the annual out-of-pocket expenses (other than for premiums) do not exceed $6,650.
Health Savings Accounts
For health savings accounts, the monthly limitation on deductions for an individual with self-only coverage under a high deductible plan as of the first day of such month is 1/12 of the lesser of (i) the annual deductible, or (ii) $2,700. For 2006, the monthly limitation on deductions for an individual with family coverage under a high deductible plan as of the first day of such month is 1/12 of the lesser of: (i) the annual deductible, or (ii) $5,450. Also, for 2006, a high deductible plan is defined as a health plan with an annual deductible that is not less than $1,050 for self-only coverage or $2,100 for family coverage, and the annual out-of-pocket expenses do not exceed $5,250 for self-only coverage or $10,500 for family coverage.
Annual Exclusion for Gifts
For 2006, the first $12,000 in gifts to any person is not included in the total amount of taxable gifts made during the year. The first $120,000 in gifts to a spouse who is not a U.S. citizen is not included in the total amount of taxable gifts. Also, recipients of gifts from certain foreign persons may have to report the gifts if the aggregate value of the gifts received in a tax year exceed $12,760.
Miscellaneous Items
(1) The aggregate decrease in the value of qualified real property in a decedent’s gross estate under an election to use the special use valuation method cannot exceed $900,000.
(2) The dollar amount used to determine interest on estate tax payable in installments is $1,200,000.
(3) For purposes of determining whether an individual’s loss of citizenship had a principal purpose of avoiding tax, the threshold is more than $131,000 in average annual net income tax for the five taxable years ending before the loss of citizenship.
(4) A federal tax lien is not valid against certain purchasers of personal property in a casual sale for less than $1,240 or a mechanic’s lienor that repaired or improved residential property for a price of no more than $6,210.
(5) The value of fuel, provisions, furniture, and other household personal effects exempt from levy may not exceed $7,430. The value of books and tools for the taxpayer’s trade or business exempt from levy may not exceed $3,710.
(6) The attorney fee award limitation is $160 per hour for 2006.
(7) The $5, $25, and $50 guidelines for disregarding the value of insubstantial benefits received by a donor in return for a fully deductible charitable contribution are, in 2006, $8.60, $43, and $86, respectively.
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