Each year brings in a host of new tax changesand 2006 is no exception. Some of these changes occur automatically every year. For example, the personal exemption you claim is indexed annually for inflation. In 2006, the exemption amount is $3,300, up from $3,200 in 2005. Other changes, however, come from recent tax laws or new IRS regulations and rulings. This latter group tends to include the more important changes. 2006 will have its fair share of these.
Here is a quick look at just a few of the more significant changes for 2006:
- The tax rules phase out the personal exemptions and itemized deductions of high-income taxpayers. But, starting in 2006, this phase-out is scaled back. Thus, you may be deduct more of your personal exemptions and itemized expenses than in the past.
- Your may be able to claim a tax credit (a dollar-for-dollar reduction in your tax bill) of up to $500 if you make qualifying energy-saving improvements to your home.
- Families with college expenses lose one of their tax breaks in 2006the up-to-$4,000 deduction for tuition and fees. However, other education-related tax benefits, such as the Hope tax credit, remain in place.
- Taxpayers who belong to eligible 401(k) plans at work may choose to make their contributions to the plan on an after-tax basis in 2006. While this means you have to pay more taxes upfront, you gain an advantage on the back-end: Your withdrawals, plus accumulated earnings, can be tax-free.
- Your chances of getting hit with the alternative minimum tax (AMT) have increased. The AMT is a parallel tax system with more income items and fewer deductions. You have to pay the AMT if it’s higher than your regular tax bill. In 2006, an exemption that protects some taxpayers from the AMT is cut back.
Please contact us if you would like to discuss these changes or want to find out about other changes that may affect your 2006 tax bill.