MONEY MANAGEMENT

TAX BREAKS GET BETTER WITH 2006 INFLATION ADJUSTMENTS

Standard deduction

The standard deduction, which is used by roughly two-thirds of all taxpayers, is $10,300 for married couples filing a joint return (plus $1,000 for each one 65 or older; $5,150 for single filers (those 65 or older can take $6,400) and $7,550 for heads of household (those 65 or older can take $8,800). The additional standard deduction amounts for the aged and for the blind will be $1,000 for each.

Personal exemptions

Taxpayers can also claim a personal exemption of $3,300 for 2006, up from $3,200 in 2005. The personal exemption begins to phase out for married taxpayers filing jointly with adjusted gross income of $225,750 (and is completely phased out when AGI reaches $348,250). For single filers, phase-out begins at $150,500 (and is fully phased out at $273,000). For heads of household, phase out begins at $188,150 in AGI (and is fully phased out at $310,650).

For 2006, the amount of the exemption phase-out reduction that would otherwise apply is reduced by one-third. In effect, even the highest earners will get $1,000 per exemption for the regular tax.

Tax brackets

The 2006 tax brackets also rise with inflation, which means taxpayers will see more of their money taxed at the lowest federal rate. For married couples, that means the first $15,100 of taxable income will be taxed at 10 percent — as compared to the first $14,600 for 2005. For single filers, the 10 percent bracket applies to taxable income up to $7,550 and for heads of household the 10 percent bracket applies to taxable income up to $10,750.

Annual gift tax

You’ll be able to make larger gifts this year without triggering the gift tax. For 2006, the annual gift tax exclusion per donee increases to $12,000, up from $11,000
last year.

Limitation on itemized deductions

Itemized deductions are limited for taxpayers with incomes over a certain threshold. For the 2006 tax year, the AGI income threshold at which deductions begin to be limited is $150,500 for married joint, head of household and single filers. For married taxpayers filing separately, the threshold is $75,250; the deductions are
trimmed by two percent of the excess over $150,500 (In 2005, a three percent rate was used and the phase-out started at a lower level).

Child tax credit

For low-income taxpayers, the per child tax credit is refundable, within limits, when your child credits exceed your income tax liability. For 2006, the value used in determining the amount of the credit that may be refundable is $11,300. The rules are complex, so you will want to consult with a CPA.

Kiddie tax amounts

For 2006, the kiddie tax rules allow a child under 14 to receive $850 — up from $800 in 2005 — in investment income (from interest, dividends or capital gains)
free of tax, with the next $850 taxed at the child’s rate, which is typically lower than the parent’s tax rate. Any amount over $1,700 is taxed at the parent’s rate. Keep in mind that your child can still owe regular income tax with less than $1,700 in income. This is only the threshold amount of investment income for the special kiddie tax.

Section 179 expense deductions

For the 2006 tax year, the maximum expensing deduction for equipment put into service by self-employed or business owners is $108,000, up from $105,000 in 2005. This deduction is reduced by the amount by which the cost of Section 179 property placed in service during the 2006 tax year exceeds $430,000.

Need advice?

Depending on your circumstances, these changes could affect the amount of income you choose to have withheld from your paycheck or the amount you pay in quarterly estimated taxes. A CPA can help you with your tax planning for 2006.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.