Transcript Individual Income Tax 2006 Update

Individual Income Tax
2006 Update
Branda Alewine, CPA
Vee Tierney, CPA
Agenda
• 2006 Federal Tax Changes
• 2006 Virginia Tax Changes
• Looking ahead - 2007
2006 Federal Update
• Election to Have Excluded Combat Pay Included
in Earned Income
– Extended through 2007
– Used in the calculation of the Earned Income Credit
– Earned Income Credit – refundable credit for certain
low-income individuals with earned income
– Also – Counts as “compensation” for IRA
contributions
• Tax-Exempt Income Reporting
– Now required to be reported on a 1099 to IRS
2006 Federal Update
• Deduction for Higher Education Expenses
Restored
– Deduct up to $4,000 instead of claiming Hope or
Lifetime Learning tax credits
– Claim on Form 1040, line 35 by entering “T” on the
dotted line to the left of the entry
• Deduction for Out of Pocket Costs for Educators
Restored
– Deduct up to $250 for Supplies, Books, etc.
– Claim on Form 1040, line 23 by entering “E” on the
dotted line to the left of the entry
2006 Federal Update
• IRA Contributions
– Maximum to a traditional or Roth is $4,000
– “Catch up” contributions are additional $1,000
for taxpayers at least age 50 by end of tax
year
– Have until due date of return (not including
extensions)
2006 Federal Update
• Charitable Contributions:
– Clothing & Household Items Donated After 8/17/06
Must Be in Good Used Condition or Better
– Can Claim a Deduction of More than $500
(Regardless of Condition) if Taxpayer includes a
Qualified Appraisal
– IRA Holders, Aged 70 ½ or Over, Can Directly
Transfer Tax-Free, up to $100,000 per year to an
Eligible Charity (Effective for 2006 and 2007)
2006 Federal Update
• Sales Tax Deduction Restored for 2006
– You may deduct either state income tax or
sales tax
– Useful for taxpayers who live in states with no
income tax (e.g., FL, TX)
– Two methods: Receipts or Sales Tax Tables
– Claim on Schedule A, line 5 by entering “ST”
on the dotted line to the left of the entry
2006 Federal Update
• Residential Energy Credits
– Nonbusiness Energy Property Credit
• Residential exterior doors, windows, heat pumps, furnaces,
central air and water heaters for principal residences only
• Placed into service in 2006 and 2007
• Lifetime maximum of $500 and:
– No more than $200 based on windows
– No more than $50 on any advanced main air circulating fans
– No more than $150 on any qualified natural gas, propane, or oil
furnace or hot water boiler
– No more than $300 on any item of energy-efficient building
property
2006 Federal Update
• Residential Energy Credits, cont.
– Residential Energy Efficient Property Credit
• 30% of the cost of eligible solar water heaters,
solar electricity equipment and fuel cell plants
placed in service in 2006 and 2007
• Maximum credit is $2,000 per tax year for each
category of solar equipment and $500 for each half
kilowatt of capacity of fuel cell plants installed per
year
• Cannot be used to heat swimming pools and hot
tubs
2006 Federal Update
• Higher Kiddie Tax Age Coverage
– New cutoff age is 18 (was 14)
– Affects Children with Greater than $1,700 of
Unearned Income
– Retroactive to 1/1/2006
• One time Refund for Telephone Excise Taxes
Charged
– For amounts charged after 2/28/03 and before 8/1/06
– Actual vs. Standard Amount Refund
2006 Federal Update
• Capital Gains & Qualified Dividends Tax
Rate Extended Until the End of 2010
• Direct Deposit of Tax Refunds into Three
Accounts (Maximum)
2006 Virginia Update
• Credit for Purchase of Long-Term Care
Insurance
– Limited to 15% of the smaller amount paid
during the year for LTCI premiums, or the cost
of the first 12 months of coverage
– Cannot get extra credit for prepaying a multiyear policy
2006 Virginia Update
• Credit for Purchase of LTCI cont.
– Not available for premiums that were
deducted on the federal return or used the
#36 subtraction code on the 2005 VA return
– Only available to taxpayers who entered into
a policy on or after January 1, 2006
– What about premiums paid during the year on
preexisting policies? No guidance just yet
Looking Ahead - 2007
• Cash Donations to Charity – Cancelled
check or written note from the charity now
required!
• 2007 Only - New Itemized Deduction for
the Cost of Premiums for Mortgage
Insurance
– Phased-Out for Taxpayers whose AGI
exceeds $100,000
– Qualified Mortgages
Looking Ahead - 2007
• Elective Deferrals to 401(k) plans
increases to $15,500
– “Catch up” contributions are additional $5,000
for taxpayers at least age 50 by end of tax
year
• IRA Contributions
– Maximum to a traditional or Roth is $4,000
– “Catch up” contribution is $1,000
Looking Ahead - 2007
• VA – Estate Tax Repeal effective July 1, 2007
• VA – Subtraction for Certain Death Benefits
effective January 1, 2007
– Applies to death benefit payments received from an
annuity contract that are subject to federal income tax
• VA – Deduction related to purchase of certain
energy-efficient items of tangible personal
property effective January 1, 2007
– Deduction equal to 20% of the retail sales and use tax
paid in connection with the purchase
Questions?