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TAKING TIME TO UNDERSTAND THE 2006 TAX CHANGES
The Internal Revenue Code is not ordinarily thought of as a
gift that keeps on giving, but, with 2005 having given way to
2006, it does contain several sections which provide for keeping
more of what you will be earning and saving more for your
retirement — on a tax-sheltered basis — out of what you keep.
They also provide, in some cases, for siphoning slightly more
of what you earn — as your income increases with inflation —
but
these cases are far less numerous.
Therefore, as you make spending and saving plans for 2006, it
should be helpful to make note of significant federal income tax
changes that became effective on New Year's Day, such as:
Tax rates: For married couples filing jointly and
surviving spouses, for example, the 25 percent marginal tax
rate begins to apply to those with taxable income of from
$61,301 to $123,700, instead of $59,401 to $119,950, after
adjustment for inflation. For single taxpayers, the 25 percent
bracket was increased to taxable income of $30,651 to $74,200,
from $29,701 to $71,950. Similar changes were made for lower and
higher tax brackets, and for married individuals filing
separately, heads of household, and trusts and estates. (See IRS
Form 1040 booklet and the Internal Revenue Service's web
site, www.irs.gov.)
Social Security and Medicare: The Social Security tax
rates for employers and employees were maintained at 6.2
percent, but the maximum amount of salaries and wages subject to
the tax was raised from $90,000 to $94,200. The maximum earnings
for beneficiary under full retirement age were increased from
$12,000 to $12,480 annually.
The additional Medicare hospital tax on both employers and
employees of 1.45 percent also was unchanged, but monthly
Medicare Part B premiums went up from $78.20 to $88.50.
Standard deduction: The standard deduction for married
taxpayers who do not itemize deductions and who file jointly, as
well as for qualifying widows and widowers, was increased to
$10,300 from $10,000, for single taxpayers and married taxpayers
filing separately to $5,150 from $5,000, and for heads of
household to $7,550 from $7,300.
Deductions for use of car: Standard rates per mile of
deductions for use of a car for business purposes was changed to
44.5 cents from 40.5 cents in 2005's first eight months
and 48.5 in the last four, and for medical or moving purposes
to 18 cents from 15 and 22 cents, respectively. The rate for use
of a car for charitable purposes was held at 14 cents per mile
except for taxpayers using a vehicle only in connection with aid
to Hurricane Katrina victims, whose deduction is 70 percent of
the business mileage rate in effect on the date of the
contribution.
Long-term care insurance deductions: Limits on annual
deductions for premiums for eligible long-term care insurance
policies were raised across the board — for those over 70, from
$3,400 to $3,530; for those 61 to 70, from $2,720 to $2,830, and
for younger taxpayers, significantly less.
Exemptions: The amount that may be deducted for each
exemption was increased from $3,200 to $3,300, as were the
levels of adjusted gross income at which exemptions begin
phasing out, from $218,950 to $225,750.
Retirement plan contributions: Just when slippage in
average annual returns on stock and bond investments underscores
the importance of having more money at work for a retirement
nest egg, the annual limit on contributions to IRS-qualified
retirement plans has gone up again, making it easier.
Under salary reduction agreements permitting deferral of
income taxes for contributions to 401(k)s, 403(b)s, SAR-SEPs,
and the Thrift Savings Plan for federal employees (456(b)s),
participants may now contribute $15,000 instead of $14,000, some
or all of which may be matched by employers. The limit on
additional "catch-up" contributions to 401(k), 403(b)
and 457(b) plans by individuals of 50 or older was raised from
$4,000 to $5,000, with a resulting higher limit on total
contributions of $20,000. The 2006 limit on contributions to
traditional and Roth IRAs is $4,000, the same as 2005; but the
"catch-up" limit was lifted, from $500 to $1,000.
Gift tax: The annual exclusion from gift tax was
increased from $11,000 to $12,000 per person.
Estate tax: The exclusion from federal estate tax of
estates' market values was raised from $1.5 million for people
dying in 2005 to $2 million for people dying in 2006, and the
maximum tax rate for taxable estates was reduced from 47 percent
to 46 percent.
February 2006 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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